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Medical costs no longer an excuse for large rate increases

December 16, 2011

We see it happen every year- health insurance plans ask for huge rate increases. The proposals then go to Health Insurance Commissioner Christopher Koller, who has the option of approving, rejecting, or modifying their requests.  In the end, the rate increase is usually less than the request, but it’s still an increase.

I’ve talked a lot about why health insurance rates go up every year. In short, it’s because the cost of medical care increases a lot faster than the rate of inflation. Sure, a portion of the increase goes to administrative costs and profits/reserves, but for the most part, insurers are just passing on the cost of medical services.

Here’s a chart with the average medical claims for small businesses, per member per month (PMPM) from 2008-2010-

Chart from the Office of the Health Insurance Commissioner

Between 2008 and 2010, those costs increased by 13%. If you average it out by year, it’s a 6.3% annual increase.

Here’s my favorite quote on health insurance rates, from former director of MA’s Health Connector, Jon Kingsdale-

It’s sort of like blaming the gas station because the price of gasoline has all of the sudden gone up by fifty percent. It’s similar economics,  most of the price you pay for gasoline is not what it costs the gas station to pump it, it’s the underlying cost of oil which the gas station has no control [over].

Well, Health Insurance Commissioner Christopher Koller won’t let  insurers use that fact as an excuse anymore.

Earlier in the month, Koller sent a letter to RI’s health insurance companies. He warned them that the Health Insurance Advisory Council is tired of seeing medical costs go up every year and it’s working on a system to slow down what they call the “medical expense trend.”

That system will probably involve restricting rate increases.  Koller’s letter offered this “guidance” to RI’s health plans-

…submit aggregate predicted medical trends for the 2012 rate factor filing (for the purposes of calculating 2013 rates) which do not exceed four percent for either small group or large group business.

Translation- when you file for a rate increase next year, don’t ask for more than a 4% increase to pay for medical costs.

How are insurers supposed to do this? After all, these increases reflect the cost of paying hospital/doctor/pharmacy bills.  Chris Koller says this “guidance” should affect health plan’s contracts with local health care providers on two fronts- the price health plans are willing to pay for  services and the quantity of services they’re willing to pay for. This means cutting down on unnecessary tests and treatments.  It’s unclear what those contracts will look like.

Basically, Koller’s main goal is to reduce the cost of health insurance in the state. He doesn’t have power over the hospitals or the doctors, who are closer to the source of rising medical costs, but he can put pressure on the insurance plans, who will in turn put pressure on the health care providers.

I’ve reached out to the health plans to see if they think this plan will work. So far, I’ve only heard back from Blue Cross Blue Shield of Rhode Island.  It gave me the letter Peter Andruszkiewicz, the President and CEO of BCBSRI, sent in response to Koller’s request.

Here are the most relevant parts of the letter-

As you know, the medical trend portion of any filing is complicated. It is comprised of both price (what is paid for a given medical service.procedure or drug) and utilization (how often those services/procedures and drugs are obtained by our members) for various categories of medical expense…

…as you are also aware, our ability to control the ‘price” component is limited. That component is tied directly to our negotiated agreements with providers. Some of these contracts are multi-year and cannot be modified to impact our filing in 2012.

As you know, our contracted rates are often impacted by outside forces such as the bargaining position of the providers. In addition, price is driven by the development of mew medical technologies and/or medications. The costs associated with these new developments are, for the most part, outside of our control….

Translation– a lot of these costs are out of our control. Even if we wanted to use our muscle to get cheaper services, some of those contracts won’t expire in time, and besides, we’re not as powerful as you think we are.

What do you think? Will this “guidance” help decrease the cost of health insurance in RI?

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