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To bend the cost curve, modernize health insurance rate review

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, (ACA) looked to the Federal government (D/HHS) to address spiralling health insurance premiums by defining “unreasonable” rate increases. Having tasked D/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.

Case-in-point: 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 the express language of the ACA– represents a less than optimal outcome. It links a teaser, in the nature of an upper limit on reasonable rate increases, to 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 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 as a “process-based” definition of rate unreasonableness.

In 1984, Massachusetts passed legislation instructing its insurance commissioner to deny any Blue Cross-Blue Shield rate increase that failed a stringent test of demonstrated impact on cost containment. This innovative approach raised the performance bar and remains on the books today. Most recently, Massachusetts BCBS responded with an Alternative QUALITY Contract with providers–the essential feature of which is the use of provider contracting mechanisms and payment reforms to address costly performance problems such as hospital-acquired infections, avoidable hospital readmissions, post-operative complications, etc.

HHS’ new Rate Review Grants could be re-oriented to focus explicitly on state-defined performance standards and problems of implementation.

Finally, funding sources could be identified to reward states, carriers and providers that successfully implemented performance-oriented rate review, had a demonstrated impact on premiums and enhanced quality. Funding could come out of shared-savings.

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. 


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