Bay State Rate Battle

Massachusetts the Site of Latest Clash over Premiums

Although 4 of the state’s largest health insurers posted first-quarter losses that they attributed mostly to Governor Deval Patrick’s efforts to slow premium growth rates for individuals and small businesses, the Massachusetts Division of Insurance is holding firm on its decision to deny insurers’ requests for premium increases. Insurers challenging the rejections assert that premium increases are a direct and necessary result of the rising cost of medical care and say the denials amount to arbitrary price controls. With the Bay State rate battle being waged in administrative hearings and lawsuits, critics of recently enacted national healthcare reforms say Massachusetts is a harbinger of what is in store when new federal healthcare laws are implemented nationwide.

In May, >$100 million in first-quarter losses reported by Blue Cross and Blue Shield of Massachusetts (BCBSMA), Harvard Pilgrim Health Care, Tufts Health Plan, and Fallon Community Health Plan were attributed to the insurers’ inability to update premiums. Three of the insurers had to tap into their reserve funds. The rate denials were not announced by the Division of Insurance until after the first quarter, but accounting rules require the insurers to immediately record the expected future losses.

BCBSMA reported a combined after-tax net loss of $65.2 million for the first quarter. The insurer said that $55 million of this loss is a required accounting treatment that reflects the decision by the state Division of Insurance to disapprove adequate premium rates in the individual and small group markets.

“The $55-million loss reflects that 2009 rates are being charged for coverage effective in April, May, and June 2010, and these premium rates are inadequate to cover the actual cost of health benefits for customers in the small group and individual market,” said Allen Maltz, chief financial officer of BCBSMA.

In an interview with First Report – Managed Care (FR-MC), Jay McQuaide, vice president of BCBSMA, said the negative impact of the rate caps for the company is about $20 million per month. “By imposing these price caps on our premium rates in the individual and small group market, at the moment we’re charging 2009 rates, which are essentially deficient by between 15% and18%. We don’t view this as a sustainable solution.”

Harvard Pilgrim Health Care reported a net loss of $27 million, $21 million of which was attributed to the Division of Insurance’s rate refusals. The company warned of deeper financial losses if the state continues to reject requests for rate increases. “We will be relying on our reserves to continue to meet our current obligations to our customers,” said James DuCharme, chief financial officer of Harvard Pilgrim.

Mr. DuCharme referred to reports recently issued by the Massachusetts attorney general and Massachusetts Division of Health Care Finance and Policy, which show that increasing prices charged by providers for medical services are the primary drivers of healthcare costs, accounting for as much as 75% of the increase in recent years.

Tufts Health Plan reported a net loss of $51.9 million for the first quarter, blaming the Division of Insurance for “what are effectively rate caps that do not allow the plan to charge for the actual costs of medical services being covered in the small group segment.”

Fallon Community Health Plan, whose rates were also disapproved by the Division of Insurance in April, reported a net loss of $8.5 million and an operating loss of $10.8 million. Charles Goheen, executive vice president and chief financial officer of Fallon, said the Department of Insurance’s decision “threatens the stability of health plans and the structure of our entire healthcare system while ignoring the root causes of rising premiums—underlying medical costs, overutilization of services, and the market power of certain providers.”

Reacting to the reported first-quarter losses, Lora Pellegrini, president of the Massachusetts Association of Health Plans, said the plans are not collecting enough premiums to cover costs. She added that the companies’ results confirm earlier predictions about how statewide reforms enacted in 2006 would impact the insurance market. “These results support what we’ve said: the plans would lose millions of dollars from this scheme and it would do nothing to control underlying healthcare costs,” Ms. Pellegrini said.

A model for healthcare reform has been operating in Massachusetts since 2006. Similarities between the health system in Massachusetts and what is being implemented nationally as a result of recently passed healthcare laws include a health insurance exchange, individual and employer mandates, and subsidized coverage.

The Massachusetts healthcare system is intended to provide near-universal health coverage of the state’s population. For legal residents who are ineligible for other public or employer-sponsored health coverage, the state provides completely subsidized comprehensive health insurance to adults earning ≤150% of the federal poverty level (FPL). Premium subsidies are available to residents earning >150% FPL and ≤300% FPL. Children of parents earning ≤300% FPL can receive completely subsidized comprehensive coverage. Employers of ≥11 must contribute to coverage for full-time employees or pay a Fair Share Assessment.

A study conducted in 2009 by The Commonwealth Fund found that the average health insurance premium for a family plan in Massachusetts was $13,788, the highest in the United States. The national average was $12,298. The rate of increase for premiums in Massachusetts between 2003 and 2008 was 40% for family plans compared with 33% nationwide. For single plans, the growth rate was 38% in Massachusetts compared with 26% nationally. At current growth rates, the state is projected to have the highest premiums for family plans in 2020, estimated at $26,730.

Since November, at the direction of Governor Patrick, the Division of Insurance has been conducting statewide hearings concentrating on small group premiums and actions that carriers are taking to address costs. In February, Governor Patrick directed the commissioner of insurance to file an emergency regulation requiring health insurance companies to file proposed changes in small business premiums with the Division of Insurance in advance of their taking effect so the commissioner can review and disapprove rates deemed excessive or unreasonable in relation to the benefit provided.

The governor’s plan also includes legislation that would trigger a presumptive disapproval of health insurer rates that are significantly above the Consumer Price Index for medical services. The bill also provides for similar oversight of provider rates to ensure shared responsibility for controlling costs.

On April 1, the Division of Insurance disapproved 235 of 274 rate increases proposed by Massachusetts insurance carriers, finding the rates were excessive or unreasonable relative to the benefit provided. The disapprovals held rates at April 2009 levels. Insurers criticized the decision and requested administrative hearings with the Division of Insurance.

On April 5, BCBSMA, along with 5 other local, not-for-profit health plans and the Massachusetts Association of Health Plans, filed legal action against the Massachusetts Division of Insurance. The legal complaint, filed in Suffolk Superior Court, contends that the Insurance Commissioner exceeded his legal authority by arbitrarily setting premium rates in the individual and small group market. The complaint requested a court trial and an immediate injunction preventing the Division of Insurance from implementing or enforcing its decision to disapprove premium rates for April, May, and June.

Earlier this year the war over insurance rates was fought on the national stage when California-based Anthem Blue Cross, a subsidiary of WellPoint, announced that its premiums for plans in the individual market would increase by 39%. Anthem’s announcement triggered calls for new federal authority to reject premium increases and a war of words between the Obama administration and health insurers similar to that which continues in Massachusetts. President Obama decried rate increases in California and across the country, stating “the status quo is good for the insurance industry and bad for America.”

Kathleen Sebelius, secretary of Health and Human Services, sent a letter to CEOs of several insurance companies demanding that executives publicly justify proposed premium increases. The next day, Ms. Sebelius attended the America’s Health Insurance Plans (AHIP) 2010 National Policy Forum and scolded insurers for using their resources to pay for advertisements critical of the president’s reform proposals.

In response, Karen Ignagni, president and CEO of AHIP, said that premium increases in the individual market are due to “soaring medical costs and because younger and healthier people are dropping their coverage due to the economy.” Ms. Ignagni called on lawmakers to “stop the politics of vilification” and address the underlying causes for rising medical costs.

Mr. McQuaide told FR-MC that after the passage of national healthcare reform, other states around the country are looking at their regulatory processes concerning premium rates. “Other plans in other states would be concerned, if they were in our shoes, with the prospect of having a state regulator set arbitrary price controls and premiums,” he said. “That would be a concern for every health plan.”

At press time, e-mails obtained by the Associated Press revealed internal concerns within the Division of Insurance about the artificial price caps imposed on April 1. In the e-mails, Robert Dynan, deputy commissioner for financial analysis at the Division of Insurance, said, “the rates, by design, have no actuarial support.”

Mr. Dynan predicted, “There most likely will be a train wreck (or perhaps several train wrecks).” He added that insurers pursuing legal action against the Division of Insurance “most likely will win,” and strongly suggested to Massachusetts insurance commissioner Joseph Murphy that the lawsuit be settled “at a rate that is actuarially sound.” Mr. Dynan warned of “the potential for catastrophic consequences to our nonprofit healthcare industry if they are not allowed to charge actuarially sound rates.”—Charles Boersig