FACT CHECK: Health Insurance Premiums -- Rate Determination and Review

Posted by The Campaign on February 24, 2010 at 7:38 AM

Health Insurance Premiums: Rate Determination and Review

Overview

The vast majority of states tightly regulate premium rates for the individual and small group markets throughout the lifetime of a policy. In those states, health plans are required to file their proposed rates with the insurance regulator and state insurance regulators carefully review these rates to ensure that they are neither inadequate nor excessive.

How are premium rates determined?

State law requires that health plans ensure the premiums collected are sufficient to cover the medical costs of their customers, or they risk financial insolvency. A health plan's actuarial team reviews historical and current data to determine necessary rates, including:

• Known past experience
• Demographic and trend projections
• Predictions of future utilization and costs (based on historical and current data).

How are premium rates reviewed?

The rate filing requirements are set by state laws and provide the state insurance regulator with an opportunity to review the proposed rates. According to the NAIC, "there are 29 states that have prior approval of rates and a number of other states that have other tools for influencing insurers to hold down rate increases."1

State insurance regulators carefully review premium increases for:

• Sufficiency: Are the rates neither insufficient nor excessive in relation to the benefits provided?
• Fair and reasonable: Are they reasonable, not inadequate or unfairly discriminatory?
• Solvency: Will the rates be too low and unable to cover expected medical costs?
• Regulatory compliance: Do the premiums charged comply with all state rating rules?
• Actuarial principles: Do the premiums reflect accepted actuarial principles?
• Adherence to state mandates: Do the benefits provided follow coverage mandates as set by the state?

A state insurance regulator requires a health plan to justify rates by providing:

1. A general description of the base rate that the company intends to charge -- this will include a detailed description of actuarial projections.
2. A description of the rate increase (if rates are being increased) and a detailed description of the factors that the company used to determine the necessity of the increase. 
3. The company's projected experience for the appropriate period-generally, this will be at least five years for, and may be for the projected life of, an individual policy, and one year for small group policies. 
4. Changes in assumptions the carrier makes based on benefit design requirements or mandates.
5. Changes in factors, such as demographics for the block of business. 

Tags: Fact Check, Costs, Rate Review

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What They Are Saying: Federal Rate Review

Posted by The Campaign on February 24, 2010 at 7:35 AM

What They Are Saying About Federal Rate Review

• Los Angeles Times:  “But the more ballyhooed initiative to have federal bureaucrats review insurance premiums…wouldn’t address the forces driving up the cost of medical care.”  (Los Angeles Times, Editorial: Obama’s Summit, 02/23/10)

• The Washington Post:  “The president also would give the government power to block increases in health-care premiums.  Given public concerns about a federal takeover of the health-care system, letting the government essentially dictate premiums hardly seems like a step in the right direction.  More than half the states already require their insurance commissioners to approve rate increases in the individual or small-group markets; the House- and Senate-passed bills provide authority to review increases for insurers participating in the newly created exchanges.  The White House argues that this power will help shield consumers in the four years before the exchanges are up and running, but its recent use of the insurance industry as a political scapegoat does not bode well for its responsible use of such authority.”  (The Washington Post, Editorial: On health care, Mr. Obama lets the next president do the hard stuff, 02/23/10)

• National Association of Insurance Commissioners:  “State insurance regulators reacted coolly Monday to provisions in the new White House health care overhaul plan that would the give the secretary of Health and Human Services power to deny excessive premium increases. ‘By and large I think the states are very effective in monitoring’ insurance markets, said an official with the National Association of Insurance Commissioners.”  (CQ, Insurers, State Regulators Fault Federal Review of Rate Hikes, 02/22/10)

• Sandy Praeger, Kansas Insurance Commissioner:  “‘I think we’re chasing the wrong tail here.  It’s really about health care costs…In most cases, the companies have been able to justify them, because of the economic situation.  The book of business is probably getting sicker because healthier people are dropping out.’”  (NPR, Obama Plan Would Monitor Insurance Premiums, 02/23/10)

• Detroit News:  “A new wrinkle added by the president would give the federal government rate-setting oversight for insurance policies. That’s a responsibility now handled by the states.  Involving Washington in rate setting would add another political layer to an already contentious process and likely make it impossible for insurance companies to recover their costs, driving them out of business.”  (Detroit News, Editorial: Obama’s Compromise Health Care Proposal Looks Too Much Like The Old Plan, 02/23/10)

• Uwe Reinhardt, Economist, Princeton University: “‘Everyone is beating up on the insurance companies, but you may be shooting at the wrong target…’”  (AOLNews, Who’s the Bad Guy in Insurance Premium Hikes?, 02/21/10)

• Kaiser Health News: “State insurance regulators said President Barack Obama goes too far with his proposal Monday to give the federal government new power to reject health insurance rate increases.  Three veteran state insurance commissioners said in interviews that states are in a better position to judge insurers’ premium proposals.”  (Kaiser Health News, State Regulators Criticize Obama Plan To Create Federal Authority Over Health Insurance Rates, 02/22/10)

• Kim Holland, Oklahoma Insurance Commissioner: “‘Health insurance is very localized and states already have a number of tools to monitor rates,’ she said. ‘Overall, I think state regulators do a good job.’” (Kaiser Health News, State Regulators Criticize Obama Plan To Create Federal Authority Over Health Insurance Rates, 02/22/10)

• Chicago Tribune:  “Price controls. Yes, price controls…That practice would not work any better in health insurance than elsewhere.  It would induce companies to cut back on the procedures they cover, cutting costs by reducing services.  It would also encourage WellPoint and other insurers to simply get out of the individual policy business entirely, to the benefit of no one.”  (Chicago Tribune, Editorial: Price controls?, 02/23/10)

• Robert Laszewski, Health Care Policy Analyst:  “There is nothing new in it save a health insurance rate regulatory board that is an awkward political proposal at best…Fundamentally, what good would insurance rate regulation do if the President’s plan has only tepid cost containment built into it in the first place?”  (The Health Care Blog, The President’s Health Care Plan, 02/22/10)

• Joel Ario, Pennsylvania Insurance Commissioner: “‘It could end up as a “who’s on first and what’s on second” problem,’ he said.”  (Kaiser Health News, State Regulators Criticize Obama Plan To Create Federal Authority Over Health Insurance Rates, 02/22/10)

• Seattle Weekly:  “Practically, however, a rate board is unlikely to do much, judging by Washington state’s experience with similar regulation…Stephanie Marquis, a spokesperson for Insurance Commissioner Mike Kreidler, says her boss’s hands were tied. He has to go along with rate increases if insurance companies show that they are paying out more money than they are taking in. And the reality is, Marquis says, that insurance companies lose money in the individual market, which holds just a sliver of the total population, and one that tends to need a lot of expensive care.”  (Seattle Weekly, Washington State Offers Dismal Lesson for Obama's New Attempt to Save Health Care Reform, 02/23/10)

• The Wall Street Journal:  “The bill’s one new inspiration is a powerful federal board that would regulate premiums in the individual insurance market.  In all 50 states, insurers are already required to justify premium increases to insurance commissioners, who generally have the power to give a regulatory go-ahead, or not.  But their primary concern is actuarial soundness and capital standards, making sure that companies have enough cash to pay claims.  The White House wants to create another layer of review that will be able to reject any rate increase that is ‘unreasonable or unjustified.’ Any insurer deemed guilty of such an infraction by this new bureaucracy ‘must lower premiums, provide rebates, or take other actions to make premiums affordable.’  In other words, de facto price controls.”  (The Wall Street Journal, Editorial: ObamaCare at Ramming Speed, 02/23/10)

• Sandy Praeger, Kansas Insurance Commissioner: “‘If you want to keep costs under control, it’s not about managing health care premiums…it’s about managing the underlying health care costs.’” (Kaiser Health News, State Regulators Criticize Obama Plan To Create Federal Authority Over Health Insurance Rates, 02/22/10)

• Kim Holland, Oklahoma Insurance Commissioner: “Holland noted that state regulators are responsible for assuring the solvency of plans, not just reviewing rates.  One question about the Feinstein proposal is the consequences that could occur from having the federal government only focusing on rates without specifically having responsibility over solvency.  She suggested that federal denial of rate increases could create solvency concerns…Holland emphasized that rising medical costs are the underlying driver of rising premiums and that policymakers need to focus on those rising costs.”  (CQ, Insurers, State Regulators Fault Federal Review of Rate Hikes, 02/22/10)

• Portfolio.com:  “States apparently can’t do this job themselves, according to the White House’s thinking. If that’s the case, where was this proposal a year ago, when the hard work of crafting health care reform legislation began?”  (Portfolio.com, The Problem With Obama’s Plan, 02/22/10)

• Dave Shove, Analyst: “BMO Capital Markets analyst Dave Shove, who follows the insurance industry, said he doubts a federal rate review would push health plans into insolvency. But he said many details remain to be resolved, and a federal regulator might motivate insurers to stop selling individual policies in some markets.  ‘That is a very real possibility,’ he said. ‘You probably will reduce choice for consumers.’”  (AP, Insurers see potential for plan insolvency behind Obama's premium regulation proposal, 02/22/10)

• Alwyn Cassil, Center for Studying Health System Change: “‘…this idea that (taking) this $12billion that they have in profits … would fix our health-care spending problems is just a pipe dream.’”  (Louisville Courier-Journal, Health insurers defend profits, 02/21/10)

Tags: WTAS, Rate Review, Costs

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