February 7, 2011 -- So who’s in charge now? More than a half century ago leading scholars in law and public policy raised the question whether the insurance industry would continue to be regulated by the states or would progressively come under Federal supervision.
Although long settled in favor of the states, the question has resurfaced, this time in the context of health insurance reform. The current answer is murky, at best.
Congress, in the newly enacted Affordable Care Act, looked to the Federal government (D/HHS) to address spiraling health insurance premiums by defining “unreasonable” rate increases. Having tasked HHS with this conundrum, Congress then went out of its way to preserve the states’ authority to regulate excessive rates. Of course, not all states are set up to do very much rate regulating; even those most heavily impacted are not necessarily on board. California, now facing a highly contentious 59% rate increase filed by Blue Shield, is a prime example. For this reason, Congress authorized a limited backup role for HHS. Some fear that it is far too limited.
The Feds have now made an attempt to fulfill their end of the co-regulatory arrangement and have given us an initial glimpse of what rate review might look like in a reformed health care system. In a relatively obscure proposed regulation published for comment in late December, HHS defined “unreasonable” rate increases in a way the insurance industry will no doubt find arbitrary and lacking in nuance, i.e. any amount over 10% a year. At the same time, it throttled back on the minimum enforcement obligations of state and federal officials to a degree virtually guaranteed to drive consumer and small business rate payers to distraction. In lieu of prohibiting or reducing “unreasonable” increases, the proposed rule merely requires full disclosure including publication of actuarial justifications. A strong argument can be made that this arrangement-- dictated largely by express congressional authorization-- represents a less than optimal outcome. It combines a teaser in the nature of an upper limit on reasonable rate increases with an illusory mechanism for enforcing increases that cross the line.
Quite apart from the organizational ambiguities of co-ordinate regulation, however, the proposed rule speaks to the current reluctance to use rate regulation as a strategy for forcefully addressing excessive costs and gaps in quality-of-care. In effect, the proposed rule supports a traditional view of the rate review process in which prior years’ (historical) costs set the floor for current year’s rates. In this model, the only cost items to receive any real scrutiny are the incremental costs associated with inflation, changes in plan design, new legal requirements and increased service utilization. Past years’ historical costs are assumed to be reasonable and thus are not put to any critical test of value, efficiency, quality or affordability. This exclusive focus on incremental costs effectively means that rate review will simply nibble around the edges of the cost problem instead of attacking it frontally.
Is there any alternative to this incrementalist approach that can be achieved within the terms of the ACA? We offer three inter-related suggestions: modify the proposed rule to re-define “unreasonable” rate increase; refocus the HHS rate review grant program to fund the modernization of state rate review programs and to develop high performance models, and find ways of rewarding demonstrated cost containment and quality improvements.
Rather than defining “unreasonable” rate increases simply by drawing a given percentage (e.g. 10%) line in the sand, HHS could say that a rate and rate filing subject to the approval of a state insurance department will be deemed unreasonable if it fails one or more objective tests of cost containment established by legislation or rule. We refer to this a “process-based” definition of rate unreasonableness.
For purposes of illustration, states could follow the lead of Massachusetts by adopting language along the following lines: “In determining if rate increases are reasonable and not excessive, inadequate or unfairly discriminatory the Commissioner of Insurance shall make a finding that the insurer has contracted with hospitals and other providers to prevent reimbursement for preventable hospital re-admissions, [and other measures specified by each state] and shall further make a finding that the contractual provisions have had or are expected to have a demonstrated impact on the prevention of services which are misused, over-used or under-used and are not medically necessary.”
This innovative approach was adopted by Massachusetts in 1984 and remains on the books today; the concept has been applied, most recently, by Massachusetts BCBS in its Alternative QUALITY Contract with providers. The essential feature is the use of provider contracting and rate review to address very costly performance problems such as hospital-acquired infections, avoidable hospital readmissions, post-operative complications, etc. The impact of these performance problems on insurance premiums and quality of care has been very well documented.
HHS’ new Rate Review Grants could be re-oriented and used by the states to modernize their programs of rate regulation. The essential features applicable to all states would be a process-based definition of unreasonableness (with leeway for each state to craft its particular requirements), a rate-making process designed to generate sufficient information to make regulatory findings, and a decision-making process culminating in the determination of rate reasonableness and rate adjustments. The basic idea is to coordinate the proposed Unreasonable Rate Rule with HHS’ Rate Review Grant program to fashion a modern, performance-oriented rate review process.
Finally, funding sources could be identified to reward states, carriers and providers that successfully implement performance-oriented rate review, have a demonstrated impact on premiums and enhance quality. Funding could come out of shared-savings or could be based on some other approach.
More than anything, today’s state rate reviews pay undue attention to the accuracy of projected actuarial trends and fail to test for evidence that underlying costs are reasonable and support efficient, high quality systems of care. A modernized, performance-oriented system of rate review could move us in this direction.
Larry Kirsch is an economist and veteran of 35 contested rate hearings. He’s served as an expert witness sponsored by consumer groups, public agencies and policyholders. Larry is managing partner of IMR Health Economics in Portland, Oregon. Larry@IMRHealth.com
Joe Ditré is an attorney and Executive Director of Consumers for Affordable Health Care located in Augusta, Maine. He has litigated almost a dozen rate cases on behalf of CAHC, an intervener in proceedings before the Maine Insurance Bureau. JDitre@mainecahc.org
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