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Obama Administration Rolls Out Proposed Rule on Insurance Market Changes

By Jane Norman, CQ HealthBeat Associate Editor

November 20, 2012 -- The long-anticipated next steps in a complicated regulatory dance involving the federal government, states, and health insurers were laid out by the Obama administration last week, and federal officials acknowledged that there is much more work ahead.

The 131 pages of proposed rules overhauling individual and small-group coverage in the health insurance market carry out the health care law's overarching aim of making sure that, beginning in January 2014, sick people who have been denied coverage in the past are able to buy health policies. And the states, which are responsible for regulating insurance, will have to adopt the Department of Health and Human Services regulations. States also will have to make sure that coverage is priced fairly and is accessible.

"These reforms are really at the heart of the Affordable Care Act," said Gary Cohen, director of the Center for Consumer Information and Insurance Oversight, in a noon call with reporters. The limitations of the current market are apparent, the rule notes: In 2011, only 10.8 million people were enrolled in the individual insurance market, while 48.6 million lacked insurance.

The comment period for the proposed rule ends Dec. 26, and Department of Health and Humans Services (HHS) officials say they understand the fears of insurers about the speed of this major transition and its impact on their bottom lines. "We solicit comments on additional strategies consistent with the Affordable Care Act that The Centers for Medicare and Medicaid Services (CMS) or states might deploy to avoid or minimize disruption of rates in the current market and encourage timely enrollment in coverage in 2014," the rule says. That could include a "transition period for certain policies," according to HHS.

Reaction from the insurance industry was not overly critical. "We appreciate that the proposed rules issued today seek to minimize coverage disruption, and we look forward to working with the department to achieve this goal," Karen Ignagni, president and CEO of America's Health Insurance Plans, which represents the industry, said in a written statement.

Under the law's mandate for guaranteed issue, insurers must cover any applicant who applies (only five states now authorize that in the individual market) and allow policyholders to renew as well. Insurers are no longer allowed to discriminate on the basis of pre-existing conditions; they are allowed to take only age, tobacco use, where someone lives and family composition into account.

Women can't be charged higher rates because of their gender or medical history. Most of the best selling plans today vary rates based on gender, says HHS.

Age, Tobacco Use, Geography

Within those broad parameters the proposed rules cover a staggering range of important and complex questions:

  • They maintain the 3 to 1 age band for premiums required under the law, though they allow ratings tied to age to rise year by year through a person's life, so premiums increase slowly and steadily and not when, for example, a five-year mark is hit. Still, a 64-year-old person can't pay more than three times as much as young person under the 3 to 1 rating specified in the law. All premium rates tied to age would be the same over 64. Insurers wanted the current 5 to 1 rating bands to remain in place.
  • They interpret the law to mean that the 3 to 1 age band was intended to apply only to adults age 21 and older, not children or teens. The bands are to be determined based on a policyholder's age at the time the policy is issued or renewed, though HHS says it will listen to comments on whether birthdays should be used instead.
  • They suggest that state high-risk pools created in the law be continued for some unspecified period beyond 2014 while insurers transition to the new system. The pools, which enrolled about 90,000 people nationally in September and have $5 billion in funding set to end in December 2013, are intended for use by individuals who can't obtain insurance easily because of their pre-existing conditions. "We are examining ways in which states could continue" the pools, HHS says.
  • They propose that each state can establish no more than seven rating areas within which premiums are set. The rating areas would apply equally to all non-grandfathered coverage in the individual and small group markets, inside or outside the health insurance exchanges.
  • They require insurers to submit data on their rates and proposed increases to the secretary of Health and Human Services. The secretary won't approve or reject such rate increases. The data will be used to monitor trends in health insurance, Cohen said. This is a change from an earlier rule laying out how the federal and state governments will review insurance rates. HHS estimates the administrative cost at $7,000 per insurer.
  • They propose that health insurers put all of their non-grandfathered business in the individual market in one single risk pool and all of the small-group business in a separate single risk pool. States could merge the two into a combined pool if they're seeking to spread risk more widely. Student health insurance coverage sold through colleges would be placed in the individual market pool, though HHS asks for comment on whether a separate pool for students should be kept.
  • They come down on the side of generating premium rates for employee and dependent coverage in the small-group market on a per-member basis. This way, factors that are allowed to figure in to the rate of premiums, like tobacco use, could be associated with specific employees and dependents.
  • With little clarity or consistency on how states now define tobacco use for rating purposes, regulators suggest that questions be asked about smoking when people apply for insurance through the exchanges.

Definitions of Family

In one area that may turn out to be tricky, regulators ask for comments on how to define which family members may be included on the same policy. Insurers now have "considerable flexibility" subject to federal and state laws, the rule says. Stepchildren, grandchildren, foster children and children under guardianship are sometimes included, sometimes not.

Officials also ask in the rule whether they should specify minimum categories of family members or whether to leave that question to states and insurers. But Cohen, in the call, said the intent is to leave this up to states. "We are not regulating on that," he said.

In more detail on guaranteed issue, the proposed rule says insurance companies must offer coverage to and accept any individual or employer in a state that applies for such coverage regardless of health risk, status or medical claims or costs, with limited exceptions. The insurance market rules apply to all non-grandfathered health coverage in a state market, they add. So even certain "closed blocks" of business would be available to new enrollees, again with a few exceptions, the rule says.

The proposal also acknowledges that insurers may incur some one-time fixed costs in the course of complying with the final insurance market rule, including administrative and marketing costs. HHS asks for information on the nature and magnitude of those costs, which insurers likely will be happy to provide. States also are asked to tally up their costs if they have to make changes related to age bands or geographic rating areas.

Figuring it all out

Health experts and groups spent a long afternoon trying to digest the details of the proposed rule, which was accompanied by two others, one on the law's wellness programs and another on exchanges.

The 3 to 1 age band is strongly disliked by insurers, who say it will drive up premiums for younger people and thereby lead them to pay penalties instead. But the senior advocacy group AARP praised both the idea and the way HHS is approaching it. "We understand the importance of stopping insurance companies from charging exorbitant premiums to older Americans, and this proposed rule will finally put limits on this discriminatory practice," Nancy LeaMond, executive vice president, said in a written statement.

But Ignagni of AHIP warned that "for health insurance exchanges and new insurance market rules to work, coverage needs to be affordable and there needs to be broad participation in the system." She said the age band "may incentivize young, healthy people to wait to purchase insurance until they are sick or injured, driving up costs for everyone with insurance."

Once the rule is final, states in the months ahead will have to adopt the federal standards so that their laws don't vary. In some states, insurance commissioners will be able to take many of these steps on their own to change regulations, but in other states it will take action by state lawmakers, health policy experts say.

The proposed rule says that states would continue to apply their own laws on insurance coverage. But if any state law conflicts with the federal law, that state law would be pre-empted, HHS says—though with the customary bow to states' rights. "Throughout the process of developing this proposed rule, CMS has attempted to balance the states' interests in regulating health insurance issuers and Congress' intent to provide uniform protections to consumers in every state," HHS says.

The rule is the second in major insurance changes required by the law. Earlier, in September 2010, as part of the health care law (PL 111-148, PL 111-152), the so-called Patient's Bill of Rights went into effect and allowed young adults up to age 26 to stay on their parents' insurance policies, banned lifetime limits on essential health benefits and ended the practice of rescission, in which insurers would drop people when they got sick.

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