Under the Premium Rate Review requirement of the Patient Protection and Affordable Care Act (“PPACA”), the Department of Health and Human Services (“HHS”), in conjunction with the states, must develop a process for reviewing “unreasonable” health insurance premium increases, including “unreasonable” increases in the individual and small group health market. (See the Alert of December 8, 2011.) If a state lacks the authority for such a review, PPACA delegates the review to HHS. (A small group market is generally defined under a state’s insurance law. If no such definition exists, it will generally include employers with 50 or fewer employees.)

HHS has now ruled that one insurer, Trustmark Life Insurance Co, operating in Alabama, Arizona, Pennsylvania, Virginia and Wyoming has proposed unreasonable premium rate increases. (HHS has previously notified all states that any year to year rate increases at or above 10% would trigger an “unreasonable” rate review.) This insurer had proposed small group rate increases ranging from 13% to 27% in five of the ten states that HHS had previously found to be lacking the authority to review increased premium rates themselves.

In its ruling, HHS outlined that under its review program, a rate increase may be excessive if:

• it would result in a Medical Loss Ratio (“MLR”) that is below the federal requirement of 80%;
• any of the assumptions on which the increase is based are not supported by substantial evidence; or
• the choice of assumptions or combination of assumptions on which the rate increase is based is unreasonable.

In determining the proposed increases to be unreasonable, HHS relied on the findings of “independent experts,” concluding that the MLR in each of the five states would be below the federal 80% requirement. HHS also found, that the assumptions used to support the rate increase were unreasonable because they were based on national experience rather than state-specific experience. HHS determined that it was “not appropriate to exclude the state-level experience.”

Under phase two of PPACA’s premium rate increase rules, effective September 2012, individual states can set specific premium rate review triggers above or below the HHS 10% level to reflect their own unique local markets.