Private Health Insurance: State Oversight of Premium Rates
Released: 2011-08-02T00:00:00

Letter

Background

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.

States’ Roles in Oversight of Health Insurance Premium Rates

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.

HHS’s Role in Oversight of Health Insurance Premium Rates

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.

Reported Practices for Overseeing Premium Rates, as Well as Outcomes of Rate Reviews, Varied across States in 2010

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.

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

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.

Outcomes of Premium Rate Reviews Varied in 2010

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.

State Officials Reported Taking Steps to Improve Processes, Increase Capacity, and Obtain Additional Legislative Authority to Oversee Premium Rates

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.

Agency Comments

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.

Appendix I: Scope and Methodology

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.

Appendix II: Additional Results from Our Survey on State Oversight of Health Insurance Premium Rates

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.

Appendix III: Carrier Capital Levels

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.

Appendix IV: Comments from the Department of Health and Human Services

Appendix V: GAO Contact and Staff Acknowledgments

GAO Contact

Acknowledgments

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.