Health Insurers Must Justify Premium Increases of More Than 10 Percent

U.S. health insurers led by UnitedHealth Group Inc. and Humana Inc. must provide justification for any planned premium increases of more than 10 percent next year, according to federal rules proposed today.

States can reject higher insurer rates, while the federal government will be limited to only publishing data on premiums, according to the U.S. Department of Health and Human Services, the agency writing the regulations. States may bar insurers with a pattern of “unreasonable” rate increases from exchanges where 24 million newly insured individuals will buy coverage.

The publication of rate increases and the states’ review will put insurers “under tremendous scrutiny,” Health and Human Services Secretary Kathleen Sebelius said today at a press conference in Washington. “The bright light of sunshine convinces insurers to think twice and check their math.”

The rules were prompted by a proposal from the California subsidiary of Indianapolis-based WellPoint Inc. to raise rates as much as 39 percent in 2010, Sebelius said. After review by California’s insurance commissioner, the underlying calculations were found to be incorrect and WellPoint cut the increase in half. “It was a very effective mechanism,” she said.

Health insurers that raise their rates more than a "reasonable" amount may be open to scrutiny from state regulators deciding who should be allowed into the new health insurance “exchanges." Photo Illustration: Bloomberg Close

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Health insurers that raise their rates more than a "reasonable" amount may be open to scrutiny from state regulators deciding who should be allowed into the new health insurance “exchanges." Photo Illustration: Bloomberg

Insurance exchanges set up by the law that President Barack Obama signed in March will offer tax credits for people to buy private coverage by 2019. Starting in 2011, insurers must provide state and federal regulators with justification for any premium increases of 10 percent or more.

Slice of Market

The Standard & Poor’s 500 Managed Health Care Index rose less than 1 percent at 4 p.m. New York time. The rate review process in the rule, which can be revised by regulators, applies to small group and individual insurance plans rather than the large group coverage used by employers for workers, Sebelius said.

WellPoint referred requests for comment to the Washington- based lobbying group, America’s Health Insurance Plans. The group said the regulation of rates was best left to states.

“The federal government is not in position to make these assessments,” Karen Ignagni, the group’s chief executive officer, said in an e-mailed statement. The proposal sets up a review threshold that’s “incomplete because it does not adequately factor in all of the components that determine premiums,” she said.

State Regulation Focus

The disclosure rules won’t have a large effect on profit margins, Matthew Borsch, a Goldman Sachs Group Inc. insurance analyst, said today in a note to clients.

“Health insurance is already extensively regulated at the state level,” Borsch wrote. “We would be more worried about an additional level of rate scrutiny if in fact the health insurers were siphoning a significant portion of premiums for profit. That is not the case.”

The administration estimates that as much as 70 percent of insurance offered in the small group and individual market will exceed the 10 percent threshold and will be subject to review, according to the regulations published today.

The 10 percent threshold will change after 2011 to a state- by-state measurement based on the history of health costs in each state, Sebelius said.

An “unreasonable” increase is defined as either lowering the percentage of premiums spent on customers’ care to less than 80 percent, or being unaccompanied by substantial evidence that health costs are rising, the agency said.

Exchange Denial

Insurers also must spend at least 80 percent of premium revenue on patient care or rebate the difference to customers. Insurers as of 2014 won’t be able to reject people based on pre- existing medical conditions, and won’t be allowed to vary premiums widely based on people’s age or health status.

Denying insurers access to the state-based insurance exchanges that begin in 2014 will prevent the companies from reaching consumers subsidized by $350 billion in tax credits during a decade, according to the Congressional Budget Office.

The federal government lacks the power to ban insurers from the exchanges. It can recommend to states, which decide on the insurers that can sell within the marketplaces, that certain health insurers don’t participate, Sebelius said.

“We’ll certainly look at patterns of insurance company practices, in terms of selecting the companies to participate in future exchanges,” Sebelius said. State insurance commissioners, along with Sebelius’s department, will watch for insurers deemed “good public citizens” for participation, as opposed to “ones you might want to keep an extra eye on or don’t want to enhance in the marketplace.”

To contact the reporter on this story: Drew Armstrong in Washington at darmstrong17@bloomberg.net;

To contact the editor responsible for this story: Adriel Bettelheim at abettelheim@bloomberg.net.

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