The 10% Rule

January 3, 2011

One of the big issues that prompted the passage of health reform last year was the 39 percent rate increase proposed by Anthem California for the individual market. That action both strengthened the will of the Democrats to enact health care reform and provided a clear cut talking point about the need for reform. As a result, one of the provisions included in the reform law was that health insurance premiums could not increase at “unreasonable rates”.

Initially, the proposal was for there to be some federal oversight in health insurance rate increase requests. A clear cut federal process was not included in the Affordable Care Act. Rather, this issue was left to the states with some federal oversight.

For almost a year, people have been asking for a definition of “unreasonable” and what process would be used to determine what it. On December 21, the U.S. Department of Health and Human Services (HHS) issued rules to answer that question. Specifically, as noted in this press release, in 2011, the answer to the question is 10 percent. After that time, the specific state rate increases will be based on state specific information and trends.

Time will tell how this rule gets implemented and whether it actually provides any relief for consumers, but it seems quite a stretch to think that this rule will do much to stabilize the market and make health care more affordable.

The immediate critique from the insurance industry was that this rule does nothing to deal with the underlying causes of increases in health care costs: provider prices and the use of services. And, while it is easier to put pressure on health plans to get them to try and deal with these issues, there are also things in the Affordable Care Act that could make it more difficult for health plans (I am still a skeptic on the concept of Accountable Care Organizations).

And, of course, we haven’t yet heard from state insurance commissioners about how they will handle the administration of this rule and whether they have the resources to review all premiums that would fall into this category – even with the extra funds provided under the ACA.

HHS notes that they will take over this function for any state insurance office that can’t do what is required. But, HHS is having its own challenges in getting funding from the current Congress, much less the new Congress – many members of which ran on a platform to repeal the ACA.

Finally, it strikes me that this rule is rife for a “playing to the test” strategy. Let’s see how many 9.9 percent rate increases go through next year and/or how many benefit changes occur to justify higher rates.

The 10 percent rate increase concept is, of course, very easy for consumers to understand. It has the virtue of enabling the administration to describe something about the Affordable Care Act that is easy to grasp and appealing to individuals. The same can’t be said about many other provisions of the Affordable Care Act, which are quite technical. In general, Congress and the administration have done a poor job communicating the benefits of health care reform to consumers. This piece could improve the administration’s success at communications.

The concept of a strong regulatory structure to oversee the insurance industry is a good one. It is necessary for confidence in the industry and for ensuring a level playing field for competition. And, of course, it is essential for ensuring that the core components of health care insurance expansion are implemented in compliance with the law and fairly at the state level. The idea of setting a single, specific number and declaring that anything that exceeds that is potentially considered “unreasonable” may be good politics but I am less certain it is good policy.