At the Kaiser Family Foundation’s Health Insurance Premium Rate Development and Review Panel NovaRest Founder Donna Novak discussed what goes into premium rates, what factors impact claim costs above and beyond health care costs and how states review rate increases.
So what goes into premium rates? Claim costs for one, which result from health care costs. Marketing and distribution costs are also a factor, along with administrative expenses, taxes, fees and assessments and a profit margin to cover cost of capital and solvency protection. Here’s a look at each of the biggest drivers:
- Claim costs (Claims costs = health care costs (HCC) less cost sharing)
- Marketing and distribution costs: may decrease under ACA due to MLR (medical loss ratio) and exchanges
- Administrative expenses: will increase under ACA due to new filing requirements
- Taxes, fees and assessments: will increases under ACA due to exchange fees
- Profit margin to cover cost of capital and solvency protection: may decrease under ACA due to MLR
There are number of factors that impact the cost of claims in addition to health care costs. Factors include the average health of the population, changes in the benefits covered and deductible leveraging. Another factor is random fluctuations, especially in small blocks. Insurers use reinsurance to lessen random fluctuations, but that adds costs. This is the reason or the credibility adjustment in the MLR rebate formula.
The average health of the population impacts the costs of premiums due to an aging population and self-selection of insured especially when there are open enrollment opportunities. It’s also due to movement of uninsured population to being insured and due to close blocks.
In addition, employers are passing more of the cost of insurance to employees through higher cost sharing, thus reducing the premium costs. Insurers are increasing cost sharing to keep premium rate increases lower.
Also, premiums are impacted by large fixed cost sharing such as copays and deductibles. The increase in HCC is all added to the claims cost and none to the cost sharing, which increases premium by a higher % than the HCC increase. Here’s an oversimplified example:
Health care cost of $1,200 with $500
Deductible goes up $120 or 10% of HCC
Claims go from $700 to $820 or 17%
How do States Review Rates? Regulatory authority is found in the laws and regulations of the states. The review steps include: completeness of the filing, overall filing and actuarial certification to understand the main drivers of cost, review of detailed assumptions, request further information and/or challenge assumptions with potential revisions to the increase, and final determination after requested changes, if any, are made. Most state authorizes allow some review, but not all. During the review, regulators will:
Determine if the rate is excessive
Determine if the rate is insufficient
Determine if the rate is discriminatory
Determine if the rate is reasonable in relation to the benefits provided (usually MLR test)
More extensive reviews include reasonableness of trend assumptions. Regulators will also make sure the trends are consistent with other carriers in the market. They will make sure the prior year estimates correct and find out if there are unusual situations that may not repeat themselves, such as shock claims. They will check the actuarial soundness of the methodology and resulting rates. There may also be rate band and/or MLR requirements. There will be a review of non-benefit expenses. The final determination is based on legal authority. Keep in mind, without approval authority, the regulator can always negotiate with the insurer.
Recently, the interpretation of many regulations is being reviewed and revised and legal authority is changing in some states. Transparency of the final determination is increasing.
Here is a great link to video of Donna’s presentation during the briefing.