Straight talk on health care reform: Health insurance rate review

What do new federal health care reforms and existing state law do to help rein in health insurance premium increases?

One tool is the use of "rate review." Prior to 2008, Colorado was a "file and use" state. File and use required insurance companies to file rates and rating data with the Divivison of Insurance; rates could be implemented before they were reviewed, but if they were determined to be unjustified, corrective action could be imposed.

House Bill 1389 and "prior approval" of premiums
In 2008, the Colorado state legislature passed House Bill 1389, the FAIR Act, which made Colorado a "prior approval" state. Under this law, health insurance rate increases became subject to prior approval by the Division of Insurance before they could be implemented. The law also allowed the division to consider the company's overall finances, including profits, investment income and surpluses, when reviewing a rate change. Prior approval gives the state authority to reject a proposed increase deemed to be excessive, inadequate or unfairly discriminatory.

Colorado also provides guidelines for carriers on loss ratios (how much the plan spends on medical care compared to other costs) – 65 percent in the individual market and 75 percent in the small-group market. These are guidelines, not requirements, but plans that don't meet the loss ratios must justify their rates.

In terms of transparency, the division provides a "rate summary" on its website.

In the first six months of the FAIR Act (July 2008 to January 2009), 80 requested rate increases were approved, 62 were disapproved, and 13 were withdrawn.

According to the Kaiser Family Foundation, the Colorado Division of Insurance frequently asks carriers to reduce rates in order to more closely comply with the statutory standard, and carriers often agree to do so. Division staff estimates that 10 to 15 percent of filings are formally rejected. This estimate does not include filings where issues were resolved or rates were reduced in order to avoid a formal disapproval.

Rate review and national health care reform
Under the new Patient Protection and Affordable Care Act, additional rate review provisions will be implemented in Colorado. These provisions will require the U.S. Department of Health and Human Services to work with state insurance commissioners to establish an annual review designed to identify "unreasonable increases in premiums." Although the final definition of "unreasonable increases" will not be finalized for a few months, it may well include consideration of a plan's pattern of rate increases, rate of growth in medical costs, overall financial solvency of the company and, effective in 2011, a plan's "medical loss ratio" (how much the plan spends on medical care compared to other costs). Under PPACA, medical loss ratios will be requirements, not guidelines, and will be more stringent than those under House Bill 1389, with an 85 percent ratio for plans in the large-group market and 80 percent for plans in the individual and small-group markets.

National health care reform grants
The new health care reforms provide a $250 million federal grant program in years 2010 to 2014 to encourage states to expand and improve the process by which they review and approve premium rates. In the first round of this grant program, the District of Columbia and 45 states received $46 million to support enhanced rate review. Colorado got $1 million to improve the quality of information used in rate reviews; reduce the amount of time required for processing reviews; improve consumer reporting, education and outreach, as well as reporting to the federal department of Health and Human Services. This will also allow the division to make the rate review process more transparent and accessible for consumers.

The grant also allowed the Colorado Division of Insurance to expand its staff. The division has hired rate review analysts and actuaries to assist with new rate filings, as well as staff to address consumer complaints and outreach. Also, the division's website will be upgraded so this information can be easily accessed by consumers.

Over the next four years, additional grant money will substantially expand Colorado's capacity to more extensively review potential rate increases. New funding will allow additional contracting, internal training, software, databases and procedural enhancements. Additional resources will permit more of the division's staff to perform more extensive rate reviews.

Insurance premiums in Colorado compared to other states
According to the Medical Expenditure Panel Survey in 2009, Colorado ranked 26th among the 50 states in the annual amount paid by a family for health insurance premiums involving employers of all sizes. The average annual premium for a Colorado family getting coverage through an employer was $13,360 in 2009, compared to $9,522 five years earlier. The average annual premium for a single employee was $4,570 in 2008, compared to $3,645 in 2003.

Factors that carriers can use to adjust rates
Colorado state law specifies the factors that an insurance company can review in order to annually adjust health care premiums. Large-group insurers (more than 50 employees) can adjust premiums based on any factor, although premium claims by the group are the most significant component. Small-group insurers (fewer than 50 employees) can adjust premiums based on age, geography, tobacco use, type of industry, family size and a plan's benefit structure. Individual insurers can adjust premiums based on age, health status, tobacco, geography and a plan's benefit design.

Companies can also review factors that reflect changes in cost related to the delivery of health care services, increases in costs and the number of services provided, frequency of use, as well as the number of claims made by all policyholders. Insurers may consider increased costs associated with existing policies and their benefit structures, costs resulting from normal business operations and adjustments in premiums due to uncompensated care or inadequate payments from public programs. Finally, premiums can be adjusted to meet the new federal health care reforms, in addition to new coverage required by state law.

Factors that are considered before approving a rate change
When an insurance carrier requests a rate increase, the following areas are reviewed: current premiums, the financial status of the carrier and its history of rate changes, company profits, administrative costs, actual and projected claims, the cost of medical care and the cost of prescription drugs.

In addition to assessing the justification for the rate change, analysts look to see if the rate request is discriminatory, excessive or inadequate. Discrimination would be charging different rates for the same benefits or rates that do not appear to be equitable. Excessive rates involve policies that are costly but provide little benefit to consumers or generate unreasonably high profits for the carrier. Inadequate rates are those that are so low that the carrier would be unable to pay projected claims or adequately meet expenses. In some cases, temporary low rates may be a strategy that can be used to create an unfair market advantage or monopoly.

If the carrier can justify that the new rate is reasonable, then the modification is approved. If that justification cannot be made, then the Division of Insurance can reject the increase or approve a smaller one.

Insurance company market share in Colorado
Another factor affecting premium rates is market competition. Although there are approximately 400 health insurance carriers in Colorado, the ten largest control about 70% of the market share. The top four, Kaiser, Anthem Blue Cross and Blue Shield, PacifiCare and United Healthcare, represent about 54.8 percent of the market.

Managing premium increases
There are many reasons for increases in health insurance premiums. When state divisions of insurance have the authority to fully review and reject rate changes, they can play a valuable role in managing premium rates when market competition alone may not be sufficient to prevent premiums from growing faster than increases in medical costs and other factors. While rate review cannot directly address all issues or single-handedly eliminate all future rate increases, it does provide another level of examination, consumer protection and transparency.

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End notes
1)  Kaiser Family Foundation, Rate Review: Spotlight on State Efforts to Make Health Insurance More Affordable, December 2010.
2) Presentation by Kelly Shanahan, Colorado Consumer Health Initiative, Insurance Watchdog Measures: The Colorado Experience, at Families USA Health Action 2009 conference in Washington. D.C., Jan. 30, 2009.
3) Kaiser Family Foundation, Rate Review: Spotlight on State Efforts to Make Health Insurance More Affordable, December 2010.
4) Patient Protection and Affordable Care Act (PPACA ) § 2794 (c)
5) Colorado Department of Regulatory Agencies, Frequently Asked Questions on Rate Filing, Rate Reviews and Approval of Health Insurance Rates in Colorado.
6) Colorado Department of Regulatory Agencies, Factors Affecting Health Insurance Premiums in 2010, Nov. 4, 2010.
7) Colorado Department of Regulatory Agencies, Frequently Asked Questions on Rate Filing, Rate Reviews and Approval of Health Insurance Rates in Colorado.
8) Colorado Department of Regulatory Agencies, Annual Report of the Commissioner of Insurance, 2009 Health Insurance Report.