Private Health Insurance: State Oversight of Premium Rates
Published: 2011-07-29T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: With premiums increasing for private health insurance, questions have been raised about the extent to which increases are justified. Oversight of the private health insurance industry is primarily the responsibility of states. In 2010, the Patient Protection and Affordable Care Act required the Department of Health and Human Services (HHS) to award grants to assist states in their oversight of premium rates. GAO was asked to provide information on state oversight of premium rates. In this report, GAO describes (1) states' practices for overseeing health insurance premium rates in 2010, including the outcomes of premium rate reviews; and (2) changes that states that received HHS rate review grants have begun making to enhance their oversight of premium rates. GAO surveyed officials from insurance departments in 50 states and the District of Columbia (referred to as states) about their practices for overseeing premium rates in 2010 and changes they have begun making to enhance their oversight. GAO received responses from all but one state. GAO also interviewed officials from California, Illinois, Maine, Michigan, and Texas to gather additional information on state practices. GAO selected these states based on differences in their authority to oversee premium rates, and proposed changes to their oversight, their size, and their geographic location. GAO also interviewed officials from advocacy groups and two large carriers to obtain contextual information.
section_title: What GAO Found
paragraphs: GAO found that oversight of health insurance premium rates--primarily reviewing and approving or disapproving rate filings submitted by carriers--varied across states in 2010. While nearly all--48 out of 50--of the state officials who responded to GAO's survey reported that they reviewed rate filings in 2010, the practices reported by state insurance officials varied in terms of the timing of rate filing reviews, the information considered in reviews, and opportunities for consumer involvement in rate reviews. Specifically, respondents from 38 states reported that all rate filings reviewed were reviewed before the rates took effect, while other respondents reported reviewing at least some rate filings after they went into effect. Survey respondents also varied in the types of information they reported reviewing. While nearly all survey respondents reported reviewing information such as trends in medical costs and services, fewer than half of respondents reported reviewing carrier capital levels compared with state minimums. Some survey respondents also reported conducting comprehensive reviews of rate filings, while others reported reviewing little information or conducting cursory reviews. In addition, while 14 survey respondents reported providing consumers with opportunities to be involved in premium rate oversight, such as participation in rate review hearings or public comment periods, most did not. Finally, the outcomes of states' reviews of rate filings varied across states in 2010. Specifically, survey respondents from 5 states reported that over 50 percent of the rate filings they reviewed in 2010 were disapproved, withdrawn, or resulted in rates lower than originally proposed, while survey respondents from 19 states reported that these outcomes occurred from their rate reviews less than 10 percent of the time. GAO's survey of state insurance department officials found that 41 respondents from states that were awarded HHS rate review grants reported that they have begun making changes in order to enhance their states' abilities to oversee health insurance premium rates. For example, about half of these respondents reported taking steps to either review their existing rate review processes or develop new processes. In addition, over two-thirds reported that they have begun to make changes to increase their capacity to oversee premium rates, including hiring staff or outside actuaries, and improving the information technology systems used to collect and analyze rate filing data. Finally, more than a third reported that their states have taken steps--such as introducing or passing legislation--in order to obtain additional legislative authority for overseeing health insurance premium rates. HHS and the National Association of Insurance Commissioners (NAIC) reviewed a draft of this report. In its written comments, HHS highlighted the steps it is taking to improve transparency, help states improve their health insurance rate review, and assure consumers that any premium increases are being spent on medical care. HHS and NAIC provided technical comments, which were incorporated as appropriate.

section_title: Letter
paragraphs: In 2009, about 173 million nonelderly Americans, about 65 percent of the  U.S. population under the age of 65, had private health insurance  coverage, either through individually purchased or employer-based  private health plans. The cost of this health insurance coverage continues  to rise. In a 2010 survey, over three-quarters of U.S. consumers with  individually purchased private health plans reported health insurance  premium increases. Of those reporting increases, the average premium  increase was 20 percent. A separate survey found that premiums for  employer-based coverage more than doubled from 2000 to 2010.  Policymakers have raised questions about the extent to which these  increases in health insurance premiums are justified and could adversely  affect consumers.
Oversight of the private health insurance industry is primarily the  responsibility of individual states. This includes oversight of health  insurance premium rates, which are actuarial estimates of the cost of  providing coverage over a period of time to policyholders and enrollees in  a health plan. While oversight of private health insurance, including  premium rates, is primarily a state responsibility, the 2010 Patient  Protection and Affordable Care Act (PPACA) established a role for the  Department of Health and Human Services (HHS) by requiring the  Secretary of HHS to work with states to establish a process for the annual  review of unreasonable premium increases. In addition, PPACA required  the Secretary of HHS to carry out a program to award grants to assist  states in their review practices. Since the enactment of PPACA,  members of Congress and others have continued to raise questions  about rising health insurance premium rates and states’ practices for  overseeing them.
You asked us to review certain aspects of states’ oversight of health  insurance premium rates. This report describes (1) states’ practices for  overseeing health insurance premium rates in 2010, including the  outcomes of premium rate reviews; and (2) changes that states that  received HHS rate review grants have begun making to enhance their  oversight of health insurance premium rates.
To describe states’ practices for overseeing health insurance premium  rates in 2010, including the outcomes of premium rate reviews, we  surveyed officials from the insurance departments of all 50 states and  the District of Columbia (collectively referred to as “states”). We received  responses from all but one state. However, not all states responded to  each question in the survey. Additionally, some survey respondents  reported that they could not provide data for all questions. We conducted  the survey from February 25, 2011, through April 4, 2011, collecting  information primarily on state practices for overseeing premium rates in  calendar year 2010. In order to obtain more detailed information about  state oversight of health insurance premium rates in 2010, we also  conducted interviews with insurance department officials from five  selected states. We selected these states—California, Illinois, Maine,  Michigan, and Texas—based on differences among the five states in  terms of their (1) state insurance departments’ authority to oversee  premium rates, (2) proposed changes to their existing practices for  overseeing premium rates, (3) size, and (4) geographic location.  Additionally, in order to obtain contextual information on states’ practices  for overseeing premium rates, we interviewed other experts and officials  from relevant organizations, including the National Association of  Insurance Commissioners (NAIC), the American Academy of Actuaries,  America’s Health Insurance Plans, two large carriers based on their  number of covered lives, NAIC consumer representatives (individuals  who represent consumer interests at meetings with NAIC), and various  advocacy groups such as Families USA and Consumers Union.
To describe changes that states that received HHS rate review grants  have begun making to enhance their oversight of health insurance  premium rates, we collected information about state changes in our  survey described above from the 45 state survey respondents that were  awarded HHS rate review grants in 2010 entitled, “Grants to States for  Health Insurance Premium Review-Cycle I” (referred to as Cycle I rate  review grants). We also asked about these changes in oversight during  our interviews with state insurance department officials from the five  selected states and in other interviews with experts and relevant  organizations described above. Additionally, we interviewed officials from  the Center for Consumer Information and Insurance Oversight within the  Centers for Medicare & Medicaid Services. We also reviewed portions of  the states’ Cycle I rate review grant applications submitted to HHS and  other relevant HHS documents. See appendix I for a more detailed  description of our methodology.
We conducted this performance audit from September 2010 through June  2011 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: The majority of Americans receive their health coverage through private  health insurance, either by purchasing coverage directly or receiving  coverage through their employer, and many of those with private  coverage are enrolled in plans purchased from state-licensed or regulated  carriers. An estimated 173 million nonelderly Americans, 65 percent,  received health coverage through private insurance in 2009. The  remainder of Americans either received their health coverage through  government health insurance, such as Medicare and Medicaid, or were  uninsured.
In general, those who obtain private health insurance do so in one of  three market segments: individual, small-group, and large-group.  Policyholders in the individual market purchase private health insurance  plans directly from a carrier—not in connection with a group health plan.  In 2009 an estimated 17 million nonelderly Americans obtained individual  private health insurance coverage. In the small-group market, enrollees  generally obtain health insurance coverage through a group health plan  offered by a small employer, and in the large-group market, enrollees  generally obtain coverage through a group health plan offered by a large  employer. In 2009, an estimated 156 million nonelderly Americans  obtained private health insurance through employer-based group plans  offered by either small or large employers. While most small-group  coverage is purchased from state-licensed or regulated plans, most large- group coverage is purchased from employer self-funded plans not subject  to state licensing or regulation. However, there are some fully-insured  large-group plans, which are subject to state regulation.
Premium rates are actuarial estimates of the cost of providing coverage  over a period of time to policyholders and enrollees in a health plan. To  determine rates for a specific insurance product, carriers estimate future  claims costs in connection with the product and then the revenue needed  to pay anticipated claims and nonclaims expenses, such as administrative  expenses. Premium rates are usually filed as a formula that describes  how to calculate a premium for each person or family covered, based on  information such as geographic location, underwriting class, coverage  and co-payments, age, gender, and number of dependents.
subsections: section_title: States’ Roles in Oversight of Health Insurance Premium Rates
paragraphs: The McCarran-Ferguson Act provides states with the authority to regulate  the business of insurance, without interference from federal regulation,  unless federal law specifically provides otherwise. Therefore, states are  primarily responsible for overseeing private health insurance premium  rates in the individual and group markets in their states. Through laws  and regulations, states establish standards governing health insurance  premium rates and define state insurance departments’ authority to  enforce these standards. In general, the standards are used to help  ensure that premium rates are adequate, not excessive, reasonable in  relation to the benefits provided, and not unfairly discriminatory.
In overseeing health insurance premium rates, state insurance  departments may review rate filings submitted by carriers. A rate filing  may include information on premium rates a carrier proposes to establish,  as well as documentation justifying the proposed rates, such as actuarial  or other assumptions and calculations performed to set the rate.  According to the Congressional Research Service (CRS) and others,  most states require carriers to submit rate filings to state departments of  insurance prior to implementation of new rates or rate changes.
The authority of state insurance departments to review rate filings can  vary. Some insurance departments have the authority to approve or  disapprove all rate filings before they go into effect, while others do not  have any authority to approve or disapprove rate filings. Further, in some  states, authority to approve or disapprove rate filings varies by market.
According to a report published by CRS, in 2010, insurance departments  in 19 states were authorized by their state to approve or disapprove  proposed premium rates in all markets before they went into effect— known as prior approval authority. Officials in states with prior approval  authority may review a carrier’s rate filing using the state’s standards  governing health insurance premium rates. In some cases, the state  officials may also consider input from the public on the proposed rate,  which can be obtained, among other ways, through public hearings or  public comment periods. If a proposed rate does not meet a state’s  standards, officials in states with prior approval authority can, among  other things, deny the proposed rate or request that the carrier submit a  new rate filing that addresses the issues that the state identified during its  review. If a proposed rate meets a state’s standards, the officials may  approve the rate filing. However, in some states, if the officials do not  review a proposed rate filing and take action within a specified time  period, the carrier’s submitted rate filing is deemed approved under state  law.
According to CRS, insurance departments in another 10 states were  authorized to disapprove rate filings in all markets in 2010, but not to  approve rate filings before a carrier could begin using the premium rate or  rates proposed in the filing. In 9 of these states, carriers were required to  submit rate filings prior to the effective date of the proposed rate—known  as file and use authority. In one state, carriers could begin using a new  premium rate and then file it with the state—known as use and file  authority. In departments with file and use authority or use and file  authority, the state officials may review a carrier’s rate filing using the  state’s standards governing health insurance rates. If a proposed rate  does not meet these standards, the officials can, among other things,  deny the proposed premium rate or request that the carrier submit a new  rate filing that addresses the issues that the state identified during its  review. However, the state officials do not have the authority to approve a  rate filing before the proposed premium rate goes into effect, and unless  the rate filing has been disapproved, a carrier may begin using the new  premium rate as of its effective date.
In six states, insurance departments were not authorized to approve or  disapprove rate filings in any market in 2010, according to CRS. In three  of these states, a carrier was required to submit rate filings for  informational purposes only, known as information only authority. In the  other three states, carriers were not required to submit rate filings with the  states.
In addition, in one state, carriers were not required to file rates for  approval or disapproval each time the carrier proposed to change  premium rates. Instead, carriers were required to file premium rates with  the form that was filed when the plan was initially offered on the market— this form includes the language in the insurance contract. This is known  as file with form authority.
According to CRS, in the remaining 15 states, authority to approve or  disapprove rate filings varied by market in 2010. For example, a state  insurance department may have prior approval authority in the individual  market, but have information only authority in the small-group and large- group markets subject to their regulation.
section_title: HHS’s Role in Oversight of Health Insurance Premium Rates
paragraphs: PPACA, signed into law in March 2010, established a role for HHS by  requiring the Secretary of HHS to work with states to establish a process  for the annual review of unreasonable premium increases. PPACA also  established a state grant program to be administered by HHS beginning  in fiscal year 2010.
HHS has taken steps to work with states to establish a process for  reviewing premium rate increases each year. In December 2010, HHS  published a proposed rule, and in May 2011, HHS issued a final rule  that established a threshold for review of rate increases for the individual  and small-group markets and outlined a process by which certain rate  increases would be reviewed either by HHS or a state. The final rule  also included a process by which HHS would determine if a state’s  existing rate review program was effective. HHS would review rates in  states determined not to have an effective rate review program; in these  instances, HHS would determine if a rate increase over an applicable  threshold in the individual and small-group market was unreasonable  based on whether it was excessive, unjustified, or unfairly  discriminatory. In developing this final rule, HHS worked with states to  understand various states’ rate review authorities.
HHS has also begun administering a state grant program to enhance  states’ existing rate review processes and provide HHS with information  on state trends in premium increases in health insurance coverage.  PPACA established this 5-year, $250 million state grant program to be  administered by HHS, beginning in fiscal year 2010. HHS announced the  first cycle of rate review grants in June 2010, awarding $46 million   ($1 million per state) to the 46 states that applied for the grants.  According to HHS, grant recipients proposed to use this Cycle I grant  funding in a number of ways, including seeking additional legislative  authority to review premium rate filings, expanding the scope of their  reviews, improving the rate review process, and developing and  upgrading technology. HHS announced the second cycle of rate review  grants in February 2011 with $199 million available in grant funding to  states.
section_title: Reported Practices for Overseeing Premium Rates, as Well as Outcomes of Rate Reviews, Varied across States in 2010
paragraphs: Through our survey and interviews with state officials, we found that  oversight of health insurance premium rates—primarily reviewing and  approving or disapproving rate filings submitted by carriers—varied  across states in 2010. In addition, the reported outcomes of rate filing  reviews varied widely across states in 2010, in particular, the extent to  which rate filings were disapproved, withdrawn, or resulted in lower rates  than originally proposed.
subsections: section_title: While Nearly All State Officials Reported Reviewing Premium Rates in 2010, the Timing of Reviews, Information Reviewed, and Extent of Consumer Involvement in Reviews Varied
paragraphs: Nearly all—48 out of 50—of the state officials who responded to our  survey reported that they reviewed rate filings in 2010. Further,  respondents from 30 states—over two-thirds of the states that provided  data on the number of rate filings reviewed in 2010—reported that they  reviewed at least 95 percent of rate filings received in 2010. Among the  survey respondents that reported reviewing less than 95 percent of rate  filings in 2010, some reported that a portion of the rate filings were  deemed approved without a review because they did not approve or  disapprove them within a specified time period. Others reported that they  did not review rate filings in certain markets. For example, respondents  from 4 of these states reported that they did not review any rate filings  received in the large-group market subject to their regulation in 2010. In  addition, some respondents that reported reviewing rate filings in 2010  reported that they did not receive rate filings in certain markets. For  example, respondents from 9 states—nearly one quarter of the states that  provided information by market—reported that they did not receive rate  filings in the large-group market in 2010. (See appendix II for more  information on the results of our survey.)
While our survey responses indicated that most states reviewed most of  the rate filings they received in 2010, the responses to our survey also  showed that how states reviewed the rate filings varied in 2010.  Specifically, the practices reported by state insurance officials varied in  terms of (1) the timing of rate filing reviews—whether rate filings were  reviewed before or after the rates took effect, (2) the information  considered during reviews, and (3) opportunities for consumer  involvement in rate reviews.
Respondents from 38 states reported that all rate filings they reviewed  were reviewed before the rates took effect, while respondents from   8 states reported reviewing at least some rate filings after the rates went  into effect. Some of the variation in the timing of rate filing reviews was  consistent with differences across states in their reported authorities for  state insurance departments to approve or disapprove rate filings. For  example, survey respondents from some states reporting prior approval  authority—such as Maryland and West Virginia—were among  respondents from the 38 states that reported that all rate filings the state  reviewed were reviewed before the rates took effect in 2010. Similarly,  survey respondents from another state—Utah—reported that at least  some rate filings were reviewed after the rates went into effect, because  the department had file and use authority and it was not always possible  to review rate filings before they went into effect. However, not all  variation in states’ practices was consistent with differences in state  insurance departments’ authorities to review and approve or disapprove  rate filings. For example, survey respondents from California—who  indicated that they did not have the authority to approve rate filings before  carriers could begin using the rates—reported that all rate filings reviewed  in 2010 were reviewed prior to the rates going into effect.
According to our survey results and interviews with state insurance  department officials, the information considered as a part of the states’  reviews of rate filings varied. For example, as shown in table 1, our  survey results indicated that nearly all survey respondents reported  reviewing information such as medical trend, a carrier’s rate history, and  reasons for rate revisions. In contrast, fewer than half of state survey  respondents reported reviewing carrier capital levels compared with  states’ minimum requirements or compared with an upper threshold.  (See appendix III for more detailed information about carrier capital  levels.) Overall, when asked to select from a list of 13 possible types of  information considered during rate filing reviews in 2010, 7 respondents  reported that they reviewed fewer than 5 of the items that we listed, while  13 respondents reported reviewing more than 10 items.
Some survey respondents also reported conducting relatively more  comprehensive reviews and analyses of rate filings, while other  respondents reported reviewing relatively little information or conducting  cursory reviews of the information they received. For example, survey  respondents from Texas reported that for all filings reviewed, all  assumptions, including the experience underlying the assumptions, were  reviewed by department actuaries for reasonableness, while respondents  from Pennsylvania and Missouri reported that they did not always perform  a detailed review of information provided in rate filings. Respondents from  Pennsylvania reported that while they compared data submitted by  carriers in rate filings to the carriers’ previous rate filings, the state’s  department of insurance did not have adequate capacity to perform a  detailed review of all rate filings received from carriers. Respondents from  Missouri reported that they looked through the information provided by  carriers in rate filings in 2010, but that they did not have the authority to  do a more comprehensive review.
We also found that the type of information states reported reviewing in  2010 varied by market or product type. For example, officials from Maine  told us that they reviewed information such as medical trend and benefits  provided when reviewing rate filings in the individual market and under  certain circumstances in the small-group market. However, they told us  that they conducted a more limited review in the small-group market if the  carrier’s rate filing guaranteed a medical loss ratio of at least   78 percent and the plan covered more than 1,000 lives. In another  example, Michigan officials reported that, in 2010, they reviewed a  number of types of information for health maintenance organization  (HMO) rate filings, including rating methods and charts that showed the  levels of premium rate increases from the previous year. These officials  told us that the state required HMO rates to be “fair, sound, and  reasonable” in relation to the services provided, and that HMOs had to  provide sufficient data to support this. In contrast, the officials told us that  the state’s requirement for commercial carriers in the individual market  was to meet a medical loss ratio of 50 to 65 percent, depending on  certain characteristics of the insurance products.
While state survey respondents reported a range of information that they  considered during rate filing reviews, over half of the respondents  reported independently verifying at least some of this information. The  remaining respondents reported that they did not independently verify any  information submitted by carriers in rate filings in 2010. Survey  respondents that reported independently verifying information for at least  some rates filings in 2010 also reported different ways in which  information they received from carriers was independently verified. For  example, survey respondents from Rhode Island reported that the  standard of independent verification varied depending on the rate filing,  and that the steps taken included making independent calculations with  submitted rate filing data and comparing these calculations with external  sources of data. In another example, respondents from Michigan  reported that in 2010 the department of insurance had staff conduct on- site reviews of carrier billing statements in the small and large-group  markets in order to verify the information submitted in rate filings.
Survey respondents from 14 states reported providing opportunities for  consumers to be involved in the oversight of health insurance premium  rates in 2010. Our survey results indicated that these consumer  opportunities varied and included opportunities to participate in rate  review hearings—which allow consumers and others to present evidence  for or against rate increases—public comment periods, or on consumer  advisory boards.
Survey respondents from six states reported conducting rate review  hearings in at least one market in 2010 to provide consumers with  opportunities to be involved in the oversight of premium rates. (See  table 2 for information on reported opportunities for consumer  involvement in states’ rate review practices in 2010.) For example,  officials from Maine that we interviewed told us that the insurance  department held rate hearings for two large carriers in 2010 and that the  size of the rate increase and the number of people affected were among  the factors considered in determining whether to hold a rate hearing. The  officials explained that if there is a hearing, the Maine Bureau of  Insurance issues a notice and interested parties, such as the attorney  general or consumer organizations, can participate by presenting  evidence for or against rate increases. Maine officials said that, before  rate review hearings are held, carriers share information about the rate  filing, but that additional details identified at a hearing may trigger a  request for further information. Maine officials said that after the state  reviews all of the information, the state either approves the rate or  disapproves the rate with an explanation of what the state would approve.
Survey respondents from eight states reported that they provided  consumers with opportunities to participate in public comment periods for  premium rates in 2010. For example, respondents from Pennsylvania  reported that rate filings were posted in the Pennsylvania Bulletin—a  publication that provides information on rulemaking in the state—for 30  days for public review and comment. In addition, officials from Maine told  us that they did not make decisions on rate filings until consumers had an  opportunity to comment on proposed rate changes. These officials added  that they are required to wait at least 40 days after carriers notify  policyholders of a proposed rate change before making a decision,  providing consumers with an opportunity to comment.
Survey respondents from six states reported providing consumers with  other opportunities to be involved in the oversight process. For example,  respondents from two states—Rhode Island and Washington—reported  that they provided consumers with opportunities to participate in  consumer advisory boards in 2010. In addition, respondents from Texas  reported that rate filings were available to consumers upon request and  that the Texas Department of Insurance held stakeholder meetings during  which consumer representatives participated in discussions about rate  review regulations.
section_title: Outcomes of Premium Rate Reviews Varied in 2010
paragraphs: The outcomes of states’ reviews of premium rates in 2010 also varied.  While survey respondents from 36 states reported that at least one rate  filing was disapproved, withdrawn, or resulted in a rate lower than  originally proposed in 2010, the percentage of rate reviews that resulted   in these types of outcomes varied widely among these states.  Specifically, survey respondents from 5 of these states—Connecticut,  Iowa, New York, North Dakota, and Utah—reported that over 50 percent  of the rate filings they reviewed in 2010 were disapproved, withdrawn, or  resulted in rates lower than originally proposed, while survey respondents  from 13 of these states reported that these outcomes occurred in less  than 10 percent of rate reviews. An additional 6 survey respondents  reported that they did not have any rate filings that were disapproved,  withdrawn, or resulted in lower rates than originally proposed in 2010.  (Fig. 1 provides information on the percentage and reported number of  rate filings that were disapproved, withdrawn, or resulted in lower rates  than originally proposed by state in 2010.)
Some of the state survey respondents reported that at least one rate filing  was disapproved, withdrawn, or resulted in rates lower than originally  proposed in 2010 even though they did not have explicit authority to  approve rate filings in 2010. For example, officials from the California  Department of Insurance reported that even though the department did  not have the authority to approve rate filings and could only disapprove  rate filings if they were not compliant with certain state standards, such as  compliance with a 70 percent lifetime anticipated loss ratio, the  department negotiated with carriers to voluntarily reduce proposed rates  in 2010. Survey respondents from California reported that 14 out of 225  rate filings in 2010 were disapproved, withdrawn, or resulted in rates  lower than originally proposed. Specifically, officials from the California  Department of Insurance told us that they negotiated with carriers to  reduce proposed rates by 2 percentage points to 25 percentage points in  2010. These officials also told us that they negotiated with one carrier not  to raise rates in 2010 although the carrier had originally proposed a   10-percent average increase in rates. In another example, although  survey respondents from Alabama reported that they did not have prior  approval authority, they reported that 22 rate filings were disapproved,  withdrawn, or resulted in rates lower than originally proposed in 2010.
States also varied in the markets in which rates were disapproved,  withdrawn, or resulted in rates lower than originally proposed in 2010. For  example, survey respondents from nine states—Alaska, Arkansas,  Hawaii, Kansas, Kentucky, Maine, Nevada, New Jersey, and North  Carolina—reported that while they reviewed rate filings in multiple  markets, only reviews for the individual market resulted in rates that were  disapproved, withdrawn, or resulted in rates lower than originally  proposed. In other states, respondents reported that rate filings in multiple  markets resulted in these types of outcomes in 2010. For example,  survey respondents from 12 states reported that rate filings in all three  markets resulted in these types of outcomes in 2010.
section_title: State Officials Reported Taking Steps to Improve Processes, Increase Capacity, and Obtain Additional Legislative Authority to Oversee Premium Rates
paragraphs: Our survey of state insurance department officials found that 41  respondents from states that were awarded Cycle I HHS rate review  grants have begun making three types of changes in order to enhance  their states’ abilities to oversee health insurance premium rates.  Specifically, respondents reported that they have taken steps in order to  (1) improve their processes for reviewing premium rates, (2) increase  their capacity to oversee premium rates, and (3) obtain additional  legislative authority for overseeing premium rates.
Improve rate review processes. More than four-fifths of the state survey  respondents that reported making changes to their oversight of premium  rates reported that they had taken various steps to improve the processes  used for reviewing health insurance premium rates. These steps  consisted primarily of the following:    Examining existing rate review processes to identify areas for  improvement. Twenty-two survey respondents reported taking steps  to either review their existing rate review processes or develop new  processes. More than two-thirds of these 22 respondents reported  that their state contracted with outside actuarial or other consultants to  review the states’ rate review processes and make recommendations  for improvement. For example, respondents from Louisiana—who,  according to officials, previously did not review most premium rate  filings because they did not have the authority to approve or  disapprove rates—reported that they had contracted with an actuary  to help them develop a rate review process. In another example,  respondents from North Carolina reported that an outside actuarial  firm independently reviewed the department’s health insurance rate  review process and recommended ways that the department could  improve and enhance its review process. Similarly, respondents from  Tennessee reported that they had obtained information from contract  actuaries on how to enhance the state’s review of rate filings. In  addition, four of these respondents reported taking steps to develop  standardized procedures for reviewing rate filings. For example,  respondents from Illinois reported that their insurance department is  developing protocols for the collection, analysis, and publication of  rate filings.    Changing information that carriers are required to submit in rate  filings. Thirteen survey respondents reported taking steps to change  the rate filing information that carriers are required to submit to the  state insurance department in order to improve reviews of rate filings.  For example, respondents from Oregon reported that they will require  carriers to provide in their rate filings a detailed breakdown of medical  costs and how premiums are spent on medical procedures and  services. In another example, respondents from Virginia reported that  their state is expanding the information required from carriers in rate  filing submissions by developing a uniform submission checklist.
Incorporating additional data or analyses in rate filing reviews. Eleven  survey respondents reported purchasing data or conducting additional  data analyses in order to improve the quality of their states’ rate filing  reviews. For example, respondents from Ohio reported taking steps to  obtain national claims data on health costs which, according to the  respondents, would enable the department of insurance to use a  separate data source to verify the costs submitted by carriers in their  rate filings. In another example, respondents from Virginia reported  that their state had begun undertaking detailed analyses of premium  trends in the state’s individual and small-group markets. According to  the state respondents, these analyses will provide rate reviewers with  benchmark industry values for various factors, such as underlying  costs and benefit changes, which will help focus rate reviewers’ efforts  on the drivers of a given rate increase. The respondents reported that  these analyses will also allow reviewers to more easily identify  potentially excessive or unreasonable rate increases.
Involving consumers in the rate review process. Three survey  respondents reported taking steps to increase consumer involvement  in the rate review process. For example, respondents from  Connecticut reported that the state’s insurance department has  posted all rate filings received from carriers on its web site and  created an online application that allows consumers to comment on  the proposed rates. In another example, respondents from Oregon  reported that the state’s insurance department has contracted with a  consumer advocacy organization to provide comments on rate filings  on a regular basis. Finally, respondents from Nevada reported that the  state is taking steps to create a rate hearing process that will allow  consumer advocates to represent the interests of consumers at the  hearings.
Increase capacity to oversee rates. Over two-thirds of the state survey  respondents that reported making changes to rate oversight reported that  they have begun to make changes to increase their capacity to oversee  premium rates. These reported changes consisted primarily of hiring  staff or outside actuaries, and improving the information technology  systems used to collect and analyze rate filing data.
Twenty survey respondents reported hiring additional staff or contracting  with external actuaries and consultants to improve capacity in various  ways, such as to review rates, coordinate the rate review process or  provide administrative support to review staff, and train staff. For  example, respondents from Oregon reported hiring staff to perform a  comprehensive and timely review of the filings, and to review rate filings  for completeness upon receipt. In another example, respondents from  West Virginia reported that they used a portion of their HHS grant funding  to obtain external actuarial support for reviewing rate filings. In addition,  Illinois officials told us that they have taken steps to hire two internal  actuaries, as well as other analytical staff to help with the processing of  rate filings to help relieve the workload of current office staff.
Seventeen respondents reported taking steps to increase their capacity to  oversee premium rates by improving information technology and data  systems used in the review process. Nine of these respondents reported  taking steps to enhance their use of the System for Electronic Rate and  Form Filing (SERFF)—a web-based electronic system developed by  NAIC for states to collect electronic rate filings from carriers—such as by  working with NAIC or by improving their insurance department’s  information technology infrastructure to support the use of SERFF.  Additionally, some respondents also reported taking steps to make other  improvements, such as creating or improving additional databases in  order to collect rate filing data and analyze trends in rate filings. For  example, respondents from Wisconsin reported that their office  contracted with an actuarial firm using HHS grant funds in part to develop  a database to standardize, analyze, and monitor rates in the individual  and small-group markets, which will enable the office to track historical  rate change data and monitor rate changes. In another example,  respondents from Illinois reported that they launched a web-based  system in February 2011 for carriers to use when reporting rate changes,  while continuing to work with NAIC on SERFF improvements with the  intention of eventually merging the state’s data system with SERFF.
Obtain additional legislative authority. More than a third of state  survey respondents that reported making changes to rate oversight  reported that their states have taken steps—such as introducing or  passing legislation—in order to obtain additional legislative authority for  overseeing health insurance premium rates. For example, respondents  from Montana reported that legislation has been introduced that would  give the state the authority to require carriers to submit rate filings for  review. In another example, Illinois officials told us that the state has  authority to require some carriers to submit rate filings, but the state does  not have the authority to approve these filings before the rates take effect.  The officials told us that legislation has been introduced to obtain prior  approval authority. Additionally, respondents from North Carolina reported  that the department has sought additional prior approval authority over  small-group health insurance rates in addition to its existing prior approval  authority over rates in the individual, small-group, and large-group health  insurance markets. Finally, some states reported taking steps to review  their current authority to determine if changes were necessary.
section_title: Agency Comments
paragraphs: HHS provided us with written comments on a draft version of this report.  These comments are reprinted in appendix IV. HHS and NAIC also  provided technical comments, which we incorporated as appropriate.
In its written comments, HHS noted that health insurance premiums have  doubled on average over the last 10 years, putting coverage out of reach  for many Americans. Further, HHS noted that as recently as the end of  2010, fewer than half of the states and territories had the legal authority to  reject a proposed increase if the increase was excessive, lacked  justification, or failed to meet other state standards.
In its written comments, HHS also noted the steps it is taking to improve  transparency, help states improve their health insurance rate review, and  assure consumers that any premium increases are being spent on  medical care. Specifically, HHS noted its requirement that, starting in  September 2011, certain insurers seeking rate increases of 10 percent or  more in the individual and small-group markets publicly disclose the  proposed increases and their justification for them. According to HHS,  this requirement will help promote competition, encourage insurers to  work towards controlling health care costs, and discourage insurers from  charging unjustified premiums. In its comments, HHS also discussed the  state grant program provided for by PPACA to help states improve their  health insurance rate review. As our report notes, in addition to grants  awarded in 2010, HHS announced in February 2011 that nearly   $200 million in additional grant funds were available to help states  establish an effective rate review program. Finally, the comments from  HHS point out that their rate review regulation will work in conjunction  with their medical loss ratio regulation released on November 22, 2010,  which is intended to ensure that premiums are being spent on health care  and quality-related costs, not administrative costs and executive  salaries.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the Secretary of Health  and Human Services, the Administrator for Medicare & Medicaid  Services, and other interested parties. In addition, the report will be  available at no charge on the GAO web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-7114 or dickenj@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. GAO staff who made key contributions to this report  are listed in appendix V.
section_title: Appendix I: Scope and Methodology
paragraphs: Our objectives were to describe (1) states’ practices for overseeing health  insurance premium rates in 2010, including the outcomes of premium rate  reviews, and (2) changes that states that received Department of Health  and Human Services (HHS) rate review grants have begun making to  enhance their oversight of health insurance premium rates.
To describe states’ practices for overseeing health insurance premium  rates in 2010, including the outcomes of rate reviews, we analyzed data  from our web-based survey sent to officials of the insurance departments  of all 50 states and the District of Columbia (collectively referred to as  “states”). We obtained the names, titles, phone numbers, and e-mail  addresses of our state insurance department survey contacts by calling  each insurance department and asking for the most appropriate contact.  The survey primarily contained questions on state practices for  overseeing rates during calendar year 2010, such as the number of filings  received, reviewed, and outcomes of review, the timing of state review,  factors considered during review, independent verification of carrier data,  consumer involvement, and capacity and resources to review rates.  During the development of our survey, we pretested it with insurance  department officials from three states—Michigan, Tennessee, and West  Virginia—to ensure that our questions and response choices were clear,  appropriate, and answerable. We made changes to the content of the  questionnaire based on their feedback. We conducted the survey from  February 25, 2011, through April 4, 2011. Of the 51 state insurance  departments, 50 completed the survey. However, not all states  responded to each question in the survey. Additionally, some survey  respondents reported that they did not have data that could be sorted by  health insurance market. See appendix II for the complete results of the  survey.
Because we sent the survey of state insurance departments to the  complete universe of potential respondents, it was not subject to sampling  error. However, the practical difficulties of conducting any survey may  introduce errors, commonly referred to as nonsampling errors. For  example, difficulties in how a particular question was interpreted, in the  sources of information that were available to respondents, or in how the  data were entered into a database or were analyzed could introduce  unwanted variability into the survey results. We encountered instances of  nonsampling survey error in analyzing the survey responses. Specifically,  in some instances, respondents provided conflicting, vague, or  incomplete information. We generally addressed these errors by  contacting the state insurance department officials involved and clarifying  their responses. However, we did not independently verify the information  and data provided by the state survey respondents.
To obtain more in-depth information on states’ practices for overseeing  rates in calendar year 2010, we interviewed state insurance department  officials from a judgmental sample of five states: California, Illinois, Maine,  Michigan, and Texas. To ensure that we identified a range of states for  our in-depth interviews, we considered  state insurance departments’ authorities in 2010 for reviewing health  insurance premium rates, as reported by the National Association of  Insurance Commissioners (NAIC);  states’ plans to change their premium rate oversight practices, as  described in their Cycle I rate review grant applications to HHS  submitted in June and July of 2010;  states’ population sizes; and  states’ geographic locations.
These criteria allowed us, in our view, to obtain information from  insurance departments in a diverse mix of states, but the findings from  our in-depth interviews cannot be generalized to all states because the  states selected were part of a judgmental sample. We used information  obtained during these interviews throughout this report.
To describe changes that states have begun making to enhance their  oversight of premium rates, we relied primarily on data collected in our  state insurance department survey, in which we asked respondents to  describe through open-ended responses steps taken to implement the  changes to premium rate oversight that were proposed in states’ Cycle I  rate review grant applications to HHS. We then performed a content  analysis of these open-ended responses through the following process:  From a preliminary analysis of the survey responses, we identified a total  of 13 types of state changes such as hiring staff or consultants to review  rates, involving consumers in the rate oversight process, and improving  information technology. We then grouped those types of changes  reported by survey respondents into three categories of reported  changes. Two GAO analysts independently assigned codes to each  response, and if respondents provided conflicting or vague information,  we addressed these errors by contacting the state insurance department  officials involved and clarifying their responses; however, we did not  independently verify the information provided in the survey responses. To  gain further information on state changes to rate oversight practices, we  also asked about changes during our in-depth interviews with insurance  department officials in five states described above. In addition, we  interviewed officials from the Center for Consumer Information and  Insurance Oversight within the Centers for Medicare & Medicaid Services,  and reviewed portions of the states’ Cycle I rate review grant applications  submitted to HHS and other relevant HHS documents.
To gather additional information related to both of our research  objectives, we interviewed a range of experts and organizations including  NAIC, the American Academy of Actuaries, America’s Health Insurance  Plans, two large carriers based on their number of covered lives, NAIC  consumer representatives (individuals who represent consumer interests  at meetings with NAIC), and various advocacy groups such as Families  USA and Consumers Union.
We conducted this performance audit from September 2010 through June  2011 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Additional Results from Our Survey on State Oversight of Health Insurance Premium Rates
paragraphs: This appendix presents additional results from our survey of insurance  department officials in all 50 states and the District of Columbia on their  oversight of health insurance premium rates in 2010, and changes they  have begun to make to enhance their oversight of health insurance  premium rates.
Table 3 presents survey responses by state on the number of rate filings  that were received, reviewed, and disapproved, withdrawn, or resulted in  rates lower than originally proposed in the individual, small-group, and  large-group markets in 2010.
Table 4 presents the number of survey respondents that reported that the  state insurance department required actuarial justification for rate filings,  and whether the justifications were reviewed by an actuary in 2010 in the  individual, small-group, and large-group markets.
Table 5 presents survey responses on states’ capacity and resources to  review rate filings in 2010.
Table 6 presents information on the types of changes that survey  respondents that had been awarded HHS Cycle I rate review grants  reported making to enhance their oversight of health insurance premium  rates.
section_title: Appendix III: Carrier Capital Levels
paragraphs: State officials monitor carriers’ capital levels to help ensure that carriers  can meet their financial obligations. State officials’ primary objective when  monitoring capital levels has been to ensure the adequacy of carriers’  capital to make sure that consumers and health care providers are not left  with unpaid claims. The focus, therefore, has been on monitoring capital  levels to ensure that they exceed minimum requirements. Officials from  some states have noted that they review this information when reviewing  rate filings.
NAIC developed a formula and model law for states to use in determining  and regulating the adequacy of carriers’ capital. The risk-based capital  (RBC) formula generates the minimum amount of capital that a carrier is  required to maintain to avoid regulatory action by the state. The formula  takes into account, among other things, the risk of medical expenses  exceeding the premiums collected. According to NAIC, 37 states had  adopted legislation or regulations based on NAIC’s Risk-Based Capital  (RBC) for Health Organizations Model Act as of July 2010 in order to  monitor carriers’ capital. However, an NAIC official told us that all states  must follow the RBC model act in order to meet NAIC accreditation  standards.
Under NAIC’s model law, the baseline level at which a state may take  regulatory action against a carrier is the authorized control level. If a  carrier’s total adjusted capital—which includes shareholders’ funds and  adjustments on equity, asset values, and reserves—dips below its  authorized control level, the state insurance regulator can place the  carrier under regulatory control. The RBC ratio is the ratio of the carrier’s  total adjusted capital to its authorized control level; state officials become  involved when the ratio drops below 200 percent. If the RBC ratio is   200 percent or more, no action is required. As shown in table 7 below,  NAIC data show that, from 2005 through 2010, except for carriers with  less than $10 million in assets, carriers’ median RBC ratios were  generally higher for carriers reporting greater assets.
section_title: Appendix IV: Comments from the Department of Health and Human Services
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: In addition to the contact named above, Kristi Peterson, Assistant  Director; George Bogart; Kelly DeMots; Krister Friday; Linda Galib; and  Peter Mangano made key contributions to this report.