ObamaCare’s Unreasonable Insurance Regulations

The health insurance rate review puzzle

Last week, as part of the ongoing implementation of the Patient Protection and Affordable Care Act (PPACA), Health and Human Services Secretary Kathleen Sebelius announced $150 million in grants to help states develop rules to regulate “unreasonable” health insurance rate increases. At a press conference last December, Sebelius said these grants would give the government “powerful new tools with which to keep insurance companies honest.”

The new rules will certainly give the government more power. But they end up creating more questions than answers, starting with the obvious: How does one define what unreasonable means? 

Under the PPACA, Sebelius is required to create a system whereby “unreasonable” premium hikes are reviewed in conjunction with state regulators. In response, it declared that insurance hikes of more than 10 percent would be subject to a review process intended to determine if the hike was excessive.

But rate review is a technically challenging, inherently subjective task. For starters, health insurance premium prices are not always set on a straightforward plan-per-year basis. Expenses can vary greatly from year to year within various plans. One year might see a plan face an abnormally high number of expensive illnesses. The following year, the same plan might be underutilized. Consequently, insurance companies price plans according to expenses from prior years. They also seek to create a balance across plans—perhaps making up for unexpected losses in one insurance pool by raising prices on another.

It’s a rather common business practice: Think of “loss leaders” in retail stores, or promotions in gyms. A business might lose money on one product but make it up on another. Insurers seek a company-wide balance, not a simple price-per-plan formula. As the Congressional Research Service notes, that means regulators will be required to make sophisticated technical judgments:

The complexity of making such a determination generally requires analysis of multiple factors by actuaries and accountants. Such a review generally does not lend itself to the use of simplistic benchmarks such as merely prohibiting double-digit percentage rate increases.

The technical complexity is compounded by the law’s vague directives and mandatory subjectivity. Which brings us to the second problem. Neither the PPACA nor any other law provides a definition of what, exactly, constitutes an “unreasonable” rate hike, leaving the secretary to create a definition through the regulatory process. 

A December 2010 analysis in Health Affairs described the law’s rate review provision as a “puzzle” and noted that the provision both authorizes review of “unreasonable” increases and forces insurers to “'submit...a justification for an unreasonable premium increase prior to the implementation of the increase,' suggesting that a premium increase could be both unreasonable and justifiable.”

It is a puzzle. But it’s not one that the Department of Health and Human Services (HHS) seems willing or able to solve. 

At the core, the requirement presents a basic definition problem. How should the Secretary determine which premium price increases are out of bounds? 

The problem was at least recognized early on, when state regulators, who have traditionally regulated health insurance markets, were asked to draw up advice for HHS on how to conduct the review process. As a staffer with the Minnesota Department of Commerce told Kaiser Health News in May, 2010, "even a zero increase might be unreasonable, if an insurer was at the same time cutting benefits offered in the policy [emphasis added].”

The guidelines HHS ended up creating offer little clarity. According to HHS’ definition, a rate hike may be unreasonable if it is “discriminatory,” “unjustified,” or “excessive.” All three are at least as muddled and subjective as the initial term, but the latter two are particularly unhelpful. “Unjustified” sounds suspiciously like a synonym for “unreasonable”—as does “excessive.” Indeed, the whole exercise takes on an Escher-esque circularity when HHS actually defines “excessive” as “unreasonably high.” Under these merry-go-round guidelines, then, rate hikes are excessive if unreasonable, and unreasonable if excessive.

HHS didn't define unreasonable. It just came up with a whole bunch of words that mean the same thing. 

Meanwhile, the law does not give Sebelius the explicit authority to reject newly raised rates if they are deemed unreasonable. Instead, she is directed to monitor rate increases across states and companies, and to prohibit insurers from participating in the new insurance exchanges—state-based, government-run health insurance marketplaces—created by the law if she detects a “pattern” or “practice” of excessive premium increases.

Given that nearly all individual insurance purchases are expected to take place within the exchanges—indeed, many experts recommend banning non-exchange purchases outright—this punishment would serve as a de facto rate rejection. Yet insurers will have little guidance about what might trigger such a consequence, because here, too, the law leaves much to the secretary’s discretion. Neither “pattern” nor “practice” is defined by law. 

The end result will be significant new discretionary authority for insurance regulators—with little clarity for insurers hoping to play by the rules. If government officials want to play favorites within the industry, it won’t be hard, and the punishment they’re allowed to dole out seems far out of line with the vagueness of the rules. In an effort to weed out unjustified, excessive, and discriminatory behavior, regulators seem to have committed to carrying out an awful lot of it themselves. 

Peter Suderman is an associate editor at Reason magazine.

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  • Fiscal Meth||

    "...and as soon as he finishes asking the question we all started laughing hysterically, and the Nancy goes 'are you serious? are you serious?' HAHAHAHAHA it never stops being funny"

  • ||

    People will look back at Obama inflicting this mess on us for generations and wonder why we were so stupid to sign up for this mess.

    In some ways the Bush Administration's blunders were understandable--when the WMD didn't show up, people latched onto the idea that Iraq was all about spreading democracy anyway...

    Not an argument I bought, but at least it was halfway plausible.

    People voted Obama in (rather than Hillary) because they were sick of the Bush Administration's seemingly perpetual state of War--just as they voted Bush Jr. in because they were sick of Bill Clinton's shenanigans.

    I don't know if we can ever undo the damage Obama has done to our nation with his hideous ObamaCare, but if we learn anything from this at all, please let it be that we shouldn't vote ourselves into some fresh hell just because we were sick of the last guy.

    Voting against the last guy never seems to end up repudiating the past--it only ends up serving as a mandate for the next clown's stupid slapstick. ...and the joke is always on us.

  • mr simple||

    But what's the alternative? Sure I didn't vote for a major party, but most people see it as Blue vs. Red and neither team is offering a non comical alternative.

  • ||

    There is no alternative. We live in the tyranny of the majority, and the majority is TEAM RED TEAM BLUE.

    Make a bunch of money and use that to insulate yourself from the bullshit. There really aren't any other options.

  • ||

    If you think one guy's gonna steal your healthcare, and the other guy's gonna steal your wallet?

    Then may I suggest that the only reasonable decision is not to vote?

    I believe there is an inverse relationship between the percentage of people who vote, on the one hand, and the number and size of things our politicians attempt to do.

    If that is indeed the case, then isn't trying to persuade our fellow Americans to stop chopping lumber for the guys who are building a gallows to hang us with--about the smartest thing a true libertarian can do?

  • ||

    People will look back at Obama inflicting this mess on us for generations and wonder why we were so stupid to sign up for this mess.

    No, not really. Most people look at this and think they got something for free. Liberals look at it and wish for single-payer.

    You can waste vast parts of your life explaining to people that the French are steadily being pushed out of the public system into supplementary private insurance (and presumably, poor people don't get those treatments), or that the Angela Merkel government in Germany nearly collapsed (and still might) because of health care costs that threaten to similarly splinter coverage. The grass is always greener for statists, even if it demonstrably isn't.

  • ||

    Maybe I'm placing too much hope in people. Too optimistic about human nature and too pessimistic about our prospects under ObamaCare?

    Perhaps.

    In retrospect though, I'd still like to think most of us will look back at the day ObamaCare passed, as the day quality healthcare was pushed out of the reach of all but the very wealthy.

  • ||

    I have a number of friends who I know on Facebook primarily because of dog connections. I have been involved in rescue work for much of the last two years, immensely rewarding emotionally. Many -- the vast majority -- of these friends are liberal Democrats, yet they don't connect the dots between the relatively straightforward fee-for-service nature of veterinary care -- and how this forces providers to have fiscal discipline -- versus the uncontrolled spending that third-party-pays systems have inflicted on everyone else. The idea that veterinary medicine might be a model for others just never enters their heads; single-payer is the solution.

  • Jack On||

    Vets have gotten expensive enough that pet insurance is now a booming market.

    My vet charges $50 just for the office visit, and he's the cheapest I found in my area. That's pretty close to what a GP charges just for the visit (if paid in cash).

  • ||

    Well, sure. A lot of the anti-cancer drugs are platinum-based and priced accordingly (carboplatin is the one I'm most familiar with). There are plenty of other treatments that aren't cheap, either, like orthopedic corrective surgery.

    But I very much doubt that the costs of a vet visit are going up by 15% annually.

  • Jack On||

    Oh I don't think it's going up by that much annually, either. But it may get that way, once most of us have pet insurance, thus divorcing us from the cost / benefit analysis (which is a widely-held and very plausible explanation for at least part of healthcare's runaway cost).

  • Jack On||

    Sorry quick vignette: my boxer had to have a dermatologist conduct tests on a severe skin allergy, and it was $700. Then several hundred every six months for continuing injections to control the allergy. It sucks.

  • ||

    That depends on whether people use it for casino operations (as low-deductible health insurance does with human medical care in the US) or for actual risk management (high-deductible insurance).

  • Jack On||

    I suppose we'll see in the coming years.

    I think it's just an interesting chance to watch this process start from the ground floor. Vet bills got too expensive for many people to be able to afford, so now there's insurance. What effect will the insurance have?

    Most importantly, what caused the vet bills to get so high to begin with, when everyone was paying cash (which is supposed to control costs)?

  • Night Elf Mohawk||

    Most importantly, what caused the vet bills to get so high to begin with...

    Maybe that pet owners are willing to
    have a dermatologist conduct tests on a severe skin allergy for $700 and then pay several hundred every six months for continuing injections to control the allergy.

  • sevo||

    "But I very much doubt that the costs of a vet visit are going up by 15% annually."
    AFAIK, vets piggyback on human meds, so the med costs increase equally.
    Especially if, for instance, you have pet eye problems.

  • some guy||

    In order for this parallel to work we would have to replace the law that requires emergency rooms to treat people with a law that allows doctors to euthanize people.

    I'm not necessarily against such a change, but most Americans would be.

  • Tony||

    Nobody voted for Bush hoping he'd invade a country on false pretenses. Obama ran on healthcare reform, as did all Democrats. When Obamacare kills 5000 Americans and costs trillions of dollars, your contrast might make some sense.

    just as they voted Bush Jr. in because they were sick of Bill Clinton's shenanigans.

    That's a little facile, considering Bush lost the popular vote, except on the Supreme Court where it mattered.

    The only way this legislation will point is toward a more universalized system. Every advanced country on earth except ours has one, and it's not because they are under the boots of a socialist conspiracy. Obamacare is pretty much the mildest alteration of the healthcare status quo imaginable, and it's not nearly enough. I get the feeling you, like its other opponents on the right, just see it as the formless bogeyman that it has been made out to be. The political message to counter it is Obamacare=evil, period. No alternate solutions for reducing healthcare costs needed or offered.

  • cynical||

    "When Obamacare kills 5000 Americans and costs trillions of dollars, your contrast might make some sense."

    So, what, 2015?

  • Mr. FIFY||

    "not nearly enough"

    We are truly fucked if that is the benchmark.

  • sevo||

    Tony|3.3.11 @ 7:05PM|#
    "Obama ran on healthcare reform,"

    Yes, idiot, and it's a shame we didn't get it.

  • Old Mexican||

    Re: Tony,

    Nobody voted for Bush hoping he'd invade a country on false pretenses.


    Nobody voted for Obama hoping he would not keep his promise of closing Guantanamo - which one is worse?

    When Obamacare kills 5000 Americans and costs trillions of dollars, your contrast might make some sense.


    He's getting there...
    http://www.globalresearch.ca/i.....&aid=17343

    The only way this legislation will point is toward a more universalized system.


    Maybe that's the reason less people like it every day.

    Every advanced country on earth except ours has one,


    Maybe because they are not as advanced as you think.

    and it's not because they are under the boots of a socialist conspiracy.


    Well, there's no conspiracy - it just happens that those so-called 'advanced countries' ARE socialist (actually, fascist, as most like Sweden and Norway and France and Germany and othes have big crony business-government partnerships... and they keep their choo-choos on time!)

  • mr simple||

    It's a good thing this law isn't unconstitutional or anything.

    So they're not even going to appeal these decisions, are they? That might cause the SC to get involved and that might not go in thief favor. They're just going to ignore it and hope it goes away and all the progs in law and the media and whatnot are going to pretend with them.

  • ||

    Even the one good ruling to come out has been blocked from implementation pending appeal. I don't have high hopes. The courts are run by people who believe that the ends justify the means.

  • ||

    All benifit cuts or rate increases will be deemed to be unreasonable. Indeed if insurance companies were reasonable they would force providers to cut prices by 90%+.

    However, I think the net effect will be to insure that no insurnace companies participate in the exchange, which will actually solve a lot of problems with the exchange.

  • ||

    They are going for Scalia's vote. If it impacts many areas before it his SCOTUS, Scalia may vote for it because not doing so would create a bigger mess. ;-)

  • ||

    "his SCOTUS" should say "hits SCOTUS".

  • That guy!||

    Yea, fascism!

  • ||

    That word gets thrown around too much. Many free western countries have national health care. If there is a conspiracy going on, it's not about fascism, it's about trying to make the worlds most unique country more Euro like. One world dare I say?

  • mr simple||

    Actually, universal healthcare is a pretty fascist idea. It's just more of he true definition of fascism and not the definition that is usually implied.

  • Jack On||

    It's a component of fascism, but the word DOES get thrown around too much, because true fascism also requires a lot of other items which don't yet apply to / in the US.

    Yes, our system sucks, and the team red / team blue dynamic is bullshit, etc., but it's ludicrous to say that that makes living here the exact same as living in Germany 1938. Our gov't has taken on some fascistic elements, but we are not yet fascist.

  • Wikipedia||

    Fascists seek to organize a nation according to corporatist perspectives, values, and systems, including the political system and the economy.

    Sounds like America to me.

  • cynical||

    You understand what "corporatism" is in the context of fascism, right? The center-left progressive socioeconomic system, not the system where evul corporations run everything?

    Just checking, since that comment could indicate either a libertarian complaint or a progtard one.

  • Old Mexican||

    Under the PPACA, Sebelius is required to create a system whereby “unreasonable” premium hikes are reviewed in conjunction with state regulators. In response, it declared that insurance hikes of more than 10 percent would be subject to a review process intended to determine if the hike was excessive.


    Katherine Sebelius, the economic calculator par excellence: Only she can know what all consumers and producers cannot know - when a price is excessive.

  • Old Mexican||

    The end result will be significant new discretionary authority for insurance regulators—with little clarity for insurers hoping to play by the rules.


    Something akin to the old Nazi system of regulatory procedures.

    http://www.canadafreepress.com.....icle/32413

  • Libertarian||

    I've said it before and I'll say it again: I love, yes love, the way most of the H&R blogs are illustrated.

  • Rich||

    Sebelius announced $150 million in grants to help states develop rules to regulate “unreasonable” health insurance rate increases.
    This is the same person who threatened the insurance companies about blaming increases on PPACA.

    The complexity of making such a determination generally requires analysis of multiple factors by actuaries and accountants.
    Well, what are a few more gov't agencies when we're gonna get an indeterminate number anyway?

    HHS didn't define unreasonable. It just came up with a whole bunch of words that mean the same thing.
    Let's just call it "Win The Thesaurus".

  • ||

  • sevo||

    “unreasonable”

    = "Fair".
    = "Balance".
    = what ever other arm-waving anyone chooses to use. Right, Tony?
    The answer is simple, but the government isn't willing to ask the question:
    Do people pay for the value they see?

  • ||

    The rules will in effect mean a cap on the profit margin of health insurers. I predict that if ObamaCare stands, profit margins will be reduced to around 0.5%. Insurers will have absolutely no room to manuever - effectively every detail of every plan will be micromanaged by regulators, and the price will be allowed to be no more than it takes for the insurer to scrape a bare profit.

  • some guy||

    This might last a few years, but instead of scraping by, the companies will actually be in a protracted death spiral. The next Democratic majority will have all the excuse it needs to enact a single payer system.

  • ||

    Sebelius said these grants would give the government “powerful new tools with which to keep insurance companies honest.”

    *facepalm*
    *facepalm*
    *facepalm*
    *facepalm*
    *facepalm*

  • rather||

    powerful new tools with which to keep insurance companies honest.

    What a joke; the only time the insurance industry can claim honesty is when they are dead but like zombies they'll still try to fuck with people

  • sevo||

    "What a joke; the only time the insurance industry can claim honesty is when they are dead but like zombies they'll still try to fuck with people"

    Nice story; want to back it up with facts?

  • rather||

    What I do know is that I think the California Nurses Association was right in pointing out that this is not an isolated case. People need to realize that there is a corporate executive who often stands between a patient and his or her doctor. That’s the reality. And I think the insurance industry is now fear-mongering during this debate on health care reform, saying that a government bureaucrat could stand between someone and his or her doctor. But the current situation is just as bad, if not worse, because you have people doing that now who are denying care to meet Wall Street’s expectations.

    Wendell Potter is former head of corporate communications for Cigna Corporation, where he worked for 15 years. He is now a fellow at the Center for Media and Democracy. This was originally published in New America Media

    Read more: http://www.sdnn.com/sandiego/2.....z1FbTDvAAF

  • Jen||

    sevo asked you to back up your assertion with facts, and instead of facts you provide a link to an interview (in other words, someone's opinion? You really are clueless.

  • some guy||

    Where rather comes from opinions are facts, profits are evil and 'rather' is so much better than you.

  • rather||

    Sorry Jen but the guy's 'opinion' is worth more than all the libertarian speculation.

    Perhaps you need to read the article to make an educated criticism.

  • rather||

    Some guy, you really are aptly self-titled. You can't argue the facts so you attack the author. Actually, I'd change your name to 'some jackass'

  • putra||

    I think Obama must should have to explain in detail about this regulation, in fact PPACA is a good program to help the citizen.

  • sevo||

    putra|3.4.11 @ 12:17AM|#
    "I think Obama must should have to explain in detail about this regulation, in fact PPACA is a good program to help the citizen."
    Are you saying it is? if so, prove it.

  • sevo||

    rather|3.3.11 @ 11:53PM|#
    "What I do know is that I think..."

    What you "think" /= what you "know". You could try what you "feel" with equal irrelevance.
    There is no doubt that the pre-hag health-care system was distorted by government intervention, but that in no way equates what you "think" or "feel" with reality.

  • rather||

    Sevo, this was the opinion of Wendell Potter is former head of corporate communications for Cigna Corporation

    Insurance companies fuck people all the time with their recidivism, and they are protected from anti-trust lawsuits by the McCarran–Ferguson Act

  • some guy||

    "recidivism"

    I do not think it means what you think it means.

    Unless, of course, you're begging the question...

  • rather||

    rescissionstrong>

    thank you

  • rather||

    rescission

  • منتدى العرب||

    Thank you

  • kelly||

    Whoa...since when did you guys start doing game commentary?

  • قبلة الوداع||

    thank u

  • دليل||

    svasvas

  • mbti||

    svasvas

  • xiingguan||

    asdvgasvcasv

GET REASON MAGAZINE

Get Reason's print or digital edition before it’s posted online

  • Video Game Nation: How gaming is making America freer – and more fun.
  • Matt Welch: How the left turned against free speech.
  • Nothing Left to Cut? Congress can’t live within their means.
  • And much more.

SUBSCRIBE

advertisement