As consumers, businesses and insurers try to understand the impact of the new federal health care reform law, another major health insurance battle is brewing -- this time in Albany.
State insurance regulators are seeking to regain the authority they once had to approve, modify or reject premium increases before they go into effect.
That power was taken away in a legislative trade 15 years ago, and officials say the resulting system of "self-regulation" by insurers, with no prior oversight of rate hikes, hasn't worked. Instead, the average annual increase in recent years has more than doubled from the late 1990s, and the number of uninsured has risen.
Indeed, a report released by the Insurance Department this month said premiums for health maintenance organizations (HMOs) in New York rose an average of 17 percent this year, and as much as 51 percent in some parts of the state.
"Health insurers require consumers to get approval before seeking treatment, so it's reasonable to have rate increases reviewed to make sure they're fair," Superintendent James Wrynn said. "The financial crisis has shown that self-regulation simply does not work."
And regulators say such authority will be even more important now that federal health reform will create state-based exchanges in which small businesses and individuals can buy insurance with federal subsidies. Twenty-five states have prior approval.
Troy J. Oechsner, deputy superintendent of insurance and chief of the department's Health Bureau, said the state wants to ensure policies are properly priced and risks balanced, so that insurers don't "drive wacky results" by raising prices to drive away customers.
But health insurers are vehemently opposed, saying that reinstating the earlier system of "prior approval" won't work because it doesn't address the root cause of the higher premiums: the rising costs of medical care.
"It didn't work effectively in the past and doesn't deal with the underlying cost issue," said Donald Ingalls, vice president of government affairs for Buffalo-based HealthNow New York, parent of BlueCross BlueShield of Western New York.
Insurers even question Paterson administration claims of big government savings from the budget proposal, and argue that the state is to blame for a lot of their costs and premium hikes because of new taxes and coverage mandates. The state has imposed more than $4 billion in taxes and fees on
health insurance policies, including $730 million a year ago.
"The governor can't have it both ways," said Paul Macielak, CEO of the New York Health Plan Association. "They increased taxes that much on health insurance, and then they're shocked that rates are going up."
Insurers also say prior approval would actually be harmful because it would subject the rate requests to political whims and artificial "price controls," especially in election years.
In turn, such "premium suppression" could lead to a "roller-coaster effect" of low hikes one year followed by a catch-up surge the next, making it difficult for customers to budget.
"If they're artificially low, the future pricing and ebb and flows are not going to be kind to small-business people," said Art Wingerter, regional president of Univera Healthcare, part of Excellus Health Plan. "They could be hit with significant increases over the prior year. It's a recipe for disaster."
That could drive insurers into bankruptcy or out of the state, or prompt them to drop products, reducing competition.
And insurers note that they are big employers in the area that could be hurt by such restraints.
In an unusual twist, the insurers are backed by hospitals and groups like the Business Council of New York State, the Buffalo Niagara Partnership and the Amherst Chamber of Commerce, even though businesses shoulder premium hikes with employees. Insurers sit on the Business Council's board, and are Partnership members.
"We don't see prior approval as the solution," said Kenneth Adams, Business Council CEO. "It may have some political appeal, but it doesn't solve the problem."
"You're dealing with the wrong part of the overall problem by focusing on prior approval," said Andrew J. Rudnick, CEO of the Partnership.
"Just putting a price control on the health insurance market in New York State would limit the options our members have when they go out and buy that commodity," said Michael Elmendorf, New York state director for the National Federation of Independent Business.
However, other businesses, as well as individual consumers, are backing state regulators. "There's hardly anything in this world that doesn't have oversight. I think a little regulation is a necessary thing in this world," said Douglas P. Taylor, chairman and CEO of Taylor Devices, a North Tonawanda-based maker of giant shock absorbers that employs about 100 and has faced hikes of 30 percent to 40 percent per year.
"Maybe the insurance companies can justify the increase. But I'd certainly like to know that at least the regulatory body has come to the same decision."
>Fits with federal law
The battle in Albany is coming to a head in the wake of the biggest federal changes to health care in decades.
The new national health care law leaves much health insurance regulation in the hands of the states. And state officials say that oversight of premiums piggybacks on the federal law, as 1.7 million New Yorkers could gain new coverage.
"We believe in markets," Oechsner said. "But we believe that rate regulation will be increasingly important to make sure health insurers don't dump bad risks on the exchange or get stuck with them."
Under prior approval, insurers would file their proposed rates with the state, which would review them and either approve, change or reject them before the companies could apply them. Such a system used to exist in the state until the mid-1990s, when state lawmakers compromised with insurers.
Up to that time, insurers could choose to accept or reject insurers "cherry-picking" the best risks. To create the current system of "guaranteed issue" and "community rating" -- in which insurers must accept everybody that applies and must charge the same amount within the community pool -- the state agreed to deregulate premiums.
Since 2000, the industry has operated freely under a "file-and-use" system, in which insurers submit rates to the state, but can apply them after 30 days.
"The current system works. It's logical. It makes sense. And it also takes the politics out of the mix," Wingerter said.
But regulators say the result is that small group premiums have risen an average of 13.96 percent a year since 2000, compared to 5.2 percent annually from 1996 to 1999.
According to the state report this month, HMO premiums for small groups in Erie County rose 12.6 percent for HealthNow, 17 percent for Independent Health and 19 percent for Univera from 2009 to 2010. Individual direct-pay premiums for HMO and point-of-service plans rose between 11 percent and 13.5 percent. Some counties downstate and in Northern New York fared much worse.
Insurers note they are still required to spend at least 75 percent of every premium dollar on medical care for small-group coverage -- less than 50 employees -- and 80 percent for the individual direct-pay market. If they don't meet that test, the state can force them to refund a portion of premiums to customers -- and has done so.
But Oechsner said it's usually two years before the state can prove that, after a rate hike is fully effective and all claims have come in for that year. For example, regulators forced UnitedHealth Group's Oxford Health Plans subsidiary downstate to refund $50 million.
"We got the refunds back," Oechsner said. "But it was two years after the fact . . . We can't do anything to protect those businesses and consumers, and that's our primary reason for wanting prior approval."
The state's plan calls for restoring that power, increasing the medical loss ratio -- the percent of premiums spent on medical care -- to 85 percent, and requiring public hearings and adequate notice of price increases.
The Paterson administration projects budget savings of $70 million in the next fiscal year and $151 million in the following year from the changes, as fewer individuals would lose coverage and be forced onto public insurance rolls.
A report by consulting firm Milliman, commissioned by the Business Council, found the likely savings to be no more than $3.3 million the first year and $13.7 million the next.