• Rate regulation

    Reacting to an NYT article on health insurance premium rate regulations Tyler Cowen writes,

    How long ago was it that we were told the health care reform would a) control costs, b) take care of adverse selection, and c) make the insurance market workable again.  Yet somehow such a policy is necessary.

    Remind me again, what will happen to the quality of coverage and reimbursement, all factors included, following price controls?

    Hmm … I’ll get back to this below. First, here’s (some of) what the article said. It’s not much longer than this so go read it in full if you think I might be leaving out something important.

    Under the proposed rules, insurers seeking rate increases of 10 percent or more in the individual or small group market in 2011 must publicly disclose the proposed increases and the justification for them. […]

    Under the proposed regulation, the federal government will evaluate each state’s procedures for analyzing insurance rates.

    If the federal government finds that a state has an “effective rate review system,” the state would conduct the annual reviews of premium increases. But, the administration said, “if a state lacks the resources or authority to do thorough actuarial reviews, the Department of Health and Human Services would conduct them.” […]

    In February, just one month before Congress completed work on the health care bill, Mr. Obama proposed giving federal officials the power to block excessive rate increases by health insurance companies. Congress did not accept the proposal, choosing instead to leave rate review primarily in the hands of state officials.

    An official at the Department of Health and Human Services said Tuesday: “The statute does not give us authority to disapprove rates. We do not have that authority. The regulation leaves state laws intact. It does not interfere with state law. In some states, rates cannot be put into effect unless the state affirmatively approves the rate increase.” In other states, insurers must file rates with a state agency before using them, but the state does not approve or disapprove rates. [Emphasis mine.]

    So, back to Cowen’s comments. I’m not sure I see the direct connection to the content of the NYT article. My thoughts and questions are:

    • I agree with his implied sentiment that the law does not do enough to control costs yet was sold as cost reducing. But the sense of “cost reducing” is important here. It’s (a) relative to the counter-factual of no reform (not cost reducing in an absolute sense) and (b) following CBO’s baseline projection. I don’t think CBOs baseline projection will hold either, but in the game as it is played it’s considered a valid score. I don’t fault Democrats for touting it. Nor would I had they been Republicans or Libertarians or Martians. (Well, that would be weird.)
    • What has the NYT article to do with adverse selection? There ought not be a problem if the mandate or the equivalent is in force.
    • I do think the law will make the non-group insurance market far more workable than it is today, provided the law is permitted to be implemented with a mandate or the equivalent. Is it problematic to outlaw pre-existing condition exclusions? Yes, but only if individuals are permitted to game the system, shirk their personal responsibility, and get covered only when sick.
    • What’s the policy here? The feds are letting the states act with some oversight. But that oversight has no teeth. It’s just a disclosure requirement. Price control? Is that price control?
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    • 2 related provisions on insurance rates, but neither one is rate regulation:
      (1) the medical loss ratio rules; and
      (2) the premium increase review rules discussed in Robert Pear’s article. The real name for these 2 provisions should be the Actuaries Full Employment Act.

      The MLR rules might (one day) result in rebates; the premium increase review rules (ACA §1003) use transparency and the bully pulpit to encourage voluntary restraint. (The proposed rule links them in a limited sense: compliance with the MLR rules is a factor in determining whether rate increases were unreasonable). The only real sanction is a State insurance commissioner can recommend exclusion from that state’s exchange after several years of not taking the hint. HHS applied the rule only to the individual and small group markets, passing up the opportunity to extend it to the large group markets.

      Having said that, I’m probably with Tyler on the ultimate policy question. I don’t want to see death panels or a federal agency setting insurance rates. But the ACA doesn’t do that.

    • Background: I am a health actuary, responsible for rate setting for multiple lines of business in multiple states. Some states currently have a rate review process, and require prior approval before a rate change can go into effect. Some states are “file and use”, no review process. Some states don’t even require you to file rates.

      The disclosure requirement is, then, an increase in oversight for a lot of states, but redundant for others. It seems like a “baby step” in leveling the requirements across all states.

      But mainly it seems redundant. The MLR requirement prevents insurers from charging an excessive premium.

      Finally, the 10% trigger seems arbitrary, suspiciously even-numbered, and low for what average increases have been the last decade or so. It just seems like a round-about way to force all carriers to disclose more information. Greater transparency might be the goal, and might be a worthwhile goal, but this is an odd way to get it.