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Getting All the Cards on the Table
Ask Arizonans about their healthcare concerns and – overwhelmingly – they will say they are worried about how much their health insurance costs and whether they will continue to be able to afford it.
Although there are many reasons for the unsustainable rise in the cost of healthcare coverage (including the continual rise in healthcare costs), one important factor is that consumers often lack the information they need to make informed decisions about what plans are right for them. Few individuals or small businesses know how much of their premium dollar goes to health care versus administrative costs like paperwork, staff salaries or profits. Consumers also have a hard time discovering why their premiums are going up. Moreover, consumers often lack the bargaining power they need to drive insurers to deliver a better deal.
While there is no ace in the hole for solving these problems, states do have options to increase transparency so consumers have better information and are better protected against unreasonable rate increases. One important opportunity is through a process called rate review, which can potentially empower consumers by requiring insurers to make information on why rates are increasing publically available. Many states even have authority to reject unreasonable health insurance premium hikes.
With Arizona currently considering how best to strengthen its rate review process in response to the federal Affordable Care Act, this report aims to help consumers, regulators and advocates better understand the policy considerations central to setting up a strong rate review process for our state.
Rate Review Models and Successes
Rate review offers a way for states to oversee insurers’ premium increases and provide better consumer protections. States generally adopt one or more of three strategies to strengthen their rate review processes: increasing the transparency of insurers’ stated reasons for increasing rates, having regulators evaluate whether the proposed increases are reasonable, and requiring insurers to get approval before they raise premiums. These approaches are not mutually exclusive. In fact, states with the strongest rate review programs include all three. The track record of states that have adopted strong rate review processes shows that such processes meet a real need and deliver results for consumers.
Potentially Unjustified Rate-Setting Practices
While there are many reasons why insurers may be justified in raising health insurance rates, insurers sometimes engage in unscrupulous rate-setting practices that leave consumers paying an unfair premium. There are several ways a rate can be unreasonable: for example, it can be unjustified because the rate increase is not adequately supported by the data; or it can be based on unfair or incorrect rate-setting practices. This can result not only in consumers generally paying too much but in unfair discrimination because it leads to different classes of enrollees paying rates that do not reasonably reflect actual differences in medical costs.
Strengthening Rate Review in Arizona
To protect consumers from unjustified rating practices and ensure that consumers pay a fair premium for their coverage, Arizona should take a number of steps to strengthen its rate review process. These include giving regulators authority to reject unreasonable rate increases; improving transparency so the public has better knowledge about rate increases; and ensuring that consumers have a voice in the rate review process.
Review and Prior Approval: Arizona should make its rate review process more effective in protecting consumers by strengthening the Arizona Department of Insurance’s authority to prevent unreasonable rate increases from going into effect. Most consumers are ill-equipped to determine on their own whether premium increases are unreasonable or detect when insurers have used unjustified rate-setting practices.
Such a change may require changes in statutes and rules. Over thirty other states already have prior approval authority for at least some insurance products, including other western states like New Mexico (which last year passed a law strengthening its rate review process), Nevada and Colorado.
Improving Transparency: For all proposed rate increases or decreases, insurers should be required to file a full range of information with the Arizona Department of Insurance. In turn, the Department should make this information publicly accessible, allowing consumers to make judgments about the quality and cost of their care, and enabling advocates to more constructively engage in the Department’s rate review activities. Disclosure should include a short narrative (written in consumer-friendly language), including key reasons for the rate increase. It should also include information on the expected impact of the rate increase on consumers, the anticipated medical trend, level of administrative spending and profit margin, and full claims data and methodology details supporting these estimates. Consumers should also be informed of any rate increases that have been deemed to be unjustified.
Consumer Involvement: Robust consumer participation can make a rate review program more useful to the public, and render regulatory deliberations better-informed. The Arizona Department of Insurance should post all rate increase information on a prominent and easy-to-use website in order for consumers to research rate filings. The Department should also develop easy ways for consumers to comment on pending filings and hold public hearings on rate filings that it determines are significant due to the size of the proposed increase, the scope of any proposed benefit changes and the number of consumers affected.
By making these changes, Arizona could make insurance coverage more affordable by providing consumers with needed information and protections. More transparency and enhanced consumer protections could allow for a more competitive insurance marketplace, resulting in lower health insurance costs and improving coverage for individuals and small businesses in our state.
 See Kaiser Family Foundation, State Health Facts – Rate Review, Small Group, and Rate Review, Individual, at http://www.statehealthfacts.org/comparetable.jsp?ind=888&cat=7 and http://www.statehealthfacts.org/comparetable.jsp?ind=887&cat=7; for the New Mexico law, see SB 208 (Feldman), Health Insurance Rate Increase Review, 2011 Regular Session, at http://www.nmlegis.gov/lcs/_session.aspx?chamber=S&legtype=B&legno=208&year=11.
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