As we await federal medical loss ratio ("MLR") standards and federal rulemaking by the Secretary of the US Department of Health and Human Services ("HHS") related to new federal reporting obligations by health insurance issuers of "unreasonable premium increases," it is helpful to consider recent health insurance premium rating activities and challenges in Massachusetts. In summary, on April 1, 2010, the Massachusetts Division of Insurance ("Division") disapproved all premium rate increases filed by health insurance carriers for small business and individual customers that exceeded 7.7 percent – which was 150 percent of the New England Medical CPI for 2009. The affected health insurance carriers filed administrative appeals of the Division's disapprovals of their premium rates. All of these administrative appeals have now been resolved, with mixed results. This client alert summarizes the Massachusetts rate disapproval proceedings and resolutions, the new Massachusetts rate filing legislation, and the implications of the Massachusetts experience for national health reform.
In 2006, Massachusetts enacted a state law precursor to national health reform that mandated that virtually all Massachusetts individuals obtain health insurance or face tax penalties. The law also combined the individual and small group insurance markets, creating a "merged market" that would make individual insurance more affordable by spreading those risks across a broader risk pool. In 2009, many Massachusetts insurance carriers suffered significant merged market losses. In order to cover the anticipated merged market claims costs, the health insurance carriers began notifying small business and individual subscribers in January 2010 of health insurance premium increases for the new merged market to be effective April 2010.
In response to complaints from small businesses, on February 10, 2010, Massachusetts Governor Deval L. Patrick directed the Commissioner of Insurance to issue emergency regulations requiring that new merged market rates, and additional documentation and data supporting those rates, be filed by the insurance carriers with the Division 30 days in advance of their effective date. The regulations did not alter the statutory requirement that HMO rates can be disapproved if "the benefits provided … are unreasonable in relation to the rate charged, [or] if the rates are excessive, inadequate or unfairly discriminatory." Nor did the regulations alter the regulatory requirement that every rate filing be accompanied by an actuarial opinion certifying that the rates conform to accepted actuarial practices. On or about March 1, 2010, each of the insurance carriers filed for approval by the Division new merged market rates for business effective April 1, 2010. Most of the rates filed reflected increases greater than 150 percent of the Medical CPI – or greater than 7.7 percent.
On March 25, 2010, the Division notified carriers that any rate increase greater than 7.7 percent would likely be disapproved, and that carriers could immediately re-file April rates at increases of 7.7 percent or less. Three national carriers re-filed at 7.7 percent; the local carriers chose not to re-file.
The Division's Disapprovals
On April 1, 2010, the Division disapproved the filed rates for 235 (of 274) health insurance products that reflected increases over 7.7 percent. In disapproving the health insurance carriers' rates, the Division focused on four principal areas:
Provider Contracting – The Division took the position that paying providers differing reimbursement rates was justified only by differences in the providers' quality of care, mix of patients, geographical location, or intensity of services, and that the carriers had failed to demonstrate that provider rate differences fell into those categories. Further, the Division found that the carriers had not demonstrated that they had taken adequate steps to renegotiate rates of reimbursement to providers.
Contribution to Surplus – The Division deemed that any rate developed with a contribution-to-surplus (or profit margin) greater than 1.9 percent was unreasonable and excessive. Five of the six carriers had used higher figures, ranging from 2.0 percent to 4.5 percent.
Medical CPI – The Division deemed that rates developed using an assumed trend greater than 150 percent of the 2009 Consumer Price Index for medical care services for the New England Region – which came to 7.7 percent – were unreasonable and excessive. Each of the carriers had filed rates with assumed trends above 7.7 percent, ranging from 8.6 percent to 12.3 percent.
Utilization – The Division found that the proposed rates were unreasonable and excessive because each of the carriers had failed to demonstrate that they were adequately controlling utilization, or adjusting their utilization control practices, in a manner sufficient to maintain claims costs at reasonable levels (e.g., resulting in an assumed trend at or below 7.7 percent).
The Administrative Hearings
Each of the carriers filed for an administrative hearing before the Division seeking reversal of the Division's rate disapprovals. The Massachusetts Attorney General's Office intervened in the administrative hearings on behalf of consumers' interests. The carriers presented documentation and testimony justifying their rates from their actuaries, provider contracting executives, and, in some cases, other witnesses. Neither the Division nor the Massachusetts Attorney General's Office presented any testimony.
On June 24, 2010, the presiding officers of the administrative hearings issued their first Final Agency Decision, reversing the Division's disapproval of Harvard Pilgrim Health Care's proposed rates. On August 6, 2010, the presiding officers reversed the Division's disapproval of Fallon Community Health Plan's rates. Between June 4 and August 16, 2010, the Division entered into settlements with the remaining four carriers (Neighborhood Health Plan, Tufts Health Plan, Blue Cross Blue Shield of Massachusetts, and Health New England).
The Final Agency Decisions
In the two Final Agency Decisions, the presiding hearing officers rejected each of the reasons the Division cited in disapproving the carriers' proposed rates.
Provider Contracting – The panel of hearing officers found that there was no basis for limiting the review of payments to providers to just the four criteria stated by the Division. In fact, the panel found that the carriers had "no realistic option in the merged market but to reimburse providers of similar services at different rates based on reasons beyond the four articulated Regulatory bases." With respect to renegotiating provider contracts, the panel found that there are legal and practical barriers to reopening existing provider contracts and that the carriers adequately had described their efforts to do so in the short period of time provided under the Division's emergency regulations and rate review process.
Contribution to Surplus – The panel of hearing officers held that a "rate is not adequate, from an actuarial and regulatory perspective, if it does not cover the sum of the projected costs of covering claims, administrative costs, and some contribution to reserves/surplus" (emphasis added), and rejected the Division's finding that any contribution to surplus above 1.9 percent is unreasonable. The panel acknowledged that there were inherent risks in the merged market and that an appropriate contribution to surplus for a particular carrier depended on that carrier's specific circumstances.
Medical CPI – The panel of hearing officers concluded that the Division's reliance on the New England Medical CPI as the sole criterion for review of an assumed trend "is improper from both an actuarial and regulatory perspective," in part due to the fact that the Medical CPI is "backward-looking (i.e., it looks at past costs) whereas rates are set prospectively," and because it did not reflect accurately a specific carrier's claims and administrative costs.
Utilization – The panel of hearing officers rejected the Division's finding that the carriers' utilization control efforts were inadequate, crediting the carriers' cost containment programs and pay-for-performance/risk-sharing arrangements with providers. The panel acknowledged that the carriers had accounted for savings from these programs in developing their proposed rates when those savings could be reliably measured and projected.
Rate Increases v. Actual Rates – The panel of hearing officers also made clear that "looking at a percentage increase, as opposed to the actual rate, is a flawed methodology, from an actuarial perspective, for determining whether a rate is excessive or unreasonable and leads to flawed results." Indeed, by looking only at the percentage increase, the Division had approved rates for certain carriers' insurance plans that were actually higher than those rates disapproved for other carriers' equivalent plans.
The New Massachusetts Merged Market Rate Filing Law
During the administrative appeals of the Division's disapproved rates, the Massachusetts legislature considered, and then enacted, new legislation that, at least temporarily, requires merged market rates to meet certain MLR, administrative cost, and contribution-to-surplus parameters or be presumptively disapproved by the Division. Chapter 288 of the Acts of 2010 provides that, beginning in 2011, proposed rates for products sold in the merged market will be presumptively disapproved (with certain exceptions) if: (i) the rates include an administrative expense loading component increase greater than the New England Medical CPI, (ii) the carrier's reported contribution to surplus exceeds 1.9 percent, or (iii) the aggregate MLR is less than 88 percent. Beginning in October 2011, the minimum MLR increases to 90 percent. Significantly, while the new law may share the Division's goal as reflected in its rate disapproval actions – putting downward pressure on merged market premium rate increases – it relies on a very different approach to achieve that result.
Implications for National Health Reform
The Patient Protection and Affordable Care Act ("PPACA") added Section 2794 of the Public Health Service Act to require the Secretary of HHS to establish an annual review of unreasonable premium rate increases, to monitor premium increases, and to award grants to states to carry out their rate review process. On April 14, 2010, HHS published in the Federal Register a Request for Information to aid HHS in the development of regulations implementing the federal premium rate review process for unreasonable premium increases. HHS has received comments from, among others, the National Association of Insurance Commissioners ("NAIC") and America's Health Insurance Plans. On August 16, 2010, the Secretary announced the award of $1 million Health Insurance Premium Review Grants to 45 states and the District of Columbia to help them develop or enhance their state's health insurance premium review processes. On September 9, 2010, the Secretary announced that regulations governing review of unreasonable premium rate increases would be issued later in the Fall.
At this time, we can only anticipate what those regulations will provide. It is unclear how the Secretary will interpret her new authority in light of existing rate review authority at the state level. Also unknown is whether the new regulations will set specific standards that will take into account accepted actuarial principles. Nevertheless, health insurance carriers should expect that proposed premium rate increases will be subject to greater scrutiny, and greater emphasis will be placed on the data and methods used to develop actuarial opinions.
In the NAIC-filed comments on this subject, the NAIC identified a range of options that regulators could use to define "potentially unreasonable" rate increases. One of those options – comparing rate increases to the Medical CPI plus a certain percentage – was relied on by the Massachusetts Commissioner of Insurance, but was then rejected by the Division's hearing officers panel as actuarially unsound. Other options – including minimum MLR requirements and rejection of excessive administrative expenses or profits – more closely track the new Massachusetts legislation. PPACA provides that, beginning in 2011, health insurance carriers will be required to provide an annual pro rata rebate to each enrollee if its MLR is less than 80 percent for plans in the small group or individual markets, and less than 85 percent in the large group market. Uniform federal MLR definitions and standards are currently under development through the NAIC. Arguably, the minimum MLR approach could preclude the need for more-restrictive regulatory rate-setting schemes.
The Massachusetts premium rate disapproval experience in 2010 for the merged market may prove to be a test case for anticipated premium rate review regulations and disapproval efforts across the country. If so, it would appear that rate reviews and rejections by regulators that seek to limit rate increases based on certain one-size-fit-all indexes – like the Medical CPI – could be vulnerable to legal attack by the carriers based on sound actuarial principles. As a result of its new rate filing legislation, Massachusetts also could prove to be the laboratory for evaluating the effectiveness of using minimum MLR and maximum administrative cost and profit thresholds to attempt to achieve efficiencies and to attempt to keep premium rate increases in check.