The division reviews and approves health insurance rates in the individual and small group markets. Health insurance rates are not regulated for large groups with 51 or more employees. In this market, competition plays a more significant role in keeping rates reasonable. In addition, large groups tend to be more sophisticated purchasers of insurance and or use insurance brokers.
In Oregon, health insurance rate filings must include actuarial documentation. Oregon law (ORS 742.005) provides that rate filings will be denied if the filings are deemed "prejudicial to the interests of the insured's policyholders," if the filings contain "provisions which are unjust, unfair, or inequitable," or, most significantly, if the "benefits … are not reasonable in relation to the premium charged."
Division actuaries rely on these laws to answer two basic questions about each rate filing: Is the aggregate rate request justified? Is the request fairly allocated among the ratepayers?
Below are the key factors the division uses to determine if the overall rate request is actuarially justified:
Click on a factor to see information.
Historical and projected loss ratio. The loss ratio is the relationship between the claims paid by the insurance company and the premiums received. In 2015, companies in Oregon had loss ratios between 78 percent and 143 percent for health insurance. These ratios vary based on the type and mix of products offered in 2015. Insurance companies seek loss ratios below 100 percent because the company will always incur some administrative costs.
This ratio means that for every dollar in premium, the company pays out 78 cents to $1.43 in medical claims. Most companies reported an underwriting loss in 2015, meaning they paid out more in medical claims and administrative costs then they received in premium. Most of these losses were in the individual market.
Under the Affordable Care Act, an insurance company is required to pay rebates to individual and small group policyholders when it fails to spend at least 80 percent of premiums collected on medical care and quality improvement. It must spend at least 85 percent of premiums on these activities in a state's large group market or pay a rebate.
In 2014, about 49,400 Oregonians saw rebates totaling $3.1 million. The division does not approve rates that would appear to result in rebates because it means the company expects to spend too little on medical care and too much on administration and profit.
However, insurance rates are based on projections - companies estimate how much they expect to pay in claims in the upcoming year, how much they expect to incur in administrative costs, and how much they expect to realize as profit. Because these are projections, it is possible that some companies may end up owing rebates, depending on how actual experience compares to the federal medical loss ratio threshold.
Historical and projected trend. Trend is the rate of change in the claims portion of an insurance company's loss ratio and consists of two main components: medical inflation and use. Medical inflation reflects the increase in the unit cost of covered medical services, including hospital stays, prescription medications, charges by physicians and other medical professionals, and costs for diagnostic services, including tests and imaging. Use reflects the rate at which medical services are used and can be affected by the health and age of the insured population, the level of coverage, the availability of new drugs and new medical technology, and the choice of treatment options by an insured and his or her medical providers. Because medical costs are the primary cost driver of health insurance premiums, trend is an important factor in rate filings. The division carefully considers all adjustments used as the basis for projecting future trends. The division tries to balance the more conservative assumptions and projections of insurance company actuaries with what we regard as more objective assumptions and projections.
Developing medical trend. Hospitals, physicians, and other health care providers are often paid for their services by billing health insurers for specific services. There are other payment models that give provider groups a fixed amount of money to pay for all services for members enrolled in the group. All provider compensation methods are considered when carriers establish claims costs.
Recent claims history is important for helping to predict future claims costs. But actuaries must also consider a variety of factors when predicting changes in claims costs. Estimates for future claims costs are affected by changes in such major factors as unit costs (fees) paid to providers; use by plan members; treatment patterns; medical technology; aging; benefit changes; and increasing demand for services from long-term members, known as underwriting "wear-off." When claims history is not appropriately adjusted for the effects of these other factors, consumers experience greater volatility in rates because short-term increases or decreases in claims costs receive disproportionate weight.
Historical and projected administrative costs. Administrative costs are generally higher for individual and small group health insurance on a per capita basis and typically decline on a percentage basis as a company's business volume grows. Administrative costs are also usually higher for new insurers, insurers that write fewer policies, or insurers that offer coverage with higher deductibles and lower premiums. Short-term administrative costs may increase due to factors such as technology investments designed to improve medical outcomes or reduce long-term costs. Since April 2010, the division has required insurance companies to separately report and justify changes in administrative expenses by line of business and to provide details about what they spend on salaries, commissions, marketing, advertising, and other administrative expenses.
Net income target. Insurance company rate filings include a net income target for each line of insurance. Net income target is the projected profit or loss after subtracting projected claims costs and administrative costs from projected revenue. The division has explicit authority to consider an insurer's investment income, surplus, and cost containment and quality improvement efforts when reviewing a rate filing. It may also consider an insurer's overall profitability, rather than just the profitability of a particular line of business, such as small group plans.
Actuarial analysis. For each of these above factors, division actuaries evaluate the reasonableness of insurance company assumptions in light of the company's past experience, the effect on policyholders, and the rates being charged by competitors.
The second set of actuarial issues - how rates vary among groups and individuals - typically depends on whether the proposed rates comply with the specific rules applicable to each commercial submarket and whether reasonable adjustments have been made to ensure a rate request that is reasonable in the aggregate is not inequitable to particular groups or individuals.
Although the division does formally deny rate requests when warranted, it more often asks for additional information, questions an insurance company's assumptions, and indicates that the rate should be reduced or increased.
Consumer input. Consumers have a minimum of 30 days to comment on insurance company rate requests for individual and small group health insurance plans. The timeline starts when a rate request filing is deemed complete and details are posted on the division's website. Consumers who have signed up on the division's website are then notified when a company has filed a rate request. Any comments they submit are posted on the website. Since October 2011, the division has held public hearings on rate requests involving small employer or individual health plans. Consumers can find more information at www.oregonhealthrates.org.