By Jane Norman, CQ HealthBeat Associate Editor

December 21, 2010 -- The responsibility for scrutinizing "unreasonable" health insurance premium increases will rest largely with state insurance regulators as long as those states have adequate systems in place to analyze the requests, under proposed regulations announced Tuesday by the Obama administration.

Health insurers who want to hike their premiums by 10 percent or more on average in 2011 in the individual and small-group market will have to justify why they've done so, under the 136-page proposed rule issued Tuesday by the Department of Health and Human Services (HHS). Such increases are not automatically assumed unreasonable—they will undergo further analysis to determine if they are.

Also, that 10 percent standard is a temporary one. After 2011, standards specific to every state will be set, using data and trends that reflect the situation in each state. Most increases in the individual market have exceeded 10 percent during the past three years, the regulation notes.

The proposed rule would apply to rate increases filed on or before July 1, 2011.

Advocates of the health care law (PL 111-148, PL 111-152) praised the announcement of the proposed rule, though some said they may have further comments after they have finished reviewing it. State regulators who did not want to lose control of their authority were relieved. The insurance industry reaction was mixed.

"So this year we had to start someplace, and moving into the double digits seems like an appropriate place to at least start the enhanced review," said HHS Secretary Kathleen Sebelius at a press briefing. "But we'll be more nuanced in the future, based on what's happened within certain states."

The proposed rule outlines how the government will implement somewhat vague language included in the health care law mandating that the agency work with states to set up a process for reviewing and defining "unreasonable" health insurance premium increases (See related story). States vary widely in their current approach to health insurance rate scrutiny, according to a recent study by the Kaiser Family Foundation.

By keeping the responsibility for scrutiny mostly with states, insurance commissioners will continue to bear the brunt of the political heat when an insurance company proposes a large health premium increase that riles consumers and politicians, something that has happened repeatedly in recent months. HHS could also criticize states that do not do enough to curb premiums. Premiums for family coverage have gone up by 131 percent since 1999, HHS says.

In the health care law, Congress did not give HHS the power to deny premium increases, to the dismay of some Democrats and consumer groups. But insurers who request "unreasonable" increases are mandated under the law to provide justification and details. That information will have to be displayed on their Web sites. Advocates hope that the dose of sunshine will prove powerful in averting proposed big increases.

Under the HHS proposed rule, states with "effective" rate review systems will scrutinize average premium increases of 10 percent or more. Officials said that includes a majority of the states. The regulation says 43 of the 50 states have some rate review process in the individual or small-group market or both, though it is unclear if HHS would consider all 43 effective.

State System Effectiveness

Four factors will be used to determine whether a state system is effective. They include whether the state receives documentation from the insurer sufficient to determine whether a rate increase is unreasonable and whether the state has effectively reviewed the documentation submitted. They also include whether the state review examines the "reasonableness" of the assumptions used by the insurance company in developing its rate proposal and the historic data underlying those assumptions. The fourth factor is whether the state follows a standard set forth in law or regulation when making the determination of whether a rate increase is unreasonable.

"This proposed regulation does not establish a standard for unreasonableness that a state must use or apply; nor does it require a numerical standard to be applied under state law to determine whether a rate increase is unreasonable," says the proposed rule. "Rather, a state regulator would apply the applicable standards that exist under state law."

The idea is to let the states exercise their regulatory authority. "The federal government will not be doing reviews of rates where there is a thorough process at the state level," said Sebelius. "We're not going to sit on insurance commissioners' shoulders and question what it is that they're doing.

"On the other hand, it is an attempt to make sure that every consumer in the country has some confidence that their rate has been looked at, has been examined, has been questioned, has been justified before it's implemented," she said.

Says the rule: "When a state with an effective rate review program determines whether a rate increase violates the standards set forth in state law and therefore whether the increase is unreasonable, HHS would adopt that determination and would not conduct an independent review of the state's determination."

Sebelius said that a number of states that do not have sufficient authority to review rate increases are seeking it from state legislatures. Grants totaling $250 million for state insurance departments will boost those efforts.

"You know, the notion somehow that this is federal overreach is absolutely the wrong lens," added Sebelius. "This is really the states take the lead in this and other areas."

Consumer Groups Like Rule

Senate Finance Committee Chairman Max Baucus, D-Mont., applauded the proposed rule and said it will give consumers the tools to learn more about premium increases, "so families and individuals will know the money they spend on insurance premiums will improve their coverage and make them healthier, not just inflate corporate profits."

A more measured reaction came from Sen. Dianne Feinstein, D-Calif., who has advocated giving HHS the power to deny or modify premium increases. "Establishing these regulations is a good first step but I believe the administration and Congress must go further," she said in a statement. She said that she and Sen. John D. Rockefeller IV, D-W.Va., will introduce legislation in the first days of the next Congress that would give states the power to modify or block increases they find unreasonable. In states where the insurance commissioner does not have that power, the secretary of HHS would be given the authority to do so, said Feinstein.

Rockefeller said that West Virgnia has received a $1 million grant to help improve scrutiny of proposed premium increases. "These new proposed regulations build on these efforts, helping state insurance departments protect consumers, discouraging unreasonable rate increases and helping keep health care costs under control," he said.

Consumer advocate groups praised the proposal. Ron Pollack, executive director of Families USA, said that "high premium increases will no longer be a done deal before consumers know what is coming."

State regulators said they were pleased with the proposal and that little will change in states with sufficient review systems—though some may add staff.

A worst-case scenario would have been one in which HHS decided that any premium increase of 10 percent or more would be unacceptable, said Sandy Praeger, the Kansas insurance commissioner and chairwoman of a National Association of Insurance Commissioners committee that worked on recommendations on the proposal. That's because states analyze rate requests using extensive actuarial and technical data and states also understand the insurance market and each insurer's history in the state, NAIC said in materials submitted to HHS.

HHS declined to extend the proposed rule to large-group insurance plans, at least for now, disappointing some consumer advocates. NAIC, though, had pointed out that most states do not approve rates for large employers and that self-insured plans are not subject to state authority under federal law.

HHS will also allow certain information submitted by insurers to justify their rate increases to remain confidential rather than requiring it all be publicly disclosed.

The general sense among those analyzing the 136-page rule was that it recognized the primary role of state insurance regulators.

Timothy Jost, a law professor at Washington and Lee University and health law expert, said he would have preferred to see a threshold below 10 percent. He also expressed some concern about the provision on confidentiality but said he was working on fully reviewing the regulation.

Robert Laszewski, president of Health Policy and Strategy Associates, said he was not surprised that HHS left much responsibility to the states. "I don't think they had much choice," because HHS would not have the funds available for enough staff members to conduct reviews, he said.

"They couldn't do it. You've got 1,500 insurance companies out there," he said.

He also said the rule "could have been worse" for insurers and questioned how precisely the 10 percent on average definition would be formulated.

Karen Ignagni, president of America's Health Insurance Plans, which represents the industry, said in a statement that insurers agree that the federal government is not the body that should be reviewing premium rate increases.

"We agree that states are best suited to review premiums because they have the experience, infrastructure and local market knowledge needed to ensure that consumers are protected and health plans are solvent," said Ignagni. "The federal government is not in a position to make these assessments."

However, Ignagni said that the proposed rule is "incomplete" because it fails to factor in all the reasons costs are rising, including new benefit mandates' cost and fewer younger and healthier people buying insurance.

"Premium review must consider the unique circumstances of small employers that are struggling to afford coverage for their employees and of the individual market in which people move in and out of coverage depending on whether they anticipate needing medical services," she said.

But Sebelius, a former Kansas insurance commissioner, said the proposal acknowledged the differences among insurers by not automatically labeling an average 10 percent increase as unreasonable. "A 10 percent increase for a company who hasn't had a rate increase for five years and is looking at a very narrow profit margin may be very different than a 10 percent increase which is a third increase in a row for a company that's posting record profit margins," she said.

By John Reichard, CQ HealthBeat Editor

December 20, 2010 -- With any decision by the U.S. Supreme Court on the constitutionality of the overhaul probably a good 18 months away, the Obama administration is busy mixing concrete and laying down pavement to implement as much of the law as it can before then.

After a "phase one" consisting of adopting a series of consumer protections in the insurance industry, the administration is now shifting into "phase two" to spur more efficient health care, White House Office of Health Reform Director Nancy-Ann DeParle told a Washington, D.C., forum Monday.

"As we look toward 2011, we're now beginning to work in earnest on phase two of implementation"—working with the states to create health insurance exchanges, and "delivery system reform," DeParle said at the event, which was sponsored by the Center for American Progress.

Delivery changes include the creation in traditional Medicare of teams of doctors and hospitals known as accountable care organizations, or ACOs—the subject of the forum. If they work together well, these new teams stand to receive payment bonuses.

"Under the new law, ACOs potentially deliver all the health care services that beneficiaries need, in a coordinated way," DeParle said. By setting targets to limit spending growth and spur measurable improvements in the quality of care, Medicare hopes through ACOs to boost quality of care and cut costs, too.

The event illuminated the angst accompanying ACO development, the desire for Medicare officials to get outside help in developing the program, and the difficult design decisions facing regulators at the Centers for Medicare and Medicaid Services. "They're being asked to regulate something that's never existed," commented one participant at the event.

CMS Deputy Administrator Jonathan Blum said final rules for the program, which starts Jan. 1, 2012, will be out next summer, and a proposed rule will be issued early in 2011. But he made a big point of saying that CMS needs help.

"We're all starting from scratch, we're all trying to figure out the ACO program together," he said. Blum said CMS will go forward with "a true proposal, wanting comments back from all perspectives, consumers first and foremost, providers, physicians, health plans, really to help inform our decision making."

"If the ACO program works well, patients . . . will have well-coordinated handoffs from physician to hospital back to physician [after discharge], back to the home," he said.

But in designing the program, CMS has to worry about whether it unduly promotes the market power of providers relative to insurers, he said. It has to think about whether and how to penalize ACOs that miss performance targets—rather than just incentivizing them through bonus payments for meeting targets.

It has to determine how to inform Medicare patients that they are part of ACOs, without causing a backlash against the program of the kind that sunk managed care in the 1990s. While patients will benefit from better-coordinated care, they need to be told, too, that doctors and hospitals stand to gain from providing more efficient care, running the risk that seniors will bolt because they think bonus-minded doctors and hospitals will shortchange them on treatment services.

CMS also has to decide how to give physician-driven ACOs access to data to help manage hospital and pharmaceutical costs—data that can be proprietary, Blum noted.

In a paper also released on Monday, Center for American Progress analysts said ACOs should avoid "the concentration of pricing power by promoting alternatives to hospital-led accountable care organizations." The analysts, Judy Feder and David Cutler, urged that doctor-led ACOs be formed alongside hospital-led ACOs.

Medicare patients should be active participants in improving the quality of their care and benefit financially if, as part of an ACO, they help lower costs and improve quality of care, they added.

The analysts also suggested the adoption of "a payment system that, first optionally and then as a requirement, leads providers to share in the financial risks of overspending as well as in the savings from underspending, relative to spending targets."

They said the ACO program has promise.

"Every analyst who studies health care believes it is possible to simultaneously lower costs and improve quality," their paper said.

Although the health law generally is a big GOP target, ACOs enjoy a fair degree of bipartisan support and may not be a target of the those seeking to repeal and replace the law. Asked whether pending spending legislation would cut funding to implement the ACO program, Blum said he would defer to Obama administration budget analysts to answer that question. But he emphasized that the program is "one of our highest priorities."

By John Reichard, CQ HealthBeat Editor

December 22, 2010 -- With Republicans arriving in force on Capitol Hill next month, sharp scrutiny of spending under the health law will surely follow—with a GOP eye toward blocking whatever can be blocked.

So what spending is mandatory and what is discretionary under the law? To the extent spending is discretionary, Republicans will have much more power to block it, given their large majority in the House and their big gains in the Senate.

At first glance, the health law (PL 111-148, PL 111-152) appears to require huge sums of discretionary spending if the overhaul is to be implemented in full. At second glance, not so much—but still enough to be a big headache for the Obama administration.

Earlier this year, the Congressional Budget Office (CBO) estimated potential discretionary spending under the health law would be a minimum of $115 billion over 10 years. "Discretionary" means that the money will have to be approved by Congress as part of the annual appropriations process, while "mandatory" means the spending is automatic.

Then-House Minority Leader John A. Boehner, R-Ohio, said the $115 billion estimate for discretionary spending costs "provides ample cause for alarm" and would nearly wipe out "the purported deficit reduction in the law."

But much of that $115 billion is for existing programs and reflects current spending levels. Among those programs are the Indian Health Service, the National Health Service Corps and community health centers.

CBO estimated that spending for existing programs, including those three, would account for at least $86 billion of the $115 billion in discretionary funding. Presumably Republicans would be less likely to go after that money.

But that still leaves a pretty big chunk of change. Prominent among the remaining discretionary spending needs under the law is money for the Department of Health and Human Services and the Internal Revenue Service to implement the measure.

If the agencies don't get it, implementation could be delayed.

CBO noted earlier this year that "the administrative and other costs for federal agencies to implement the act's provisions will be funded through the appropriations process; sufficient discretionary funding will be essential to implement this legislation in the time frame called for."

CBO said the IRS will need $5 billion to $10 billion over 10 years to implement "the eligibility determination, documentation and verification processes for premium and cost-sharing credits."

HHS will need at least that much to make changes under the law to Medicare, Medicaid, the Children's Health Insurance Program and the private insurance market, CBO added.

A former GOP congressional aide noted that Democrats will be trying to get discretionary funding for those agencies in March after a stopgap spending measure has just run out and Congress is beginning to turn its attention to debating a budget resolution.

Discussions of another bill to continue funding of the government, including implementation money for HHS and IRS, "will be closer and closer to the budget debate, which is going to be so framed by the debt limit," the former aide commented. "The electorate is so engaged about the size of the debt right now. I think it's one of many things that will be a difficult negotiation" for Democrats, the aide said.

White House officials wouldn't comment specifically on the difficulty of getting implementation money for HHS and the IRS. "We look forward to working with Congress to get the funding necessary to implement the programs and initiatives critical to the American people," said Kenneth Baer, communications director at the White House Office of Management and Budget.

The Congressional Research Service (CRS) has issued reports detailing both the discretionary and mandatory spending provisions of the health law.

A number of discretionary items seek "to address concerns about the current size, specialty mix, and geographic distribution of the health care workforce," the Sept. 2 CRS report on discretionary funding noted.

The administration says more doctors will be needed to meet the health care needs of the newly insured. But Republicans may block the expansion of treatment capacity if they block the discretionary funding required.

The report lists other discretionary items such as improvements in measuring and reporting quality of care; disseminating innovative strategies for improving health care; improving the coordination of care for people with chronic illnesses; and combining primary care and mental health care services so they are located in the same treatment centers. They also include programs to prevent elder abuse; expand trauma services; better coordinate emergency services; and test alternatives to the current medical malpractice litigation system.

By Rebecca Adams, CQ HealthBeat Associate Editor

December 20, 2010 -- An explosion of health information technology investments driven by three government policies will be the most significant issue for the health care industry in 2011, according to an analysis by the Health Research Institute of PricewaterhouseCoopers LLP (PwC).

Hospitals, physicians and other providers are likely to establish or expand their health IT systems because of the three Department of Health and Human Services (HHS) policies. The most important is a Medicare and Medicaid bonus payment system in 2011 for providers who upgrade electronic health records and other health IT systems. Medical providers can get higher Medicare or Medicaid rates if they meet criteria spelled out in regulations published in July.

In October, the HHS Office of the National Coordinator for Health Information Technology took a step in assisting providers who want to update their systems when it published a list of technology products that it certified as eligible for the Medicare and Medicaid bonuses.

Health insurers and providers also will be preparing for a new coding system required by federal regulations that will take effect starting in 2012. The new coding system, known as ICD-10, will add five times as many diagnosis and inpatient codes as in the current system. Converting to a new system will require more than 1,300 modifications that must be made by January 2012, according to the Health Research Institute report.

The Food and Drug Administration will add to the momentum for health IT investments. The agency will probably finalize rules for the reporting of deaths and injuries caused by medical devices in 2011. The rules are expected to encourage manufacturers and healthcare facilities to use a federal electronic portal instead of paper to file reports of adverse events.

More than $88.6 billion was spent by providers in 2010 on developing and implementing electronic health records and other health IT initiatives, the report said. Next year, industry analysts predict that health IT and consulting vendors will see a 10 percent to 20 percent rise in revenues.

The increase in health IT expenses could lead to an increase in mergers and acquisitions, according to the report. Facilities that are considering a merger or acquisition will have more reason to pursue one because of higher health IT costs.

Other major issues for the industry in 2011 include:

• Medical loss ratio and health exchange requirements for insurers. The health care law requires health plans to spend 80 percent to 85 percent of premiums on benefits or give customers a rebate. States also are expected to begin work on insurance exchanges that the law requires to open in 2014. Both issues will require major changes to insurers' business activities in 2011.
• Accountable care organizations (ACOs). Medical providers will start preparing to join networks joining hospitals, physicians and other providers that are designed to improve the efficiency and effectiveness of medical care. Providers would be able to share in any savings they produce through increased coordination.
• Mergers and acquisitions. Analysts at PwC predict a continued increase in mergers and acquisitions, particularly in midmarket transactions valued at $100 million to $500 million.
• Mobile health care applications. Health care organizations, including drug companies, are seeking to increase patients' interest in their products and influence medical outcomes through digital and mobile phone applications or ads.

By Jane Norman, CQ HealthBeat Associate Editor

December 20, 2010 -- Health and Human Services Secretary Kathleen Sebelius said that "there is no going back" when it comes to the health care overhaul, warning that repeal would cost jobs in an uncertain economy, drive up health care costs, and endanger the lives of those who run up against benefit caps.

In a conference call with regional reporters, Sebelius also declined to endorse any alternatives to the requirement that all Americans have insurance, which is under attack in legal challenges. A federal judge in Virginia on Dec. 13 ruled the individual mandate unconstitutional, although judges in two other lawsuits have upheld it.

Sebelius' remarks came following that Virginia ruling as well as oral arguments in a multistate suit in Florida on Dec. 16 in which a federal judge appeared sympathetic to opponents of the law. In addition, Republicans about to take control of the House continue to push for repeal, and though that is not likely, they are expected to try to strip the law's funding and rework specific provisions. Rep. Phil Gingrey, R-Ga., vowed recently to "absolutely pull the plug" on spending.

As HHS seeks to bolster public perception of the law, Sebelius will hold another press event Tuesday morning at which she will announce "efforts to bring unprecedented transparency and accountability to the health insurance market." That is widely expected to be an announcement of details of a regulation that lays out a process for federal review of premium increases, as authorized under the health care law. The regulation has been under review at the Office of Management and Budget.

Sebelius in the call warned that repeal would lead to continued private insurance company dominance of health care. "We know that there are some across the country and some who will be new members of Congress who are coming to town, declaring that their number one goal is to eliminate the benefits and put insurance companies back in charge," she said.

"I think it's important that folks understand that there is no going back," said Sebelius. "We can't return to the days when over the last 10 years insurance charges went up 131 percent and people have less coverage and less options."

A repeal of the law would mean a return to a time when insurance companies could place annual limits on payouts of health care benefits, she said. It could also bring back lifetime caps "that I've heard directly from parents and others that put people in a life-or-death situation," said Sebelius.

Repeal would make it harder to find a doctor because it would cut new funding for underserved communities and affect job creation as well, she said.

It would mean that instead of the investment we're making in new community health centers across the country to double the number of patients that are able to be served, we would stop those new jobs and new services, bring that construction to a halt, make it tougher for people in the most underserved areas to actually access health care," Sebelius warned.

Rather than making insurance more affordable and available, "repeal would make sure that insurance was even further out of reach and that our costs continue to skyrocket," she said.

But Republicans say that the anticipated burden of the health care law on employers is keeping employers from expansions and job creation. "Right now, small businesses across the land are in desperate fear, " said Rep. John Fleming, R-La., in recent special orders organized by the House GOP Doctors Caucus. "I would say that the largest cause of this is health care, the health care reform."

Sebelius, asked about proposals by Nebraska Sen. Ben Nelson that would replace the individual mandate with financial incentives to buy insurance, Sebelius was skeptical.

Nelson wants to take an approach advocated by two Republicans—Leslie Norwalk, who ran Medicare and Medicaid under President George W. Bush, and Gail Wilensky, who ran the programs under President George Bush.

Both have noted that the "Part B" doctor care and "Part D" prescription drug parts of Medicare are voluntary but that a high percentage of seniors sign up as soon as they are eligible because they must pay much higher premiums if they delay enrolling.

Sebelius did not endorse the Nelson approach and said she has not seen specific language from him. "I think we're likely to see, you know, a variety of opinions as we travel toward the Supreme Court," she said. "The mandate, as you know, doesn't even become effective until 2014."

She added, "As Sen. Nelson knows very well, because he is a former insurance commissioner, as I am, right now the real promoters of the personal-responsibility initiative were often the insurance companies." Insurers have said repeatedly that the requirement is needed so that enough healthy people are in the insurance pool to balance out the claims of the sick.

Sebelius said she agrees the individual mandate is necessary. "It's like, you know, allowing people to buy car insurance only after they have a wreck," Sebelius said. "That market would quickly, I think, disintegrate and dissolve."

By Jane Norman, CQ HealthBeat Associate Editor

December 22, 2010 -- Medicare officials again were touting the benefits of the health care law for seniors—and a recent poll shows their attempts might be having some success in winning over what has been a highly skeptical segment of the population.

A month-by-month tracking poll conducted by the Kaiser Family Foundation on the health care law (PL 111-148, PL 111-152) has consistently found that seniors with an unfavorable view of the law outnumber those with a favorable view. But in the December poll, the percentage of people older than 65 who answered "unfavorable" when asked about their opinion of the law hit its lowest point since the measure's passage—40 percent.

Seniors have been wary of the law in large part because of its reductions in Medicare spending for provider services—though supporters say the reductions won't harm beneficiaries—and cuts in the Medicare Advantage private insurance program.

To combat that perception, the Centers for Medicare and Medicaid Services (CMS) spent $3 million this summer on an ad campaign featuring TV star Andy Griffith praising the new law, a move met with intense criticism from Republicans.

In addition, Obama administration officials throughout the year have repeatedly talked up new benefits for seniors, such as the $250 checks in 2010 for those who hit the prescription drug "doughnut hole," reduced prices for prescription drugs next year for those in the doughnut hole and efforts to root out Medicare fraud and waste.

On Wednesday, CMS Administrator Donald M. Berwick in a conference call with reporters pounded away at the health care message. He urged seniors to sign up for a Medicare prescription health or drug plan prior to the Dec. 31 deadline for open enrollment. "This year, as a result of the new health care law, there's more in it for people with Medicare," he said. Free annual wellness checkups are on the way in 2011, he added.

The administration's PR effort may be working.

In Kaiser's December tracking poll, the percentage of seniors surveyed who said they had an "unfavorable" view of the law showed a clear decline. In April, 56 percent had an unfavorable view, and it hit 53 percent in August. By December, it shrank to 40 percent.

The percentage with a favorable view has stayed more stable. It was at 34 percent in December compared with 32 percent in April.

The tracking poll also showed that many more seniors seem undecided now when it comes to what to think about the law, with 26 percent in December declining to state an opinion compared with just 12 percent in April and 16 percent in November.

In addition, Kaiser said 39 percent of those polled ages 65 and older said the Medicare program will be worse off under the health care law—a drop from 43 percent who responded that way in July. There were 22 percent who said it will be better.

The Kaiser Health Tracking Poll was conducted Dec. 1 through Dec. 6 among a nationally representative random sample of 1,207 adults ages 18 and older. The margin of sampling error is plus or minus 3 percentage points. The margin of error may be higher in subgroups.