WSR 97-01-136
PROPOSED RULES
INSURANCE COMMISSIONER'S OFFICE
[Filed December 19, 1996, 11:47 a.m.]
Continuance of WSR 96-24-103.
Preproposal statement of inquiry was filed as WSR 96-17-080.
Title of Rule: Criteria for determining when the benefits provided in a contract are and are not reasonable in relation to the amount charged by health carriers as regulated under RCW 48.44.010(3) and 48.46.020(1).
Purpose: This filing replaces the proposed rule filed as WSR 96-24-103 on December 4, 1996. This proposed rule differs from the previous filing in that it does not apply to disability insurers, whose financial structure may not lend itself to a full cost-of-service analysis. These criteria do not apply to Medicare supplement and long-term care products of health care service contractors and health maintenance organizations whose rates are governed by other rules. This rule allows those who submit rate filings to know what to plan for and what to expect and helps to make the process fair, credible and understandable for all who are affected by the rate decisions. The criteria help make the rate review process uniform among health carriers.
Other Identifying Information: Insurance Commissioner Matter No. R 96-7.
Statutory Authority for Adoption: RCW 48.02.060, 48.44.020(2), 48.44.050, 48.46.060(3), and 48.46.200.
Statute Being Implemented: RCW 48.44.020, 48.47.060.
Summary: Washington statutes state that the Insurance Commissioner may disapprove a health benefit contract or agreement on the grounds that the benefits are unreasonable in relation to the amount charged. They further state that contracts and agreements shall be submitted for approval to the commissioner and the rates of any such plans shall be reasonable in relation to the benefits.
Reasons Supporting Proposal: The historical approach to determining when the benefits provided in a contract were reasonable was a fixed "loss ratio" test established in 1981. This test was repealed as outdated and no longer meaningful. Many carriers have requested a replacement for the repealed regulation. While it is possible for the commissioner's staff to evaluate the reasonableness of contracts filed by health carriers in the absence of published criteria, an explicit set of criteria adopted as a rule will make the process of evaluating rate filings more efficient and equitable. Such a set of criteria allows those who submit rate filings to know what to plan for and what to expect and helps to make the process fair, credible and understandable for all who are affected by the rate decisions. The criteria help make the rate review process uniform among health carriers.
Name of Agency Personnel Responsible for Drafting: Bethany Weidner, Olympia, Washington, (360) 664-2532; Implementation and Enforcement: Ida Zadrow, Olympia, Washington, (360) 407-0197.
Name of Proponent: Deborah Senn, Insurance Commissioner, public, and governmental.
Rule is not necessitated by federal law, federal or state court decision.
Explanation of Rule, its Purpose, and Anticipated Effects: The rule establishes criteria for evaluating reasonableness based on three types of charges that are included in premiums. Carriers must demonstrate that they have accounted for and allocated the following cost elements in a reasonable and verifiable manner: (1) Expected value of all future claims costs; (2) prudently incurred nonclaims costs; and (3) contribution to surplus, considering investment income and the level of surplus available to the carrier.
The purpose of this proposed rule is to fulfill the statutory requirement that the commissioner ensure that health plan charges are reasonable. The impact of the rule will be to make the evaluation process clearer, simpler, and fairer to all affected by health plan rate changes.
Note: The hearing for this rule replaces the hearing previously scheduled for January 13, 1996. The January 13, 1996, hearing is canceled.
Proposal does not change existing rules.
A small business economic impact statement has been prepared under
chapter 19.85 RCW.
(a) Is the rule required by federal law or federal regulation? No.
(b) What industry is affected by the proposed rule? The industry code that would be affected by this rule includes Hospital and Medical Service Plans, industry code #6324. In Washington, such plans are called health care service contractors (HCSCs) and health maintenance organizations (HMOs).
(c) List the specific parts of the proposed rule, based on the underlying statutory authority (RCW section), which may impose a cost to businesses. Most rates filed by health care service contractors (HCSCs) and health maintenance organizations (HMOs) are currently subject to review by the commissioner. The commissioner has the statutory authority to disapprove these rates if the benefits provided therein are "unreasonable in relation to the amount charged" (RCW 48.44.020 (2)(d) and 48.46.060 (2)(d)). Although rate analysts for the Office of the Insurance Commissioner evaluate rates based on criteria included in this proposed rule, the commissioner believes it is important to set forth the standards used in a rule. The purpose of this proposed rule is to set forth the criteria on which a rate filing is to be evaluated. The intended result is to achieve uniformity in the rate review process for all carriers, consistent with applicable statutes and regulations, standard actuarial practices, and standards for financial reporting.
Because rate filings are presently subject to review by the commissioner, this rule does not impose new direct costs on the carriers; however, the commissioner recognizes the potential for costs associated with the time required to read and comprehend the new rule. The goal of this impact statement is to determine whether this potential cost would disproportionately affect smaller carriers doing business in Washington state.
(d) What will be the compliance costs for industries affected? The intent of the proposed rule is to set forth in rule a consistent set of criteria on which to evaluate rate increases proposed by HCSCs and HMOs. These proposed criteria will be used by the OIC to determine whether a proposed rate increase is unreasonable in relation to benefits. The commissioner recognizes the potential for costs associated with the time required to read and comprehend the new rule; however, this would be a cost associated with any rule establishing criteria pursuant to RCW 48.44.020 (2)(d) and 48.46.060 (2)(d).
(e) What percentage of the industries in the four-digit standard industrial classification will be affected by the rule? This proposed rule would affect one hundred percent of the HCSCs and HMOs that request rate increases for health benefit plans subject to OIC rate regulation under RCW 48.44.020 and 48.46.060.
(f) Will the rule impose a disproportionately higher economic burden
on small businesses within the four-digit classification? In order to
evaluate the effects of this proposed rule on large and small HCSCs and
HMOs, it is important to recognize the varying structure of the carriers
within the industry. Tables 1 and 2 (shown below) describe the types of
health benefit plans that are currently offered by the largest and
smallest HCSCs and HMOs in Washington state. The carriers will remain
anonymous to maintain confidentiality. Of the smallest carriers
described in Table 1, 50% exclusively offer health plans that are not
subject to this proposed rate review rule (e.g. Medicaid plans, Medicare
supplement plans). Thus, if these carriers continue offering these same
types of plans, they would not be affected by the proposed rule.
Conversely, all of the largest six carriers described in Table 2 offer
plans that are subject to rate review by the commissioner and would be
subject to this proposed rule. Due to the types of benefit plans small
carriers choose to offer, many are effectively excluded from the
requirements of this proposed rule. Thus, this proposed rule does not
appear to disproportionately burden smaller HCSCs and HMOs.
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* carrier intends to market individual and group plans in the future.
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(g) Can mitigation be used to reduce the economic impact of the rule on small businesses and still meet the stated objective of the statutes which are the basis of the proposed rule? Potential costs of this rule have been reduced (see (i)) to a negligible amount.
(h) What steps will the commissioner take to reduce the costs of the rule on small businesses? The commissioner will ensure that no extraneous requirements are included in the rule. Also, see part (i) for more information.
(i) Which mitigation techniques have been considered and incorporated into the proposed rule? Based on written comments from and discussions with representatives of HCSCs and HMOs, the commissioner eliminated several provisions from the proposed rule that would have required carriers to provide sample rates for a specified benefit level for each major product. Elimination of these provisions has reduced the analytical work and paperwork required to comply with the proposed rule. On November 19th, carriers were invited to a meeting to discuss issues regarding the proposed rule. A previous version of the rule would have included disability insurers in its scope. After reviewing comments from persons affected by the rules, the original rule was amended to exclude disability insurers and a new CR-102 and amended rule were proposed.
(j) Which mitigation techniques were considered for incorporation into the proposed rule but were rejected, and why? The drafting staff considered including a formula to be used by carriers to determine when a rate increase would be judged reasonable, but this was rejected on the grounds that: (i) Such a formula would not implement the statutory requirement that a rate increase or decrease request be evaluated on the basis of the charges being reasonable in relation to benefits and (ii) such a formula would be a "cookie-cutter" approach that might disadvantage one type of carrier versus another.
(k) Briefly describe the reporting, record-keeping, and other compliance requirements of the proposed rule. The rate review criteria are designed to be consistent with applicable statutes and regulations, standard actuarial practices, and standards for financial reporting. It is not the intent of this rule to require record keeping that is not consistent with the standard practice and sound financial management of health carriers. Specific reporting requirements will be described under a separate rule.
(l) List the kinds of professional services that a small business is likely to need in order to comply with the reporting, record-keeping, and other compliance requirements of the proposed rule. In the event an HCSC or HMO has difficulty comprehending the intent of the proposed rule, the Insurance Commissioner will make resources available to assist the carrier in understanding and complying with the proposed rule. This is consistent with the OIC's current approach to rate filing by carriers.
(m) Analyze the cost of compliance including, specifically:
Cost of equipment: No additional cost of equipment expected.
Cost of supplies: No additional cost of supplies expected.
Cost of labor: Firms may possibly need to hire consulting labor to assist them in making their initial filing under the revised criteria.
Cost of increased administration: No additional cost of increased administration expected.
(n) Compare the cost of compliance for small business with the cost
of compliance for the largest businesses in the same four-digit
classification, using one or more of the following (as specifically
required by RCW 19.85.040 (1)(a), (b), and (c)). HCSCs and HMOs offering
individual and group plans based on standard, nonnegotiated rates are
currently subject to community rating statutes (RCW 48.44.022, 48.44.023,
48.46.064, and 48.46.066). Rate proposals for all state and federally
funded plans are subject to appropriate state and federal regulation.
The target of the proposed rate review rules is to provide a consistent
set of criteria for all plans under the jurisdiction of the OIC. One
need for the rule is to evaluate merit pooling rates as thoroughly as
rates of different types of plans. It is important to note the structure
of the smallest and largest carriers described in Tables 3 and 4 (shown
below). Again, the carriers will remain anonymous to maintain
confidentiality. Although 50% of the smallest carriers offer individual
and group plans that are subject to rate review by the OIC, these small
carriers market very few large group policies, and none of these policies
are based on merit pools. Conversely, large carriers earn the largest
percentage of the premiums from large group plans that include plans
based on merit pool rates. Also, as described in part (f), if carriers
were to continue providing the types of plans they are now marketing,
only half of the small carriers would be affected by this rule while all
of the large carriers would be impacted by the proposed rule.
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* carrier intends to market individual and group plans in the future
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* Beginning January 1, 1996, it became a statutory requirement to use community rating for small groups (groups with under fifty members). This particular carrier combined small and large groups and rated these groups together prior to 1996, thus no data disaggregated by group type is available before this year.
(o) Have businesses that will be affected been asked what the economic impact will be? Yes. All carriers were informed of the commissioner's intent to draft a rule regarding rate review criteria for all health carriers in August 1996. The CR-101 for this rule was filed on August 21st of this year. All carriers were sent copies of the proposed rule on November 8, 1996, and were asked to provide comments regarding this proposed rule to the commissioner. On November 19th, carriers were invited to a meeting to discuss issues regarding the proposed rule. A CR-102 was filed on December 4, 1996, that included a proposed rule. That rule would have included disability insurers in its scope. After reviewing comments from persons affected by the rule, the original rule was amended to exclude disability insurers and a new CR-102 and amended rule were filed December 19, 1996.
(p) How did the commissioner involve small businesses in the development of the proposed rule? All small HCSCs and HMOs were invited to provide feedback to the commissioner regarding the intent to draft a rule pertaining to rate review standards in August of 1996. Also, all small carriers were sent copies of the draft rule on November 8, 1996 and asked to provide comments to the commissioner. All small carriers were also invited to participate in a meeting to discuss issues related to this rule held on November 19, 1996. The commissioner also notified the Washington Health Extra, a newsletter distributed to many small carriers, and information about the rule and the meeting appeared in the issue published the first week of November.
(q) How and when were affected small businesses advised of the proposed rule? Small carriers were advised of the proposed rule in writing on November 8, 1996. Also, see parts (o) and (p) for more details.
A copy of the statement may be obtained by writing to Kacy Brandeberry, P.O. Box 40255, Olympia, WA 98504-0255, e-mail inscomr@aol.com, phone (360) 664-3790, FAX (360) 586-3535. Please specify that you are requesting a copy of the amended small business economic impact statement for Rule 96-7.
Section 201, chapter 403, Laws of 1995, does not apply to this rule adoption. These rules are not significant legislative rules, as defined at RCW 34.05.328 (5)(c)(iii).
Hearing Location: General Administration Building, 1st Floor Auditorium, 11th and Columbia, Olympia, Washington, on January 23, 1997, at 10:00 a.m.
Assistance for Persons with Disabilities: Contact Steve Carlsberg, TDD (360) 664-3154, by January 22, 1997.
Submit Written Comments to: Kacy Brandeberry, P.O. Box 40255, Olympia, WA 98504-0255, Internet e-mail inscomr@aol.com, FAX (360) 586-3535, by January 22, 1997.
Date of Intended Adoption: February 6, 1997.
December 19, 1996
Deborah Senn
Insurance Commissioner
SUBCHAPTER G
CRITERIA FOR REASONABLENESS OF HEALTH PLAN RATES
NEW SECTION
WAC 284-43-700 Demonstration that benefits provided are reasonable in relation to the amount charged for a contract per RCW 48.44.020 (2)(d) and 48.46.060 (3)(d). (1) For the purposes of this section, a health benefit plan is a contract (including dental-only and vision-only plans) of a health care service contractor or health maintenance organization offered by a health care service contractor or health maintenance organization to provide, arrange, reimburse, or pay for health care services, except the following: Long-term care insurance (governed by chapter 48.84 RCW), and Medicare supplemental health insurance (governed by chapter 48.66 RCW).
(2) The commissioner can disapprove a health care service contractor's or health maintenance organization's health benefit plan if the benefits provided therein are unreasonable in relation to the amount charged for the contract. A rate is reasonable in relation to benefits if it is based on the following four elements:
(a) An actuarially sound estimate of the expected value of all future claims costs associated with the filing. Claims costs and capitation expenses or staff expenses used in the actuarial estimate should recognize, as applicable, the savings associated with managed care provisions used with new or revised products. Such managed care provisions may include provider discounts associated with network changes; global contracts for procedures; utilization review activities and other types of professional or institutional utilization management.
(b) An actuarially sound estimate of all prudently incurred claims settlement expenses, operational and administrative expenses that are reasonably allocated to the filing.
(c) A reasonable, expected cost of capital or contribution to surplus to the extent not offset by investment income and other income and considering the level of unassigned surplus available to the carrier.
(d) When a carrier files rates with the commissioner, it must demonstrate that it has accounted for and allocated each of these costs in a reasonable and verifiable manner so that the commissioner can determine whether the proposed rates satisfy the requirements of RCW 48.44.020 and 48.46.060.
(3) For purposes of this section, equity or net worth shall be
computed under statutory accounting principles ("SAP"), which must be
reconciled to the books and records of the company. However, at the
carrier's option or in the case of a not-for-profit company, the
carrier's statutory surplus may be used instead. In the absence of a
reasonable means to allocate equity or unassigned surplus to specific
products or groups of products, the equity calculation and related cost
of capital calculation will be made on a total company basis. The rate
therein derived will be assigned to the contract filing at issue.
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