New Rules Would Require Insurers To Justify Double-Digit Rate Increases

KHN Staff Writer

Dec 21, 2010

Health insurers seeking a rate increase of 10 percent or more in 2011 must publicly detail why the increase is needed, under proposed rules released by the Obama administration Tuesday.

Under the proposal, the flagged premium increases would be subject to review by the states – or the federal government in some cases – to determine if they are unreasonable.

In following years, the Department of Health and Human Services will adjust the specific percentage threshold for each individual state. Thresholds would vary partly because medical costs vary by state.

The proposed rules, which would affect insurance policies sold to individuals and small businesses but not large employers, result from the new health care law. Administration officials repeatedly criticized insurers for raising rates excessively during and after the long debate leading up to passage of the law in March.

Evidence "suggests that the majority of increases in the individual market have exceeded 10 percent each year for the past three years," significantly exceeding some national measures of cost inflation, according to the proposal.

While consumers may see any large increase as unjust, the government proposal says it is not possible to know whether an increase is unreasonable until its underlying assumptions are analyzed.

Final rules could be issued in about six months, after a public comment period. They would affect rate increases filed or effective after July 1, 2011.

America's Health Insurance Plans, the industry lobby, says rising premiums are caused by a variety of factors, including rapidly increasing medical costs. The regulation considers some of those costs, the group says, but doesn't adequately factor in new benefit mandates and the recession, which is causing younger and healthier people to drop coverage, leaving fewer premium dollars to cover a pool of relatively older or sicker policyholders.

"For example, data from the state of Oregon show that prices of many medical services have increased at an average annual rate exceeding 10 percent," says AHIP CEO Karen Ignagni. "California data show that prices for a hospital stay increased by more than 150 percent between 2000 and 2009—an average annual growth rate of 11 percent. Trends likes these are being seen across the country."

Some consumer advocates say the proposed regulation doesn't go far enough. The proposal, for example, gives states discretion on revealing some of the detailed data provided by insurers. States could reveal simpler summaries of the data.

"The whole point of this regulation, as the HHS secretary has said, is to shine a light on the actuarial assumptions … in the hope that public scrutiny will shame insurers into doing the right thing," says Carmen Balber, director of Consumer Watchdog's Washington office. "If full data is not disclosed, in many cases we're left with the status quo."

The health care law requires review and justification for increases deemed unreasonable, but does not give the federal government authority to reject rate increases. Federal officials hope public disclosure will discourage unnecessarily large rate increases, encourage state regulators to take a closer look and help individuals and businesses make wise choices. State officials can also bar insurers with a pattern of unreasonable increases from selling their products in new marketplaces, called exchanges, which are set to open in 2014.

State regulation of premiums varies widely. Some states review proposed rate changes and can deny increases before they go into effect; others allow insurers to put new rates into effect and examine them only if questions are raised.

HHS says it will look at several factors in determining whether rates are unreasonable, including whether an insurer meets a requirement that it spend at least 80 percent of its revenue on medical costs and whether it produces substantial evidence for the increase.

Insurers would have to post on their websites proposed increases above the thresholds and if the rates ultimately are deemed unreasonable they'd have to post that fact as well, in addition to explaining reasons for the increases. Insurers would need to publicly detail what they are spending on medical care, expected future claims costs and administrative spending, including executive compensation.

States would do their own rate reviews unless HHS determines they don't have an effective system. Among other things, states must show they collect data sufficient to determine whether a rate increase is unreasonable and review that data effectively, the proposal says.

Forty-five states and the District of Columbia have already accepted about $1 million each in grants to help them bolster their ability to review rate increases. HHS officials said a substantial majority of states already have effective rate review.