Insurers ante up for health reform with lower premium rates

The Department of Health and Human  Services (HHS) rolled out reports documenting big gains for consumers from health reform last month. In addition to promising wide choice in healthcare coverage at affordable rates, the Obama administration highlighted savings already achieved under the Patient Protection and Affordable Care Act (PPACA).

According to HHS, the premium rate review program established by PPACA saved consumers $1.2 billion in 2012 by pressuring insurers to lower proposed increases. Insurance companies also paid $500 million in rebates under new rules limiting the medical loss ratios (MLR) on health plans, bringing the savings from these two provisions up to $1.7 billion.

Furthermore, HHS calculates that the MLR rule saved consumers another $3.4 billion by compelling insurers to reduce premiums  and “operate more efficiently.”

While these programs may cut costs for consumers in the short run, they also erode insurer revenues and profits, which may reduce future plan offerings in certain markets.

The cuts from rate review were most notable in the small group market, where “high” (over 10%) rate change requests dropped from 16% to 9.7%, according to an analysis by the HHS assistant secretary for policy and evaluation (ASPE). This pushed the average rate change down by 19% (from 5.8% to 4.7%), saving 3.4 million consumers about $866 million.

Similarly, high rate change requests in the individual market dropped from 14% to 12%, reducing premium increases by $311 million. Total savings thus added up to $1.2 billion.

ASPE also concludes that insurers were much less likely to request rate increases of 10% or more in 2012 than previously, knowing that hefty hikes would be scrutinized closely by state regulators and HHS. In 2012, 26% of rate increases in the individual market exceeded 10%, compared to 43% of rate hikes proposed in 2011.

The analysis by ASPE, though, doesn’t highlight the fact that HHS approved most high rate increase requests. The analysis by ASPE, though, doesn’t highlight the fact that only 28% of requests for high rate increases in 2012 were rejected by regulators or modified by the issuer; the majority of requests went through without change.

Lower Margins

Meanwhile, the MLR policy had a noticeable impact on insurer profitability, a development seen as beneficial or troubling, depending on one’s viewpoint. Insurers reduced administrative costs and lowered premiums to meet the new spending standards, according to analysis supported by the Commonwealth Fund and published in the September 2013 issue of Health Affairs.

The data indicates that in 2011, the first year the MLR policy was in effect, insurers in the individual market saw MLRs rise 5.5% rise overall-and 7% at for-profit firms. This had an impact on the bottom line, as operating margins dropped 1.3% for all insurers, and 2.2% at for-profit firms.

The lesser impact on non-profit firms is evidence, according to the authors, that these insurers already were spending more on healthcare services and keeping profits low, so they didn’t have to make big adjustments.

The changes in spending and margins also were less notable in the small- and large-group markets, where administrative costs and premiums generally are lower for all insurers.

The larger issue is whether insurers can offer high-quality affordable healthcare coverage, especially in the individual market, and meet all the PPACA requirements. The premiums and benefits provided through exchanges will provide some answers. But the prospect of added taxes on health plans will only raise costs more, raising uncertainty about future health insurance prices and plans options.