By Nancy Lopez

Background

Over the past decade, health insurance premiums have doubled (with particularly sharp increases in the small group and individual markets), making insurance coverage unattainable for millions of Americans.^[1] News stories have reported that some health insurers have sought to increase premium rates as much as 50 percent.

Under federal law,^[2] states have the legal authority to regulate health insurance in both the individual and group health plan markets. As part of this authority, states have the power to review proposed rate increases as part of an effort to insure that health insurers are solvent and that their plans are fairly designed and administered. But states can also limit their oversight and review authority: While the U.S. Department of Health and Human Services (HHS) reports that 33 states and the District of Columbia have the authority in some markets to review a proposed health insurance rate increase before it goes into effect, only 26 of these states and the District of Columbia have the authority to reject a proposed rate increase.^[3]

The purpose of a rate review is to consider whether a proposed premium increase is reasonable in light of the characteristics of the insured population and its anticipated use of care, the underlying cost of medical care, the insurer’s own reasonable administrative costs, and health plan solvency (that is, whether the insurer maintains the level of financial reserves necessary to assure proper operations even if costs rise faster than anticipated in setting the premiums charged). Insurance issuers point out that rate increases may be significant if the insured population grows sicker or if the cost of health care or of plan administration jumps considerably. Insurers have raised concern that limits on premium increases could result in market instability, a decision by insurers to exit the market entirely, or bankruptcy for some insurance companies.^[4] By contrast, consumers and some government officials advocate for implementing a stricter rate review process, claiming that insurers do not need to raise premiums, noting that insurance companies have shown increases in profits and surpluses over the last year.^[5] Furthermore, an independent evaluation of certain recent premium rate increases has shown errors in the insurer’s calculations used to justify the proposed increase.^[6]

Changes Made by the Health Reform Law (P.L. 111- 148, §§ 1003-1004, as amended by §10101(i))

Initial and Continuing Premium Review Process:

• The Affordable Care Act (ACA) makes premium increase rate reviews a federal insurance requirement applicable to all states. Beginning with the 2010 plan year, the ACA requires the HHS Secretary, in collaboration with the States, to establish an annual review process of “unreasonable” health insurance premium rate increases.^[7] Health insurance issuers must justify “unreasonable” premium rate increases to the Secretary and the relevant State and also must disclose such increases “prominently” on their website prior to implementation.^[8]
• Beginning in the 2014 plan year, the HHS Secretary, along with States, will monitor health insurance premium increases for plans offered both inside and outside state health insurance Exchanges.^[9] Additionally, the ACA requires States to consider excess premium growth outside of an Exchange compared to growth inside an Exchange when deciding whether large group market insurers can offer qualified health plans through the State’s Exchange.^[10]

Grants In Support of the Premium Review Process:

• The ACA establishes a 5-year (2010-2014), $250 million grant program^[11] to help states establish a premium increase review process that complies with federal requirements and that provides information on rate trends to the federal government. Information must be provided for each premium rating area within a state. Each state is also required to make recommendations regarding whether issuers showing patterns of excessive premium increases should be excluded from participation in the state’s health insurance Exchange.^[12] States may use their funds to create Medical Reimbursement Data Centers that operate impartially and that collect, organize, analyze, and publicize provider reimbursement information from insurance issuers.^[13] Centers are expected to utilize this information to develop fee schedules that reflect market costs for medical care.

Implementation

Agency

The Secretary of HHS is responsible for implementing the provisions relating to the disclosure and review of unreasonable premium increases.

Key Dates

Beginning in plan year 2010, the Secretary, in collaboration with the States, will establish an annual review process for “unreasonable” premium increases for health insurance coverage.

Beginning in plan year 2014, the Secretary, in collaboration with the States, will monitor premium increases inside and outside of an Exchange.

Agency Action

On April 14, 2010 HHS published a request for comments relating to the premium review provisions of PHSA §2794.^[14]

On June 7, 2010 HHS released an Initial Announcement inviting states to apply for grants for health insurance premium review for FY2010.^[15]

On August 16, 2010, HHS announced grant awards totaling $46 million to 45 states and the District of Columbia to be used to create or enhance State’s health insurance premium review process.^[16]

On December 23, 2010 HHS released a Notice of Proposed Rulemaking (NPRM)^[17](the comment period closed on February 22, 2011) establishing a rate review process to ensure a review of all proposed rate increases exceeding a specified threshold in order to determine if the proposed increase is unreasonable. The rules provide as follows:

• State authority. State law supersedes any determination made by HHS regarding a premium rate increase under the ACA. Therefore, if HHS determines that a rate increase is unreasonable, the insurance issuer may nonetheless implement the increase if it is permitted under state law.^[18]
• Applicability of review process. The review process applies only to the individual and small group markets (with small groups defined by the state unless the state lacks a definition, in which case the ACA standard applies). The NPRM excludes the large group market, grandfathered plans, excepted benefit plans and self-insured plans. The annual rate review process would begin for rate increases submitted on or after July 1, 2011.^[19]
• Premium rate increase defined. The scope of review consists of a review of the underlying rates and methods used by the issuer to calculate its premiums, which in turn reflect estimated future claims costs for a particular product and the revenue necessary to pay anticipated expenses for claims and non-claims (e.g., administrative expenses).^[20]
• Rate increase review threshold. The threshold is set at an average rate increase of 10% or more for 2011; thereafter the HHS Secretary will attempt to establish a state-specific threshold if state-specific trend data is available, otherwise the threshold will remain at10% or more. This threshold applies to single and multiple rate increases (calculated within the preceding 12 month period) and applies to the weighted average of rate increases for a particular “product,” defined in the NPRM as a health benefits package with a specific set of rating and pricing methodologies offered by a health insurance issuer within a State.^[21]
• Rate review process. If HHS deems a State’s review process “effective,” then that State reviews the rate request and makes a determination that in turn is reported to the Secretary. A review process is “effective” if the State has a legal rate review process consisting of certain elements: the legal authority to collect insurer data and documentation supporting the proposed increase; timely and effectively review of the data; an independent review of the reasonableness and validity of insurer’s information; and a standard of review that is specified in state law.^[22] HHS will conduct proposed rate reviews for insurers operating in states that lack an effective process.
• Disclosure requirements for unreasonable rate increases. If a rate increase exceeds the threshold, the issuer must provide preliminary justification to the state and HHS (additional information to be provided if HHS conducts the review) under a specified disclosure standard that satisfies federal standards, with results posted to the HHS website unless the information is determined to be “confidential” under the Freedom of Information Act.^[23]
• Unreasonable rate increases. An “unreasonable rate increase” is defined as a rate that is: excessive (i.e., is unduly high in relation to covered benefits using an issuer’s medical loss ratio as a benchmark; or is not evidence-based); unjustified (i.e., not supported by documentation); or unfairly discriminatory (i.e., rate differences in similar risk categories that conflict with state law^[24] or unreasonable differences in expected costs if no state law applies).

On March 1, 2011 HHS published proposed consumer disclosure notices which insurers will be required to complete and electronically report when proposing a premium rate increase above the 10% threshold. The information provided in the notices will be easily accessed on the HHS website and provide consumers with detailed information of the proposed increase.^[25]

Key issues

Should the rate review process apply to large group markets?: The NPRM sought comments on whether the rate review process should be extended to the large group markets subject to HHS oversight under the ACA.

Rate increase review threshold: The NPRM sought comments on the reasonableness of a 10% review threshold for triggering reviews.

Public input as part of effective state programs: The NPRM sought comments on whether to allow public comment on unreasonableness as a criterion for determining whether a state has an effective rate review program.^[26]

Definition of insurance markets: The NPRM seeks input on whether state definitions of small and large group insurance markets should control, even if the definitions adopted by states differ from those found under the Public Health Service Act, as amended by the ACA.^[27]

Definition of “Unreasonable”: The NPRM seeks additional comments on whether factors not already listed in the NPRM, which have the potential to affect the reasonableness of a rate, should be taken into account in determining whether a rate increase is unreasonable.^[28]

Disclosure: What amount of information about rate increases should be shielded from public view? The NPRM seeks public comment on the disclaimer language to be used on its website to prevent the public from misconstruing the preliminary justification data related to premium rate increases.^[29]

Authorized Funding Levels

For Premium Increase Review Grants: Congress appropriated $250 million (out of funds from the Treasury not otherwise appropriated), to be awarded during FY2010 to FY2014. Funds not used within that time period will be made available to States for implementation of insurance reforms and consumer protections.^[30]

In August 2010, $46 million of the grant funds were awarded to 45 states and the District of Columbia (each received $1 million) to improve their premium rate increase review process.