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Focus on Regulation

CMS Releases Proposed Rule on Health Insurance Markets and Rate Reviews

The Centers for Medicare & Medicaid Services (CMS) released a proposed rule implementing the Patient Protection and Affordable Care Act’s (PPACA) requirements regarding health insurance markets, guaranteed availability and renewability of health insurance coverage, permissible factors for setting premiums, and risk pooling requirements.  Today, 43 states permit individual premiums to be based on health status (and other factors no longer permissible under PPACA), so these market rules will have a significant impact on residents of virtually every state.  These requirements are applicable to all non-grandfathered plans in the individual and small group markets, whether sold inside or outside the exchanges.  Non-grandfathered coverage sold through MEWAs (multiple employer welfare arrangements) also is subject to these requirements.  (The law does not apply to self-funded plans.)  The majority of these requirements will become effective January 1, 2014.  Comments are due December 26, 2012.

Guaranteed Availability and Renewability

Today, consumers can be denied insurance in the individual market because of a current or past health problem in 45 states.  As one of the key market changes established by PPACA, the proposed regulation states that an insurer that offers coverage in an individual or group market must accept the application of any individual or employer that applies for coverage under any plan offered by that insurer in that state. The only time an insurer can refuse to accept an application for coverage is if it demonstrates that it does not have the financial means to underwrite additional policies. Furthermore, an insurer can only refuse to renew in cases of non-payment of premiums, fraud, enrollee movement outside of the plan’s service area, or termination of a plan. The rule includes steps that an insurer must take before terminating a plan, and the insurer can only change the terms of coverage at the time of renewal.

Permissible Factors for Setting Premiums

PPACA established a number of limitations on the factors an insurer can use to set health insurance premiums. Specifically, premiums can vary only based on whether the plan covers an individual or a family; geographic location; age; and tobacco use.  In addition to eliminating rates based on health status, rate based on gender, now permissible in 37 states, will no longer be allowed.  Moreover, states cannot establish more than seven geographic rating areas without permission from CMS and states with fewer than seven areas are deemed permissible.

This proposed rule offers further detail on how insurers can use these factors to set rates in the small group and individual markets. For example, all insurers must use a uniform age rating curve when calculating rates for individuals 21 or older, and rates cannot vary by more than 3:1 between otherwise similar individuals of different ages, starting from age 21.  (Actuarially sound rates would be set separately for children.)  The proposed rule provides instruction for calculating family rates by generally requiring that the insurer add the individual rates of each member of the family to determine the total premium.  However, for large families, only the three oldest family members under age 21 will be included together with the older family members to prepare to family rate.  (For states that already require pure community rating without adjustments for age or tobacco use, the regulation would permit the state to require issuers to use family tiered rates with corresponding multipliers.)  Importantly, the regulation asks for comments on whether federal law should specify the minimum categories of persons (e.g., domestic partners, children under guardianship, step children, grandchildren, etc.) that must be included within family coverage or should defer to the states and insurance issuers.  Where rates are based on tobacco use, the variation cannot exceed 1.5 to 1, and where the individual is covered under a family rate, this factor must be used only in connection with the portion of the family rate attributable to the member who uses tobacco.

In general, rates for small employers also would be determined by adding up the individual rates for members and dependents.  At its option, an employer may decide on the mechanism for allocating the cost of premiums to employees (e.g., based on age and tobacco use as well as family coverage), or may establish a single premium for all members for individual or family coverage.

Risk Pooling

The proposed rule addresses how insurers are to create risk pools for their individual and small group products for the purpose of calculating rates. Insurers must consider the claims from individuals in all of their non-grandfathered health plans offered in the state. The rates for all of the plans an insurer offers in a state, whether inside or outside the exchanges, must be based on the data gathered from the same risk pool, and can only vary between plans based on a number of enumerated permissible adjustments. This helps ensure that rate increases for healthy and less healthy people will be equal over time. Furthermore, a state has the authority to require that all individual and small group enrollees are merged into one risk pool.

Rate Increase Reporting Requirements

A major section of the proposed rule relates to changes in the way that insurers and states must report data to CMS. For example, a health insurer must submit a standardized Rate Filing Justification form to CMS any time one of its plans experiences a rate increase. The proposed rule also adds factors that CMS will consider when determining whether a state has an Effective Rate Review Program, which allows a state to review proposed rate increases instead of CMS.