On May 19, the US Department of Health and Human Services (HHS) issued a final regulation requiring that, starting on Sept. 1, 2011, health insurers filing for an “unreasonable” rate increase – namely one that exceeds 10 percent – must publicly justify their proposal, so that “consumers [will] know why they are paying the rates that they are.”
The problem is that the federal government has no legal authority to regulate health insurance rates. Insurance, including health insurance, is regulated by the states. The McCarran-Ferguson Act, which preserves the principle of state regulation of insurance, was not amended by the Patient Protection and Affordable Care Act, the law under which the new rule on health insurance rates was issued. So what is going on here? With no regulatory authority at all, HHS is trying to bully or shame health insurers into reducing their rate increases. The whole effort is an incredible exercise in chutzpah.
The fact sheet put out by HHS to explain the new regulation claims that “Many times insurance companies have been able to raise rates without explaining their actions to regulators or the public or justifying their reasons for their high premiums.” In fact, in most instances, health insurers do have to justify rate increases to their state regulators, by providing actuarial data that can be reviewed by the state regulator’s actuaries.
One can question why, in a competitive market (and health insurance is highly competitive in most parts of the country), private companies should have to justify rates at all. Health insurance is not a public utility (at least not yet, although that seems to be the direction it is headed). Auto manufacturers don’t have to justify rate increases to a government agency. Makers of washing machines don’t have to. Why insurers? Oil companies are starting to face the same kinds of questions regarding gasoline prices at the pump, even though there is no evidence that gasoline prices are not highly competitive.
Who defines an 'unreasonable' rate?
But even if we accept the need to regulate prices for insurance – and there are some good arguments for doing so, given the complex and intangible nature of the product – states do that already. Under the laws of most, if not all, states, rate increases that are not actuarially justified can be denied or rolled back. What HHS seems to be saying is that even if rate increases can be actuarially justified, insurers can not use them if they are “unreasonable.” Where does that authority come from? Who determines what is “unreasonable?” Is a 10 percent increase unreasonable per se?
Even though there is no statutory authority for the federal government to deny or roll back health insurance rates, the effort being mounted by HHS will probably work, at least in the short term. Indeed, it is already having some effect, as some state regulators are denying rate increases for being unreasonable even if they are actuarially justified. Some companies are voluntarily forgoing rate increases that they would have sought previously.
Of course, there is a limit to what can be done by persuasion and publicity alone. Health insurers may simply go out of business if they can’t make what they consider to be a reasonable profit. Already there is substantial consolidation in the industry as the large commercial health insurers – which are very efficient operations – are buying up or driving out of business their smaller or nonprofit competitors. That trend will continue and accelerate, so that eventually there will be only a handful of health insurers in the market.
At that point, it may indeed become necessary for government to step in and deal with the remaining companies as if they are public utilities. The HHS argument, then, becomes a self-fulfilling prophecy.
The causes of high insurance
Missing from the new HHS regulation is any discussion of why the cost of health insurance keeps going up so fast. Some of it, of course, is due to the widespread usage of very expensive new techniques for keeping alive, at great expense, people who would have died in earlier years. Everything from organ transplants to kidney dialysis to drug treatment for HIV is expensive not only to perform but also results in very expensive long-term recovery and maintenance costs.
Some is also due to overusage of medical services by people who are paying only a fraction of the real cost of their care, or overprescribing by physicians who are concerned about being sued for malpractice or who don’t want to tell their patients that the drugs they have seen advertised on television will not help them.
Some is due to our inability as a society to say that one treatment may be better and more effective than another, or that some providers do a better job than others. Instead we let virtually all proposed treatments and providers be advertised and made available to everyone, regardless of cost or relative effectiveness.
There is undoubtedly some “fat” in the insurance system. But the bottom line is that insurance really is simply a mechanism for paying costs, and unless the costs of the services paid for by insurers are controlled or reduced, there is only so much that can be gained by squeezing the insurance companies.
It will be very interesting to see how much pushback HHS gets from these new rules, how effective they will be, and how insurers targeted and “exposed” by HHS will react. I predict that they will find other ways to remain profitable or they will go out of business. Either road will not do much to improve our health-care system and may actually make things worse.
Lawrence H. Mirel is a partner at Wiley Rein LLP in Washington and heads the firm's Insurance Regulation & Legislation Group. He is the former Commissioner of Insurance, Securities and Banking for the District of Columbia and has been involved in insurance matters for more than 30 years.