Insurers will have to justify rate increases over 10 percent

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Insurers will have to justify rate increases over 10 percent

by Joan McCarter

Amid numerous reports of massive rate increases, and profits, for health insurance companies in the new Affordable Care Act universe, the Obama administration is demanding that insurers begin justifying proposed rate increases in September of this year

Kathleen Sebelius, the secretary of health and human services, issued a final rule establishing procedures for federal and state insurance experts to scrutinize premiums. Insurers, she said, will have to justify rate increases in an environment in which they are doing well financially, with profits exceeding the expectations of many Wall Street analysts.

“Health insurance companies have recently reported some of their highest profits in years and are holding record reserves,” Ms. Sebelius said. “Insurers are seeing lower medical costs as people put off care and treatment in a recovering economy, but many insurance companies continue to raise their rates. Often, these increases come without any explanation or justification.”

Federal health officials proposed the 10 percent threshold in December. The insurance industry criticized it as an arbitrary test that could brand a majority of rate increases as presumptively unreasonable. But the administration rejected the criticism and insisted on the 10 percent standard in the final rule, issued Thursday.

Beginning in September 2012, the government will set separate thresholds for the states, depending on health care and insurance costs in those states. In the meantime, insurers will have to abide by the 10 percent threshold. Note that it doesn't mean insurers can't increase premiums above 10 percent, but that they will have to justify those increases. Insurers, of course, don't like it and say that the rule will do nothing to "address the underlying costs of health care, which they described as the main factor driving up premiums." Which does deflect from the issue of insurance company profits.

This new rule comes in the midst of a rhetorical war waging this week between industry group America's Health Insurance Plans (AHIP) and health care advocacy group Health Care for America Now (HCAN) over the industry's profits. Former insurance company executive Wendell Potter writes about it at HuffPo:

Robert Zirkelbach, spokesman for America's Health Insurance Plans (AHIP) took aim at the health care advocacy group Health Care for America Now (HCAN). HCAN took issue with AHIP's assertion that the average profit margin for health insurance firms is just 4.4 percent. Zirkelbach did not explain how he came up with that figure, but considering the fact that the big for-profit insurers had significantly higher margins than 4.4 percent last year (according to Yahoo! Finance), AHIP's calculations must have included the insurers that, at least in theory, don't make profits at all, like the so-called nonprofit Blue Cross and Blue Shield plans.

In a memo to editors and reporters Thursday afternoon, HCAN took issue with the 4.4 percent figure and accused AHIP of trying to pull the wool over journalists' eyes.

"AHIP's focus on profit margins is misleading and designed to protect their massive income by shifting attention away from their return on equity—a key measure of profits as a percentage of the amount invested," HCAN's executive director, Ethan Rome, wrote.

"That return is a phenomenal 16.1 percent as of today. By that measure, health insurers are ranked fourth highest of the 16 industries in the health care sector. The health insurance industry has a higher return for investors than cell phone companies, beer companies, mortgage companies, life insurance companies, TV broadcasters, drug store companies, or grocery stores."

The drivers of health insurance costs, the industry will say, is doctors practicing "defensive medicine" and "fraud and abuse in the entire system." However:

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