S.5470 (Breslin) / A.8280 (Morelle)
Health Insurance Premium Rate Setting
June 10, 2009
The Business Council opposes this legislation, which would make the process known as “prior approval” the exclusive mechanism for adjusting health insurance premium rates for existing products in the small group and individual insurance markets by eliminating the alternate rate adjustment process known as “file and use”. The bill also increases the minimum loss ratio to not less than 85 percent for small group and individual policies, from 75 percent and 80 percent respectively.
Reinstating prior approval of rate changes, from which the state transitioned between 1996 and 2000, and other provisions in this bill will give the Superintendent of Insurance complete discretion and expanded authority over rate changes without regard to the underlying cost drivers of premiums. Requiring the prior approval of rate changes would be a return to what had become a subjective, politicized, flawed process of artificial rate suppression and price controls. With some modifications, The Business Council supports maintaining the rate setting process currently in place in New York, which includes the objective, actuarially-based alternate rate adjustment process that ties rate changes to health-care costs.
Under current law, all new products and their rates require the prior approval of the state Insurance Superintendent before the products may go to market; the proposed legislation makes no changes to the rate setting process for new products.
Prior to 1996, the Insurance Law required insurers seeking to increase or decrease premiums for individual and small group policies to get the prior approval of the Superintendent. Since 1996, Insurance law has permitted Article 43 corporations, HMOs, and commercial insurers (since 1994) to adjust rates for individual and small group policies without going through the prior approval process under an alternative, “file and use” process. The "file and use" alternative was established to address concerns that the prior approval process was overly subjective or political, administratively burdensome and costly and, as a result, did not allow appropriate rate changes that reflected contributing costs.
In order for insurers to employ this alternative process, an actuarially-based minimum loss ratio test is required that permits a rate adjustment only when a product dedicates a certain percentage of the premium to the payment of claims. Based on their actuarial projections of the cost of coverage and the many factors that contribute to it, including hospital care, physician services, prescription drugs, utilization, taxes, administration and other factors, insurers must submit certification to the Department that they will meet or exceed the loss ratio for health-care services (75 percent for small group and 80 percent for individual policies.) After certifying to the Department that the rate filing meets the statutory requirements, the insurer notifies the subscriber of the new rate, and 30 days later the new rate may be implemented.
A year-end review or reconciliation is undertaken to determine whether the insurer has met the minimum loss ratio standards it had previously certified. If the insurer fails to meet the standards, it must refund to subscribers the difference in premiums collected between the projected loss ratio it had previously certified when the rate was filed and the actual loss ratio it experienced.
Rate Suppression, Price Control Redux
Reinstating prior approval and giving the Superintendent complete discretion to set rates will not solve the problem of rising health insurance costs; it will only serve to mask the underlying causes for increased costs. The current rate setting system is not what is driving premiums higher. The cost of coverage is primarily driven by the cost and use of health care goods and services. Government actions such as $4.2 billion in health insurance taxes, including $700 million in new and increased taxes passed as part of the 2009-10 State Budget, and dozens of insurance mandates drive the cost even higher.
If enacted, these provisions would mark a return to a time when the rate setting process and adequacy of rates were subject to political pressure and public sentiment. Under prior approval, premiums were artificially suppressed, regardless of the underlying costs and actual health-care trends. As a result, consumers were subject to arbitrary and erratic rate increases.
Business Council member employers have repeatedly identified the cost of employee health coverage as their top cost-of-doing-business issue. Yet, a subjective system of price controls and artificial rate suppression that historically has been susceptible to politicization is not in anyone's interest. Denying insurers adequate, actuarially-sound rate increases will result in financial losses that have practical, negative implications for employers that purchase coverage.
For example, losses incurred by an insurer will limit its ability to invest in technology and system improvements and wellness, disease and care management programs that help make insurers more efficient, help employers control their costs, and help workers maintain their health. Insurers' support for health information technology and quality initiatives – valuable tools in reducing costs and medical errors, and enhancing value - could suffer.
In addition, insurers' reserves, which in large part serve to protect subscribers and health-care providers in the event of a catastrophic event like a pandemic, could be impacted. The industry's workforce of about 26,000 New Yorkers in communities throughout the state could be reduced. Finally, reintroducing price controls could financially weaken some insurers to the point of impairment or insolvency, potentially leading to fewer insurers, less competition and less choice for employers.
Maintain and Modify “File and Use”, Address Concerns Over Process
The Business Council supports maintaining “file and use” - inaccurate shorthand for a reasonable process based on objective, actuarial standards and a system of checks and balances. However, we support revisions to the current law to improve the rate implementation process.
We recommend that the Morelle/Seward bill, Assembly 4688 and Senate 3062, which standardizes the calculation of the minimum loss ratio for purposes of the “file and use” process, as an alternative to the Governor's bill. As the support memo for the Morelle/Seward bill suggests, the legislation takes a measured approach to the concerns that have been voiced about the current process by expanding safeguards to ensure the integrity of rate changes and giving the Superintendent increased enforcement authority.
In addition to the modifications found in Assembly 4688 and Senate 3062, we recommend providing employers with more timely notification of planned rate increases. Specifically, these modifications to the process would:
- Require insurers to give subscribers more timely notice of rate changes. Under current law, insurers are required to notify customers at least 30 days in advance of a rate change; however, this leaves many businesses with little time to work with their insurers or brokers to consider other options. In response to Business Council member concerns, The Business Council recommends that insurers be required to give at least 60 days advance written notice of a rate change. By giving subscribers more notice of planned rate changes, they would have more time to work with their insurers or brokers to perhaps identify a more affordable product or plan design, educate their workers about any policy changes, or shop for a more affordable product.
- Raise the minimum loss ratio to 80 percent for small group policies, from 75 percent. The higher ratio ensures that a greater amount of the premium dollar be returned in health care benefits for this price sensitive market. The “expected” minimum loss ratio of 85 percent proposed in the bill is unrealistic and impractical.
- Expand the regulatory power of the Superintendent to suspend an insurer's ability to use the alternate rate adjustment process if it is determined to be in deliberate and repeated non-compliance with the law.
- Clarify ambiguous language in the law in order to standardize the calculation of minimum loss ratio when “file and use” is applied.
We urge you to reject the Governor's bill (S.5470 Breslin/A.8280 Morelle). We recommend that the current alternate rate adjustment process be maintained, and that you consider Assembly 4688 and Senate 3062 and more timely notification of rate changes as described above as an alternative.