On May 19, 2011, in the latest chapter in its efforts to implement the health reform provisions of the Affordable Care Act (ACA), the U.S. Department of Health and Human Services issued the final Rate Increase Disclosure and Review Rule. The HHS rule was published in the Federal Register on May 23, and became effective on July 18. At its core, the rule creates a federal-level review process for health insurance rate increases, and requires insurers to provide justification when they exceed established thresholds. Health insurers and employers must understand what the rule does and does not do, and its interplay with state law, to ensure compliance and minimize its administrative burden.

The rule applies to all health insurance coverage offered in the individual and small group markets. It does not apply to large group coverage. There is considerable interplay between the rule and state law — for example, it relies on respective state law to define a "small group." As with other ACA requirements, it does not apply to coverage provided through a "grandfathered" benefit plan — one that existed before March 29, 2009, and meets other conditions established by HHS under separate rulemaking.

Not all insurance rate increases are subject to review under the new rule. For rates filed or that become effective on or after Sept. 1, the issuer must submit justification to HHS for any increase of 10% or more. Beginning in 2012, HHS will establish a state-specific threshold for disclosure of rate increases and will only apply the 10% threshold when a state-specific threshold has not been created. Each state-specific threshold will be based on data and trends that reflect cost trends particular to that state. HHS will publish the state-specific thresholds by June 1 of each year, and they will be effective for the 12-month period beginning on Sept. 1 of each year. If a rate increase falls below the relevant threshold, it will only be subject to review under applicable state law.

THE REVIEW PROCESS

When a rate increase is subject to review, an issuer must first submit a "preliminary justification." This includes a rate increase summary (Part I) and a written description justifying the rate increase (Part II), provided to both HHS and the applicable state authority. When HHS performs the rate review, instead of relying on a state to perform the review, the issuer must provide certain rate-filing documentation enabling HHS to perform the review (Part III). HHS will publish parts I and II of the preliminary justification on the healthcare.gov Web site, along with a prominent disclaimer explaining that the preliminary justification is a summary of information under review and not a determination that the rate is unreasonable. HHS will post Part III information (when provided for HHS to perform the review) on the Center for Consumer Information and Insurance Oversight Web site, if the information is not designated as confidential.

Rates are not presumed to be unreasonable. HHS will declare a rate increase unreasonable when it is:

• "Excessive" (unreasonably high in relation to the benefits provided).

• "Unjustified" (not supported by the information provided by the issuer).

• "Unfairly discriminatory" (results in prohibited or unwarranted premium differences between insureds with similar risk categories).

Reflecting the critical limitations of the ACA on federal rate review, the rule does not provide HHS with any authority to deny a rate increase it determines to be unreasonable or to prevent its implementation. HHS is essentially limited to enforcing the filing and justification requirements of the rule, and would be forced to pursue a court order if an issuer does not meet these requirements. An issuer will only be prevented from implementing an "unreasonable" rate increase if a state has and enforces its state-level authority to deny a rate increase. However, the rule does establish an administrative hurdle for an issuer that intends to implement an "unreasonable" rate increase. The issuer must submit to HHS a "final justification" for the increase, and prominently post HHS’ (or the state’s) "unreasonable" determination and other information on the issuer’s Web site for three years.

A key factor in complying with the rule is understanding the related but distinct roles of HHS and the respective states in the rate review process. The ACA and HHS rate-review provisions do not pre-empt or otherwise replace state laws or processes for the annual review and approval of rate increases. They provide a layer of federal review to supplement existing state processes and compel disclosure of information to consumers when rate increases exceed the established threshold. Many of the standards in the rule refer to state law, such as the definition of a small group, and HHS will rely on states that maintain "effective rate review programs" to perform the actual rate review. Most states already review proposed increases in health insurance rates and disapprove them if they are excessive. Only in states that lack the legal authority or resources to effectively review rate increases will HHS perform the review. Therefore, an insurer’s premium rate increases may be subject to state or federal review, depending on whether a particular state adopts appropriate standards to implement the rate-review requirements.

NAVIGATING VARYING PROCESSES

As a direct consequence of state-level implementation, there will be variances not only in the allowed rate-increase thresholds, but also in the review process itself. Under the rule, if a state requires a proposed rate increase to be filed with the state prior to implementation of the increase, the health-insurance issuer must send HHS and the applicable state the preliminary justification on the date the issuer submits the proposed increase to the state. For all other states, the health-insurance issuer must send HHS and the applicable state the preliminary justification prior to the implementation of the rate increase. This approach is intended to assure that there will be a justification for all rate increases that ultimately are determined to be unreasonable, without requiring any change in state law or practice for reviewing rates. However, this is one additional item an insurer must keep track of that will vary for each state.

In another example of state variance, some states review rate filings at a product level while others review rate filings on an aggregated product basis, particularly in community-rated environments. Although the rule accommodates both approaches, it requires issuers that file rates on an aggregated product basis to develop rate increases using the same claim experience, and the proposed increases must be the same for each of the different products. This approach may not be consistent with the way insurers now track data.

Insurers should be mindful that the rule is not always consistent with state law — as demonstrated by the situation when claims experience must be reported for aggregated products. For another example, insurance "product" is defined under the rule as a package of health insurance coverage benefits with a discrete set of rating and pricing methodologies offered in a state. This definition is not consistent with many state definitions. Although HHS believes it is flexible enough to accommodate existing state definitions, and issuers will not have to reclassify products to comply, this definitional variance between federal and state law may complicate rate review for some issuers.

The bottom line is that it will be incumbent on issuers to understand the rule and the rate-filing requirements of each state in which it offers health insurance products, and then develop a state-specific strategy that melds the state and federal requirements. While many of the complexities of the rule may not be readily apparent until an insurer is under review, a comprehensive strategy on the front end will minimize the administrative burden of complying with the rule and the risk of violating its requirements. Proper planning can turn a regulatory mountain into an administrative molehill.

Darryl T. Landahl, of counsel to Brown­stein Hyatt Farber Schreck, advises clients in the areas of health care, Medicare and ERISA. Cara S. Elias, an associate, practices in the areas of employee benefits, ERISA and corporate law.