Governors Should Resist Obamacare’s Attempt to Wrest Control of Insurance Rate Review from the States
Update: The new proposed regulation has been released. We are analyzing it and will post an article in the near future.
State governors need to resist a federal grant which would give the federal government control over health insurance rate increases.1
Background
The Grants to States for Health Insurance Premium Review program2 was authorized by Section 1003 of the Obamacare legislation and then amended by Section 10101(i). (Yes, you heard us right—Obamacare amends itself!)
States that take this “grant” agree to a new federal program that defines when an insurance rate increase is “unreasonable.” Insurance companies that run afoul of this definition will have to post a standardized form on their company website justifying the “unreasonable rate increase” and may be excluded from participating in state exchanges.3
The grant program consists of two “cycles.” According to the American Medical Association, 48 states have taken Cycle I of the grant program which requires them to improve their state process for reviewing premium rates.4 Cycle II of this program, expected to be released before January 1, 2011, will require states to agree to abide by the definition of “unreasonable rate increase” as set by the Secretary of the Department of Health and Human Services (HHS). We assume that, like Cycle I, grants in Cycle II of the program will require the signature of the governor of each participating state.
Four Reasons to Resist
Obviously, no one is advocating for unreasonable rate increases. But we find four problems with Cycle II of this grant program:
1. It is a federal power grab
Some assert that state rate review processes will not be affected by Obamacare.5 While it is true that premium rate review process set up by Cycle II of the grant program runs independently from the rate review processes of the states, it gives the federal government a competing voice by both allowing the federal government to define what is “unreasonable” and by its data reporting requirements.
It may be possible to have a state to approve a rate increase and then have HHS declare that same increase unreasonable.
2. Its terminology unfairly favors bureaucrats
Can you have a “justified,” “unreasonable rate increase”? If it is “unreasonable,” then it is “unjustifiable.” But the way the statute reads, a rate increase is first classified as “unreasonable” and then insurance companies must post a justification for what has already been classified as “unreasonable.”
The Obamacare statute does not appear to give insurance companies a means to challenge the “unreasonable” classification. It appears from the text of the statute that the “unreasonable” label remains even after the insurance company justifies its position.
We’ll know better if this is the way the program will work once Cycle II of the grant program is released.
3. It provides a scapegoat instead of instituting real reform
Some argue insurance companies are charging too much. But if one company is charging too much, then other companies should be able to step in with a more competitive rate. The way to reduce high insurance premiums is not to regulate them down but to enact policies that promote competition among insurers.
This regulation merely gives the federal government a scapegoat—someone to blame for the anti-market policies it has created.
4. It is an unnecessary waste of money
Cycle II of this grant program is superfluous. With the implementation of the Medical Loss Ratio (MLR) regulation,6 a federal program to prevent “unreasonable rate increases” is not necessary. The MLR regulation already requires that insurance companies spend between 80% and 85% of premiums on health benefits. If they spend less than this because they charged an unreasonable rate—they will have to give refunds. Former Connecticut Insurance Commissioner, Thomas Sullivan, suggested as much in response to those who criticized him for approving certain rate hikes in Connecticut.7
Spending on redundant regulatory review wastes valuable resources. As the American Enterprise Institute has said, “The direct costs of administering and complying with prior-approval rate regulation are ultimately borne by consumers.8
1 Because “Cycle II” of this grant is expected to be released before January 1, 2011, outgoing governors may get to act on it before incoming governors take office. Incoming governors in states where a prior administration has authorized the receipt of this grant must act quickly if they wish who wish to block this Obamacare provision. This will most likely include acting to rescind the authorization of the prior administration and taking steps to make sure any federal funds received are returned.
2 Department of Health and Human Services, Grant to States for Health Insurance Premium Review—Cycle I, June 7, 2010, available at http://www.hhs.gov/ociio/initiative/final_premium_review_grant_solicitation.pdf.
3 42 U.S.C. § 300gg-94 (a)(2), (b)(1)(b).
4 Emily Berry, Conn. Insurance rate hikes prompt outcry amid politically charged backdrop, AMEDNEW.COM, Nov. 1, 2010, http://www.ama-assn.org/amednews/2010/11/01/bisb1101.htm.
5 The Henry J. Kaiser Family Foundation, Rate Review: Spotlight on State Efforts to Make Health Insurance More Affordable, FOCUS ON HEALTH REFORM, Dec. 2010, available at http://thehill.com/images/stories/blogs/kaiser%20state.pdf.
6 See our website for more information.
7 Matthew Sturdevant, Commissioner Sullivan Says Rate Hikes Were Based On “Sound Actuarial Science," INSURANCE CAPITAL, Oct. 7, 2010, http://blogs.courant.com/connecticut_insurance/2010/10/commissioner-sullivan-says-rat.html.
8 Scott E. Harrington, Beyond Repeal and Replace: Regime Change for Health Insurance Regulation, Dec. 2010, p. 19, available at http://www.aei.org/docLib/Regime-Change-for-Health-Insurance-Regulation.pdf.