The Patient Protection and Affordable Care Act (hereafter referred to as 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 Affordable Care Act, 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 groups and individuals. Under the Affordable Care Act, states deemed not to have effective rate review programs would cede their review authority to DHHS.8
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.9 Individual issuers’ history of unreasonable rate increases may be used to exclude them from participating in the Affordable Care Act-initiated health insurance exchanges in 2014. 10 To prevent insurers from retaining an unreasonable share of the premium dollar for administrative expenses and profits, the Affordable Care Act also requires insurers to meet target medical loss ratios (MLRs), which are the percentage of premium income spent on medical benefits and quality improvement according to the line of business. DHHS set the MLR target at 80 percent for individual and small group coverage. Carriers not meeting this target are required to provide customers with premium rebates.
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 authorities.11 Four more states have authorized rate review in the individual and five more in the small group market since passage of the Affordable Care Act.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 prior approval. Some “file and use” states subject filings to retrospective review. 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.
In September 2010, the Assistant Secretary for Planning and Evaluation (ASPE) contracted with NORC at the University of Chicago to conduct a study of trends in premiums in the individual and small group health insurance market from 2008-2011. ASPE aimed to establish trends in the individual and small group market in the years prior to the passage of the Affordable Care Act. NORC was also asked to examine trends in MLRs during the study years. To build the study database, the plan called for NORC to collect insurers’ rate filings with state insurance departments.
8 U.S. Government Accountability Office, Private Health Insurance: State Oversight of Premium Rates, July 2011, GA)-11-701, p. 8.
9 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.
10 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....
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.