2011 WELLMARK RATE PROPOSAL
Issued December 30, 2011
The Iowa Insurance Division received an annual individual rate filing for Wellmark Blue Cross Blue Shield (Wellmark) on October 17, 2011. Wellmark has requested a 9.35% rate increase effective April 1, 2012 for four blocks of their individual health insurance business. Under Iowa law, health insurance carriers are allowed to place policyholders in groups with other policy holders for purposes of spreading risk and policy selection. The four blocks of business for which Wellmark is seeking a request represent different groups or policy forms. The four blocks of business are Pools 3, 4, 5 and Blue Transitions. The proposed premium rate increase for all the blocks of business will affect 48,814 policies.
Rate Filing and Review Procedure
Pursuant to a 2009 Executive Order, a rate filing shall receive an independent actuarial review to determine the adequacy and appropriateness of the proposed rate. The independent review is performed simultaneously as the Division in-house review. The Division maintains a list of independent actuarial firms and selected Magnum Actuarial Group of Hartland, Wisconsin. The reports of the Division actuaryand Magnum Actuarial Groupare available on the Division website.
In addition, Iowa Code section 505.19 requires the Commissioner to hold a public hearing on a proposed health insurance rate increase which exceeds the average annual health spending growth rate as published by the Centers for Medicare and Medicaid Services of the United State Department of Health and Human Services. The current rate is 6.1%. (For filings in 2012, the rate will be 5.8 %.) The Consumer Advocate for the Division solicits and receives public comments on the proposed health insurance rate increase. Those comments are posted online by the Iowa Insurance Consumer Advocate.
A hearing on the proposed rate was held Saturday, December 10, 2011 at 11:00 a.m. at the Urbandale Public Library in Urbandale, Iowa. Access to the hearing was made available at 12 state-wide locations via the Iowa Communications Network (ICN.) The Consumer Advocate presented public testimony on the comments she had received from consumers. The Commissioner took comments from policyholders and concerned citizens. Comments were received from citizens at the Urbandale Library and from all 12 state-wide ICN sites. Laura Jackson, a representative of Wellmark, spoke on behalf of the carrier and answered questions from the audience. The hearing lasted approximately 3 hours. A transcript of the hearing was posted online by the Iowa Insurance Consumer Advocate.
The Commissioner reviewed the actuarial reports from both the Division actuary and Magnum Actuarial Group. In addition, the Commissioner reviewed the comments made to her at the public hearing on December 10, 2011 and the hundreds of comments received through phone calls, mail and the internet to the Consumer Advocate. (The comments received along with the report of the Consumer Advocate are available online.) The Commissioner also consulted with financial and actuarial staff within the Division.
Background on Premium and Healthcare Costs
The Division’s Annual Report to the Iowa Governor and Iowa Legislature on Health Care costs shows that underlying health care expenditures are increasing. (A copy is available on the Division website.) Premiums are typically calculated based upon estimated health care claims so when health care expenditures increase so do premiums. As noted in the report for example, when the cost of health care increases but the deductible does not, the increase in health care costs is added to the calculation of the health care premium.
Overall, in 2010, there was a net increase in medical costs reported by health insurance carriers in Iowa in the amount of $68.8 million. Keep in mind that this number is for insurance premium costs only and is not reflective of costs for coverage in the areas of Medicaid and Medicare. Private health insurance only impacts approximately 25% of the health care dollars spent in Iowa.
Wellmark Blue Cross Blue Shield is comprised of two insurance companies operating in Iowa. One is Wellmark Health Plan of Iowa, Inc. which offers an HMO product. The second is Wellmark, Inc. that provides health insurance in the individual, small group, and large group market. Commissions and administrative expenses are a relatively small percentage of the costs of a premium under both product lines. For example, in 2010, the commissions and administrative expenses for Wellmark Inc. were 4% and 9% respectively. The commissions and administrative expenses for Wellmark Health Plan of Iowa, Inc. were 3% and 5% respectively. Under the new federal health care reform law, carriers will be limited in the percentage of premium used to pay administrative costs including commissions. (20% for individual insurance plans and 15% for group insurance plans.) Consumers will be able to have greater transparency in seeing what percentage of their health insurance premium is being used to pay underlying health care claims and the percentage allocated for administrative expenses.
In 2010, Wellmark Health Plan of Iowa, Inc. maintained an average medical loss ratio of 87% in the individual market. This means that 87% of the premium was allocated for health care claim expenses. 13% of the premium was allocated for administrative costs. Wellmark Inc. maintained an average medical loss ratio of 86% in the individual market. 86% of the premium was allocated for health care claim expenses and 14% was allocated for administrative costs. Keep in mind that some blocks of business may have a higher or lower medical loss ratio based upon the experience of the members in the block of business. For example, the block of business known as Pool 3 had a medical loss ratio in 2011 of 91.29%. The block of business known as Blue Transition had a medical loss ratio in 2011 of 125%.
Reports of the Actuaries
The actuarial reviews were conducted only on the underlying base rate proposal by Wellmark. The Division does not regulate rate changes due to age, geographical areas, smoker and non-smoker differentials, male and female differences and differences between individual contracts and family contracts. However, carriers cannot arbitrarily change the above factor rates. Once the initial policy form is approved, all the factors will remain the same throughout the life of the policy form.
It is the purpose of the internal and independent actuarial reviews to determine if the increase proposed by Wellmark is justified and comports with the state and federal loss ratio standards. Under the new federal law, if the insurance carrier errs in the increase which is approved by the Division, the carrier will be required to pay rebates to policyholders using a retrospective formula under federal law. Iowa has a 75% federal loss ratio standard in effect for calendar year 2012. Should Wellmark not reach that federal loss ratio, rebates will be required.
Both the Division actuary and Magnum Actuarial Group concluded that the rate increase proposals for Wellmark are reasonable and justified under current state and federal guidelines. In fact, they exceed current loss ratio guidelines. Wellmark’s internal model assumed a target loss ratio for 85% for Pool 3 and 80% for Pools 4 and 5 which all exceed state and federal requirements. The Blue Transition Pool loss ratio of 125% far exceeds the guideline of 75%. (Iowa was granted an adjustment to the federal loss ratios to allow for a phased in period to meet the 80% medical loss ratio for individual health insurance policies. The 80% medical loss ratio will be effective in 2013.)
Both actuarial studies reviewed the trend assumptions based upon past policy activity. It should be noted that Magnum Actuarial Group suggested that the information reviewed would support a higher average rate increase of 13.3%.
Consumer Concerns and Issues
Over 300 comments were received by the Consumer Advocate concerning the proposed Wellmark premium increase. During the public hearing on December 10, 2011, the Commissioner heard from Wellmark policyholders and concerned citizens throughout the state who questioned the rate increase. While rates have increased, personal incomes have remained flat. Many speakers spoke of personal decisions regarding maintaining health insurance or spending those premium dollars on other essential family needs. Many people questioned the administrative costs of Wellmark. As the largest health insurer in the state, many consumers felt they have little choice and selection in carriers. The market is very limited. Several citizens questioned the underlying costs of health care and the lack of oversight of medical costs and services.
Overall, there was a great deal of frustration expressed. The health care delivery and payment system is complicated and fragmented. Premium notices are difficult to understand. Charges and costs are not always transparent. Individuals who purchase their own health insurance without the expertise and purchasing strength of a business entity often feel they have little influence in the system. There is a distrust of how insurance is administered and regulated. And some of that may be due to a lack of understanding and education.
The Commissioner would note that the notice sent by Wellmark explaining the proposed rate increase did not provide a clear explanation. One section of the notice stated that part of the rate increase was a 62% increase in profit and retained earnings. Policyholders were confused by the statement and its relationship to the rate increase request and the overall premium to be paid by the policyholder. The Division will be working more closely with carriers to adequately explain to policyholders the premium increase and its impact on claims and administrative costs.
Future Premium Rate Issues
The Division is mindful that several key provisions of the federal health care reform law which go into effect in 2014 will also impact health insurance premium rates. Beginning in 2014, insurers will not be able to decline coverage to applicants with pre-existing conditions. Insurers will be required to provide plans with minimum essential health benefits that may be greater than benefits provided today under certain plans. Gender and health risks will be eliminated as rating factors. There will be limits on age rating. Plans will be required to offer coverage with minimum required cost sharing. To meet this, some plans will need to reduce the member out-of-pocket liabilities which will increase premiums.
Preliminary discussions with health insurance carriers and internal discussions in the Division lead us to believe that many consumers will continue to see rate increases. Depending upon how policyholders are pooled for rating purposes, some consumers could see large rate increases while others may see some rate decreases. For example, if all individuals were in one pool, the young and healthy member rates would increase while older and less healthy members would have rate decreases. A major factor in determining these premium levels will be the underlying cost of the health care delivery system.
Conclusion and Decision
The Commissioner has reviewed the testimony of policyholders and consumers, studied both actuarial reports and consulted with various Division staff regarding the Wellmark rate increase proposal. This is not a decision she takes lightly. Thousands of Iowans will be impacted by this decision-many in a negative fashion. Health care and health insurance costs have become key issues of debate in our state. A healthy population is an essential component to a thriving state economy. The balancing of the needs of Iowa consumers and the solvency of an insurance carrier must be weighed carefully.
There is no evidence that the proposed rate filings are discriminatory or excessive under Iowa statute. The Commissioner therefore approves the proposed individual rate increases filed by Wellmark for implementation on April 1, 2012.
Dated December 30, 2011
Susan E. Voss
Iowa Insurance Division