Straight talk on health care reform: Health insurance rate review

In our first Straight Talk email, we addressed the minimal impact of federal health care reforms on increasing insurance premiums in Colorado (representing under 5% of rate increases).

But what does the federal law do – in concert with a recent state law – to help rein in those increases? One of several tools provided by the new law is "rate review."

Although some form of rate review has existed for some time, Colorado was a "file and use" state before 2008. That meant that insurance companies were required to file rates and data with the Division of Insurance; rates could be implemented before being reviewed, but if they were determined to be unjustified, corrective action could be imposed.

In 2008, the Colorado legislature passed House Bill 1389, the FAIR Act, which made Colorado a "prior approval" state. This change in law said that health insurance increases were subject to approval by the Division of Insurance before they could be implemented.

The law also allowed the division to consider a company's overall finances, including profits, investment income and surpluses, when reviewing a proposed rate change. Prior approval gave the state the authority to reject a proposed increase deemed to be excessive, inadequate or discriminatory.

In the first six months under this law (July 2008 to January 2009), 80 rate increases were approved, 62 were disapproved and 13 were withdrawn.[1]

We believe the premium review process offers important checks and safeguards for consumers and that new federal reform provisions will further assist in this effort.

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 premium for a Colorado family covered through an employer was $13,360 in 2009, compared to $9,522 five years earlier (a 40 percent increase). The average annual premium for a single employee was $4,570 in 2008, compared to $3,645 in 2003 (25 percent increase).[2]

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 considerations of a plan's pattern of rate increases, analysis of the rate of growth in medical costs, overall financial solvency of the company and, effective in 2011, the plan's "medical loss ratio" (how much the plan spends on medical care compared to other costs).

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[3]. In the first round of that program, Colorado received $1 million to enhance its existing rate review process and to bolster consumer education and outreach. This will allow the Colorado Division of Insurance to make the rate review process more transparent and accessible for consumers.[4] Future funding from that larger grant will improve and expand the division's capacity for rate review analysis.

Many factors are considered when reviewing health insurance rate increases. Changes in premiums can be caused by a health insurer's financial situation and whether its current rate structure can still cover claims and administrative costs. Those factors change as part of the normal business cycle.

Increases can also arise from factors that are outside the control of any insurance company -- primarily growth in medical spending. Unhealthy personal lifestyles, an aging population and increased use of health care services all contribute to that growth in spending. So do new health care advances, new technology and rising drug costs.

While rate review cannot directly address all of those components or single-handedly eliminate all future rate increases, it does provide a greater level of examination, consumer protection and transparency.

Click here for more a more in-depth look at rate review by policy analyst Bob Semro.

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[1] 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., January 30, 2009.
[2] Colorado Department of Regulatory Agencies, Frequently Asked Questions on Rate Filing, Rate Reviews and Approval of Health Insurance Rates in Colorado.
[3] Patient Protection and Affordable Care Act (PPACA ) § 2794 (c)
[4] Colorado Department of Regulatory Agencies, Frequently Asked Questions on Rate Filing, Rate Reviews and Approval of Health Insurance Rates in Colorado.