Challenging Health Insurance Premium Rate Increases: Part 4 – How to Challenge the Amounts Health Insurers Keep for Administrative Expenses, Reserves, and Surpluses

This is the fourth 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 3: How to critique insurers’ assumptions about future medical costs
Part 5: Involving consumers in the rate review process

This blog examines how advocates can challenge t

he amounts insurers keep on hand for administrative expenses, reserves, and surpluses.

What you’ll learn from this post: How to evaluate a health insurer’s spending on administrative costs, reserves, and surpluses

Health insurers set their premium rates to cover two primary categories of expenses: future medical costs and administrative costs for processing claims. In this post, we’ll explore how, as part of the rate review process, you can evaluate what insurers are spending on administrative costs, as well as the amounts they keep on hand as reserves (to pay future claims) and surpluses (the money left over).

Which factors related to a health insurer’s administrative expenses, reserves, and surpluses must regulators review?

Depending on the state, the responsibility for reviewing proposed increases in premium rates falls on either a state regulator or the U.S. Department of Health and Human Services (HHS).

To help determine whether or not proposed rates are reasonable, HHS requires regulators to assess a number of factors, including these non-medical costs: administrative costs, capital and surpluses, medical loss ratios (MLRs), and reserve needs. In the rate review process, advocates should also look at these factors.

Looking More Closely at Insurers’ Non-Medical Spending

What constitutes a health insurer’s administrative expenses?

An insurer’s administrative expenses include:

• salaries
• broker commissions
• marketing costs
• IT and other costs for processing consumers’ claims and maintaining databases

What are an insurer’s “reserves”?

“Reserves” refers to the money the insurer sets aside to pay for future medical claims.

Why do these costs matter in the rate review process?

A health plan’s administrative costs may be excessive. Further, a plan might collect more in premium dollars than it needs. A plan might do this to cover administrative expenses and ensure it has enough funds on hand to pay claims.

The goal of rate review is to determine whether or not a plan’s proposed premium rates are reasonable. For instance, if the plan is accumulating too much money as surplus or profit, regulators could decide that a plan’s proposed premiums are unreasonably high.

Determine How Much a Health Insurer is Spending on Medical vs. Non-Medical Costs (Medical Loss Ratio)

What is a medical loss ratio (MLR)?

All insurance companies have an obligation to limit their administrative expenses and profits, to operate efficiently, and to wisely spend the premium dollars they collect. One way to measure how well an insurer does this is to examine its medical loss ratio, or MLR. An insurer’s MLR shows the percentage of premium dollars that it spends on medical care compared to all other expenses. These other expenses can include advertising, marketing, administrative costs (including salaries and compensation), and profits paid to shareholders.

The Affordable Care Act Requires Health Plans to Allot a High Percentage of Total Spending to Medical Care

The Affordable Care Act established a minimum percentage of total spending that insurers must devote to medical care. This is known as a minimum medical loss ratio (MLR) requirement. The health care law set MLRs for health plans of different sizes:

• Individual and small group health plans must spend at least 80 percent of the premium dollars they collect on medical care—an MLR of 80 percent.
• Large group plans (plans with more than 100 employees) must spend at least 85 percent of premiums on medical care—an MLR of 85 percent.

If an insurer does not meet its MLR, it must refund the excess premium dollars it has collected to its enrollees.

States are allowed to set higher MLR requirements than the Affordable Care Act. For example, in New York, the MLR for individual health plans is 82 percent.

Though a number of states have set their own MLRs, the MLRs set by the Affordable Care Act are now the minimum standard that most plans must meet.

Why MLRs Matter in the Rate Review Process

Under rate review, if an insurer’s MLR is too low, advocates can argue that the insurer should lower its premiums.

One advantage of rate review is that it can require an insurer to lower its premiums before plan enrollees start to pay those premiums. This is preferred over allowing the insurer to charge higher premiums and then requiring the insurer to send rebates to enrollees.

Another advantage of rate review is that it allows regulators to look at whether the MLR is unreasonably low for a particular plan—not just the insurer’s MLR by state. This is important because, when a health insurance company is calculating the MLR to determine whether it owes rebates, it looks at all the plans it sells to individuals in a state as a group. And it looks at all the plans it sells to large employers as another group. In either the individual or employee plan category, there could be plans in that group with an MLR below the 80 or 85 percent standard. During rate review, stakeholders have the opportunity to look at the MLR for any particular plan.

How Advocates Challenged Health Insurers’ MLRs in Their States

We talked with advocates in six states (Colorado, Connecticut, Maine, New York, Oregon, and Vermont) plus the District of Columbia about how they conduct rate review. In all of these states, advocates mentioned the importance of looking closely at all health plans’ administrative expenses and at how they calculate their MLRs. The MLRs of nonprofit insurers deserve extra scrutiny. Because of their tax status, they have a special obligation to keep administrative expenses and surpluses in check.

1) Does the insurer’s MLR history show that it is setting premiums too high?

Health Care for All New York submitted a comment letter in 2013 that questioned whether one particular insurer would meet the required MLR. In the letter, Health Care for All New York referred to the insurer’s past record to encourage heightened scrutiny of its rate filing:

“… Aetna has struggled to comply with the law and keep the Medical Loss Ratio above 82% in the state of New York. In 2011, Aetna returned $3,663,077 to its subscribers, and in 2012, it issued a rebate in the amount of $3,454,360… this trend of repeated violations of the MLR mandate should be kept in mind as the Department reviews their proposed premiums.”

2) Is the health insurer accumulating profits by projecting an unrealistic MLR? And are high administrative costs necessary?

Colorado advocates worked with an actuary to submit a comment letter that questioned whether  Golden Rule Insurance plan’s projected MLR was in line with past experience, noting that the company had accumulated profits in the past. The Colorado Insurance Division disapproved the high premium increase, partly based on the company’s profits and its plans to spend a significant amount on insurance agent commissions.

3) Is the MLR reasonable for each particular health plan sold by the insurer and for each group of enrollees?

The Office of the Healthcare Advocate in Connecticut questioned the lack of variation in MLRs for health plans that were offered both inside and outside the exchange. It noted that the insurers calculated the MLR across businesses inside and outside the exchange, yet inside the exchange, the networks are narrower and the provider reimbursement is definitely lower: “The MLR should be very different inside and outside the exchange and that deserves to be challenged.”

4) Do nonprofit health plans have an obligation to protect affordability and spend premium dollars on medical care?

Consumers Union in California worked with an actuary to question Blue Shield’s projected increase in administrative costs, as well as the MLR in a particular health plan. They noted that a price increase in a particular plan would be a burden to consumers, so they asked that Blue Shield price that plan to achieve an 80 percent MLR. They also asked the regulator to consider Blue Shield’s mission as a nonprofit to ensure access to high-quality care at an affordable price. Ultimately, the state regulator approved a much lower rate increase.

Looking More Closely at Insurers’ Reserves and Surpluses to Determine Whether They Have Set Reasonable Monthly Premiums

What are insurers’ reserves and surpluses?

The term “reserves” refers to the amount (of your monthly premium) an insurer sets aside to cover the medical claims and expenses it expects to incur in the future.
The term “surplus” refers to an amount that an insurer accumulates when the premiums (and/or investments) it collects total more than it pays in administrative expenses and medical claims. Insurers must have sufficient funds to pay their expected expenses and provide a cushion against unexpectedly high medical claims, and in case a particular plan fails financially.
Regulators also use the term “risk-based capital (RBC),” which refers to the dollars an insurer keeps to protect a plan’s ability to pay potential medical claims to remain solvent. The level of capital that is needed to assure a plan’s financial solvency—its RBC—is often expressed as a range with a minimum and maximum. But insurers often accumulate surpluses that are far beyond what is required to maintain an adequate RBC.

Why reserves and surpluses matter

The amount held for reserves and surpluses matters in instances where insurers raise premiums to generate more funds than necessary to protect plan solvency. Consumer advocates can argue that premiums should not be set so high that an insurer will accumulate excessive surpluses.

How Advocates Looked at Health Insurers’ Surpluses in Their State

State regulations require all health insurers to hold a minimum amount of premium dollars in reserves and surplus, but most state laws do not set an upper limit on how much money an insurer can accumulate. And reviewing excess capital and surpluses are not always part of the rate filing process. In those states that do formally look at excess capital and surplus levels, this review can be part of their rate review process or a separate process.

In Vermont, Lila Richardson, a staff attorney from the Health Care Advocate Project, looked at surpluses during rate review. In one case, she received help from an actuary to comment on a high proposed rate increase that would have been unaffordable to enrollees. Vermont rejected the increase for a number of reasons, including that the insurer had high medical and claims trend assumptions, and thus set premiums high for several years, unnecessarily contributing to the company’s surplus levels.

During the rate review process, health insurers will often argue that their risk-based capital is a confidential trade secret. But Richardson disagrees, explaining, “In fact, [contributions to surplus or RBC] can be calculated from a company’s end-of-the-year financial reports and should not be deemed confidential during the rate review process.”

Nonprofit Health Insurers Should Receive Extra Scrutiny Nonprofit insurers, including nonprofit Blue Cross Blue Shield health plans, deserve added scrutiny when it comes to reserves and surpluses. They have an obligation to serve the public interest. These insurers do not have to pay certain taxes. And because of this mission and special treatment, they should restrict their surpluses to only what is necessary to protect their solvency and to protect them in cases of high claims. Nonprofit insurers should not be retaining excessive surpluses simply to pay unreasonably high salaries and other compensation to their management. Consumers Union has published a guide that examined nonprofit health insurers’ surplus levels. This guide offers tips on how to approach the process of challenging surplus levels at nonprofit insurers: How Much Is Too Much: Have Nonprofit Blue Cross Blue Shield Plans Amassed Excessive Amounts of Surplus?

In 2008, the District of Columbia passed a law strengthening regulators’ role in examining surpluses that should serve as a model for other states. The “Medical Insurance Empowerment Act” gives the D.C. health insurance commissioner the right to examine excess surplus levels and created a process separate from the rate review process for scrutinizing surplus levels. The law requires the insurance commissioner to review and determine if surplus levels are excessive. If the commissioner identifies excess surpluses, he or she can lower an insurer’s monthly premiums or require the insurer to use excess surplus to pay for other community benefits, such as supporting programs for lower-income people.

D.C. Appleseed has actively engaged in the surplus review process under this law. The group found that the required review by the commissioner’s independent actuary was not sufficiently rigorous, so Appleseed used its own actuary. It then submitted a comment letter noting that the law requires nonprofit insurers to spend any reserves that exceed the amount needed to assure solvency (by lowering its premiums and/or providing community benefit contributions). Families USA also submitted comments in a D.C. review of the reserves held by a Blue Cross Blue Shield plan.

Other Resources

An excellent resource that provides an overview of the rate review process is Consumers Union’s An Advocates Guide to Health Insurance Rate Hikes:  What You Can Do to Protect Individual Market Consumers.

Consumers Union also hosts a rate review website that has additional new resources.

Maine Consumers for Affordable Health Care

• Rate Review Presentation by Joe Ditre, currently with Maine Consumers for Affordable Health Care, will be joining Families USA’s staff in September. He is an experienced rate review advocate and a great resource for other state advocates. His powerpoint presentation from Families USA’s 2012 Health Action Conference provides a good overview of rate review covering both the new Affordable Care Act rate review requirements and sources of information to help you challenge a rate filing.
• Presentation on How to Look at Year-End Financial Statements

What you learn about rate review can help other advocates—share your strategies with us on Twitter and Facebook

If you have tips or best practices to share, other advocates are waiting to hear from you! Please share your strategies with us through Facebook or Twitter using #ratereview2015.