Tuesday, March 16, 2010

How not to regulate rates

I wrote last month about a proposal by our Governor to limit insurance rate increases for the individual and small business market in Massachusetts. While he has filed legislation on this front, he also has taken administrative action through his Division of Insurance (summary of both here). New DOI emergency regulations could be used to turn down any rate increase that exceeds 4.8%.

On February 14, DOI issued "filing guidance" to the insurance companies to carry out these regulations. Here's the disapproval section, requiring the previous year's rates to stay in effect if the new rates are not approved:

Health Plans may immediately re-file if a filing is disapproved, but the filing will be subject to at least another 30 days for review. Health Plans may not increase a rate from the prior year if the filing is disapproved. For example, if a group policy is renewing on April 1st, and the March 1st filing for April rates is disapproved, the prior April's rates must stay in effect until such time, if any, that the Health Plan's filing is deemed not disapproved. Health Plans must notify the affected policyholder if a filing is disapproved by the Division.

While I have made clear my predisposition for a wholesale state review of insurance payments to providers, the Administration's rulemaking is another matter altogether. This kind of piecemeal approach to regulation is ill-advised. You simply can't just look at one set of premiums and rule on their reasonableness by administrative fiat.

To the extent the proposed rates are reflective of the demographics and actuarial characters of the group's members, any attempt to use a predetermined price index as a threshold is, on its face, arbitrary. Beyond removing the proper price signal of the underlying cost of medical care and the risk characteristics of the population, turning down a proposed rate increase on these grounds introduces a level of turmoil into the market that will be difficult to unravel.

For those from out of state, please recall that the preponderance of these policies in Massachusetts are written by non-profit insurance companies, so there are no shareholders to bear the shortfall. Instead, the insurers will have to reduce capital reserves, modify plan designs, or cross-subsidize these policies with revenues from other policies. Where reimbursement rates are currently under negotiation, the insurers might attempt to put downward pressure on providers to sell services for this customer segment below cost to make things balance. If agreed to, this would lead to further cost-shifting to other subscribers; but it might be that providers choose not to sign up with insurers that request this. That would leave consumers with policies that do not include certain doctor and hospital networks.

In my days of regulating utilities, the appellate court would have found this kind of ratemaking to be arbitrary and capricious. Requiring investor owned utilities to sell certain services below cost might also have been found to be confiscatory. I don't know what legal standard would apply here, but I am guessing we might soon find out.

Fortunately, indications are that the proposed legislation is unlikely to make progress, but this administrative regulatory approach will move forward unless it is stopped. It should be.


Bill Reenstra said...

There is a clear problem with abusive rate increases for individual policies and those with small groups were insurers wish to eliminate individuals that they deem to be to big a risk. An example was described by the President yesterday. This needs to be addressed and controlled.

In your post you do not describe the criteria that the State will use to evaluate changes in rates. These may, or may not, be all together proper. The reader, and I assume you, don't know how the insurance commission will evaluate rate changes. Until I know the procedures they will use, I am not willing to condemn the state's action.

Larry MD said...

Until the consumer/patient is responsible for more of their medical bill, any case base reimbursement system is doomed to failure. Capitation is based on the premise that providers can positively impact their patient's health. An obese society that eats, drinks and smokes too much has no financial penalty for their poor health decisions. Universally insuring the uninsured, who are typically either very sick or very healthy, does nothing to change this debate. People don't like to pay for their car maintanence but they know the alternative will be more costly repairs. Until patients are financially burdened to look at their bodies in the same way America will continue to require more of it's GDP be spent on healthcare. Getting the government out of the health insurance business and moving towards higher deductible/ catastrophic health insurance policies would bend the healthcare cost curve and reward healthy decisions. Otherwise, we all are forced to pay for others lack of self discipline which means either hospitals, providers or insurers wind up with the short end of the stick when governments cannot keep up with healthcare inflation.

Barry Carol said...

Sigh. Most people know that health insurance is expensive and getting more so because health CARE is expensive and growing faster than our economy and our ability to pay for it. The most important drivers of healthcare cost growth are rising prices charged by hospitals, doctors, labs, imaging centers, drug companies and device manufacturers and increased utilization driven by a combination of the proliferation of new technology and, to a lesser extent, the aging of the population.

Since I don’t have to deal with regulators in MA or anywhere else, I can be direct. They don’t have the courage to take on the powerful provider interests while insurers are an easy target that lots of people love to hate. One would think that regulators should want to ensure that insurers remain sufficiently solvent so that they can pay medical claims on a timely basis as they are incurred. As Paul noted, the MA health insurance market is dominated by non-profits. They are hardly profiteering. If regulators are interested in bending the medical cost growth curve, I recommend disclosure of provider contract reimbursement rates and medical outcomes to the extent that they are measurable.

Anonymous said...

More on this topic from Michael Widmer, President of the Mass Taxpayers Association: http://www.boston.com/bostonglobe/editorial_opinion/oped/articles/2010/03/17/caps_hurt_health_system/?comments=all#readerComm