JUNE 2014 Deciphering the Data: Health Insurance Rates and Rate Review In-Brief Health insurers participating in the new Marketplaces are filing rates for 2015 during the next few months. A few states have already released data on proposed rates. There is substantial economic, policy, and political interest in the magnitude of proposed rate changes. This brief provides background for understanding the economic drivers of proposed rates, state and federal rate review authority, the effects of rate changes on Marketplace enrollees and federal spending on premium credits, and the economic and political dynamics of the rate review and approval process. Premium rates for individual and small group expenses (including taxes and fees), and, using While the competitive environment, company health insurance generally must be filed with language from DHHS’ Unified Rate Review strategy, and other factors will play a role, and often must be approved by state regulators, Template, an amount for “risk and profit.” proposed rates for 2015 will be heavily and the ACA requires health insurers to justify Medical costs are by far and away the largest influenced by projected cost of medical claims, unreasonable rate increases. While individual component. To illustrate this point, we analyzed including the projected effects of any changes market rates in the Marketplaces for 2014 2013 financial statement data filed by all health in total care costs, and provider networks, received considerable attention when they were insurers, as reported by the National Association contracts, and fees. Projected characteristics released by the federal government and the of Insurance Commissioners (NAIC). As shown of the risk pool for 2015 compared with states in the latter half of 2013, the rate filing/ below, medical costs equaled approximately projections used for 2014 rates will be a key approval process received relatively little public 85% of individual market premiums countrywide determinant of the magnitude of proposed rate discussion. The discussion and debate promises in 2013. (The ACA requires insurers to rebate a changes for 2015 rates. See further discussions to be broader and earlier this year, as insurers portion of premiums if expenditures on medical here and here. file their 2015 rates. A number of states have claim costs and quality improvement in a state released these proposed rates, prompting highly are less than 80 percent of premiums less An insurer has to price its individual market partisan dialogue about what they mean. Many certain taxes and fees in the individual and policies using a single-risk pool for ACA- ACA opponents will claim that any non-negligible small group markets and 85 percent in the large compliant policies, excluding catastrophic rate increases are further proof of an ACA train group market.) policies, grandfathered plans, and non- wreck. Many ACA supporters will claim that compliant policies that are permitted to be any percentage rate increases below double The 2014 premiums for Qualified Health renewed through October 2016. Evidence that digit levels prove that the ACA is working. The Plans (QHPs) in state and federally-facilitated enrollees in the 2014 risk pools in some states facts, however, will be far more complex. Here Marketplaces varied substantially across states are older than had been projected will put we provide some context for understanding the (and rating areas within states), largely due to some upward pressure on rates. Projections proposed rates and the review process. geographic differences in the projected cost of of the average projected medical expenses medical claims. Using RWJF Breakaway data, we of enrollees of any given age will be critical. mapped average silver plan premiums for a 30 Insurers have substantial information on the RATE DRIVERS year old couple with two children. Our analysis age distribution and other demographics of Insurance premium calculations for a given risk reveals that 2014 monthly premiums averaged 2014 enrollees, and many insurers have claims pool have three main components: the projected $1,000 or more in eight states and under $700 experience for large numbers of enrollees on cost of medical claims, projected administrative in five states. or off the exchanges who were insured prior to 1 JUNE 2014 Percentage of Individual Market Premiums in 2013 Medical claims 84.6% General & administrative 8.1% Distribution 5.1% Claims adjustment 2.1% Cost containment 1.2% Taxes & Fees 1.0% Quality improvement 0.9% Pre-tax margin -3.1% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Source: author analysis of industry aggregates based on company-level data from SNL Financial. 2014. But they have less data to assess the expected utilization But possible constraints on program funding could occur if HHS of their newly insured enrollees this early in 2014, and the is unable to allocate the necessary funds. Changes in the ACA’s extent of adverse selection associated with guaranteed issue, transitional reinsurance program parameters already set for limitations on permissible rating factors, relatively low penalties 2015 will increase projected medical costs net of reinsurance for not complying with the requirement to obtain coverage, and payments compared with 2014 and thus contribute to higher hardship exemptions from the mandate. rate increases. Insurer representatives have expressed substantial concern REVIEW OF “UNREASONABLE” RATE INCREASES about the transitional policy that will allow individuals in states that permit to renew non-complying health plans through Section 2794 of the ACA, “Ensuring that Consumers Get Value October 2016. Younger and healthier policyholders may be for Their Dollars,” charged HHS, in conjunction with the states, more likely to continue these plans, resulting in older and less to establish a process for annual review of “unreasonable” healthy risk pools for QHPs and putting upward pressure on health insurance rate increases. It requires insurers to justify rates. Differences across states in the degree to which insurers unreasonable rate increases to HHS and relevant state are permitted to extend non-complying plans will contribute to regulators prior to implementation, and to “prominently post differences in the magnitude of proposed rate increases, with such information on their Internet websites,” with public states that allow extensions on average having a less healthy disclosure otherwise ensured by HHS. The ACA, however, did risk pool and higher increases. The assessment of expected not require regulatory approval of rate changes by the states or utilization will also be complicated by any tendency of newly permit HHS to deny rate increases. insured Marketplace enrollees to utilize relatively high levels of care right after obtaining coverage. HHS set 10% as the threshold for “unreasonable” rate increases beginning September 1, 2011, and has maintained it at that The bottom line is that insurers face substantial uncertainty level. (Although the statute permitted adoption of state-specific about the magnitude of medical claim costs for 2015, in thresholds, HHS denied requests by Alaska and Wisconsin for addition to the general risk in forecasting medical cost trends higher thresholds in 2012.) Insurers that propose increases of even when risk pools are relatively stable. Moreover, payments 10% or more must file a preliminary justification with HHS and under the ACA’s risk adjustment will depend on how an insurer’s the state, which is posted on an HHS website and the insurers’ experience compares to other insurers, which for 2014 will not websites. If the state or HHS deems the increase unreasonable be known until early 2015. Insurers will continue in 2015 to and the insurer nonetheless implements the increase (in those receive partial protection against loss from higher than projected states that do not require prior regulatory approval of rates), medical costs from the ACA’s temporary risk corridor program, the insurer must submit a final justification to regulators and and HHS made changes in risk corridor parameters to allow post it on the insurer’s website. HHS has provided a number greater protection given continuation of non-complying plans. of examples where it asserts that enhanced rate review 2 JUNE 2014 Average 2014 Silver Plan Premiums for Couple Aged 30, 2 Children $802 $1,175 NH VT $996 $833 WA ME $740 $817 MT ND $717 $979 MN MA $801 $735 $1,141 RI OR $943 $705 $1,004 NY WI $993 ID SD $899 $1,169 MI CT WY $757 $1,035 $835 PA IA NJ $837 $848 $907 NE $941 OH $846 $867 NV IN DE IL $756 $741 $655 WV $803 UT $1,056 MD $686 $856 $783 VA CO $917 KS MO KY CA $886 $798 $665 NC DC TN $741 $751 OK $913 $878 $731 SC AR AZ NM $698 $921 $1,073 AL GA MS $901 $812 LA TX $1,212 AK $881 FL $600 to $700 $700 to $800 $616 HI $800 to $900 $900 to $1,000 *excludes a number of $1,000 to $1,250 plans in VA covering bariatric surgery with extraordinarily Source: author analysis of RWJF Breakaway data. large premiums saved consumers money by reducing insurers’ requested rate “Prior approval” laws require rates to be filed with regulators increases, as has the Kaiser Family Foundation. for approval. Rates often are deemed approved if the regulator takes no action within a specified time of the rate filing (such as The ACA authorized the HHS to assume responsibility for review 30 or 60 days). Rates generally can be disapproved after initial of proposed rate increases at or above the 10% threshold if approval if regulators determine they no longer meet regulatory it deems that a state does not have an effective rate review standards. A variety of other laws require rates to be filed process. HHS regulations subsequently established detailed with regulators either before or after they take effect, without criteria for effective rate review. As of April 2014, HHS was requiring prior approval, although some laws allow regulators to responsible for the reviews of rates for the individual market in challenge rates for not meeting regulatory standards. five states (Alabama, Missouri, Oklahoma, Texas, and Wyoming). Thirty-five states and the District of Columbia had prior approval The ACA also authorized $250 million for Health Insurance Rate rate review authority for individual health insurance as of Review Grants for states to improve their rate review. The funds, January 2012 (see map and Kaiser Family Foundation). A few which have been authorized to specific states in several cycles, additional states had prior approval authority only for coverage have been used to expand the scope of rate review and rate filing provided by health maintenance organizations. While a few requirements, improve information technology, improve consumer states enacted such authority following the passage of the ACA, interfaces (such as rate review websites), and hire staff. many others beefed up their rate review in conjunction with the law’s establishment of criteria for effective rate review and rate review grant program. Rate review statutes, whether for health GENERAL RATE REVIEW AUTHORITY insurance or general insurance, are only one indicator of the The overall standard for the review and regulation of insurance likely intensity of rate review. States with prior approval authority, rates by the states typically is that rates be adequate but not for example, may vary considerably in how they exercise their excessive or unfairly discriminatory. Specific types of authority statutory authority to disapprove proposed rates. for individual health insurance vary across states and are often complex. As is true for property/casualty insurance, however, an In contrast to health insurance rate regulation, a significant important distinction is whether regulators must approve rates. amount of research has considered the effects over time of 3 JUNE 2014 States with Prior Approval Rate Review Authority for Individual Health Insurance NH VT WA ME MT ND MN MA RI OR NY WI ID SD MI CT WY PA NJ IA NE OH NV IN DE IL UT WV MD VA CO KS MO KY CA NC DC TN SC OK AR AZ NM AL GA MS LA TX AK FL No prior approval Prior approval HI Source: Kaiser Family Foundation, 2012. state rate regulation of automobile insurance and, to a lesser ECONOMIC AND POLITICAL DYNAMICS extent, workers’ compensation insurance. The results suggest OF RATE REVIEW AND APPROVAL that prior approval authority on average had little or no effect on Proposed Marketplace rates for 2015 will vary widely across rates in relation to claim costs. There is evidence, however, that states due to differences in underlying rate drivers and regulators sometimes did not permit rate increases to keep pace market conditions. The extent to which proposed rates are with increases in claim costs in some states with prior approval approved without changes will depend on states’ general authority, which contributed to less coverage being available and statutory authority over health insurance rates and specific exits by some insurers. In addition, the rate review and approval implementation of that authority. It also could depend on the process in some states and time periods has been characterized operation of ACA-required review of proposed increases of by lengthy hearings on proposed rates, including claim cost 10% or more by the states and HHS, as well as possible projections, administrative costs, and proposed profit margins. influence from HHS on state regulators implementing their general rate authority, perhaps especially in states with The lessons from this research for health insurance are not federally-facilitated Marketplaces. clear, in part because of the higher market concentration in many states’ individual (and small group) health insurance Increases in rates for 2015 vs. 2014 will have diverse effects markets compared with property/casualty insurance markets, on consumers in a given market, depending in large part on and also because of potentially new dynamics for the health their eligibility for premium subsidies. A significant majority insurance Marketplaces. If health insurers proposed large of Marketplace enrollees countrywide are subsidy-eligible. increases, extensive concern with the affordability of health Given that premium subsidies are calculated as the difference insurance and the history of politically sensitive automobile and between the premium for the second lowest cost Silver plan in a workers’ compensation insurance in some states could presage market and specified percentages of income (up to 400% of the significant regulatory pressure for restraining rate increases. Federal Poverty Level), many enrollees will be at least partially shielded from rate increases, with federal spending on premium subsidies making up the difference. 4 JUNE 2014 If a subsidy-eligible person’s income does not change, increases factors favor regulatory accommodation to proposed increases. in the 2015 premium for the second lowest cost silver plan First, to encourage insurer participation in the Marketplaces in would increase the subsidy on a dollar-for-dollar basis, and 2015 and beyond in an environment of substantial uncertainty, most if not all of the premium increase would be borne by it remains fundamentally important for regulators to approve the federal government. Depending on the specifics, subsidy- rate increases accompanied by reasonable but necessarily eligible persons with growing incomes may face higher prices uncertain projections. Attempts to reduce proposed rate for coverage net of premium subsidies, but less than the entire increases significantly could cause some insurers to exit and increase. Some persons with incomes below 400 percent of others to forgo plans to enter in 2015 or later. Second, regulatory FPL who were not eligible for subsidies in 2014 will become suppression of rate increases could increase pressure for subsidy eligible in 2015 due to increased rates for the second narrower provider networks and lower provider reimbursement lowest cost Silver plan, thus partially shielding them from rate and, other things being equal, undermine insurers’ financial increases. On the other hand, persons with incomes above strength and increase insolvency risk, especially for smaller and 400% of FPL in 2014 and 2015 will face the full increase in newer insurers. premium rates. On the other hand, some state regulators may have and exert There are at least three implications of these diverse effects leverage to deny proposed rate increases, betting that insurers on enrollees and potential enrollees. First, the mechanics will submit reduced requests rather than exit. Insurers that of premium subsidies (and the individual mandate) will limit have made significant investments in entering the Marketplace downward pressure on enrollment from rate increases for in a state could be reluctant to exit in the face of short-run subsidy eligible persons. Second, potential Marketplace suppression of rates by regulators. Larger insurers also might be enrollees who are not subsidy-eligible could have greater concerned with unpredictable political responses at the state or incentive to seek or maintain jobs with employer-sponsored federal level to any threat of exit or actual exit. coverage, purchase coverage directly from insurers who sell only off-exchange policies, or forgo coverage and pay the penalty Some insurers might anticipate that certain regulators will face for violating the mandate. Third, consumer discontent with rate strong political pressure to reduce proposed rate increases. increases and any attendant political pressure on regulators to In that case, proposed rates might contain an extra element hold down rate increases could be greater in states where more of conservatism in anticipation that rates ultimately approved potential enrollees are not subsidy-eligible. will be lower than those initially proposed. Under that scenario, regulators would be able to claim savings for consumers even Regulators in states with explicit authority to approve rate though all or part of the savings would be illusory. The extent to increases, and those in some states that may otherwise be which any of these scenarios play out will depend heavily on the able to affect rates, will likely face a difficult balancing act if magnitude of proposed rate increases in different markets. confronted with proposals for large rate increases. At least two 5 About the Authors JUNE 2014 This Data Brief was written by Scott E. Harrington, PhD and Janet Weiner, MPH. About The Leonard Davis Institute of Health Economics The Leonard Davis Institute of Health Economics (LDI) is the University of Pennsylvania’s center for research, policy analysis, and education on the medical, economic, and social issues that influence how health care is organized, financed, managed, and delivered. LDI, founded in 1967, is one of the first university programs to successfully cultivate collaborative multidisciplinary scholarship. It is a cooperative venture among Penn’s health professions, business, and communications schools (Medicine, Wharton, Nursing, Dental Medicine, Law School, and Annenberg School for Communication) and the Children’s Hospital of Philadelphia, with linkages to other Penn schools, including Arts & Sciences, Education, Social Policy and Practice, and Veterinary Medicine. About the Robert Wood Johnson Foundation For more than 40 years the Robert Wood Johnson Foundation has worked to improve the health and health care of all Americans. We are striving to build a national Culture of Health that will enable all Americans to live longer, healthier lives now and for generations to come. For more information, visit www.rwjf.org. Follow the Foundation on Twitter at www.rwjf.org/twitter or on Facebook at www.rwjf.org/facebook.