Early Evidence on Federal Rate Review Regulation and Premiums in the Individual and Small Group Markets

Under the Affordable Care Act (ACA), the federal rate review regulation requires insurers to document and publicly justify “unreasonable premium increases” when they file advance notice of rates starting with the 2011 plan year.  Before the ACA, states had substantial variation in their authority to review rates.  Almost half of the states had “prior approval” rate regulation, under which, carriers could not use a rate until it was approved by the state or the rate was “deemed approved” after a specified period of time passed. In contrast, other states had “file and use” regulations in which insurers had to file rates, but could proceed with rate increases without state approval. States also used various criteria to determine whether rates were reasonable. Most states used state established medical loss ratios (MLR) in determining whether the rates were “unreasonable”, but they used different MLR thresholds. In addition, states differed in levels of enforcement of their regulations as well as in the strength of their regulatory oversight.  

In this paper, we investigate the effect of the federal rate review regulation on premium growth in the individual and small group markets by exploiting the baseline (pre-ACE) differences in state rate review regulations. The federal regulation is expected to have a larger impact on states with less stringent baseline rate review authority.

We put together a rich data set that provides a full characterization of the baseline state rate review authority and activity including state-established MLRs for rate review purposes using information from the states’ grant applications to the Center for Consumer Information & Insurance Oversight for establishing their rate review, Consumers Union, interviews with the legislative librarians of each state, as well as from a survey we administered to the state regulators. Data on insurance premiums came from the Supplemental Health Care Exhibit (SHCE) of the National Association of Insurance Commissioners (NAIC) for 2010-2012.  In addition to premiums, claims and enrollment, we also observe and control for insurer demographics such as HMO status, ownership type, business tenure, group affiliation and overall size and presence in other markets and other insurance segments (individual market, small group, large group).  Furthermore, our models control for other state regulations (e.g. rate restrictions, high risk pools), state demographic characteristics (e.g. race/ethnicity, unemployment rate), and state political environments (political party control of the state government, house, and the political party affiliation of the governor).

Our preliminary findings reveal that change in premiums adjusted for claims spending declined during 2010-2012 across all states, but the declines were smaller in states with baseline “prior approval” compared with states that had baseline “file and use” or no rate review regulations. Moreover, among states with either the baseline “prior-approval” or “file and use” regulation, the declines in adjusted premiums were larger in states with less stringent MLR thresholds for determining rates to be “unreasonable”.