Federal health reform (PPACA) gives states new tools to control rising insurance rates. Insurance companies must now spend more on healthcare and less on administration, marketing and profits. Unreasonable increases must be justified. And a more competitive marketplace will emerge from the creation of state “exchanges.”

Review and Justification of “Unreasonable Increases”

The law requires the Secretary of Health and Human Services [HHS], in conjunction with the states, to establish a process for annual review of “unreasonable” premium increases. The process must require insurers to submit a “justification” for an unreasonable increase to HHS and the relevant state prior to implementing the increase. Insurers must post the justification on their websites and the Secretary must ensure that unreasonable increases and justifications for them are publicly disclosed.

The federal Office of Consumer Information and Insurance Oversight (OCIIO) has issued a proposed federal ruleto establish the PPACA process for reviewing unreasonable premium increases. The rule would require insurers to justify individual and small group increases that meet a certain threshold (on non-grandfathered plans only). In 2011, any rate increase of 10% or more would require a justification. Beginning in 2012, HHS may establish a state-specific threshold based on each state’s costs of healthcare and coverage.

For rate increases meeting the threshold, insurers would submit to the state and HHS a “preliminary” justification that will be posted on HHS’s website. State regulators would determine whether proposed rates for their states are unreasonable under state law standards if HHS has determined that the state has an “effective rate review program” in place. States that have given their regulators the authority to reject a proposed rate increase could do so if the rates are found to be unjustified under state law.

For those states that do not meet HHS’s criteria for effective rate review, HHS would review proposed rates and decide whether they are “unreasonable,” meaning the rates are “excessive, unjustified, or unfairly discriminatory.” However, HHS will have no authority to deny a rate increase even if it finds the increase unreasonable. HHS would post its determination of unreasonableness on its website and require insurers to post the determination on their websites.

Proposed consumer disclosure notices are available for review.  Insurers would use these forms to provide information to consumers about the rate increases meeting the review threshold.

Federal and State Monitoring of Premium Increases

Effective beginning in 2014 plan year, the law requires the Secretary, along with the States, to monitor premium increases for insurance plans offered on or outside of an exchange. Insurers must continue to publicly justify increases deemed unreasonable.

Federal Funds for State Rate Review Available from 2010 through 2014

The new law allocates $250 million in grants to states for five years beginning with fiscal year 2010 for states to implement a rate review process. As a condition of receiving a rate review grant, states insurance commissioners must provide the Secretary of Health and Human Services with information about trends in premium increases in various areas throughout their states, and they must make recommendations to state exchanges about whether certain insurers should be excluded from exchanges based on a pattern or practice of excessive or unjustified rate increases.

HHS awarded the first round of rate review grants on August 16. Forty-five states and the District of Columbia applied for and received $1 million to apply toward rate review improvements. Each state receiving a grant has submitted a plan describing how it intends to improve rate review.

HHS announced on February 24, 2011 that states may begin applying for rate review funding under the second round of grants, totaling nearly $200 million.

Medical Loss Ratios

Effective by January 1, 2011, the law will require insurers to provide an annual rebate to members if they do not spend at least 80% of individual and small group premiums (85% for large groups) on medical care and activities that improve healthcare quality. The percentage of premium dollars spent on medical care is known as the medical loss ratio. A majority of states have had minimum medical loss ratio requirements in place for some time, but often those minimums required insurers to spend only 55% to 65% of individual market premium dollars on medical care.

The federal regulation governing the new medical loss ratio standard is available here.

Coming in 2014

The PPACA includes other reforms, such as the creation of state “exchanges,” that will change the way that individual market consumers and small groups buy insurance. Some of these reforms will effect how insurers set rates and may impact state oversight of rates.

Insurers seeking to offer plans through the exchange will need to post a justification for a premium increase on their websites prior to implementing an increase. The exchanges will consider such premium increases, as well as recommendations from state regulators about insurers having a pattern or practice of unreasonable rates, when deciding whether to make an insurer’s plan available on an exchange.