Emergency Regulation to Enforce Medical Loss Ratio in Patient Protection and Affordable Care Act of 2009 Made Permanent

On Thursday February 9, 2012, California Insurance Commissioner Dave Jones announced that he had obtained approval from the California Office of Administrative Law to make permanent the emergency regulation issued in 2011 allowing the Department of Insurance (the “Department”) to enforce the medical loss ratio guidelines in the Patient Protection and Affordable Care Act of 2009 (“PPACA”) (which we previously discussed here).

As of January 1, 2011, the PPACA required all health insurers in the individual market to maintain an 80% medical loss ratio.

The Department obtained approval to make permanent its amendment to 10 California Code of Regulations § 2222.12 to reflect this requirement. A copy of the text of the regulation can be viewed here.

This permanent regulation went into effect on February 8, 2012.

The regulation adopted by the Department contains more stringent requirements than PPACA, as it allows the Department to evaluate whether the 80% medical loss ratio will be met at the time a rate is filed with the Department, rather than waiting until the end of the year to determine if this ratio was satisfied.

Concerned About Excessive Rates, California Insurance Commissioner Requests Rate Filings from Medical Malpractice Carriers

On February 17, 2011, California Insurance Commissioner David Jones announced in a press release that the California Department of Insurance had contacted several unnamed medical malpractice insurers to raise concerns about excessive rates and request that these insurers submit rate filings with the CDI to reduce their rates. 

California Insurance Code sections 1861.01 and 1861.05, enacted in 1988 as part of Proposition 103, specifically grants the CDI the authority to regulate the rates of certain property and casualty lines of insurance, including medical malpractice insurance. It requires these insurers to apply to the CDI for prior approval of rates and prohibits the use of excessive rates. 

The CDI noted in its press release that it has employed these provisions in the past to regulate the rates of medical malpractice insurers, including reducing rate increases. 

In contrast, the CDI specifically confirmed that it does not have the authority to reject rates from health insurers that it deems excessive or unreasonable, as health insurance is not subject to California Insurance Code sections 1861.01 and 1861.05.

In his announcement, Commissioner Jones noted that the basis for the CDI’s determination that medical malpractice rates might be excessive is the low loss ratios that these medical malpractice insurers experienced. 

In the CDI’s view, low loss ratios are an indication that premiums might be excessive and in violation of the law. 

The CDI plans to require a rate filing from those medical malpractice insurers it believes have excessive rates and review the rate filings to ensure that the rates comply with the aforementioned provisions of the California Insurance Code as well as all other applicable provisions of the law.

Guidelines for Health Insurers Requesting Rate Increase Issued by California Insurance Commissioner (SB 1163)

by Marina Karvelas

On February 4, 2011, California Insurance Commissioner Dave Jones released draft guidelines for implementing SB 1163 (“Guidance 1163:2”).

SB 1163, signed by former Governor Schwarzenegger on September 30, 2010, responds to the federal Patient Protection and Affordable Care Act (“PPACA”), which requires the United States Secretary of Health and Human Services to establish a process for the annual review of “unreasonable” increases in premiums for health insurance coverage.

Under the federal act, health insurers must submit to the secretary, and the relevant state, a justification for an “unreasonable” premium increase prior to implementation of the increase.

SB 1163, effective January 1, 2011, requires health insurers to file with the California Department of Managed Health Care or the California Department of Insurance detailed rate information regarding proposed premium increases and requires that the rate information be certified by an independent actuary. 

The bill authorizes the departments to review these filings and issue guidance regarding compliance. It also requires the departments to consult with each other regarding specified actions as well as post certain findings on their Internet Web sites.

In his draft guidelines (“Guidance 1163:2”), Commissioner Jones lists several factors that will be used by the Department to determine if a rate is “unreasonable.”

Under Section A: Unreasonable Rate Increases, the first factor the Department will look at is:

[t]he relationship of the projected aggregate medical loss ratio to the federal medical loss ratio standard in the market segment to which the rate applies, after accounting for any adjustments allowable under federal law.” (Guidance 1163:2, § A, p. 1.) 

The draft guidelines expressly incorporate, by reference, the interim federal regulation effective January 1, 2011, titled “Health Insurance Issuers Implementing Medical Loss Ratio Requirements Under the Patient Protection and Affordable Care Act,” 45 C.F.R. §§ 158.101-158.232.

The interim federal regulation requires health insurers to spend a certain percentage of consumers’ premiums on direct care for patients and efforts to improve health care quality.

For individual and small group market insurers, this is 80% of the consumers’ premium, and for large group market insurers, it is 85% of the consumers’ premium.

If insurers fail to meet the ratio requirements, beginning in 2012, they will be required to provide a rebate to their customers by August 1 of each year.

The federal rule allows for a State to require a higher medical loss ratio than that required under the interim regulation. The interim federal regulation (pdf), published December 1, 2010, is subject to a 60-day public comment period.

Other factors identified in Commissioner Jones’ draft guidelines to determine whether a premium increase is “unreasonable” include: 

  • Whether the assumptions for the rate increase are supported by substantial evidence;
  • Whether the choice of assumptions or combination of assumptions for the rate increase is reasonable;
  • Whether the data or documentation provided is incomplete or inadequate;
  • Whether the filed rates result in premium differences between insureds within similar risk categories that either are not permissible under California law or do not reasonably correspond to differences in expected costs;
  • Whether itemized changes are substantially justified by credible experience data;
  • Rate of return for prior three years and anticipated for the following year;
  • Insurer’s employee and executive compensation;
  • Degree to which the increase exceeds rate of medical cost inflation;
  • For individual policies, compliance with 10 C.C.R. 2222.12. (Guidance 1163:2, § A, pp. 1-2.) 

In addition to Filing and Notice requirements as well as specific filing forms (Sections B and D Guidance 1163:2), the draft guidelines contain several requirements for actuarial certification. Each of the following must be included in the actuarial certification:

  • The actuary’s qualifications and independence;
  • Opinion that the proposed premium rates are “actuarially sound in the aggregate;”
  • Complete description of data, assumptions, rating factors and methods with rate calculations for each contract or policy form;
  • Statement of opinion whether the rate increase is reasonable or unreasonable, and if, the latter, the justification for the increase; a discussion of the factors listed in § A, and 10 C.C.R. § 2222.10 for individual health insurance;
  • A description of the testing performed by the actuary. (Guidance 1163:2, § C, pp. 3-4.) 

Notwithstanding the above requirements, the Insurance Commissioner currently does not have the authority under SB 1163 to reject health insurance rate increases.

In the last legislative term, Commissioner Jones (formerly an assemblyman) sponsored AB 2578, a strong insurance rate reform bill that would have given the Commissioner such authority (it failed to pass in the Senate).

The Commissioner is currently supporting another effort at such legislation.

Commissioner Jones’ draft guidelines are subject to a 7 day public comment period before they are finalized.

Originally posted to Barger & Wolen's Insurance Litigation and Regulatory Law Blog

Emergency Regulations to Enforce PPACA Medical Loss Ratio Guidelines Granted to California Department of Insurance

On Monday January 24, 2011, newly elected California Insurance Commissioner Dave Jones announced in a press release that he had obtained approval from the California Office of Administrative Law to issue an emergency regulation allowing the Department of Insurance (the “Department”) to enforce the medical loss ratio guidelines in the Patient Protection and Affordable Care Act of 2009 (“PPACA”). 

As of January 1, 2011, the PPACA requires all health insurers in the individual market to maintain an 80% medical loss ratio. The Department obtained approval to amend 10 California Code of Regulations § 2222.12 to mirror this requirement. A copy of the amended text can be viewed here

The emergency regulation went into effect on January 24, 2011, and expires on July 26, 2011. It requires California health insurers to demonstrate compliance with the 80% medical loss ratio at the time of the Department’s rate review.