WSR 98-04-011

PERMANENT RULES

INSURANCE COMMISSIONER'S OFFICE

[Insurance Commissioner Matter No. R 97-2--Filed January 23, 1998, 3:27 p.m., effective March 1, 1998]

Date of Adoption: January 22, 1998.

Purpose: Adopt standards for filing of rates and forms for health care service contractors and health maintenance organizations to provide consistent and up-to-date guidelines for filing contract forms and rate schedules and to specify the standards to be used to determine when proposed premiums are not unreasonable in relation to benefits.

Citation of Existing Rules Affected by this Order: Repealing WAC 284-44-100, 284-44-110, 284-44-120, 284-44-130, 284-44-140, 284-44-150, 284-44-160, 284-44-190, 284-44-200, 284-44-210, and 284-44-220.

Statutory Authority for Adoption: RCW 48.02.060, 48.44.050, and 48.46.200.

Other Authority: RCW 48.44.020 (2)(d), 48.44.022, 48.44.023, 48.46.060 (3)(d) and (5), 48.46.064, and 48.46.066.

Adopted under notice filed as WSR 98-02-063 on January 7, 1998.

Changes Other than Editing from Proposed to Adopted Version: Definitions in WAC 284-43-910 (14) and (17) were amended for clarity. Changes were made in WAC 284-43-915 (3)(b) and (c) to increase clarity. WAC 284-43-920(4) was added to establish a method for carriers to receive notice of the commissioner's receipt of a filing. WAC 284-43-930(2) was changed to reduce perceived ambiguity. WAC 284-43-930 (2)(a)(i), (ii), and (iii) were changed to increase reporting flexibility for carriers and to reduce the costs and burden of filing. WAC 284-43-930(3) was changed to reduce possible ambiguity. WAC 284-43-930(5) was changed to relieve possible filing burdens. WAC 284-43-930 was amended to allow the commissioner to modify or waive filing requirements in unique circumstances or when they would cause an extraordinary administrative burden. The effective date of these rules was changed to March 1, 1998.

Number of Sections Adopted in Order to Comply with Federal Statute: New 0, amended 0, repealed 0; Federal Rules or Standards: New 0, amended 0, repealed 0; or Recently Enacted State Statutes: New 0, amended 0, repealed 0.

Number of Sections Adopted at Request of a Nongovernmental Entity: New 0, amended 0, repealed 0.

Number of Sections Adopted on the Agency's own Initiative: New 12, amended 0, repealed 11.

Number of Sections Adopted in Order to Clarify, Streamline, or Reform Agency Procedures: New 12, amended 0, repealed 11.

Number of Sections Adopted using Negotiated Rule Making: New 0, amended 0, repealed 0; Pilot Rule Making: New 0, amended 0, repealed 0; or Other Alternative Rule Making: New 12, amended 0, repealed 11.

Effective Date of Rule: March 1, 1998.

January 22, 1998

Deborah Senn

Insurance Commissioner

SUBCHAPTER I--HEALTH PLAN RATES

NEW SECTION

WAC 284-43-900 Authority and purpose. This subchapter is adopted under the general authority of RCW 48.02.060, 48.44.050, and 48.46.200. Its purpose is to provide guidelines for the implementation of RCW 48.44.020 (2)(d), 48.44.022, 48.44.023, 48.44.040, 48.46.060 (3)(d), 48.46.060(5), 48.46.064, and 48.46.066 as to the filing of contract forms by health care service contractors and health maintenance organizations and the calculations and evaluations of premium rates for these contracts.

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NEW SECTION

WAC 284-43-905 Applicability and scope. This subchapter applies to health benefit plans as defined in RCW 48.43.005(9), and contracts for limited health care services as defined in RCW 48.44.035(1), offered by health care service contractors and health maintenance organizations registered in this state under chapter 48.44 or 48.46 RCW. It applies to such plans purchased directly by individuals, small employers, and large employers, or other organizations.

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NEW SECTION

WAC 284-43-910 Definitions. For the purpose of this subchapter:

(1) "Adjusted earned premium" means the amount of "earned premium" the "carrier" would have earned had the "carrier" charged current "premium rates" for all applicable "plans."

(2) "Amount charged" means all sums charged, received, or deposited as consideration for a "contract" or "group contract" or the continuance thereof. An assessment or a membership, contract, survey, inspection, service, or similar fee or charge made by the carrier in consideration for a "contract" or "group contract" is considered part of the "amount charged."

(3) "Annualized earned premium" means the "earned premium" that would be earned in a twelve-month period if earned at the same rate as during the applicable period.

(4) "Anticipated loss ratio" means the "projected incurred claims" divided by the "projected earned premium."

(5) "Base rate" means the amount charged for a specific "plan," expressed as a monthly amount per "covered person or subscriber," prior to any adjustments for geographic area, age, family size, wellness activities, tenure, or any other factors as may be allowed.

(6) "Capitation expenses" means the amount paid to a provider on a per "covered person" basis, or as part of risk-sharing provisions, for the coverage of specified health care services.

(7) "Carrier" means a health care service contractor or health maintenance organization.

(8) "Certificate" means the statement of coverage document furnished "subscribers" covered under a "group contract."

(9) "Claim reserves" means the "claims" that have been reported but not paid plus the "claims" that have not been reported but may be reasonably expected.

(10) "Claims" means the cost to the "carrier" of health care services provided to a "covered person" or paid to or on behalf of the "covered person" in accordance with the terms of a "plan." This includes "capitation payments" or other similar payments made to "providers" for the purpose of paying for health care services for a "covered person."

(11) "Community rate" means the weighted average of all "premium rates" within a filing with the weights determined according to current enrollment.

(12) "Contract" means an agreement to provide health care services or pay health care costs for or on behalf of a "subscriber" or group of "subscribers" and such eligible dependents as may be included therein.

(13) "Contract form" means the prototype of a "contract" and any associated riders and endorsements filed with the commissioner by a health care service contractor or health maintenance organization.

(14) "Contribution to surplus, contingency charges, or risk charges" means the portion of the "projected earned premium" not associated directly with "claims" or "expenses," that in the case of investor owned companies, provide the carrier with a fair rate of return on investor-supplied capital commensurate with the risk assumed by the overall business of the carrier. In the case of a not-for-profit carrier, these are the portion of the "projected earned premium" that provide assurance of the carrier's solvency.

(15) "Covered persons" means all "subscribers" and their eligible dependents.

(16) "Current community rate" means the weighted average of the "community rates" at the renewal or initial effective dates of each plan for the year immediately preceding the renewal period, with weights determined according to current enrollment.

(17) "Current enrollment" means the monthly average number and demographic make-up of the "covered persons" for the applicable contracts during the most recent twelve months for which information is available to the carrier.

(18) "Earned premium" means the "amount charged" plus any rate credits or recoupments, applicable to an accounting period whether received before, during, or after such period.

(19) "Expenses" means costs that include but are not limited to the following:

(a) Claim adjudication costs;

(b) Utilization management costs if distinguishable from "claims";

(c) Home office and field overhead;

(d) Acquisition and selling costs;

(e) Taxes; and

(f) All other costs except "claims."

(20) "Experience period" means the most recent twelve-month period from which the carrier accumulates the data to support a filing.

(21) "Extraordinary expenses" means "expenses" resulting from occurrences atypical of the normal business activities of the "carrier" that are not expected to recur regularly in the near future.

(22) "Group contract" or "group plan" means an agreement issued to an employer, corporation, labor union, association, trust, or other organization to provide health care services to employees or members of such entities and the dependents of such employees or members.

(23) "Incurred claims" means "claims" paid during the applicable period plus the "claim reserves" as of the end of the applicable period minus the "claim reserves" as of the beginning of the applicable period. Alternatively, for the purpose of providing monthly data or trend analysis, "incurred claims" may be defined as the current best estimate of the "claims" for services provided during the applicable period.

(24) "Individual contract" means a "contract" issued to and covering an individual. An "individual contract" may include dependents.

(25) "Investment earnings" means the income, dividends, and realized capital gains earned on an asset.

(26) "Loss ratio" means "incurred claims" as a percentage of "earned premiums" before any deductions.

(27) "Medical care component of the consumer price index for all urban consumers" means the similarly named figure published monthly by the United States Bureau of Labor Statistics.

(28) "Net worth or reserves and unassigned funds" means the excess of assets over liabilities on a statutory basis.

(29) "Plan" means a "contract" that is a health benefits plan as defined in RCW 48.43.005(9) or a "contract" for limited health care services as defined in RCW 48.44.035(1).

(30) "Premium rate" means the "amount charged" per "subscriber" or "covered person" obtained by adjusting the "base rate" for geographic area, family size, age, wellness activities, tenure, or any other factors as may be allowed.

(31) "Projected earned premium" means the "earned premium" that would be derived from applying the proposed "premium rates" to the current enrollment.

(32) "Projected incurred claims" means the estimate of "incurred claims" for the rate renewal period based on the current enrollment.

(33) "Proposed community rate" means the weighted average of the "community rates" at the renewal dates of each plan for the renewal period, with weights determined according to current enrollment.

(34) "Provider" means any health professional, hospital, or other institution, organization, prescription drug vendor, or person that furnishes health care services and is licensed or otherwise authorized to furnish such services.

(35) "Rate renewal period" means the period for which the proposed "premium rates" are intended to remain in effect.

(36) "Rate schedule" means the schedule of all "base rates" for "plans" included in the filing.

(37) "Requested increase in the community rate" means the amount, expressed as a percentage, by which the "proposed community rate" exceeds the "current community rate."

(38) "Service type" means the category of service for which "claims" are paid, such as hospital, professional, dental, prescription drug, or other.

(39) "Small group contracts" or "small group plans" means the class of "group contracts" issued to small employers with no more than fifty eligible employees, including sole proprietors. "Small employer" is defined at RCW 48.43.005(13).

(40) "Staffing data" means statistics on the number of "providers" and associated compensation required to provide a fixed number of services or provide services to a fixed number of "covered persons."

(41) "Subscriber" means a person on whose behalf a "contract" or "certificate" is issued.

(42) "Unit cost data" means statistics on the cost per health care service provided to a "covered person."

(43) "Utilization data" means statistics on the number of services used by a fixed number of "covered persons" over a fixed length of time.

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NEW SECTION

WAC 284-43-915 Demonstration that benefits provided are not reasonable in relation to the amount charged for a contract per RCW 48.44.020 (2)(d) and 48.46.060 (3)(d). In addition to the requirements of RCW 48.44.022, 48.44.023, 48.46.064, and 48.46.066, where applicable:

(1) For individual and small group plans, benefits shall be found not to be unreasonable in relation to the amount charged if one or more of the following is true:

(a) The requested increase in the community rate is zero percent or less and the anticipated loss ratio is seventy percent or more; or

(b) The anticipated loss ratio is eighty percent or more and the requested increase in the community rate is not more than the applicable rate in the following table.

CPI* Maximum Rate Increase

7% or less CPI*+3%

7% to 10% 10%

10% or more CPI*

* CPI refers to the rate of increase in the medical care component of the consumer price index for all urban consumers.

(2) For group plans other than small group plans, benefits shall be found not to be unreasonable in relation to amount charged if the anticipated loss ratio is eighty percent or more.

(3) If the conditions of subsection (1) or (2) of this section are not met, benefits shall be found not to be unreasonable if the projected earned premium for the rate renewal period is equal to the following:

(a) An actuarially sound estimate of incurred claims associated with the filing for the rate renewal period, where the actuarial estimate of claims shall recognize, as applicable, the savings and costs associated with managed care provisions of the plans included in the filing; plus

(b) An actuarially sound estimate of prudently incurred expenses associated with the plans included in the filing for the rate renewal period, where the estimate shall be based on an equitable and consistent expense allocation or assignment methodology; plus

(c) An actuarially sound provision for contribution to surplus, contingency charges, or risk charges, where the justification shall recognize the carrier's investment earnings on assets other than those related to claim reserves or other similar liabilities; minus

(d) An actuarially sound estimate of the forecasted investment earnings on assets related to claim reserves or other similar liabilities for the plans included in the filing for the rate renewal period.

(4) The contribution to surplus, contingency charges, or risk charges in subsection (3)(c) of this section, shall not be required to be less than zero.

(5) For the purposes of this section, the rate of increase in the medical care component of the consumer price index for all urban consumers shall be measured by comparing the index for the month immediately preceding the month in which the filing is submitted to the index for the corresponding calendar month for the prior year.

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NEW SECTION

WAC 284-43-920 When a carrier is required to file. (1) Every contract form and any modification thereof, and every rate schedule and any change thereof shall be filed with the commissioner:

(a) Before being offered for sale to the public; and

(b) Within thirty days after the end of an eighteen-month period during which a previous filing has remained unchanged for such period, including contract forms filed prior to the effective date of this regulation.

(2) Filings of negotiated contract forms, and applicable rate schedules, that are placed into effect at time of negotiation or that have a retroactive effective date are not required to be filed in accordance with subsection (1)(a) and (b) of this section, but shall be filed within thirty working days after the earlier of:

(a) The date group contract negotiations are completed; or

(b) The date renewal premiums are implemented.

(3) An explanation for any filing delayed beyond the thirty-day period as described in subsection (2) of this section shall be given on the filing document as set forth in WAC 284-43-950.

(4) If a return copy of the filing is desired, it shall be submitted in duplicate. The duplicate copy will be stamped by the commissioner to indicate receipt of the filing and will be returned to the sender if a return self-addressed envelope is enclosed with the filing.

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NEW SECTION

WAC 284-43-925 General contents of all filings. Each filing required to be made pursuant to WAC 284-43-920 shall be submitted with the filing transmittal form prescribed by and available from the commissioner. The form will include the name of the filing entity, its address, identification number, the type of filing being submitted, the form name or group name and number, and other relevant information. Filings shall also include the information required on the filing summary set forth in WAC 284-43-945 for individual and small group plans and rate schedules or as set forth in WAC 284-43-950 for group plans and rate schedules other than those for small groups.

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NEW SECTION

WAC 284-43-930 Contents of individual and small group filings. Under RCW 48.44.022(3) and 48.46.064(3) the experience of all individual plans shall be pooled; and under RCW 48.44.023(3)(i) and 48.46.066(3)(i) the experience of all small group plans shall be pooled. Filings for individual plans shall include base rates for all individual plans and filings for small group plans shall include base rates for all small group plans. Each individual and small group filing shall include all of the following information and documents:

(1) An actuarially sound estimate of incurred claims. Experience data, assumptions, and justifications of the carrier's projected incurred claims shall be provided in a manner consistent with the carrier's rate-making methodology and incorporate the following elements:

(a) A brief description of the carrier's rate-making methodology, including identification of the data used and the kinds of assumptions and projections made.

(b) The number of subscribers by family size, or covered persons for the plans included in the filing. These figures shall be shown for each month or quarter of the experience period and the prior two periods if not included in previous filings. This data shall be presented in aggregate for the plans included in the filing and in aggregate for all of the carrier's plans.

(c) Earned premium for each month or quarter of the experience period and the prior two periods if not included in previous filings, for the plans included in the filing.

(d) An estimate of the adjusted earned premium for each month or quarter of the experience period and prior two periods for the plans included in the filing.

(e) Claims data for each month or quarter of the experience period and the prior two periods. Examples of claims data are, incurred claims, capitation payments, utilization data, unit cost data, and staffing data. The specific data elements included in the filing shall be consistent with the carrier's rate-making methodology.

(f) Documentation and justification of any adjustments made to the experience data.

(g) Documentation and justification of the factors and methods used to forecast incurred claims.

(2) An actuarially sound estimate of prudently incurred expenses. Experience data, assumptions, and justifications shall be provided by the carrier as follows:

(a) A breakdown of the carrier's expenses allocated or assigned to the plans included in the filing for the experience period or for the period corresponding to the most recent "annual statement";

(i) Health care service contractors shall provide an expense breakdown at least as detailed as the annual statement schedule "Underwriting and Investment Exhibit, Part 3, Analysis of Expenses" as revised from time to time;

(ii) Health maintenance organizations shall provide an expense breakdown at least as detailed as the "Annual Statement, Report #2: Statement of Revenues, Expenses and Net Worth," for administrative expenses as revised from time to time;

(iii) The allocation and assignment methodology used in (a)(i) or (ii) of this subsection may be based on readily available data and easily applied calculations;

(b) Identification of any experience period expenses that are extraordinary; and

(c) Documentation and justification of the assignment or allocation of expenses to the plans included in the filing; and

(d) Documentation and justification of forecasted changes in expenses.

(3) An actuarially sound provision for contribution to surplus, contingency charges, or risk charges. Assumptions and justifications shall be provided by a carrier as follows:

(a) The methodology, justification, and calculations used to determine the contribution to surplus, contingency charges, or risk charges included in the proposed base rates; and

(b) The carrier's net worth or reserves and unassigned surplus at the beginning of the experience period and at the end of the experience period.

(4) An actuarially sound estimate of forecasted investment earnings on assets related to claim reserves or other similar liabilities. The carrier shall include documentation and justification of forecasted investment earnings identified in dollars, and as a percentage of total premiums and the amount credited to the plans included in the filing.

(5) Adjustment of the base rate. Experience data, assumptions, justifications, and methodology descriptions shall be provided that include:

(a) Justifications for adjustments to the base rate, supported by data if appropriate, attributable to geographic region, age, family size, use of wellness activities, and tenure discounts;

(b) Justifications, supported by data if appropriate, of any other factors or circumstances used to adjust the base rates; and

(c) Description of the methodology used to adjust the base rate to obtain the premium rate for a specific individual or group, which is detailed enough to allow the commissioner to replicate the calculation of premium rates if given the necessary data.

(6) Actuarial certification. Certification by an actuary, as defined by WAC 284-05-060(1), that the benefits and services to be provided are reasonable in relation to the amount charged.

(7) The requirements of subsections (1) through (6) of this section may be waived or modified upon the finding by the commissioner that a plan contains or involves unique provisions or circumstances and that the requirements represent an extraordinary administrative burden on the carrier. An example of such a situation could include a plan offered by a relatively small carrier, where such plan has limited benefits and is designed to generate an unusually small premium.

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NEW SECTION

WAC 284-43-935 Experience records. (1) Every carrier shall maintain for each plan for the five most recent years, records of:

(a) Incurred claims;

(b) Earned premiums; and

(c) Expenses.

(2) Such records shall include data for rider and endorsement forms that are used with the contract forms. Separate data may be maintained for each rider or endorsement form as appropriate. Experience under contract forms that provide substantially similar coverage may be combined for recordkeeping purposes.

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NEW SECTION

WAC 284-43-940 Evaluating experience data. In determining the credibility and appropriateness of experience data, consideration shall be given to all relevant factors, including:

(1) Statistical credibility of the amount charged and services and benefits paid, such as low exposure, low loss frequency, and recoupment;

(2) Actual and projected trends relative to changes in medical costs and changes in utilization;

(3) The mix of business by risk classification; and

(4) Adverse selection or lapse factors reasonably expected in connection with revisions to plan provisions, services, benefits, and amount charged.

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NEW SECTION

WAC 284-43-945 Summary for individual and small group contract filings.

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NEW SECTION

WAC 284-43-950 Summary for group contract filings other than small group contract filings.

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NEW SECTION

WAC 284-43-955 Effective date. This subchapter shall become effective on March 1, 1998.

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REPEALER

The following sections of the Washington Administrative Code are repealed:

WAC 284-44-100 Authority and purpose.

WAC 284-44-110 Applicability and scope.

WAC 284-44-120 Definitions.

WAC 284-44-130 When filing is required.

WAC 284-44-140 General contents of all filings.

WAC 284-44-150 Experience records.

WAC 284-44-160 Evaluating experience data.

WAC 284-44-190 Unique contract forms.

WAC 284-44-200 Effective date.

WAC 284-44-210 "Filing document" form--Standard contract filing information.