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.