Smart Benefits: RI Cracks Down on Health Insurer Rating Practices
Monday, June 10, 2013
After reviewing employer files, Rhode Island’s Office of the Health Insurance Commissioner has found that these practices – at times – have caused employers to receive steeper discounted rates than was necessary. That’s why, effective June 1, the state’s three big insurers, BCBSRI, UnitedHealthcare of New England, and Tufts Health Plan, must now follow new guidance when developing premium rates for employer groups to reduce the swing in rates between carriers.
Health Insurance Commissioner Chris Koller outlined four main findings in his review of group rating practices:
- Objective, sound actuarial standards and procedures were not established
- Group rates offered were not based on the company’s established actuarial standards and procedures
- The application of a company’s actuarial standards and procedures were not adequately documented
- Discounted group rates were based on marketing and business objectives, rather than based on sound actuarial principles
The issue with these practices is that some employer groups can receive arbitrarily lower rates than others, and unfair competition among carriers is in violation of the Unfair Competition and Trade Practices Act, according to Rhode Island’s general laws (27-29-4(7)(iii). And, while new business discounting has been standard practice among the carriers to attract employers looking to change insurers, it often catches up with employers in years one or two of the contract if too much rate relief was given up front.
Now, new business discounts will likely disappear, or at least diminish considerably.
8 New Rating Standards
OHIC intends to monitor group rating and underwriting practices more closely and will apply the following eight new standards to determine whether carriers are using unfair discrimination techniques to discount rates and gain competitive advantage:
1. A health insurance company shall establish group rating and underwriting standards which are based on rational, objective and financially sound actuarial criteria.
2. A health insurance company may use the underwriting judgment of its professional staff in connection with a group account, however, such professional judgment must be based on rational, objective and financially sound criteria.
3. The practice of “first year discounts” may be used only if, as applied to a particular group account, it is based on rational, objective and financially sound criteria.
4. A health insurance company shall consistently and thoroughly apply its established group rating and underwriting standards when developing and offering group rates.
5. A health insurance company shall establish internal procedures to adequately document the application of its group rating and underwriting standards, so that an audit or examination of group accounts will clearly demonstrate why a particular rate was offered, and who authorized the offer.
6. A health insurance company shall establish internal controls to ensure its compliance with its group rating and underwriting standards, and with the regulatory standards established.
7. For rates offered after May 1, 2013, a group must cover at least 85% of the fully loaded premium, including full administrative expenses and contribution of reserves. For rates after, January 1, 2014, a group must cover at least 90% of the fully loaded premium, including the full administrative expense approved by the Commissioner, and the full contribution to reserves. For rates after January 1, 2015, a group must cover at least 95% of the fully loaded premium including the full administrative expense and the full reserve contributions.
8. Insurers may need to amend and re-file their rating formulas to comply with the new regulatory standards.
Lack of Business Discretion Means Higher Rates
These more stringent standards will prohibit carriers from using any business discretion when weighing new business opportunities. What does that mean for employers? There’ll be both pros and cons. For example, employers will benefit from more predictability with rating since the rates they receive will be indicative of the claims levels in the group and more appropriate for the level of risk in the employee population. And rates may be more stable, with less ups and downs year to year.
However, on the other hand, employers will likely see less competition in rates when shopping. That means employers won’t be able to leverage carriers against each other on price anymore. Instead, employers will probably need to renew current plans rather than switch to a competing insurer.
The bottom line? Employers should prepare for other means to control premium costs.
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