Last Thursday, September 12, 2013, the Department of Health and Human Services (“HHS”) reported that the rate review provisions (the “Rate Review Provisions”) of the Affordable Care Act (“ACA”) saved an estimated $1.2 billion on health insurance premiums in 2012 for 6.8 million policyholders.  The Rate Review Provisions are intended to increase transparency behind premium increases and to hold health insurance companies accountable for such increases.

The Rate Review Program

Section 1003 of the ACA amends the Public Safety and Health Act (“PSHA”) to include the new Section 2794, the Rate Review Provisions, which were implemented on September 1, 2011.  The Rate Review Provisions require the Secretary, in conjunction with states, to establish a process for annual review of unreasonable health insurance premium increases.   Insurers are required to submit to the Secretary and the relevant state insurance departments a prospective justification for premium increases over a threshold amount.  If CMS determines that a state has an effective rate review program, states may determine their own premium increase threshold and whether increases above such threshold are unreasonable.  Contrastingly, if CMS determines that a state does not have an effective rate review program, CMS will conduct the review of insurance premium increases equal to or greater than ten percent, pursuant to 45 C.F.R. 154.

State insurance departments and CMS must make public announcements of insurance premiums that are determined to be unjustified, excessive, or unfairly discriminatory.  Insurers are required to post such findings on their websites.  However, CMS does not have authority to “disapprove” a rate increase or prohibit issuers from using rates found to be unjustified.

Where Are the Savings Coming From?

Policyholder savings appear to stem from two sources: (1) health plan issuers refraining from increasing premiums to avoid negative publicity associated with federal disclosure requirements, and (2) states disapproving unreasonable premium increases.  Currently, approximately twenty-four states have enacted legislation authorizing their insurance departments or commissions to disapprove certain rate changes.  Resultantly, issuers are avoiding premium increases by operating more efficiently and reducing overhead costs.

Other Savings under the ACA

In addition to the Rate Review Provisions, the ACA contains several initiatives that are estimated to have saved policyholders millions, including the 80/20 Rule, otherwise known as the Medical Loss Ratio Rule (the “MLR Rule”).  The MLR Rule requires health plan issuers to spend at least 80 percent of premiums on health care for plans in the individual or small group markets.  For health plans in the large group markets, issuers are required to spend at least 85 percent of premiums on health care.  Where issuers fail to spend such amounts on health care, they must issue rebates to consumers according to the unspent amounts, rather than using such funds on administrative, marketing, or overhead costs.

According to CMS, in 2012, the MLR Rule saved 77.8 million consumers an estimated $2.4 billion on premiums resulting from issuers operating more efficiently.  Moreover, nearly 8.5 million Americans received approximately $500 million in rebates because of the MLR Rule.

Impact on Insurance Companies and Agencies

For insurance issuers, the effects of the Rate Review Provisions and the MLR Rule signal immediate decreases in retained underwriting gains, essentially decreases in profit.  Accordingly, insurance brokers and agents have experienced immediate decreases in commissions for successfully brokered health plans.  Such effects may signal a downstream impact on consumers with decreased services provided by insurance agents, decreased coverage under certain plans, and potential new fees for agent services.

The CMS report is unclear as to how HHS calculated policyholder savings under the Rate Review Provisions.  HHS reports that premium increase requests dropped twelve percent in the individual market and by nineteen percent in the small group market.  However, such figures rely upon state submitted data, with significant data portions removed due to incompleteness.

In addition to increased savings through reduced premiums and rebates for consumers, for-profit insurers reportedly spent greater amounts on medical claims and quality improvement in 2012.  Nevertheless, the long-term effects of the MLR Rule and Rate Review Provisions on health plan issuers remain to be seen.

The HHS rate review release is accessible online.

The most recent CMS report on the MLR Rule is also accessible online.