The Alan Katz Health Care Reform Blog

Health Care Reform From One Person's Perspective

Rate Regulation Grants Announced by HHS

Posted by Alan on February 27, 2011

Carriers set health insurance premiums based on several criteria. The single biggest component is the expected cost and utilization of medical services. Then there’s the need to cover overhead (such as operations, sales costs, marketing and armies of lawyers to deal with regulation) and profit (or retained earnings for non-profits). Insurers know they don’t operate in a vacuum, however, so they consider the pricing of competitors as well.

What’s a reasonable premium? Arguably it’s one that covers claims, operations, provides a profit, but is still affordable to consumers, at least relative to the pricing of competing carriers. This approach assumes an effective market. Carriers that get greedy (and overcharge) will lose market share to more fairly priced competitors. Those that underprice their plans one year will need to seek large premium increases the following year to make up for losses. At any one time a particular carrier’s pricing may be out-of-whack (to use the technical term), but over time the market is supposed to work things out to keep pricing reasonable.

The market, however, can be messy. A carrier seeking to make up for losses in prior years may need to seek substantial rate increases (think 40-to-50 percent).  Within the walls of the insurance company such increases makes perfect sense. Medical costs and utilization are skyrocketing. Operating efficiencies take time to achieve (without totally degrading customer service). Executives are rarely first in line to reduce their own take-home pay (nor would it amount to a lot if they did). The only way to make up for underpricing errors is to raise rates – a lot.

Outside the bubble that is most corporations, however, double-digit premium increases appear more like highway robbery than a logical business decision. How many items in our economy go up 10, 20, 40 percent of more each year? Year-after-year? Cars don’t. Most food items don’t. Gas prices may skyrocket, but they drop from time-to-time, too. Health insurance premiums seem to be on a one-way trajectory upward. When’s the last time health insurance premiums fell? (1996 is the last time I recall, but I may be missing some other exceptions).

This pricing trend is unsustainable. Some of you may recall the “rule of 72” from your economics (or math) classes. The rule of 72 is a way to estimate how long, given a growth rate, it takes to double a number. Just divide the assumed rate of growth into 72. Invest $100 in an account paying 5 percent interest and your principal will double in roughly 14.4 years (72/5 = 14.4). Increase the cost of health insurance by 10 percent per year and premiums will double in 7.2 years.

So here’s the situation: carriers price their products to cover their costs (both claims and administration), to earn a profit and to be competitive in the marketplace. Consumers see their costs increasing at unacceptable levels. What’s a lawmaker to do?

If that lawmaker believes in markets they let nature take its course. If the lawmaker: 1) believes the market isn’t working; and 2) government needs to step in when markets are broken, you require carriers to get government approval before raising their rates. The Patient Protection and Affordable Care Act includes provisions to encourage this latter approach. Or as the federal government’s web site puts it, “The affordable Care Act provides new tools and resources to protect consumers and employers from large and unreasonable health insurance premium hikes.”

That encouragement is the reason the Department of Health and Human Services is making $199 million in grant funds available to help states “create or enhance their premium rate review programs.” The goal is to bring greater transparency to the rate making process while assuring that the states are “comprehensively” reviewing carrier’s proposed prices hikes.

The idea is to prevent “unreasonable” rate increases – which begs the question: what’s unreasonable? According to a regulation proposed by HHS, that would be any rate increase of 10% or more in the individual and small group market segments. Maybe. The 10 percent threshold doesn’t determine whether a rate increase in unreasonable, but it would trigger a state review to determine if it is. Carriers would also need to post their justification for such rate increases on the Internet.

Personally, I don’t mind increased transparency in health insurance pricing. As I’ve written before, carriers need to educate consumers and lawmakers about the value they provide. After years of being hammered politicians in both parties and reams of articles about denied or rescinded coverage, the general public would be excused asking “what is it you folks do that’s of any benefit?”

So if the states ask tough questions and make carriers justify their increases, I’m fine with it. A second set of objective eyes couldn’t hurt and as I’ve noted in an earlier post, the resulting dialogue could be a way to educate the public about how rates are driven by the cost of medical care. But what we’re likely to see is an increasing number of states deciding their regulators need to sign off on any rate increase (some states already do this).

Inserting politics into the premium setting process distorts an already messy process. What politicians (or their appointees) are going to sign off on a significant rate increase – even an objectively necessary substantial premium hike – in the middle of an election season? Rates are already impacted by the underwriting cycle, now they are to be beholden to election cycles? The calculation for a politician is simple: if they allow a substantial rate increase they anger voters; if they deny it they upset an insurance carrier. Sure they could try to explain to their constituents why the rate hike was needed. But that’s hard work. It’s far easier to just say no.

Nor are public officials likely to link medical cost increases to premium hikes. Far easier to attribute increasing costs to greedy insurance executives than doctors or hospitals. Nor is there anything regulators with the authority to reject premium increases can do about increases to medical costs. The PPACA does not give states the power to tell doctors what they should charge for a given procedure. Anyone who has read this blog for long knows I’m not a fan of a single payer health care system. I do respect, however, the honesty of single payer advocates who recognize that their approach is about controlling the cost of health care at its source – what doctors and hospitals charge for care.

Advocates of increased government involvement in rate setting believe it will help lower costs. And there’s no requirement that states seek approval powers over premiums to qualify for the grants. But some (I’m looking at you California) no doubt will.

There are cost containment provisions in the PPACA. Certainly not enough, but they’re there. Rate regulation, and encouraging states to establish themselves as the final arbiters of what rate increases are permissible, is not one of them.


2 Responses to “Rate Regulation Grants Announced by HHS”

  1. Patrick Chapman said

    In 1972, the monthly cost for my FULL COVERAGE medical insurance through Kaiser was ONLY $14.95 a month with NO deductible. It was very easy for me to meet the above monthly cost for medical insurance. In the late 1970’s to the early 1980’s health insurance went on the rise substantially. The primary reason being the legal profession was allowed to start advertising their services, thus greatly increasing the number of law suits filed all accross the nation, especially against the medical profession due to the extensive amount of mal-practice insurance covearge that most medical facilities carry. Simply put the medical profession is a prime target for trial lawyers due to the amount of money that’s to be had from out of court CASH settlements.

    The three MAJOR contibuting factors to the increased cost of medical insurance are:

    (1) Trial lawyers using the 7th Amendment in our constitution (Jury trial) to force the medical facility into an out of court settlement, whether the plaintiff has a valid case or not against the medical facility. The mal-practice insurance company for the medical facility views the out of court settlement as a the least expensive way out. The settlement cost is then passed on to the medical facilty and then to the end consumer in the form of higher cost of medical insurance coverage. The way to solve this problem is to modify the 7th amendment to refect that both parties to a law suit must agree to a jury trial, if they can’t agree to this then the case would go in front of a judge to be tried where it would either get thrown out or a reasonable judgement entered with the right of appeal. If this were to happen, 90% of the medical law suits filed today against the medical profession wouldn’t get filed because the attorney for the plaintiff would know they can no longer extort the medical facilty with the threat of an expensive jury trial, thus leading to an EASY out of court CASH settlement.

    (2)Because of all of the law suits brought against the medical profession by the trial lawyers, the medical profession practices what’s known as defensive medicine. They perform procedures that wouldn’t normally be done in an attempt to prove they used due dilligence and covered all aspects of their patients needs, procedures that are costly and un neccessary. The unfortunate part is the medical profession that performed these procedures doesn’t get the opportunity to show in court how well they performed their duties because of (1) above, the case doesn’t go to trial. The costs of the unnecesary procedures are again passed on to the cunsumer. #1 and #2 can both be attributted directly to legal profession and their blatant abuse of the 7th Amendment, right to a jury trial.

    (3) The insurance companies must allowed to insure accross state lines. The insurance companies don’t want to see this happen because it creates competition amongst the insurance companies forcing them to provided better service at reduced costs. A prime example of this is during Ronald Reagan’s first term when he signed into law the new interstate banking laws that allowed lenders to loan out of their home state. Interest rates on home mortgages went from double digits to single digits in a mtter of six months. Competition in the free enterprise system is what keeps the quality and service of a product up and prices down.

    Patrick Chapman

  2. I have been a licensed agent for 15 years. I use the following analogy to help my clients maximize their benefits and keep cost down. I ask them if they would take their American Express card into to Best Buy and just say “give me a big screen”? Never asking about cost or quality. They always tell me “no”. My next question to them is when you take your insurance card into your doctor’s office do you ever ask them “is this medically necessary and how much is it going to cost”? I usually get a “no” to this one too which amazes me. I then take the opportunity to educate them why they may want to learn to do that. Until Americans learn not to give their doctors Carte Blanche (a blank check) there isn’t going be cost containment.

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