Curbing the Growth of Health Insurance Premiums

The Affordable Care Act (ACA) seeks to curb the growth of health insurance premiums in part by controlling the avarice of health insurance companies. For much too long the health insurance companies were free to charge whatever the market would bear for their policies. The typical profit margin was based on recovering their costs plus 25 to 30% for profit and overhead. Built into overhead were salaries for top executives as large as 8 to10 million dollars per year. The ACA set a limit of 20%, down to 15% for overhead and profit. Any year when profit margins exceed that limit, the insurance companies will be obliged to return that money to customers the following year in the form of lower premiums. There is room for profit and for reasonable executive salaries, but no tax deductions are allowed on salaries and incentives above $500,000 annually for executives.

Health insurance companies will function by establishing their policies each year with each state in which they propose to do business. Each company will place its plans on a state “exchange” where they will be in competition with the plans provided by other companies. The ACA leaves to the states the task of regulating the insurance rate for each company. The ACA makes $250 million available to states for them to employ staff to analyze proposed rate increases to determine whether they are needed. It requires companies to justify their proposed increases and it requires them to fully disclose their costs and profits. The law also provides for federal review in states that are not equipped to do the job themselves.

The exchanges are still in process of being formed at the state level. Kaiser Family Foundation did a national survey on the cost of insurance premiums for families in 2011. They found that the cost of family plan premiums for employer-sponsored health insurance escalated by nine percent in 2011. Why this increase? Americans are growing older and require more health service. The obesity epidemic is associated with increased health problems. New diagnostic tools and procedures help drive costs. But a major culprit is insurance companies’ desire to raise premiums before controls and vigorous scrutiny kick in from the Affordable Care Act, beginning in 2012.

Critics say the law is weak in that it gives each state the ultimate decision as to how much to permit rate increases. In mid-2011, 26 states had laws giving their state regulators authority to veto rates deemed excessive and by March 10, 2012 this authority had grown to 37 states. Seven other states have power to review rate increases in advance but not to block them. Other states without legal power are occasionally effective in negotiating with insurance companies. Much has been accomplished but a state government that is in the pocket of the insurance industry can still do great harm to its citizens and requires intervention by the federal government.

The U.S. Department of Health and Human Services (HHS) in April 2012 deemed health insurance premium increases in nine states “unreasonable” under rate review authority granted by the Affordable Care Act. After independent expert review, HHS said two insurance companies proposed unreasonable health insurance premium increases in nine states. The excessive rate hikes would affect over 42,000 residents in these nine states. These insurers requested rate increases as high as 24 percent. They would spend a low percentage of premium dollars on actual medical care and quality improvement, and justifications were based on unreasonable assumptions.

The department also released a report showing that since the rate review process began in mid 2011, health insurers have proposed fewer double-digit rate increases. More states are taking an active role in reducing rate increases, and consumers in all states can go to a government site to see the justification given by providers for their rate increases. As of March 10, 2012, the justifications and analysis of 186 double-digit rate increases for plans covering 1.3 million people have been posted on Health Care.gov, resulting in a decline in rate increases. As a result of this scrutiny premium increases dropped by 4.5%.

The state exchanges will be fully organized and in operation by January 1, 2014. In states that refuse to create an exchange, the federal government will step in and do so following federal guidelines. The competition among providers is expected to drive down costs, along with oversight by state insurance regulators, who will have resources to question the rationale of companies that propose excessive rate increases.

The struggle for cost control will never end, but there is every expectation that billions of dollars will be saved for the American people who pay health insurance premiums and for the government itself that buys coverage for more than 20% of the American population.