The Affordable Care Act (ACA) brought an unprecedented level of scrutiny and transparency to health insurance rate increases. The ACA ensures that any proposed rate increase of 15% or more by an insurer in the individual or small group market will be scrutinized by independent experts to make sure it is justified. This analysis will help moderate premium hikes and lower costs for individuals, families, and businesses that buy insurance in these markets. Additionally, insurers must provide easy to understand information to their customers about their reasons for rate increases above a certain amount, as well as publicly justify and post on their website any unreasonable rate increases. These steps allow consumers to know why they are paying higher rates.
Unreasonable Rate Increase
When CMS reviews a rate increase that is subject to review, CMS will determine that the rate increase is an unreasonable rate increase if the increase is an excessive rate increase, an unjustified rate increase, or an unfairly discriminatory rate increase.1
The rate increase is an excessive rate increase if the increase causes the premium charged for the health insurance coverage to be unreasonably high in relation to the benefits provided under the coverage. In determining whether the rate increase causes the premium charged to be unreasonably high in relationship to the benefits provided, CMS will consider:
(1) Whether the rate increase results in a projected medical loss ratio below the Federal standard in the applicable market to which the rate increase applies, after accounting for any adjustments allowable under Federal law;
(2) Whether one or more of the assumptions on which the rate increase is based is not supported by substantial evidence; and
(3) Whether the choice of assumptions or combination of assumptions on which the rate increase is based is unreasonable.
The rate increase is an unjustified rate increase if the health insurance issuer provides data or documentation to CMS in connection with the increase that is incomplete, inadequate or otherwise does not provide a basis upon which the reasonableness of an increase may be determined.
The rate increase is an unfairly discriminatory rate increase if the increase results in premium differences between insureds within similar risk categories that:
(1) Are not permissible under applicable state law; or
(2) In the absence of an applicable state law, do not reasonably correspond to differences in expected costs.
1See 45 CFR 154.205
Effective Rate Review Program
CMS encourages states to conduct rate review and has worked with states to strengthen their programs. A state with an Effective Rate Review Program must conduct reviews of proposed rate increases at or above the applicable threshold (currently 15%), but if a state lacks the resources or authority to conduct the required reviews, CMS will review the rates for compliance.
CMS will determine whether a state has an Effective Rate Review Program for each market based on all available information. CMS reserves the right to evaluate from time to time whether, and to what extent, a state's circumstances have changed such that it has begun to or has ceased to satisfy the required criteria.
In evaluating whether a state has an Effective Rate Review Program, CMS will apply the following criteria for the review of rates for the small group market and the individual market, and also, as applicable depending on state law, the review of rates for different types of products within those markets:2
(1) The state receives sufficient data and documentation from issuers to conduct the required examination of rate increases.
(2) The state conducts an effective and timely review of the data and documentation submitted by a health insurance issuer in support of a proposed rate increase.
(3) The state's rate review process includes an examination of:
(i) The reasonableness of the assumptions used by the health insurance issuer to develop the proposed rate increase and the validity of the historical data underlying the assumptions.
(ii) The health insurance issuer's data related to past projections and actual experience.
(iii) The reasonableness of assumptions used by the health insurance issuer to estimate the rate impact of the reinsurance and risk adjustment programs under sections 1341 and 1343 of the Affordable Care Act.
(iv) The health insurance issuer's data related to implementation and ongoing utilization of a market-wide single risk pool, essential health benefits, actuarial values and other market reform rules as required by the Affordable Care Act.
(4) The examination must take into consideration the following factors to the extent applicable to the filing under review:
(i) The impact of medical trend changes by major service categories.
(ii) The impact of utilization changes by major service categories.
(iii) The impact of cost-sharing changes by major service categories, including actuarial values.
(iv) The impact of benefit changes, including essential health benefits and non-essential health benefits.
(v) The impact of changes in enrollee risk profile and pricing, including rating limitations for age and tobacco use under section 2701 of the Public Health Service Act.
(vi) The impact of any overestimate or underestimate of medical trend for prior year periods related to the rate increase.
(vii) The impact of changes in reserve needs;
(viii) The impact of changes in administrative costs related to programs that improve healthcare quality;
(ix) The impact of changes in other administrative costs;
(x) The impact of changes in applicable taxes, licensing or regulatory fees.
(xi) Medical loss ratio.
(xii) The health insurance issuer's capital and surplus.
(xiii)The impacts of geographic factors and variations.
(xiv) The impact of changes within a single risk pool to all products or plans within the risk pool.
(xv) The impact of reinsurance and risk adjustment payments and charges under sections 1341 and 1343 of the Affordable Care Act.
(5) The state's determination of whether a rate increase is unreasonable is made under a standard that is set forth in State statute or regulation.
Public disclosure and input.
In addition to satisfying the provisions listed above, a state with an Effective Rate Review Program must provide:
(1) For proposed rate increases subject to review, access from its web site to at least the information contained in Parts I, II, and III of the Rate Filing Justification that CMS makes available on its web site (or provide CMS's web address for such information), and have a mechanism for receiving public comments on those proposed rate increases, no later than the date specified in guidance by the Secretary.
(2) Beginning with rates filed for coverage effective on or after January 1, 2016, for all final rate increases (including those not subject to review), access from its web site to at least the information contained in Parts I, II, and III of the Rate Filing Justification (as applicable) that CMS makes available on its web site (or provide CMS's web address for such information), later than the first day of the annual open enrollment period in the individual market for the applicable calendar year.
To determine whether a state met these standards, HHS reviewed all available documentation, and met with State regulators and their staff to verify the information and obtain any updates, CMS will continue to accept information from states and monitor state procedures and regulations in order to ensure correct classification. CMS can reevaluate the status of this list as changes are made in each state.
As of April 8, 2022, most states and the District of Columbia have an Effective Rate Review Program for the individual and small group markets. CMS reviews rates for both of those markets in Oklahoma and Wyoming until those states can meet Effective Rate Review criteria.