Health Insurance Rate Review: Lowering Costs for American Consumers and Businesses

For more than a decade, health insurance premiums have risen rapidly, straining the pocketbooks of American families and businesses. Since 1999, the cost of coverage for a family of four has climbed 131 percent.[i]  These increases have forced families and employers to spend more money, often for less coverage. Many times, insurance companies have been able to raise rates without explaining their actions. In most cases, consumers receive little or no information about proposed premium increases, and aren’t told why health insurance companies want to raise rates.

The Affordable Care Act is bringing an unprecedented level of scrutiny and transparency to health insurance rate increases. The Act ensures that, in any State, any proposed rate increase by individual or small group market insurers at or above 10 percent will be scrutinized by independent experts to make sure it is justified. This analysis will help moderate premium hikes and lower costs for individuals, families, and businesses that buy insurance in these markets. Additionally, insurance companies must provide easy to understand information to their customers about their reasons for unreasonable rate increases, as well as publicly justify and post on their website any unreasonable rate increases. These steps allow consumers to know why they are paying higher rates.

The Affordable Care Act makes $250 million available to States to take action against insurers seeking unreasonable rate hikes. To date, 43 States and the District of Columbia are using $44 million in grants provided by HHS to help them improve their oversight of proposed health insurance rate increases. 

State rate review activities are paying off for consumers:

• Rhode Island’s Insurance Commissioner used his rate review authority to reduce a proposed increase by a major insurer in that State from 7.9 percent to 1.9 percent.
• Californians were saved from rate increases totaling as high as 87 percent after a California insurer withdrew its proposed increase after scrutiny by the State Insurance Commissioner.
• Nearly 30,000 North Dakotans saw a proposed increase of 23.7 percent cut to 14 percent following a public outcry.
• Connecticut’s Insurance Department rejected a proposed 20 percent rate hike by one of the State’s major insurers.

New Tools Will Help States, Consumers

Starting September 1, 2011, insurers seeking rate increases of 10 percent or more for non-grandfathered plans in the individual and small group markets are required to publicly disclose the proposed increases and the justification for them.  Such increases will be reviewed by State or Federal independent experts to determine whether they are unreasonable. In future years, the threshold for review will be set on a State-by-State basis using data that reflect insurance and health cost trends in each State.  And an easy-to-access, consumer-friendly disclosure form explaining the proposed increases will also be made publicly available through HHS, State and/or insurer websites.

The rate review regulations work in conjunction with other parts of the Affordable Care Act that will also hold premiums down. The law requires insurers to spend at least 80 percent of premium dollars on direct medical care or to improve the quality of care instead of on overhead, advertising, and executive salaries and bonuses. If an insurer fails to meet that test, they must pay a rebate to their enrollees.  This “medical loss ratio” regulation, released on November 22, 2010, makes the health insurance marketplace more transparent and increases the value consumers receive for their money. 

States with Effective Rate Review Programs

HHS encourages States to conduct rate review and has worked with States to strengthen their programs. As detailed in the rate review regulation finalized on May 19, 2011, States with effective rate review systems must conduct reviews of proposed rates above the applicable threshold (10% from September 2011-August 2012), but if a State lacks the resources or authority to conduct the required rate reviews, HHS will conduct them. 

An effective rate review system:

• Must receive sufficient data and documentation concerning rate increases to conduct an examination of the reasonableness of the proposed increases.
• Must consider the factors below as they apply to the review:
  • Medical cost trend changes by major service categories
  • Changes in utilization of services (i.e., hospital care, pharmaceuticals, doctors’ office visits) by major service categories
  • Cost-sharing changes by major service categories
  • Changes in benefits
  • Changes in enrollee risk profile
  • Impact of over- or under-estimate of medical trend in previous years on the current rate
  • Reserve needs
  • Administrative costs related to programs that improve health care quality
  • Other administrative costs
  • Applicable taxes and licensing or regulatory fees
  • Medical loss ratio; and
  • The issuer’s capital and surplus.
• Must make a determination of the reasonableness of the rate increase under a standard set forth in State statute or regulation.
• Must post either rate filings under review or preliminary justifications on their websites or post a link to the preliminary justifications that appear on the CMS website.
• Must provide a mechanism for receiving public comments on proposed rate increases.
• Must report results of rate reviews to CMS for rate increases subject to review.

To determine whether a State met these standards, HHS reviewed all available documentation, and met with State regulators and their staff to verify the information and obtain any updates. CMS will continue to accept information from States and monitor States in order to ensure correct classification.  CMS can reevaluate the status of this list as changes are made in each State.

HHS also issued an amendment to the rate review final rule making clear that coverage sold to individuals or small groups through an association is subject to rate review, on or after November 1, 2011. The list below indicates whether Federal or State process will be used to review proposed insurance rate increases in each market.

As of August 1, 2012:

• Forty-four States, the District of Columbia and three U.S. territories (Guam, Puerto Rico and the U. S. Virgin Islands) have effective rate review in at least one insurance market;
• Forty-three States, the District of Columbia and three U. S. territories (Guam, Puerto Rico, and the U.S. Virgin Islands) have effective review for all non-association insurance markets.
• In six States and two U.S. territories, the Federal government will conduct reviews in all markets, until those areas are able to strengthen their review processes and authorities.
• In addition, with respect to association products:
  • Thirty States, the District of Columbia and 3 U.S. Territories (Guam, Puerto Rico and the U.S. Virgin Islands) will review association rates in the individual and small group markets;
  • In twelve States, the Federal government will conduct a portion of the reviews; and
  • In eight States and two U.S. Territories, the Federal government will review all rates for association products.

List of Effective Rate Review Programs

The list below indicates whether Federal or State process will be used to review proposed insurance rate increases.

Updated July 27, 2012.

* Oregon State law exempts from rate review association plans that retain 95% or greater of their employer groups (ORS 743.734)

** Pennsylvania will have effective rate review authority for the non-association commercial small group market effective March 21, 2012 per newly enacted legislation (Act 134 (renumbered) of 2011).  Until that date, CMS will review Pennsylvania non-association commercial small group products while the State will continue to review rates for all other non-association products.  As for the association rates, effective March 21, 2012, Pennsylvania will begin reviewing rates for small group associations sitused in Pennsylvania along with the rates for individual associations sitused in the State that it is already reviewing.  CMS will continue to review the rates for individual and small group associations that are not sitused in Pennsylvania.

*** In Vermont, non-sitused plans are exempt from filing with the State under the following circumstances (8 V.S.A. § 3368):

1. the master policy was lawfully issued and delivered in a State in which the insurer was authorized to do insurance business (and thus regulated by the State of issue)
2. (i) no more than 25 of the certificate holders are Vermont residents; or (ii) the master policy covers one or more certificate holders who reside in Vermont, are employed at a workplace located outside Vermont and have obtained insurance coverage through the workplace;
3. The person or entity holding the master policy exists primarily for purposes other than to procure insurance, is not a Vermont corporation or resident, and does not have its principal office in Vermont; and
4. The policy is not offered for sale by an agent or broker licensed in Vermont, offered by mail to a Vermont resident, or marketed in Vermont in a similar manner.

Note: In this chart, the term “sitused” refers to the State where the policy (not the individual certificate) is issued; the Situs State is the State that has the primary jurisdiction and whose laws, rules, and regulations govern the policy.  Additionally, for the purposes of this chart, an “exempt” plan is one that is exempt under State law from State rate review requirements.

^‡ Status Updates:

• Following the release of August 15, 2011 Bulletin 11-06 from the Iowa Insurance Division, Iowa now has effective rate review in both the individual and small group market.
• Following August 22, 2011 correspondence from the Idaho Department of Insurance confirming its intent to comply with the rate review regulation (45 CFR Part 145), Idaho now has effective rate review in both the individual and small group market.
• Based on information received from the Guam Department of Insurance, Guam now has effective rate review in both the individual and small group markets.
• Following issuance of July, 2011 Ruling Letter from the Puerto Rico Department of Insurance, Puerto Rico now has effective rate review in both the individual and small group markets.
• As of November 2011, Hawaii is reviewing all rates for association plans sitused in Hawaii.
• As of January 1, 2012, Alaska has rate review authority in all markets per State statute.
• Effective August 1, 2012, the Idaho Department of Insurance will exercise their authority to review rates for Association Products in the Small Group Market.