Editor’s Note: This is the latest in a series of posts by Timothy Jost on the implementation of the Affordable Care Act.  Earlier posts analyze provisions governing the medical loss ratio, insurance exchanges, coverage for pre-existing conditionsappeals of coverage denialscoverage for preventive services, a patient bill of rights, grandfathered plans, tax-exempt hospitals, the small employer tax credit, the Web portal, reinsurance for early retirees, and young adult coverage.

Last week Gallup announced that currently only 44.8 percent of Americans receive health insurance through their place of employment, down from 50 percent in 2008 and a new low. One cause of this dramatic decline in coverage is certainly the rapid and continuous rise in health insurance premiums, which increased by 131 percent from 1999 to 2009, eclipsing the 38 percent increase in worker’s wages and 29 percent inflation during that period. One of ways in which the Affordable Care Act attempts to make health care more affordable is by slowing the escalation of health insurance premiums.

The Affordable Care Act includes several provisions intended to address premium growth. First, the medical loss ratio requirements that go into effect on January 1, 2011 are intended to increase the efficiency of health insurers and to require insurers to rebate to their enrollees premiums that turn out not to have been required to cover health care costs and quality improvement. Second, the legislation provides $250 billion to support state health insurance rate review regulatory activities, $1 million of which has already been made available to each of 45 states that requested grants and the District of Columbia. Third, the law provides that, beginning in 2014, the exchanges must take into account the justifications offered by health plans for proposed premium increases and “patterns or practices of excessive or unjustified premium increases” in determining whether to permit a health plan to be marketed through the exchange. Finally, section 2794 of the Public Health Services Act, created by section 1003 of the Affordable Care Act, requires the Department of Health and Human Services (HHS), “in conjunction with the States” to “establish a process for the annual review. . . of unreasonable increases in premiums for health insurance coverage.”

The Notice of Proposed Rulemaking

On December 21, 2010, HHS issued a notice of proposed rulemaking intended to implement section 2794. Although HHS has previously implemented Affordable Care Act requirements through interim final regulations, which are effective upon publication, it decided to publish a proposed rule and take comments before implementing this provision, acknowledging the sensitivity of the issue. Moreover, despite the fact that the statute explicitly requires implementation “beginning with the 2010 plan year,” the rule will only affect rate increases filed after July 1, 2011, in recognition of the fact that 2010 rate increases are already in effect.

Section 2794 is a puzzle. It requires HHS to review premium increases “in conjunction with the States,” but does not specify the responsibilities of either HHS or state governments. It requires HHS to “review” premium increases, but does not authorize HHS to reject them. It authorizes review of “unreasonable” premium increases, but proceeds to require insurers to “submit . . . a justification for an unreasonable premium increase prior to the implementation of the increase,” suggesting that a premium increase could be both unreasonable and justifiable.

Summary of the Rule

The proposed regulation attempts to sort out this puzzle. It begins by establishing a threshold level above which premium increases must be justified preliminarily. For 2011 this threshold will be 10 percent; for 2012 and later it will be either 10 percent or a state-specific threshold (which could be higher or lower) determined by the costs of health care and insurance in a particular state. Any issuer that proposes a rate increase in excess of this threshold must submit a preliminary justification for the rate increase before it goes into effect to HHS and to the applicable state. HHS will post this information on its website. If the applicable state has a rate review program determined by HHS to be “effective,” the state will review the rate request and report to HHS, which will accept its decision. If the state does not have an approved program, the insurer must submit further information to HHS and HHS will review the proposed rate increase determining whether it is “unreasonable,” defined as excessive, unjustified, or unfairly discriminatory. If HHS decides that a proposed rate increase is unreasonable, it will post this determination on its website. The insurer may then withdraw its proposed increase, propose a lower increase (which must also be reviewed if it is above the threshold), or implement the proposed “unreasonable” increase. Whether or not an insurer can implement an increase determined to be unreasonable by a state will, of course, depend on state law.

Application of the Rule

The proposed rule only applies to the individual and small group and not to the large group market. This is contrary to the statute, which applies to all “health insurance issuers,” including large group insurers. The definition of small group follows state law where the state offers a definition, but only includes groups of 50 or smaller where state law does not offer a definition. The preamble also states that HHS will defer to the state definition of small group, even if the state defines small groups as groups of 25 or smaller or defines association health plans as large groups. This is contrary to the terms of the Affordable Care Act, which define small employers as employers with 100 or fewer employees, or, if a state elects prior to 2016, with 50 or fewer.

The regulation’s preamble notes that most states do not regulate rates for large groups and that large groups normally have sufficient bargaining power to make rate review unnecessary. Large employers also often have the option of self-insurance. But it is arguable that groups of 26 (or even 51) and small employers covered through association health plans are not that different from very small groups, and also need protection. As specified in the statute, grandfathered plans, excepted benefit plans, and self-insured plans are not subject to the regulation.

“Premium Increases” Defined

Although the statute applies to “premium increases,” the regulation applies the threshold to the weighted average of increases in rates for a specific “product.” “Product” is defined as a “package of health insurance coverage benefits with a discrete set of rating and pricing methodologies that a health insurance issuer offers in a State.” The application of the regulation is thus more granular than is the medical loss ratio regulation, which applies to “issuers,” at the state and market level. Nevertheless, a “product” rate increase could be below the 10 percent threshold and yet insured individuals or groups might face premium increases far in excess of 10 percent, thus the regulation does not necessarily capture all unreasonable “premium” increases. The regulation also applies not just to single increases but also to premium increases that when aggregated with increases over the preceding 12 months exceed 10 percent.

HHS estimates that a total of 417 issuers (311 in the individual market and 342 in the small group market, with considerable overlap) will be subject to the regulation; that between 4,858 and 5,828 rate increases will be filed in 2011; that between 40 and 67 percent of rate filings in the individual market and 20 and 42 percent in the small group market will be non-grandfathered in 2011; and that 50 to 70 percent of rate filings in the individual market and 20 to 40 percent in the small group market will be above the 10 percent threshold. In sum, HHS estimates that 371 and 1396 filings (mid-range, 773) will require justification for 2011, although the number will increase as plans lose grandfathered status.

The Preliminary Justification

If a rate increase request exceeds the threshold, the insurer must submit a “preliminary justification.” The preliminary justification must include a summary of the rate increase setting out certain information about the rate increase request and a written narrative explaining the data and assumptions used to develop the rate increase request. If HHS is reviewing the rate increase rather than a state, an additional set of rate filing information must be provided to HHS to permit a determination as to whether the request is unreasonable.

This disclosure requirement is the key to the regulation. Although the statute does not authorize HHS to reject proposed rate increases, Congress determined that public disclosure of information supporting rate increases would invite public scrutiny of rate increase proposals and might have a “sentinel effect,” deterring unreasonable requests. In a number of instances in the past year, insurers have had rate increases rejected or have withdrawn proposed rate increases in the face of public criticism of the proposed increases.

The scope of the information that must be disclosed under the regulation is disappointing. HHS had requested the National Association of Insurance Commissioners (NAIC) to develop a rate filing disclosure form to be used for purposes of justifying rate increase proposals. The NAIC executive and plenary approved the form on December 16, 2010. Although HHS has not yet released the forms that it will require insurers to use to justify rate increases, the elements described in the proposed regulation seem far less detailed and expansive than that required by the NAIC form, which had been generally applauded by consumer organizations because of the scope of the information it would provide.

Further, although section 2794 requires both HHS and the insurer to disclose publicly information supporting a rate increase, the proposed regulation allows issuers to designate portions of the rate filing information the issuer provides to HHS (although not the rate increase summary and written narrative) as “confidential,” and then requires HHS to determine under its Freedom of Information Act regulation (45 C.F.R. ‘ 5.65)
whether or not the information should be disclosed. This provision of the proposed regulation confuses public disclosure under the Freedom of Information Act, which explicitly contains an exception for trade secrets and confidential commercial and financial information, with the public disclosure of the justification required by 2794, which contains no such exceptions, and would seem to offer an extraordinary (and extralegal) accommodation to insurers.

Rate Review by HHS or the States

The rate increase request is next reviewed by the state or by HHS. If a state has an “effective” rate review program and notifies HHS of its determination as to the reasonableness of a rate within five days of that determination, HHS will accept it. A state will be deemed to have an “effective” program if the state:

1) requires insurers to provide data and documentation supporting rate requests;
2) conducts a timely and effective review of that data and documentation;
3) reviews the reasonableness of the assumptions used by an insurer in developing a rate request, the validity of the data, and the reliability of past projections submitted by the insurer and analyzes a rate request in light of a dozen listed factors, such as medical trend and utilization changes; and
4) applies to rate reviews a standard found in state statute or regulation.
States are not required to have the authority to actually deny proposed rate increases.

Currently, according to HHS, 43 of the states review rates in the individual or small group market, or both, and at least 10 more have indicated an interest in pursuing greater regulatory authority. HHS states in the preamble that “a significant majority of States would currently meet the standards for having an effective rate review process” in one or both of the relevant markets, although a recent study of state rate review programs by the Kaiser Family Foundation projects a much less sanguine view of state rate review authority and of the exercise of that authority.

If effective state rate review authority is not available, HHS will review the proposed increase in terms of whether it is excessive (in relationship to the value of benefits offered and considering the insurers medical loss ratio); unjustified (by the documentation and data), or unfairly discriminatory. If HHS determines that a proposed rate increase is unreasonable, it will post this determination on its website along with a brief explanation. It will also post a state determination that a rate increase is unreasonable. The insurer may then abandon the proposed rate increase, reduce it, or implement it. If the insurer decides to proceed with the unreasonable rate increase, it must submit to HHS and post on its website a final justification of the rate increase. But in the end, Congress did not empower HHS to stop proposed increases.

There is no role for consumers in the rate review process, other than that of publicizing the fact that a rate increase has been deemed unreasonable. HHS is seeking comment on whether an opportunity for the public to comment on rate review requests should be considered as a criterion for determining the effectiveness of a rate review program. Consumers are allowed to comment on rate increase proposals in some states, and HHS should consider both requiring states to allow consumer participation, as well as allowing consumer participation in its own rate review process.

A Year of Active Rulemaking

The rate review regulation concludes a very active year of rulemaking for HHS. The rate review regulation is the last of the immediate and first year reform regulations under the Affordable Care Act, and although some major regulations are expected next year (the exchange and uniform explanation of benefit regulations for example), and some interim final regulations may be revised, things should be quieter on the regulatory front. A discernable pattern has emerged from this first year regulatory effort, with HHS attempting to implement faithfully the consumer protections mandated by Congress while at the same time responding practically to industry concerns and being careful to respect the prerogatives of the states. Although AHIP’s response to the rate review regulation was predictably negative, in fact on first read the proposed regulation seems uncharacteristically tilted toward industry. Perhaps HHS is “triangulating,” given the new congressional realities, but I hope the final rule, and in particular the preliminary justification form, will be stronger than what is signaled by this proposal.