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State Report Demonstrates Cost of Deregulation of Health Insurance Premiums

Report Supports Need to Pass Governor’s Bill Giving Insurance Department Prior Approval of Proposed Health Insurance Premium Increases

Deregulation of health insurance premiums has resulted in excessive rate increases that require many New Yorkers to pay more for health insurance than they should, and even force some to drop coverage altogether, according to a report issued today by the New York State Insurance Department. Governor David A. Paterson has submitted a bill to reinstate the Insurance Department’s authority to review health insurance premiums before insurers raise rates to ensure that the increases are not excessive.

“Controlling the cost of health insurance is a major part of making New York a better place to live and do business. The high cost of health insurance is one of the most important issues for businesses large and small.” said Governor Paterson. “Deregulation of health insurance rates has resulted in excessive rate increases that have contributed to the high cost of coverage for many New Yorkers. I have submitted a bill that will restore regulation of health insurance rates to help ensure that premiums are not excessive. I urge the Legislature to pass this bill.”

Superintendent Eric Dinallo said, “Many New Yorkers are shocked to learn that the Insurance Department does not approve premium increases for health insurance. In fact, since the mid-1990s, the law prevents the Insurance Department from even reviewing rates before insurers send bills to policyholders. Our report illustrates the problems of deregulation and why restoring our ability to regulate rates better balances the interests of consumers, providers and health plans.”

The Insurance Department report is titled, “The Price of Deregulation: How ‘File and Use’ Has Undermined the State’s Ability to Protect Consumers from Excessive Health Insurance Premiums.” “File and use” is the deregulated mechanism that allows New York State health insurers to increase premium rates without the approval of the Insurance Department.

Prior to 1996, health insurers had to get the Insurance Department’s approval before increasing their premiums. That year, the Legislature deregulated health insurance premiums, giving health insurers the right to simply “file and use” rate increases, allowing them to impose increases with minimal regulatory oversight.

The Insurance Department’s report finds that, under file and use:

  • Health Insurers Can Increase Premiums With Virtually No Oversight. The Insurance Department is not allowed, by law, to review insurers’ rate calculations or underlying actuarial assumptions, much less approve or disapprove a premium increase before it goes into effect.
  • Health Insurers Have Failed to Self-Police. File and use does contain a self-policing mechanism that requires insurers to refund excessive premiums to policyholders, but not until almost two years after the premium rate goes into effect. However, the mechanism does not protect against all abuses and it has clearly not worked. Under prior approval (1990-1995), the Insurance Department reduced 24% of premium rates submitted by health plans after concluding the rate was excessive. Under file and use (1996-2007), when it was up to the health plans to report their own overcharges, health plans self-reported excessive rates only 3% of the time. Between 2000 and 2007, health plans refunded approximately $48 million in overcharged premiums without Insurance Department intervention. Insurance Department investigations of some filings found that during this same period some health plans overcharged policyholders an additional $105 million - more than twice what the plans “self-policed” under file and use. This number may be understated because of the loopholes discussed below that may hide some excessive rates.
  • File and Use Hinders Insurance Department Enforcement. File and use contains loopholes that allow health plans to revise underlying assumptions after the rates go into effect to avoid paying refunds. For example, at the end of a year, health plans can increase their estimate of claims they will have to pay but have not yet received, which are known as the reserves for “incurred but not received,” or IBNR, claims.
  • File and Use Increases the Number of Uninsured. Under file and use, an unjustified rate increase can result in an unjustified loss of health insurance coverage. File and use gives health plans until September 30 after the applicable year to pay refunds -- up to 21 months after rate increases go into effect. No relief is available to consumers or businesses that had to cancel their coverage because they could not afford the inflated rate increase in the first place. As such, file and use is a classic case of “justice delayed is justice denied.”
  • File and Use Undermines Efforts to Help the Most Vulnerable. The state spent about $826 million from 2000 to 2008 in subsidies to make health insurance more affordable for working low-income New Yorkers and individuals with health conditions that make insurance very expensive. File and use, deregulated and subject to abuse, directly contravenes the State’s efforts to enhance affordability in these markets and protect consumers. While New York is trying to increase health coverage, file and use works to decrease it.
  • Insurers’ Profits Have Increased While Health Insurance Has Become Less Affordable for Small Businesses and Individuals. Under deregulation, health insurer profits have been high. For example, in 1996, health insurers paid less than two percent of premiums as dividends to their parent companies. In 2007, they paid more than eight percent of premiums as dividends to their parent companies. Indeed, health plans have distributed more than $5.4 billion in dividends since full deregulation in 1999.
  • The report further finds that file and use has proven inadequate to protect New Yorkers from excessive premium increases. Reinstating the Superintendent's authority to subject health insurance premium rate filings to regulatory scrutiny before the rates go into effect avoids the pitfalls of file and use for the following reasons:
    • Prior Approval Does Not Rely On Self-Policing By Plans. Under prior approval, the Insurance Department will use objective criteria to review rates before they are increased and will not rely on self-interested insurers to certify compliance and police themselves.
    • Prior Approval Avoids Creating Unnecessarily Uninsured. Ensuring rates are correct before they go into effect will help prevent New Yorkers from losing coverage because they had to drop coverage when an excessive rate increase made health insurance unaffordable.
    • Prior Approval Allows Regulators to Protect Vulnerable Markets. Prior approval will help ensure that State subsidies of the direct pay market and Healthy New York achieve full value in the markets for which they were intended.
    • Prior Approval Creates More Regulatory Certainty. Because rates will not be increased in a “black box,” the Insurance Department can prevent excessive rate setting better both before and after premiums are increased. The current loopholes will be more difficult for health plans to exploit.
    • Prior Approval Protects Against Insolvencies. There is no credible evidence that prior approval in New York resulted in health plan insolvencies. Moreover, the Insurance Department’s central priority is to ensure solvency of all insurers.
    • Nearly Half of All States Have Prior Approval. Twenty-four states currently have some form of prior approval of health insurance rates.

Dr. David Hannan, President of the Medical Society of the State of New York, said, “Health insurer profits have soared, yet patient and employer premium costs have skyrocketed and physicians face continuing difficulty in receiving payment for care provided. Mandating prior approval of premiums combined with increasing the insurers’ medical loss ratios will reduce the incentive of carriers to divert premium dollars to excessive administration expenses or profit. It would better enable the Insurance Department to comprehensively evaluate if the insurers’ rate increase requests are justified, and most importantly, evaluate how the premium dollars the companies collect are actually being spent.”

Elisabeth Benjamin of the Health Care for All New York Campaign and Director of Healthcare Restructuring Initiatives at the Community Service Society said, “The Department’s report underscores the reality for most working families in New York. During this decade, unregulated health insurance premiums have increased by 81%, while real wages have only increased by 11%. New Yorkers can no longer afford a deregulated health insurance market.”

Mark Scherzer, Legislative Counsel to New Yorkers for Accessible Health Coverage, said, "The Insurance Department's report provides compelling evidence to confirm what hard-pressed insurance consumers already know: Insurers will take advantage of any situation where effective regulation is lacking. That's why we should reinstate the highly effective mechanisms of prior approval of rate hikes and rate hearings. Even the last Insurance Superintendent of the Pataki administration, which oversaw the de-regulation of the 1990s, advocated reinstating prior approval. Consumers who lose coverage because of illegally overcharged premiums have no effective remedy, while insurers have ample legal protections if regulators refuse to approve justified premium increases."

Bob Cohen, Policy Director of Citizen Action of New York, said, “The experience of the last decade – in which consumers have faced double-digit rate increases -- clearly shows that New York’s experiment in deregulation of health insurance rates has been a failure. Too many consumers and employers alike cannot afford quality health insurance, which seriously affects both their health and their financial stability. We need the Legislature to listen to the voices of consumers around the state and establish meaningful state oversight over health insurance rates this legislative session.”

The Insurance Department’s report is being issued in conjunction with today’s testimony of Troy Oechsner, Deputy Superintendent for Health, before the New York State Assembly Insurance Committee public hearing on the Governor’s prior approval bill. The hearing will take place at 10:00 am in Hamilton Hearing Room B of the Legislative Office Building in Albany, NY.


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