Challenging Health Insurance Premium Rate Increases: Part 3 – Analyzing Insurers’ Medical Cost Assumptions

This is the third blog in our series that shares tips and best practices from consumer advocates in several states about how to effectively participate in the health insurance rate review process. The rest of the series covers: 

Part 1: How to prepare for rate review
Part 2: First steps for advocates after rate increases are proposed 
Part 4: Challenging the amounts insurers keep on hand for administrative expenses, reserves, and surpluses
Part 5: Involving consumers in the rate review process

This blog discusses how to critique insurers’ assumptions about future medical costs.

What you’ll learn from this post: How to evaluate health insurers’ predictions about changes in medical costs

Insurers set premium rates to cover two primary categories of expenses: future medical costs and the insurers’ administrative costs for processing claims. In this post we’ll explore how you can critique the insurer’s assumptions about the first category of expenses: future medical costs.

Examine the insurer’s assumptions about future costs

What is a medical cost trend?
Medical cost trend refers to the change in how much medical costs will change over time.

Why medical cost trends matter in the review process
Health insurance companies use predictions about medical costs to justify increases in premium rates. If an insurer inflates its medical trend predictions, the premium increase will likely be excessive.

Which factors related to medical cost trends must regulators review?
Depending on the state, the responsibility for reviewing proposed increases in insurance premiums falls on either a state regulator or the U.S. Department of Health and Human Services (HHS). To help determine whether proposed rates are unreasonable, HHS requires that regulators assess a number of factors, including these related to medical cost:

• Medical cost trend changes by major health service categories
• Changes in utilization of services by major health service categories
• Changes in the health risk profile of enrollees
• Impact on the current premium rate of how an insurer over- or under-estimated medical trends in previous years

Assess an insurance company’s overall predictions about how much the cost of health care will rise

Predictions about medical costs are often just a guess and the estimates are usually within a range. Actuaries who work for insurance companies—and are responsible for predicting future costs—tend to use the highest possible estimate. This creates a problem because new Affordable Care Act plans do not have comparable data from past years to rely on and, thus, the estimates of their enrollees’ medical costs may be too high.

Four ways to assess the fairness and accuracy of an insurer’s overall medical cost trend assumptions

• Compare the medical cost trend assumptions of various health insurers’ against each other. Health Care for All New York compared the medical trend assumptions of several insurers in a comment letter last year. It urged regulators to reject rate filings in which insurers predicted much higher medical cost trends than their competitors.
• Review the historical cost trends for a plan in a similar market to determine whether the new proposed medical cost trend is in line with previous years. Or look to see if the compound effect of rate increases for several years in a row seems too high. In a 2012 comment letter, Health Care for All New York used historical trends for specific insurance plans in New York to challenge a high medical trend assumption.
• Use state and national medical cost trend forecasts for comparison. You can cite studies that forecast medical trends as a basis for challenging an assumed medical trend. In the previous letters, New York advocates used state-specific reports as well as a national report (PriceWaterhouseCooper’s Health Research Institute’s annual Medical Cost Trend report). While state or even regional data about price and utilization is preferred, a national report offers some evidence of medical cost expectations and can help trigger a closer look at the insurer’s assumptions.
• Make the case that medical cost trend assumptions should be conservative. Actuaries indicate that there is a range of reasonable medical cost trend assumptions. You can argue that a rate should be based on the lower end of reasonable assumptions, especially if this will reduce the impact of several years of rate increases. Colorado advocates worked with an actuary to submit a letter that commented on the medical cost trends used by the Golden Rule Insurance Company. The letter cited a blog from the White House Council of Economic Advisers to suggest a lower medical trend assumption might be appropriate. The Colorado Division of Insurance rejected the insurer’s proposed rate increase.

Scrutinize changes in the health of the population covered by the insurer’s plan

What is an enrollee risk profile?
This profile is an analysis of the likely health status of the population enrolled in a health plan, which may be based on age, demographics, and any available health information.

Why does enrollee risk matter in the review process?
Insurers use the risk profile to estimate the amount of medical claims that they will receive. In any given year, insurers may enroll a pool of individuals who are healthier or sicker than expected. When insurers predict declining average health of their enrollees, they increase premiums.

This year, insurers may overstate the risk profile of the newly insured population. Make sure that insurers’ projections account for two provisions of the Affordable Care Act (ACA) that lower their risk:

• The increased number of young and healthy people who enrolled because of the ACA
• The three mechanisms to protect insurers—risk adjustment, risk corridors, and reinsurance—created by the ACA in case they get a disproportionate share of unhealthy enrollees

Look out for “fudge factors” added to protect health insurer profits

Be aware that insurers often build various factors into their rates to protect them in case the health of enrollees declines. You should look for discrepancies in the rate filing that protect the insurer’s profits if its predictions about medical costs are wrong and drive up premiums.

In Oregon, for example, OSPIRG reports the use of a “fluctuation factor” by insurers in rate filings in past years. This amounts to a sort of actuarial fudge factor supposed to protect the insurer if it was wrong in its predictions about the future cost of medical claims. Not only is this type of factor not fair, in Oregon this type of justification for higher premiums is no longer allowed.

In 2012, Consumers Union commented on an unaffordable 14.8 percent hike in premium rates proposed by Blue Shield of California. It said that the insurer’s trend rates were unsupported by data. Additionally, the insurer used a fudge factor called a “Provision for Adverse Deviation (PFAD)” to build in an unjustified increase to premiums. Ultimately, state regulators approved a much lower premium increase.

Determine whether a health insurer is factoring in savings from measures to reduce costs (cost-containment)

Because the cost of health care contributes to an insurer’s medical trend predictions, you should explore what steps the insurer is taking to keep costs down and whether savings from these measures are fully reflected in the premium rate proposal.

What are cost-containment initiatives?
Cost-containment initiatives include efforts by any number of entities (insurers, providers, consumers) to reform or reduce underlying health care costs. Initiatives can range from promoting medical homes, to reducing unnecessary hospital readmissions, to “bundling payment” for a full course of care rather than for each individual service provided to a patient.

Why cost-containment initiatives matter in the review process
The ultimate driver of the cost of health insurance is the underlying cost of medical care. Rate review is one of several tools that consumer advocates can use to encourage insurers to adopt creative and consumer-friendly cost-containment initiatives, and to set affordable premium rates that reflect those strategies.

Looking at cost-containment initiatives
OSPIRG has a contract with the state insurance division to be a consumer voice in the rate review process. The following are three approaches OSPIRG uses to address cost containment in rate review that other states may wish to replicate:

• First, OSPIRG is encouraging the Insurance Division to inquire whether lower negotiated health insurance premium rates are being incorporated into how an insurer determines its premium rates. For example, this year plans have negotiated reimbursement rates with a narrower network of providers, thus reducing costs. Further, the lessening of “bad debt” as more people gain insurance should lower hospital charges. These cost-savings should be reflected in premium rates. OSPIRG is hoping to gain more transparency around negotiated reimbursement rates in the future by tying to the rate review process the state’s all-claims payer database—which aggregates data from public and private payers in Oregon about payment for medical claims and about the population that receives services.
• Second, insurance companies in Oregon are required to describe all of their cost-containment practices as part of their rate filings. OSPIRG asks insurers specific follow-up questions about why insurers are not exploring different cost-containment initiatives. For example, see OSPIRG’s comments on Providence Health Plan’s rate filing. The Insurance Division eventually rejected Providence’s filing.
• Third, OSPIRG is now working with the Division of Insurance to develop a more detailed, standard format for reporting on cost-containment initiatives to be sure that cost savings are passed on to consumers. In the future, plans will have to include information about both utilization patterns and the quality and outcomes of care with their rate filings.

Other Resources

Consumers Union Toolkit:  An Advocates Guide to Health Insurance Rate Hikes:  What You Can Do to Protect Individual Market Consumers.
Consumers Union Rate Review Website: http://consumersunion.org/topic/health-care/rate-review/
Rate Review Presentation by Joe Ditré, Maine Consumers for Affordable Health Care: Ditré, who will begin working with Families USA in September, is an experienced rate review advocate and a great resource for other state advocates. His presentation from Families USA’s 2012 Health Action Conference provides a good overview of rate review requirements and sources for information to help you challenge a rate filing.

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