The federal Patient Protection and Affordable Care Act (“PPACA”) requires the United States Secretary of Health and Human Services to establish a process for the annual review of “unreasonable” increases in premiums for health insurance coverage. Under the federal act, health insurers must submit to the secretary, and the relevant state, a justification for an “unreasonable” premium increase prior to implementation of the increase. The federal act does not define "unreasonable" increase. However, an interim federal regulation effective January 1, 2011, titled “Health Insurance Issuers Implementing Medical Loss Ratio Requirements Under the Patient Protection and Affordable Care Act,” 45 C.F.R. §§ 158.101-158.232 attempts to do so. The interim federal regulation requires health insurers to spend a certain percentage of consumers’ premiums on direct care for patients and efforts to improve health care quality. For individual and small group market insurers this is 80% of the consumers’ premium and for large group market insurers, it is 85% of the consumers’ premium. If insurers fail to meet the ratio requirements, beginning in 2012, they will be required to provide a rebate to their customers by August 1 of each year. The federal rule allows for a State to require a higher medical loss ratio than that required under the interim regulation. The interim federal regulation (pdf), published December 1, 2010, is subject to a 60 day public comment period. California and the District of Columbia have each incorporated the federal medical loss ratio in their respective efforts to respond to the PPACA. New Jersey current law is consistent with the federal medical loss ratio.
Effective January 1, 2011, California (SB 1163), requires health insurers to file with the California Department of Managed Health Care or the California Department of Insurance detailed rate information regarding proposed premium increases and requires that the rate information be certified by an independent actuary. On February 4, 2011, the California Insurance Commissioner issued draft guidelines for implementing SB 1163 (“Guidance 1163:2”). The California draft guidelines expressly incorporate, by reference, the federal medical loss ratio which is the first factor the Department will review to determine if a rate increase is "unreasonable." Other factors include whether the filed rates result in premium differences between insureds within similar risk categories that either are not permissible under California law or do not reasonably correspond to differences in expected costs, the insurer's rate of return, as well as the insurer’s employee and executive compensation. (Guidance 1163:2, § A, pp. 1-2.) An actuary's certification that must accompany the rate filing must include his or her opinion that the proposed premium rates are “actuarially sound in the aggregate,” a complete description of data, assumptions, rating factors and methods with rate calculations for each contract or policy form, a statement of opinion whether the rate increase is reasonable or unreasonable, and if the latter, the justification for the increase, and a description of the testing performed by the actuary. (Guidance 1163:2, § C, pp. 3-4.) Notwithstanding these requirements, the California Insurance Commissioner currently does not have the authority to reject health insurance rate increases. A legislative effort, however, is underway to provide such authority.
On January 20, 2011, the Council of the District of Columbia enacted the "Reasonable Health Insurance Ratemaking and Health Care Reform Act of 2010". (DC ACT 18-710). The DC Act authorizes the Commissioner of Insurance to approve health care premium rates. Section 102 sets forth standards in ratemaking and Section 103 incorporates the interim federal regulation and federal medical loss ratio, including a rebate requirement in the event an insurer fails to substantially comply with the medical loss ratio. If an insurer fails to comply with the rebate requirements, it "shall constitute an unfair or deceptive act or practices and shall be subject to the penalties in the Insurance Trade and Economic Development Act." Under Section 106, the Commissioner also has authority to rescind previously approved rates. Any previously approved but subsequently disapproved rate will be on a prospective basis only from the date of the notice of disapproval. Not unexpected, the DC Act reflects an aggressive response to the federal mandate.
On January 18, 2011, the New Jersey Office of Administrative Law issued Rule Proposals for Individual Health Coverage (pdf), (43 N.J.R. 143(a)). New Jersey currently has a detailed regulatory framework for individual health coverage including rate filing requirements, loss ratio and refund reporting requirements. N.J.S.A. 17B:27A-2 (the "Individual Health Coverage Act"). Certain regulatory provisions of the Individual Health Coverage Act are scheduled to expire on June 5, 2011, including N.J.A.C 11:20-6 governing informational rate filings and 11:20-7 relating to loss ratio and refund reporting requirements. The Rule Proposals seek readoption of these regulations. The Rule Proposals contain a specific statement regarding compliance with the federal standards. "The Federal law includes provisions regarding medical loss ratios in the individual market, including requirements for the payment of rebates to consumers. It is the Department's current understanding that the calculation of medical loss ratios and payment of rebates in accordance with existing New Jersey law does not prevent the application of the Federal law, and no changes to the current rules at N.J.A.C. 11:20-6 or 7 are being proposed at this time." (43 N.J.R. 143(a)). Public comment to the Rule Proposals will be entertained up until March 19, 2011.
Marina Karvelas is an insurance litigation and regulatory law partner in Barger & Wolen’s Los Angeles office. She is a frequent contributor to the firm’s Insurance Litigation and Regulatory Law Blog and can be reached at firstname.lastname@example.org or (213) 614-7345.