The Affordable Care Act and associated regulatory changes may substantially affect the individual and small group markets for health insurance. This study uses public data obtained from websites of state insurance regulators to assess increases in the premium rates for major medical insurance policies in the individual and small group markets in 2011 and 2012. We look at outcomes such as increases in premium costs, modification of proposed premium rate increases by state regulators, possible determinant characteristics of state markets, and possible effects of increased transparency in these markets. ASPE asked NORC to conduct this assessment in the context of recent changes in the regulation of health insurance established under the Patient Protection and Affordable Care Act of 2010 (Affordable Care Act or ACA).
The assessment of premium rate increases follows on a prior study where NORC analyzed the same outcomes for the years 2008 to 2011. This prior study, known as “Trends in Health Insurance Premiums” or the “Trends study,” addressed similar research questions; however, it involved a slightly different panel of states and different methods for capturing information. While this report includes data from both studies, the Trends study included an incomplete picture of 2011 because data collection occurred during the course of the year, and some states did not make filings publicly available immediately – all Trends study estimates for 2011 were given a cautionary footnote as a reminder.
In the United States, about 22 million employees and dependents are covered under small group plans and about 14 million people are covered by individual plans.2 Most states define the small group market as employers with 50 employees or less. Ninety-eight percent of small firms are fully-insured and purchase coverage directly from insurers, and so are subject to state regulation.3 Individual insurance, often referred to as the “residual market,” is purchased by households where the employer(s) of working adults do not offer coverage.4 Prior to the passage of the ACA, these markets for decades experienced higher rates of inflation than the large group market.5,6 Aspects of the ACA are designed to enable states to better regulate insurers’ potential premium increases in the individual and small group markets.
The Affordable Care Act created new reporting and regulatory requirements for health insurance issuers in the United States. In 2011, the United States Department of Health and Human Services (DHHS), acting under authority granted by the ACA, established a process for health insurance issuers to annually report premium income, administrative expenses and medical claims expenses. DHHS also created a process for state governments or DHHS officials to review increases in premiums for health insurance products sold to small groups and individuals. Under the ACA, states deemed not to have effective rate review programs would cede their review authority to DHHS.7
Section 1003 of the Affordable Care Act authorizes states or DHHS (in cases where the state’s review process is not deemed effective) to review the reasonableness of rate increases. DHHS regulations stipulate that insurers increasing premiums by 10 percent or more must justify such premium increases either to the state insurance department or to DHHS.8 Once a proposed rate increase is submitted, the reviewing entity may declare it a “reasonable” or “unreasonable” increase. This review does not affect the regulator’s powers in state insurance markets (state legislatures retain jurisdiction over the ability to require prior approval of new rates or the ability to deny rate increases), but individual issuers’ history of unreasonable rate increases may be used to exclude them from participating in the ACA-initiated health insurance exchanges in 2014.9 The process for conducting “unreasonable rate review” was implemented on September 1, 2011. To prevent insurers from retaining an unreasonable share of the premium dollar for administrative expenses and profits, section 2703 of the ACA also requires insurers to meet target medical loss ratios (MLRs), the percentage of premium income spent on medical benefits and quality improvement within a given line of business. DHHS set the MLR target at 80 percent for individual and small group coverage. From the start of 2011 forward, carriers not meeting this target are required to provide customers with premium rebates. The first rebates were issued in August 2012 for MLRs incurred in 2011.10
At the time the Affordable Care Act became law, state regulatory authorities in 31 states had “prior approval” authority in the individual market and 25 states had “prior approval” authority in the small group market. This authority constrains carriers from raising premiums without approval from the state regulatory agency.11 Since passage of the ACA, four more states have authorized rate review in the individual market and five more have authorized it in the small group market.12 One state – Maine – has dropped “prior approval” review. Other states either do not require filings for rate increases or allow insurers to “file and use” rates without regulator approval. Some “file and use” states subject filings to retrospective review, in which the carrier may enact the rate upon filing it, but the state may still have some ability to modify or disapprove the proposed rate. In practice, differences among “file and use” states and “prior approval” states are not always clear. A state may have “prior approval” authority but approve nearly all requests. Alternatively, a “file and use” state may exercise retrospective review consistently and thus subject insurers to more rigorous review than the lax “prior approval” state. Regulators in both “prior approval” and “file and use” states are additionally asked to participate in the unreasonable rate review program for large requested rate increases, although their determinations about the reasonableness of these rates does not change whether or not they are empowered to modify or deny the rates.
In addition to authorizing states or DHHS to review the reasonableness of rate increases and establishing the MLR target, the ACA authorized a grant program that provides states with $250 million in Health Insurance Premium Review Grants over five years. The grant aims to improve how states review proposed health insurance premium increases and hold insurance companies accountable for unjustified premium increases. The grants were distributed through two cycles; Cycle I awarded $1 million to all 45 states that applied for them and the District of Columbia in 2010, for a period of performance through September 2011.13 Cycle II grants were awarded to 28 states and the District of Columbia in 2011 for up to three years in two phases: Phase I Cycle II grants are for three years, and Phase II Cycle II grants are for one to two years, depending on the initial date of award.14 Cycle III grants are set to be awarded in September, 2013 for an 18-month period.15,16 States had ranging levels of authority to prevent unreasonable premium increases before the ACA; however, states are using the funding from the Health Insurance Premium Review Grants Program to enhance their rate review process in a number of ways. These enhancements include seeking legislation to increase authority to review rates, developing infrastructure to collect, analyze, and report on rate review decisions, expanding premium review to other health insurance products, improving the operational process used to conduct reviews, increasing transparency to the public on the results of the state review, and developing and upgrading the technology used for these processes. 17
Table 1 presents the state regulatory conditions for the 29 states included in this study (referred to as the State Market Reform study and abbreviated as “SMR study” in all tables in this report). In the individual market, we determined that four of the included states have “file and use” authority, 20 have “prior approval” authority, and five have established conditions that trigger whether a carrier or filing is subject to regulator prior approval. In the small group insurance market, we determined that 5 of the included states have “file and use” authority, 19 have “prior approval” authority, and 5 have established conditions that trigger whether a carrier or filing is subject to regulator prior approval. The states whose regulatory condition was not clearly classifiable as “file and use” or “prior approval” are grouped under the classification “other” in terms of their regulatory review authority for the purposes of analysis.18 For example, in the individual market Virginia has “prior approval” authority for all products except HMO products. In the small group market, Pennsylvania has “prior approval” authority unless a proposed rate increase is less than 10 percent.
We determined that 9 of the 29 states included in this study had a public web portal through which some data on the individual and small group insurance markets was available prior to passage of the ACA; as of today, all do. Furthermore, 26 of the 29 included states (all except Florida, Iowa, and Oklahoma) received at least one of the Rate Review Cycle I and II grants. This suggests that regulations and funding from the ACA have contributed to efforts to strengthen the rate review process and improve public disclosure in many states. “Prior approval” authority seems associated with establishing a public website in several former “file and use” states. However, some “file and use” states such as California and Illinois have established a public website since the ACA was passed.
Table 1: Regulatory Authority and Public Availability of Rate Filings by State, for States Included in Study19
|State||Filing Requirements, Individual Market||Filing Requirements, Small Group Market||Public Website Prior to ACA||Received Rate Review Cycle I Grant||Received Rate Review Cycle II grant|
|AL||File and Use except for HMOs, which need prior approval||File and Use except for HMOs, which need prior approval||x|
|AR||Prior Approval||Prior Approval||x||x||x|
|CA||File and Use||File and Use||x||x|
|CO||Prior Approval||Prior Approval||x||x||x|
|CT||Prior Approval||Prior Approval for HMO Small Group Plans; Actuarial certification without enforcement authority for non-HMO plan types||x|
|DC||Prior Approval||Prior Approval||x||x|
|DE||File and Use||File and Use||x|
|FL||Prior Approval||Prior Approval||x|
|IA||Prior Approval||Prior Approval|
|IL||File and Use||File and Use||x||x|
|IN||Prior Approval||Prior Approval||x||x|
|KS||Prior Approval*||Prior Approval*||x|
|KY||Prior Approval||Prior Approval||x||x|
|ME||File and Use, unless a 80% minimum loss ratio is not met, the carrier does not have a credible block of business and the increase is greater than or equal to 10%. Otherwise, the state has prior approval authority.||File and Use, unless a 80% minimum loss ratio is not met, the carrier does not have a credible block of business and the increase is greater than or equal to 10%. Otherwise, the state has prior approval authority.||x||x|
|MI||Prior Approval||Prior Approval||x||x||x|
|MN||Prior Approval||Prior Approval||x|
|NC||Prior Approval||Prior Approval||x||x||x|
|NE||Prior Approval||Prior Approval||x||x|
|NJ||File and Use (with a 80% MLR requirement)||File and Use (with a 80% MLR requirement)|
|NV||Prior Approval||Prior Approval||x||x|
|NY||Prior Approval||Prior Approval||x||x|
|OK||Individual Major Medical is File and Use; Individual HMO is Prior Approval||Prior Approval|
|OR||Prior Approval||Prior Approval||x||x||x|
|PA||Prior Approval||Prior Approval, but File and Use if the rate increase is below 10%||x||x||x|
|RI||Prior Approval||Prior Approval||x||x|
|TN||Prior Approval||Prior Approval||x||x|
|VA||Prior Approval, except for HMOs which are File and Use||File and Use||x|
|WA||Prior Approval||Prior Approval||x|
|WI||File and Use||File and Use||x||x||x|
2 National Health Policy Forum, Individual and Small-Group Market Health Insurance Rate Review and Disclosure: State and Federal Roles After PPACA, September 2011, p. 2. See http://www.nhpf.org/library/issue-briefs/IB844_RateReview_09-28-11.pdf
3 Data are from author analyses of the 2012 Kaiser/HRET public use file. Statistic cited is Percentage of Firms with Self-Insured Plans, Overall (EMPWT) -- 1.917%. See http://kff.org/private-insurance/report/employer-health-benefits-2012-an...
4 Alternatively, all adults in the household may be unemployed.
5 P. Ginsburg, J. Gabel and K. Hunt, “Tracking Small Firm Coverage, 1989-1996,” Health Affairs January/February, 1998, Vol 16, No. 7, pp. 167-171.
6 J. Gabel and J. Pickreign, “Risky Business: When Mom and Pop Buy Insurance for Their Employees,” The Commonwealth Fund, Task Force on the Future of Health Care, April 2004
7 National Health Policy Forum, Individual and Small-Group Market Health Insurance Rate Review and Disclosure: State and Federal Roles After PPACA, September 2011, p. 2. See http://www.nhpf.org/library/issue-briefs/IB844_RateReview_09-28-11.pdf
8 States and the Federal governments review rate increases of non-grandfathered plans in the individual and small group markets above a certain threshold (at or above 10 percent for September 2011 to August 2012) to determine if they are unreasonable. See http://cciio.cms.gov/resources/factsheets/rate_review_fact_sheet.html.
9 The ACA establishes state-based exchanges that begin operation in 2014. Exchanges are organized electronic markets that allow households to purchase insurance coverage outside of the mechanism of employer-sponsored plans. Small employers can also purchase coverage on the exchange. Exchanges are the portal where eligibility for Medicaid and subsidized private insurance are determined. Private insurers will offer plans on the exchange and the exchanges will provide extensive information about these plans. By 2017, about 18 million individuals and 4 million employer-based persons are estimated to enroll in the exchanges. See http://www.cbo.gov/system/files/cbofiles/attachments/43057_Health....
10 US Department of Health and Human Services press release, “Health care law saved an estimated $2.1 billion for consumers.” Published September 11, 2012 at http://www.hhs.gov/news/press/2012pres/09/20120911a.html, accessed May 15, 2013.
11 Most states have some form of “deemer” review. If the state has not issued a decision after some agreed-upon time period, the premium increases go into effect.
12 Kaiser Family Foundation, “State Authority to Review Health Insurance Rates,” http://www.statehealthfacts.org/comparetable.jsp?ind=887&cat=7, accessed August 28, 2012; also see, National Conference of State Legislatures, http://www.ncsl.org/issues-research/health/health-insurance-rate-approva..., accessed July 21, 2012.
13 Office of Consumer Information and Insurance Oversight (OCIIO), “Grants to States for Health Insurance Premium Review-Cycle I.” http://www.grants.gov/search/announce.do;jsessionid=y2QcRJMprnytTmFSt5Jd.... Accessed May 15, 2013
14 Centers for Medicare and Medicaid Services, “Grants to Support States in Health Insurance Rate Review-Cycle II,” http://cciio.cms.gov/resources/fundingopportunities/cycle_ii_rate_review..., published February 24, 2011, accessed May 15, 2013
15 The Center for Consumer Information & Insurance Oversight, “New Resources to Help States Crack Down on Unreasonable Health Insurance Premium Hikes,” http://cciio.cms.gov/Archive/Regulations/rates.html, accessed April 22, 2013
16 Centers for Medicare and Medicaid Services, “Grants to States to Support Health Insurance Rate Review and Increase Transparency in Health Care Pricing, Cycle III,” http://www.grants.gov/search/synopsis.do;jsessionid=xqTpRJCNNHdyDmGrPLSJ..., published May 8, 2013, accessed May 15, 2013
17 National Health Policy Forum, Individual and Small-Group Market Health Insurance Rate Review and Disclosure: State and Federal Roles After PPACA, September 2011, p. 2. See http://www.nhpf.org/library/issue-briefs/IB844_RateReview_09-28-11.pdf
18 The Trends study used the classifications “Prior Approval”, “File and Use”, and “HMO Prior Approval” (prior approval for HMO products, file and use or no requirement for other products) to designate state regulatory authority – at the time, nearly all states fit one of the three categories. In subsequent tables, the Trends data for HMO Prior Approval states and the SMR data for “Other” states will both be displayed, but not directly compared to one another, as they reflect different groups of states.
19 In Table 1, we gathered the information in the “Filing Requirements” columns from “Private Health Insurance Premiums and Rate Reviews,” a report published by the Congressional Research Service, and from two tables in Kaiser Family Foundation (KFF) State Health Facts reports (Individual Market: http://kff.org/other/state-indicator/rate-review-individual/#notes-1; Small Group: http://kff.org/other/state-indicator/ratereview-small-group/#notes-1). The KKF reports indicate the rate filing requirements and rate review authority for each state as of January 2012, based on data collection and analysis by researchers at the Center on Health Insurance Reforms, Georgetown University Health Policy Institute. We compared the regulatory statuses displayed in the KFF tables to those presented in the Congressional Research Service report. For any discrepancies, we sought additional information to determine the current (2013) state review authority and filing requirements. We determined final regulatory requirements for such states using Department of Insurance (DOI) website information or by contacting state Department of Insurance employees via phone or email.
We gathered the information in the column “Public website prior to ACA” from the HHS report “Health Insurance Premium Grants: Detailed State by State Summary of Proposed Activities” (http://www.healthcare.gov/news/factsheets/2010/08/rateschart.html).
We gathered the information in the “Received Rate Review Cycle I/II Grant” columns from the CCIIO report “Rate Review Grants” (http://cciio.cms.gov/archive/grants/rate-review-grants-map.html).
*We determined that Kansas has a de facto prior approval filing requirement based on a conversation with a Kansas Department of Insurance representative on April 8, 2013.