Saying that “[d]regulation of health insurance premiums is a failed experiment leading to unjustified premium increases and more people losing their health insurance coverage,” Governor David Paterson signed into law program bill number 278, reinstating the Insurance Department’s authority to review and approve health insurance premium increases before they take effect. The new law, which is part of the Governor’s health insurance reform agenda, requires health insurers and HMOs to make application to the Insurance Department prior to implementing premium increases. The Department would have a 60 day period to review the rate application (with extension and tolling of that time period for requests for additional information) and its actuarial and financial support, with a goal towards ensuring that rates are justified and not excessive. The Department may approve, modify or disapprove the filing. The new law would apply to all rate increases taking effect on or after October 1, 2010. The Governor also said, “Not only will stronger oversight of rate increases benefit New York’s individuals and small businesses, but prior approval will also provide us with the tools necessary to make sure federal health care reform is implemented in a fair and efficient manner.” Under the new federal health legislation health insurers will be required to report justifications for “unreasonable” rate increases as well as the percentage of premiums spent on claims, quality of care, taxes and administrative costs.

The bill packed a double wallop for health insurers and HMOs by raising the medical loss ratio from 75 percent to 82 percent for the small business book and from 80 to 82 percent for individual policies. The original proposal provided an 85 percent medical loss ratio so it appears that insurers and HMOs won somewhat of a victory in this area. What is not clear in the bill, from my untrained eyes, is whether or not taxes and assessments will be treated as medical costs when calculating the ratio or whether companies will be expected to pay those obligations from the 18 percent of each premium dollar that the state government will allow them to keep. This issue is critical to the insurers and HMOs . Perhaps there is an understanding with the department that does not appear in any official document? If there is not some relief in this area, the long term effects of this change could be damaging to the financial health of the industry. Further, the law provides an opportunity for policyholders and the public to provide comments to the insurer and the Insurance Department on the rate applications. The Insurance Department is required to post relevant comments on its website to provide a forum for public input and discussion. Small businesses and individuals will receive a longer notice of rate increases – 60 days instead of 30 days – allowing them more time to consider alternative coverage options that may be more affordable.

The legislation was hailed from many corners of the state with small businesses and physicians voicing strong support. Leah McCormack, MD, President of the Medical Society of the State of New York is quoted as saying, “the extraordinary profits generated by the health plan industry over the last several years have been made at the expense of New York’s magnificent but financially strained health care system. At the same time, physician reimbursement has been aggressively constrained, the premiums paid by businesses-including physician employers- to support the health care system have increased dramatically, and patient cost-sharing obligations have grown significantly.” The new law, Dr. McCormack continued, “will better assure that the health insurance industry is not allowed to extract grossly excessive amounts of resources from New York’s health care system and divert such resources to company dividends and profits. Instead these resources will be committed to enhancing patient access to needed care.” Superintendent Wrynn, who was a strong advocate for the bill, said, “This legislative victory, under Governor Paterson’s unwavering leadership, is the culmination of years of battling for more affordable quality health care. Prior approval will work in tandem with President Obama’s health care reform to make sure insurer’s premium rates are transparent and their reporting is correct.”

How did the health insurers and HMOs get to this point? It is true that health insurance premiums have increased at a much greater rate than inflation in recent times. Expenditures for health insurance continue to take a greater percentage of income each year and many Americans are at the breaking point in their ability to afford the coverage. These increases are obviously reflective of the rapidly increasing cost of medical care, medical technology and pharmaceuticals. However, health insurers and HMOs have not helped their cause with sometimes shocking executive salaries. This development has not gone over well with the public and its elected representatives. Also, an increasing number of New York’s health insurers have been found by the Department in recent years as charging excessive premiums (based on the old 75 percent medical loss ratio standard) and forced to give refunds to policyholders.

During our time at the Insurance Department we struggled with the concept of increasing health rates and we did seek to reinstitute prior approval, both administratively and legislatively. On the administrative front, we were challenged in court and lost and the legislature never desired to pass the legislation at that time. We also offered the industry a compromise in the form of a “flex-rating” system under which insurers would have the freedom to raise rates a smaller fixed percentage without prior approval while requiring them to seek prior approval for larger increases. The industry rejected that proposal. I’ll bet they now wish they hadn’t.

Okay, so health insurers and HMOs have now joined auto, medical malpractice and worker’s compensation carriers as insurers who must seek prior approval for rate increases. The experience of those other insurers with prior approval has not been great. Prior approval in the medical malpractice area has produced chronically impaired insurers while, at the same time, causing extreme dissatisfaction among physicians with the cost of the insurance. The experience of worker’s compensation carriers and auto insurers has been a bit better, but companies have struggled to create profits in both areas. Only time will tell what affect this law will have on health insurance carriers and the marketplace. As a former regulator, involved in rate increase requests, it will be next to impossible to keep political influences out of the rate-making process. Further, it appears to me that the Insurance Department will have a difficult time getting the staff and resources necessary to be able to make rate decisions within the 60 day time period. While that period can be tolled and extended, depending on the completeness of the filing, it is still a short time period given the breadth of responsibilities of the health bureau in this age of budget cutting.

I saw one event this past week that may be an encouraging sign for the health insurance industry. The Assembly insurance committee tabled all health insurance coverage mandate bills (except coverage for autism) given the passage of the prior approval legislation. While the legislature wanted to cut the health insurers some slack for having to accept prior rate approval, the move also indicates that the state government is now a partner with the health insurance industry in setting rates. Any pressure to increase rates, caused by more coverage mandates, will be jointly experienced by the health industry and the Insurance Department at the same time. How could the Department deny a rate increase caused by more coverage mandates? This may force the legislature to avoid costly coverage mandates in the future.

A lot of non-insurance people have asked me over the past year about my thoughts on health insurance reform. While there are many steps that can be taken to lower the cost of insurance in this area, I usually respond by asking my questioner to consider the following basic undeniable facts when listening to all of the political rhetoric:

1. Most people utilize health care services at a level far greater than any other generation before us, taking advantage of expensive medical technology that did not even exist only a few years ago, and

2. Health Insurance is expensive because medical care is expensive. Any reform that does not take these facts into account will probably not deliver the promised results.

Workers’ Compensation Rates To Go Up

Pursuant to the new rate approval process contained in chapter 11 of the laws of 2008, Insurance Law Section 2304 provides for a two-step process to set workers’ compensation insurance rates. First, the designated Rate Service Organization (RSO), which is the New York Compensation Insurance Rating Board (NYCIRB), shall file annual “loss cost” revisions with the New York State Insurance Department by June 1 of each year. The term “loss costs” is defined as “that portion of a rate intended to represent the anticipated costs of claim payments and loss adjustment expenses associated with such claim payments, and may include one or more trend factors.” Loss costs do not include provisions for insurer specific expenses (other than loss adjustment expenses), such as acquisition costs, overhead and taxes, or profit. Second, in order to establish a proper rate, each insurer must separately file its loss cost multiplier (LCM) with the Superintendent. The rate for each classification is calculated by multiplying the approved loss costs by the LCMs filed with and approved by the Superintendent for the individual insurer. The first step in this process for the next policy year, which begins on October 1st, involved NYCIRB making its annual “loss cost” filing, which provides for a 7.7% increase.

NYCIRB cites several factors for the increase. To quote the report, “Claim frequency continues to decline in New York, but at a similar rate at seen previously. Claim costs, however, continue to increase, with both the indicated indemnity and the medical trend higher than seen in the previous filing.” (NYCIRB Proposed 2010 Loss Cost Revision, page 5.) The indemnity average claim severity (2008 policy year) has increased over 7% from the average in the 2007 policy year. Medical average claim severity has increased over 16% from policy year 2006 to 2008. Some of the indemnity cost increase could be due to the scheduled statutory increase in the maximum weekly benefit provided in the 2007 reform legislation.

The current loss cost filing takes into account the fact that on July 1, 2010 the maximum benefit will increase from $600 per week to 2/3 of the state’s average weekly wage, with additional annual increases effective July 1st of each subsequent year, keyed to the statewide average weekly wage as determined by the New York State Department of Labor. Thus, on July 1st of this year, the maximum weekly benefit will rise to $740, according to the filing.

It is troubling that the employer costs of the workers’ compensation system are increasing so rapidly only three years from the passage of the comprehensive act that was supposed to lower their costs. What has gone wrong?

The filing gives us some clues as to the problem. Many of the savings that the bill was supposed to deliver in the long term have not materialized yet. The reform bill called for the use of uniform medical treatment guidelines, but while guidelines have been finished for four body parts, they are not complete and are not mandatory. (See filing page 7.) In addition, the impact of the ten year limitation on permanent partial disability (PPD) has not resulted in lower system costs. The filing states that this is due to the fact that impairment guidelines have not yet been published and, further, it is too early in the process of classifying claims for insurers to experience any cost saving effect. The filing also states that with respect to PPD claims, “the mandatory settlement offers, as well as compelling carriers to pay the present values of these claims into the Aggregate Trust Fund, may significantly reduce the carrier’s negotiation leverage in trying to reach a settlement and, as a result, put upward pressure on claim costs.” (See filing p. 8) Further, it appears that the effect of the closing of the special disability fund has not yet resulted in savings to the carriers.

It appears that unlike the 1996 Workers’ Compensation reform, which held insurance rates flat for nearly a decade, the costs of the State’s Workers’ Compensation system are increasing at a significant rate only three years after the 2007 reform bill. Based on the addition of the individual company loss cost multipliers, some companies could issue rate increases of over 10%. This is a great concern given the current state of our economy.

The trend is troubling and should receive attention from the Governor and the Legislature in the very near future.