Written by Jay Angoff Mehri & Skalet, PLLC

for

Consumers Council of Missouri

funded by

Missouri Foundation for Health

Health Insurance Rate Review

for Missouri Consumers

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Table of Contents

I. Introduction....1

II. The rate filing .............................................................................................................................................. 2

A. Defining a rate filing............................................................................................................................... .... 2 III. Analyzing a rate filing ................ 4

A. Challenging Trend ............................................................................................................................... 4 1. Analyzing historical data ............. 5

a. Determine whether the base experience on which the actuary calculates trend is reasonable. ..... 5 b. Separate out each element of trend and require that the insurers actuary justifies each item, and eliminate any double counting ............................................................................................................ 6 c. Ensure that 2016 trend is based on actual trends, not the actuary's projected trends for previous years .................................................................................................................................................... 8

d. Ensure that the time period selected by the actuary is not designed to produce a higher than reasonable trend. ................................................................................................................................. 9

e. Ensure that occurrences that cannot happen under the ACA are not factored into the trend calculation. .......................................................................................................................................... 9 f. Ensure that the rate filing does not recoup losses from past years. .............................................. 10

g. Ensure that the justification the actuary relies on for his trend selections consists of more than vague generalizations with no supporting data .10

2. Challenging trend based on new conditions. ............................................................................. 10

a. Changes aimed at reducing costs.....10 b. Reductions in the amounts the insurer will pay providers in 2016. ............................................. 12

c. The more favorable health status of post-2014 enrollees. ............................................................ 12 d. The increasingly greater penalty for not having health coverage..13

e. The lack of meaningful enforcement for insurer non-compliance.13 f. The requirement that smokers pay their own way..14

3. Giving special consideration to the trend factor selected by new entrants: the Second Mover Advantage..15 4. Analyzing administrative changes to the ACA that could raise the cost of ACA-compliant coverage in 2016. ...... 15

B. Analyzing non-claims costs ................................................................................................................. 16

1.Accuracy of expenses. ....16 2. Changes in the ACA likely to result in reduced expenses for insurers in 2016 ........... 17

a. Savings due to the structure of the exchange and the individual mandate17 b. Savings from the elimination of underwriting. ............................................................................. 17

c. Savings from decreased marketing expenses.18

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d. Savings from reduced compensation to agents and brokers..18

e. Saving from narrow networks....18 3. Efforts to prevent insurers from passing certain types of expenses through to consumers.......19

C. Analyzing profits .................................................................................................................................. 19

D. Ways to ensure that savings resulting from Risk - Adjustment, Reinsurance, and Risk Corridors are included in the rate..22

IV. Actions consumers can undertake to challenge proposed rate increases for 2016..24

A. Ask the state and HHS to make public the actuarial justification supporting the proposed rate. ........................ 24

B. What consumers can do if the HHS Rate Review office, the HHS-run Exchange, and the Missouri DOI all decline to either hold a hearing or make the rate justification public .......... 25

C. More actions consumers can take if HHS makes the rate justification public but declines to hold a hearing.27

I. Introduction Missouri arguably has less regulation of health insurance rates than any other state in the nation. Most state laws provide that health insurance rates must not be excessive, inadequate, or unfairly discriminatory, or require that they be reasonable or that they meet some similar standard. Missouri law contains no standards that health insurance rates must meet. Most state laws authorize the head of insurance for the state to disapprove rate increases either before or after they take effect; under Missouri law the director of the Department of Insurance (DOI) has no authority to disapprove rates at any time. And, all other states allow the Department of Insurance to cooperate with the federal governments operating an Exchange in the state under the Affordable Care Act (ACA); Missouri law prohibits any such cooperation that is not required by federal law. Because the authority of the Missouri Department of Insurance over health insurance rates is so limited, the federal Department of Health and Human Services (HHS) has labeled Missouri as one of only five states that does not have an effective rate review program.1 Under the ACA, when HHS identifies a state as not having such a program, it has the authority to review proposed health insurance rate increases of 10 percent or more to determine if they are unreasonable. Although HHS does not have the authority to disapprove an increase it finds unreasonable, it must post its finding and an explanation for it on the HHS website. The insurer also must post that finding and explanation on its website. HHS does not review proposed rate increases of less than 10 percent, nor, as noted above, does the Missouri Insurance Department. However, all insurers selling on the Exchange must submit and post on their websites a justification for any rate increase of any size before they are certified to sell on the Exchange. The Exchange -- which in Missouri is run by HHS -- must take that increase into consideration when determining whether to allow the insurer to sell on the Exchange. Over the past three years, HHS has not implemented the ACA rate review provisions and regulations in a way that enables the public to participate in the rate review process. HHS regulations require the rate filing information that insurers file with HHS to be made publicly available so that consumers can analyze the rate filing and challenge any unjustified rate increase. The only information exempt from public disclosure would be specific information contained in the rate filing that the insurer demonstrates is trade secret. To date, HHS has not made any information available before rates were implemented. This has prevented the public from participating in the rate review process in the five states without a state-mandated process -- Missouri, Alabama, Oklahoma, Texas and Wyoming. If HHS continues to withhold rate filing information while rates are proposed, consumers will continue to be hard-pressed to find a way to have an effect on rates as the federal law intended them to have.

1 The four others are Alabama, Oklahoma, Texas and Wyoming.

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Increasingly, consumers are making known their disapproval of HHSs failure to make rate filings public. In April 2014, 56 state consumer organizations and eight National Association of Insurance Commissioners (NAIC) consumer representatives petitioned HHS to make rate filings public as required by the ACA. In June 2014, Consumers Union submitted a Freedom of Information Act (FOIA) request for all rate filing information for plans sold on the federal exchange. And in August 2014, Consumers Council of Missouri (CCM) submitted a FOIA request for Missouri rate filing information. When HHS failed to respond to that request, CCM filed suit in federal court in St. Louis seeking the information. While the results of these efforts are not yet fully known, HHS has stated that it is working toward making more information available. It released a proposed rule on November 26, 2014, which seeks to increase the number of health plans whose rate increases HHS will review and to make the timing for filing justifications uniform. HHS states that these modifications will improve predictability and transparency, reduce the opportunity for anti-competitive behavior, and establish a more meaningful opportunity for consumers and other stakeholders to comment on proposed rate increases before rates are finalized.2 HHS has also indicated that it hoped to have at least some part of the rate filing information available before 2016 rates are implemented. Although HHSs repeated failures to make rate filing information public invites skepticism for 2016, and although the outcome of CCMs lawsuit cant be known at this time, HHS could release some information on proposed rate increases in time for consumer groups and other third parties to influence 2016 rates before they are locked in. Accordingly, this manual attempts to set out opportunities for consumer advocates to impact rates if some or the entire 2016 rate filing information is released. Consumer groups can effectively participate in the ratemaking process by questioning the assumptions and estimates the insurer used to justify its proposed rate increase. This manual explains the elements of rate filings by health insurance companies and the analysis consumers should do to determine whether the insurers assumptions regarding each element are reasonable. It also instructs consumers how to argue, if appropriate, that an insurers proposed rate is unreasonable and therefore should be reduced, based on the analysis of each element.

II. The rate filing A. Defining a rate filing A rate filing contains the insurers justifications for the rates it seeks to charge. It includes data on the insurers revenue and expenses (claims and administrative costs) and the assumptions it used to estimate its future claims, and thus the amount it needs to collect in premiums to pay those claims. It also includes numerous tables showing individual premiums resulting from applying the factors on which the ACA allows rates to vary -- age, geographic location, family size and smoking status. 2 79 Fed. Reg. 70703.

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The ACA requires the secretary of HHS, in conjunction with states, to establish a process for the review of "unreasonable" health insurance rate increases and to ensure the public disclosure of information on such increases and justifications for all health insurance issuers.3 HHS has established a threshold of a proposed 10 percent increase for reviewing potentially unreasonable rates.4 In states that HHS has found to have an effective rate review program, the state insurance department reviews the proposed rates. In states that HHS has found not to have an effective rate review program,5 Centers for Medicare and Medicaid Services (CMS) of HHS reviews such increases. HHS has found that Missouri does not have an effective rate review program. Therefore, CMS is responsible for reviewing proposed rate increases exceeding 10 percent in Missouri. HHS has specified what is to be included in the rate filing, which it calls the Rate Filing Justification. It consists of three parts: 1. Part I is the Unified Rate Review Template, which is a compilation of data used to determine the rate increase. It must include the following: a. Historical and projected claims experience; b. Trend projections related to the number and types of services used and the cost of each service; c. Assumptions about claims related to benefit changes; d. Allocation of the overall rate increase to claims costs and non-claims costs; e. Allocation per enrollee per month of the current and projected premium; and f. A three-year history of rate increases for the product associated with the rate increase. 2. Part II is a summary explanation of the assumptions used to develop the rate increase and the most significant factors responsible for the increase. Part II must include information on the experience of the insurer, including historical and projected expenses, and loss ratios. 3. Part III is the Actuarial Memorandum and supporting Exhibits, which contain the assumptions and reasoning supporting the rate increases and the data contained in Part I. This is the most important document in a rate filing. It explains the methodology used to calculate the rates. It sets forth the data, assumptions, estimates and calculations on which a rate is based; it seeks to justify any rate increase.

3 42 U.S.C. 300gg-94(a)(1). 4 The HHS Rule gives the state the option of choosing a threshold for potentially unreasonable increases that is different than 10%, 45 C.F.R. 154.200(a)(2), but no state has established a different threshold 5 HHS requires a state to have a mechanism for receiving public comment on proposed rate increases before HHS can deem it an Effective Rate Review state. 45 C.F.R. 154.301(b). A state which fails to disclose information on which the rate increase is based until after the rate is approved or implemented would seem to prevent the public from commenting on proposed rate increases.

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Under the Rate Review Rule, if HHS reviews the rate insurers must file a Rate Filing Justification with HHS. In states where the state and HHS do the review the insurer must file with both.6 Parts I and III must be filed for proposed increases of any amount. Part II must be filed for proposed increases of 10 percent or more.7 Notably, although the ACA and HHSs rate review rule authorize HHS and the states to find a rate unreasonable and to publish that finding on their websites, they do not authorize HHS to disapprove unreasonable rates, nor do they authorize any state to do so that does not already have such authority.

III. Analyzing a rate filing

This section explains both the elements of the rate filing that have the greatest impact on the rate and ways to challenge the assumptions and estimates that affect those elements. An insurers proposed rate is largely dependent on the amount it projects it will pay out in claims for that year, the amount it projects it will spend on administrative expenses and the profit it believes it needs to earn. Those projections are all based on both the insurers experience and the actuarys expectation as to how future conditions are likely to affect past performance. Consumers can challenge the elements of a rate filing in two ways. First, they can explain why, based solely on the insurer's historical data, the assumptions the actuary made about its claims and needed premiums are unreasonable. Second, they can explain why the actuarys estimates are unreasonable, based on conditions that were absent in prior years such as changes in the law that affect the behavior of the insurer, new market characteristics and technological changes. A. Challenging trend Trend is the rate at which the cost of claims changes each year. Trend has the greatest impact on the rate. Trend for a future year cannot be known in the current year. Therefore, the actuary estimates trend based on the rate of increase in claims costs during past years and, based on that judgment, the effect of any new conditions on the insurers claims costs. Trend for the full year preceding the year for which the rates are being proposed is not available because rates charged in any given year must necessarily be proposed well before the end of the year preceding that year. To calculate expected claims costs for 2015, therefore, the actuary would typically choose a trend factor based on the insurer's experience through 2013 and then trend that factor forward by two years, i.e., multiply 2013 claims by the trend factor to estimate 2014 claims and then multiply 2014 claims, as trended, by that same factor to estimate 2015 claims. Actuaries are not required to use a particular method in calculating trend. For example, they may use different periods of time; they may use different types of averages; they may use different types of claims data; and they may give different weights to different methodologies. 6 45 C.F.R. 154.215 (c). 7 Id.

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In short, actuaries are permitted to exercise an unusually broad amount of discretion in projecting trend -- as to what historical data to use, how to manipulate it and what is likely to happen in the future. 1. Analyzing historical data Actuaries are the people who set rates for insurance companies, based on, among other things, the insurer's historical experience and the assumptions actuaries make about both that experience and future conditions. Part I of the Rate Filing Justification contains data on the insurer's historical claims experience. Consumers can challenge the actuarys assumptions based on the insurers historical experience in at least the following eight ways:

a. Determine whether the base experience on which the actuary calculates trend is reasonable.

Except for grandfathered policies and the non-ACA-compliant policies insurers are permitted to renew through 2016, individual and small group policies sold in 2014 under the ACA guidelines were new policies. They both contained new benefits -- the ten ACA-mandated Essential Health Benefits8 -- and provided for four different benefit levels, based on average costs: 60 percent, 70 percent, 80 percent and 90 percent (designated by the ACA as bronze, silver, gold and platinum, respectively). In addition, they had to comply with the new underwriting, rating and consumer protection rules established by the ACA. To estimate the cost of coverage under the new ACA-compliant plans, insurers had to rely on other experience and then adjust that experience. Some insurers used their experience from other states where guarantee issue and community rating were already the law. Some combined their experience on their traditional underwritten business with the small amounts of guarantee-issue business they had traditionally been doing. And some used other insurers' experience that was arguably similar, either alone or in combination, with their own experience. Consumers should ensure that insurers do not use data or make assumptions in connection with their base experience that are clearly unreasonable. For example, some insurers in the past have double counted -- or possibly even triple-counted -- in adjusting their base experience upward to approximate their projected business from the Exchange. Specifically, insurers may adjust their base experience upward because of the poorer health status of the previously uninsured as compared to the insured; because of pent-up demand" -- the previously uninsured finally getting services they needed in the past but did not seek because they were uninsured and will now get through insurance; and because of demand due to the ACA's eliminating or limiting deductibles and co-payments for people with incomes of less than 200 percent of the poverty level. It is not clear that these three effects are entirely separate. 8 The 10 ACA-mandated Essential Health Benefits are (1) ambulatory patient services, (2) emergency services, (3) hospitalization, (4) maternity and newborn care, (5) mental health and substance use disorder services, (6) prescription drugs, (7) rehabilitative and habilitative services and devices, (8) laboratory services, (9) preventive and wellness services and chronic disease management, and (10) pediatric services, including oral and vision care. 42 U.S.C. 18022.

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Similarly, some insurers may seek to adjust rates upward both for increased usage and for the unfavorable risks coming to ACA plans from the state-run high risk pool and the federally operated high-risk pool -- the Pre-existing Condition Insurance Plan. The factor the actuary uses for increased utilization, however, may well have already accounted for these same unfavorable risks. Consumers should ask the actuary:

! Did he include in the rate multiple increases based in whole or in part on the same underlying cause, such as pent-up demand and unfavorable risks?

b. Separate out each element of trend and require that the insurers actuary justify each item and eliminate any double counting.

The trend factor insurance companies use to calculate their rates each year is typically far more than the rate of increase in national health expenditures as compiled by CMS, as explained more fully in subsection c, below. The trend insurers use usually consists of several different elements. Specifically, trend may include: (1) Unit cost trend -- the increase (or decrease) in the prices the insurer pays to doctors, hospitals and other health care providers. Although in theory it should be close to the annual change in national health care expenditures, it usually exceeds that change. Consumers should ask the actuary:

! What has caused the company's trend in annual unit cost to be so much higher than the annual increase in national health expenditures?

(2) Change in utilization and mix of services -- the increase (or decrease) in the insurers payments to providers caused by the use of more (or fewer) services by its enrollees due to the change in the mix of risks the insurer attracts. For example, if it attracts less healthy people than it has in the past, they will use more services than its enrollees have used in the past. Consumers should ask the actuary:

! It is possible that the insurer is including within trend not just the increase in payments to providers but also the increase in usage of providers due to changes in its enrollees health status and behavior?

If the answer to (1) or (2) is unsatisfactory the company should not be able to add a separate amount for utilization increases. (3) Deductible leveraging -- the amount the enrollee must pay out of pocket before insurance coverage kicks in. Most health insurance coverage includes a deductible. When an insurers payment to a provider increases but the deductible the enrollee pays does not, the percentage

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increase in the insurers payment to the provider is greater than the percentage increase in the amount the insurer and the enrollee together pay the provider.9 The actuary may overstate the effect of deductible leveraging in three ways: (a) It may already be included in the underlying unit cost trend. (b) If enrollees have already met their deductibles, the existence of the deductible will have no effect on trend. (c) The size of deductibles varies, and some policies may not have deductibles. Consumers should ask the actuary to:

! Explain the assumptions used about enrollees meeting their deductibles and deductibles of various sizes; and

! Explain how those assumptions were reflected in the calculation. (4) New benefits -- for example, effective in 2010, the ACAs requirement for insurers to cover certain preventive services without cost sharing and to have no lifetime limits. Effective in 2014 they must cover the ten categories of benefits the ACA designates as Essential Health Benefits. According to HHS, the cost for the years 2010 through 2013 for the Patients Bill of Rights mandates in the ACA -- e.g., mandatory coverage of certain preventive benefits without cost sharing, no lifetime limits and no pre-existing conditions for those under age 19 -- is less than 1 percent of premium.10 If the actuary increased the projected trend, consumers should ask:

! What source did he use for those increases? ! What support does he have for any increase included for any ACA-mandated Essential

Health Benefit the company has not provided in the past? In addition, the ACAs Essential Health Benefits mandate could have the effect of reducing an insurers benefit costs, if the insurer has traditionally offered a benefit that other insurers have not offered but that the ACA now requires. In that case, some enrollees of the company traditionally offering those benefits will inevitably shift to other carriers, thus lowering the first insurers costs. Consumers should ask the actuary, particularly an actuary for dominant carriers:

! Did he determine if the insurer had traditionally offered any benefits that other carriers did not but now will have to offer?

! If so, how, if at all, did he factor that phenomenon into the rate filing? 9 Assume, for example, that an insurer increases its payment to a provider for a service from $3,000 to $3,500. The percentage increase is 500/3000, or 1/6, i.e., 16.7%. If the enrollee has a $500 deductible, however, the amount the insurer pays the provider after the enrollee pays the deductible goes from $2,500 to $3,000, and the percentage increase is 500/2,500, or 20%. And with a $1,000 deductible, the insurers payment goes from $2,000 to $2,500, with a percentage increase of 500/2000, or 25%. 10 See Igor Volsky, Sebelius Says Cost of Patients Bill of Rights Should Have Small Impact on Premiums, http://thinkprogress.org/health/2010/06/22/171511/pbor-costs/ (last accessed Dec. 9, 2014).

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Some insurers may include all four elements discussed above in trend, while some may treat one or more of those elements as separate factors in addition to trend. Consumers should:

! Seek to ensure that, whether an insurer considers each of the above elements as part of trend or in addition to trend, it breaks out each separately and specifically justifies each element.

! Make sure that the insurer does not double count.

c. Ensure that 2016 trend is based on actual trends, not the actuary's projected trends for previous years.

Consumers should compare the trends the actuary used in the past for what were then future years with what those trends turned out to be.11 If actual trend turned out to be lower than the trend the actuary projected -- i.e., if the insurer ended up paying out less than the actuary projected it would -- then it would be reasonable to reduce the trend the actuary projects for the rating year for two reasons. First, the insurer's rates are already inflated based on their having been based on a trend that proved to be too high. Second, any actuary's record of continually overstating trend in the past makes it reasonable to believe that he will continue to overstate trend in the future. Notably, actuaries may use a trend they expect to be higher than the true trend so as to give the company an extra cushion -- i.e., extra protection if the company ends up having to pay unexpected claims and extra profit if it doesn't. For example, both the major actuarial firms that advise the industry and individual company actuaries tend to use trends that substantially exceed the actual change in national health expenditures calculated by CMS. For example, since 2009 the annual change in national health expenditures has been 4.1 percent or less. In contrast, the annual rate of increase in the Milliman Medical Index, produced by a major actuarial firm, has decreased from 7.8 percent to 5.4 percent,12 while individual insurers have typically used trends exceeding Milliman trends by one to three points. Consumers should ask the actuary:

! How did he derive his assumed trend for both the year the rate will apply to and previous years?

! How, if at all, did the difference between his assumed trend for past years and the actual trend for those years affect the trend he selected for the new year?

! What actuarial judgment did he use and how did he apply it in selecting his trend for the new year?

11 Actuarial and accounting firms and investment firms publish data both on the actual increase in healthcare costs in past years and projected increases in healthcare costs in future years. See, e.g., note 12. 12 Christopher S. Girod, Lorraine W. Mayne, Scott A. Weltz, Susan K. Hart, 2014 Milliman Medical Index, (May 2014).

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d. Ensure that the time period selected by the actuary is not designed to produce a higher than reasonable trend. The trend the actuary uses for the rating year depends substantially on the past periods he chooses on which to base his projection for the rating year. Consider, for example, the average annual percentage change in national health expenditures: 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 8.5 9.6 8.6 7.2 6.8 6.5 6.3 4.8 3.8 3.9 3.9 4.1 3.6

Source: National Health Expenditures, CMS Office of the Actuary, National Health Statistics Group Using that data or Milliman data for the same years, which consistently uses a higher trend but also shows a decline over time the actuary could choose a methodology that gave a substantial amount of weight to older data and less weight to more recent data, thus producing a higher trend than recent data would indicate. Consumers should ask the actuary:

! Did he use older data to support a higher trend for the rating year, rather than newer and seemingly more relevant data that would support a lower trend?

e. Ensure that occurrences that cannot happen under the ACA are not factored into the trend calculation. In calculating trend actuaries traditionally have also included separate amounts for underwriting wear-off and selection/deterioration. Pre-ACA insurance law allowed insurers to levy surcharges and to decline people based on health status. As a result, only healthy people could buy insurance. As time went on some of those people would inevitably get sick and incur claims. The effects of underwriting -- of an insurer being able to decline the sick and insure only the healthy -- would therefore wear off. Underwriting wear-off cannot exist under the ACA. It has no underwriting; insurers can neither decline nor levy surcharges based on health status. The pre-ACA ability of insurers to reject people based on health status also resulted in sick people staying in the policies they had. They knew they could be turned down if they applied for a new policy. Healthy people in policies that sick people also bought switched to other policies, for which they qualified but sick people didnt, and were able to get them at cheaper rates. As a result, the health status of the pool in the old policy deteriorated and the costs of those policies increased dramatically. That phenomenon is known as "selection/deterioration." Like underwriting wear-off, the use of health status or selection/deterioration -- is prohibited under the ACA. Consumers should ask the actuary:

! Did he include a factor for underwriting wear-off in rates for 2014 and later years? ! Did he try to increase trend based on selection/deterioration of ACA-compliant policies?

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f. Ensure that the rate filing does not recoup losses from past years. Requiring each years rates to stand on their own is a well established principle: An insurer cannot raise rates in the rating year in order to recoup amounts it has lost because its rates were too low in previous years. For example, if an insurer is losing money in 2015 based on its current rates, it cannot include in its proposed 2016 rates any amount for recoupment of what it projects will be its 2015 losses. Insurers know this and therefore are unlikely to include an express provision for recoupment of past losses in their rate filings. However, they may try to accomplish the same goal by overstating trend. Consumers should ask the actuary:

! Can they be sure that the rates do not include an attempt to recoup previous losses? g. Ensure that the justification the actuary relies on for his trend selection consists of more than vague generalizations with no supporting data. The actuary may support his trend selection only by stating that it is based on industry wide data, data from recent trend surveys or actuarial judgment. Consumers should ask the actuary to:

! Provide hard data to support the trend he is using.

2. Challenging trend based on new conditions The trend that would be reasonable based solely on historical data should be adjusted based on conditions likely to be present in the rating year that have not been present in the past. Actuaries routinely adjust trend upward based on such conditions, e.g., new benefits the ACA requires insurers to offer. However, the ACA also contains several provisions designed to reduce healthcare costs. Consumers should ask the actuary:

! To what extent, if any, did he take these new conditions into consideration in projecting trend in the rating year, and how, if at all, did he quantify those changes?

! What actions did the insurer take to reduce costs, and how, if at all, did he account for those efforts in the rate filing?

a. Changes aimed at reducing costs. The ACA reduces healthcare costs through provisions in both newly authorized programs and stronger existing programs. Those provisions and programs include:

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(1) Mandatory penalties for hospitals with unusually high readmission rates. Such penalties now apply only to Medicare. However, many hospitals acknowledge that these penalties have caused them to take steps to reduce their readmission rates with respect to all types of patients and thus, to reduce their overall costs. CMS projects that the Hospital Readmission Reduction Program will save $8.2 billion from 2013 to 2019.13 (2) Accountable Care Organizations (ACOs), which are affiliations of doctors, hospitals and other health care providers who coordinate the care they provide to their Medicare patients. CMS projects that ACOs will save $4.9 billion over ten years.14 If the ACO saves the Medicare program money, the ACO participants will receive part of that savings. ACOs thus give providers an economic incentive to develop practice patterns that reduce the cost of treating Medicare patients. The ACO participants may reasonably be expected to also implement those same practice patterns when treating non-Medicare patients. (3) Bundled payments, under which providers are paid a set fee for providing multiple services. For example, CMS projects that the bundled payment system for patients with end stage renal disease will reduce Medicare spending by $1.7 billion. (4) Value-based purchasing, under which hospitals are evaluated and rewarded based on multiple performance measures. CMS estimates that one such program implementing value-based purchasing, the Payment Adjustment for Conditions Acquired in Hospitals Program, will save $3.24 billion from 2015 to 201915 and that another such program, the Physician Quality Reporting Initiative, will save $1.92 billion from 2012 to 2019.16 (5) Electronic health records, which are intended to cut costs by reducing paperwork and which providers may be penalized for not adopting. CMS estimates that improvements to productivity and market based adjustments in most provider settings can save as much as $205 billion over 10 years.17 (6) The Partnership for Patients, which is designed to cut costs by reducing the incidence of hospital-acquired infections and preventing complications during transitions from one care setting to another. The Community-based Care Transition Program is part of the Partnership for Patients Program and can save $500 million from 2011 to 2013, according to CMS.18 (7) Provisions designed to reduce fraud and abuse, such as expanding audits, requiring in-person visiting with physicians for certain services and requiring expanded data machine

13 CMS, Office of the Actuary, Estimated Financial Effects of the Patient Protection and Affordable Care Act, as Amended, 25, (2010), http://www.cms.gov/Research-Statistics-Data-and-Systems/Research/ActuarialStudies/downloads/ppaca_2010-04-22.pdf. 14 CMS, Affordable Care Act Update: Implementing Medicare Cost Savings, 4, http://www.cms.gov/apps/docs/aca-update-implementing-medicare-costs-savings.pdf ,(last accessed Dec. 2, 2014). 15 CMS, supra note 8. 16 Id. 17 CMS, supra note 9 at 4. 18 CMS, supra note 8.

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capabilities should reduce costs for providers. CMS projects that these programs will reduce costs by $4.9 billion over ten years.19 The CMS projections are only estimates, not hard numbers, and may well be overstated. Nevertheless, even if these estimates are discounted to some extent, the above initiatives can reasonably be expected to reduce healthcare costs, perhaps substantially. Consumers should ask the actuary:

! Did he take each of these cost-saving factors into account in projecting trend for the year for which they are proposing to increase rates, and how, if at all, did he quantify their effects?

! If the answer is no, why did he not take any of the above into account? ! If he doesnt know, did not consider or did not quantify the steps the insurer is taking to

reduce costs, to explain that too.

b. Reductions in the amounts the insurer will pay providers in 2016 The insurer may have negotiated rate increases for certain services with certain providers that are lower than trend or that may even be a net decrease from the prior years rates. For example, the insurer may have confined the in-network panel to lower cost providers or guaranteed certain providers a higher volume of patients in exchange for accepting lower provider rates. Consumers should ask the actuary:

! Did he review the rates the insurer is paying providers during the rating year, and how, if at all, did he quantify the effect of those rates in selecting trend?

The insurer may also use a software program that automatically reduces the rates it pays providers or effectively forces out-of-network providers to accept lower in-network rates. Consumers should ask the actuary:

! Does he know if the insurer uses such a program, and, if so, did he include its effect in selecting trend?

c. The more favorable health status of post-2014 enrollees Insurers strongly argued in 2014 that individuals with the greatest need for insurance -- those with pre-existing conditions were much more likely to sign up for insurance than people with no such conditions. If that is accurate, it follows that a larger percentage of those signing up in 2015 and future years will be healthier than was the case in 2014 and that the total pool in 2015 and future years -- including both new and renewal enrollees -- will be healthier than it was in 2014. The pool will also be healthier because pent-up demand will have been satisfied -- the previously uninsured who became insured in 2014, and to a lesser extent in 2015, will have gotten care for problems they avoided getting care for when they were uninsured. 19 CMS, supra note 9 at 5.

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Consumers should ask the actuary: ! Did he consider the improvement in the health status of the pool after 2014 in projecting

trend post-2014 and how, if at all, did he quantify that improvement? d. The increasingly greater penalty for not having health coverage For 2014, the penalty for not buying insurance was the greater of $95 or 1 percent of income above the tax filing threshold, which was $10,150 for an individual. For 2015 that penalty jumped to the greater of $325 or 2 percent of income above the filing threshold, and for 2016 it jumped further, to the greater of $695 or 2.5 percent of income above the threshold. Thus, between 2014 and 2016, 20 the maximum penalty increases by 150 percent and the minimum penalty by more than 600 percent. A substantial number of people for whom paying the penalty was less expensive than buying insurance in 2014 will find that no longer to be the case after 2014. Added to that is the generosity of the subsidies available on the Exchange and the fact that 85 percent of buyers on the Exchange qualified for some subsidy for 2014.21 (That should not be surprising, given the relatively high level -- $95,400 for a family of four in 2014 -- at which the subsidy phases out.) The greater penalty should both increase the number of people buying coverage through the Exchange and improve the average health status of the people buying such coverage. Those induced by the increased penalty to buy insurance after 2014 are likely to be healthy, since those in poor health and thus most in need of insurance presumably already bought it in 2014 and 2015. Consumers should ask the actuary:

! What assumptions did he make as to the number and health status of people electing to pay the penalty rather than buy insurance in 2014 and in future years?

! What effect did any differences in those assumptions have on the insurers proposed rates for 2016?

e. The lack of meaningful enforcement for insurer non-compliance

HHS announced that it would not penalize insurers for violating the ACAs rating and underwriting provisions in 2014 as long as they acted in good faith. It has continued this moratorium on enforcement in 2015. The ACA doesnt provide for lawsuits to be filed over rating and underwriting provisions. In addition, the Obama Administration has made clear that it does not intend to enforce the ACA against insurers.22

20 HHS, The fee you pay if you dont have health coverage, https://www.healthcare.gov/what-if-i-dont-have-health-coverage/, (last accessed Dec. 9, 2014). 21 HHS Press Office, Enrollment in the Health Insurance Marketplace totals over 8 million people, (May 1, 2014), http://www.hhs.gov/news/press/2014pres/05/20140501a.html. 22 The following language, for example, appears on the websites of the three federal Departments implementing the ACA: Our approach to implementation is and will continue to be marked by an emphasis on assisting (rather than imposing penalties on) plans, issuers and others that are working diligently and in good faith to understand and come into compliance with the new law. This approach includes, where appropriate,

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The ability of insurers to violate the ACA without suffering any adverse consequences is probably greater in Missouri than in any other state because of the hands-off position Missouri has taken with respect to ACA enforcement. Add to this the statutory prohibition on state officials cooperating with the implementation of the Exchange unless federal law compels such cooperation.23 Faced with potential liability if they enforce the ACA, Missouri officials have understandably erred on the side of not enforcing the law. Therefore, insurers may be able to take actions designed to disenroll high-cost patients even though the insurers would be violating the law, because they know that such actions are unlikely to be penalized in any meaningful way.24 Similarly, insurers may be able to market in such a way as to attract the healthy and avoid the sick, even though the ACA prohibits such marketing.25 Consumers should ask the actuary:

! Did he consider the effects of non-enforcement of the ACA? ! How, if at all, did he quantify them in calculating trend?

f. The requirement that smokers pay their own way The ACA authorizes states to permit insurers to surcharge smokers by up to 50 percent. This is particularly significant for Missourians, since the state consistently ranks among the top ten states in smoking per capita.26 Double counting should be forbidden: The insurer should not be permitted both to levy a surcharge on smokers and to increase rates for non-smokers based in part on its payments for smokers medical expenses. Consumers should ask the actuary:

! Did he back out the health care costs of smokers in calculating trend?

transition provisions, grace periods, safe harbors, and other policies to ensure that the new provisions take effect smoothly, minimizing any disruption to existing plans and practices. 23 The statute also creates a private right of action enabling any Missouri citizen to sue any official who does cooperate. 24 The St. Louis Post-Dispatch reported on three tactics insurers are using to avoid insuring high-cost individuals: 1) entering the market late, presumably after other insurers have picked up the higher cost individuals; 2) creating narrow networks that exclude well-known cancer hospitals and specialists; and 3) requiring hefty first payments for prescriptions, especially for HIV patients and other high-cost individuals who may have to pay 30% up front for a $2000 drug. Tom Murphy, 3 ways insurers can still avoid covering the sick, (Aug. 27, 2014). The Associated Press similarly reported that over 300 patient advocacy groups wrote to HHS arguing that insurers are using tactics which are highly discriminatory against patients with chronic health conditions. Richard Alonso-Zaldivar, Patient advocates say insurers avoiding the sick (Aug. 18, 2014). 25 45 C.F.R. 147.104(e). 26 According to the CDC, twenty-five percent of Missouris population smokes, ranking Missouri 3rd in smokers per capita among the states. CDC, State Highlights: Missouri, http://www.cdc.gov/tobacco/data_statistics/state_data/state_highlights/2010/states/missouri/index.htm (last accessed November 25, 2014).

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3. Giving special consideration to the trend factor selected by new entrants: the Second Mover Advantage

If people with health conditions are accustomed to and satisfied with the doctors and hospitals they visit, they are not likely to switch to another insurer with a different network just to save a few dollars a month. People in excellent health, on the other hand, are relatively unconcerned about which providers are in their network because they rarely see any. They are much more likely to switch insurers based on price. Therefore, by undercutting the prices of the carriers already in the market, an insurer new to the market is likely to attract a disproportionate number of healthy people, who are likely to switch based on price. People with pre-existing conditions are less likely to switch based on price because they want to continue to see the providers theyre accustomed to seeing. Consumers should ask the actuary:

! Did he account for the healthy people a new insurer is likely to attract -- the Second-Mover Advantage -- in calculating the effect of its mix of business on trend?

4. Analyzing administrative changes to the ACA that could raise the cost of ACA-compliant coverage in 2016 The Administration has taken certain actions that could cause the average health status of people buying plans under the ACA to deteriorate, thus raising the cost of those plans. Insurers can reasonably be expected to seek to raise rates based on those actions. They include: a. Allowing insurers and enrollees to continue to renew plans that do not comply with the ACA if the state permits them to do so, which Missouri has. b. Allowing people 30 and over whose insurance has been cancelled to buy so-called catastrophic coverage, which covers less than 60 percent of average costs, despite the ACAs allowing only those younger than 30 to buy such policies; c. Making it easy for people who do not buy insurance to obtain a hardship exemption from paying the penalty for not buying insurance. The extent to which the first two of these factors may reasonably be expected to raise costs may not be great. No subsidies are available either to people who renew coverage non- compliant with the ACA or who buy catastrophic coverage. In fact, catastrophic plans have proved to be unpopular because they cost almost as much as bronze plans but provide substantially less coverage. Consumers should ask the actuary:

! To what degree, if any, did he raise rates based on assumptions of damage to the health status of the Exchange pool from people renewing non-ACA-compliant plans or buying catastrophic coverage?

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HHS has not aggressively publicized the ease with which people can get hardship exemptions. To the contrary, substantial publicity has focused on the difficulty of obtaining exemptions from the individual mandate. Consumers should ask the actuary:

! To what degree, if any, did he raise rates based on the assumption that a substantial percentage of people whose policies were cancelled will obtain hardship exemptions?

B. Analyzing non-claims costs In rate filings, insurers set forth the amounts they allocate to various categories of expenses and seek to set the rate at a level that allows them to pay their claims costs and their expenses and have enough left over to earn a profit. In the Rate Filing Justification, insurers must provide data on non-claim costs in Part I, the allocation of the overall rate increase to claims and non-claims costs. Parts II and III also contain information about non-claims costs in the explanation of how the rate was determined. Consumer advocates can challenge the expenses the insurer seeks to include in the rate in three ways: 1. Accuracy of expenses

Insurers' expenses include agents commissions, general administrative expenses, and taxes, licenses and fees, including certain new fees authorized by the ACA, such as a fee for participating in the Exchange.27 The percentage of premium the insurer includes in the rate filing for each type of expense is based on the percentage the insurer has attributed to these types of expenses in previous rate filings. The insurers two largest expenses are agents' commissions and general administrative expenses. Consumers should:

! Make sure that the percentages of premium the company has allocated to its expenses in the rate filing are no greater than those percentages were in prior years rate filings.

In addition, the Annual Statement the company files with the Missouri DOI and NAIC by March 1 each year must separately disclose its total general administrative expenses, its expenses for commissions and its total premiums for the prior year. Those elements are not broken down by policy. 27 See NAIC Discussion Paper on Inclusion of ACA Fees in 2013 Premium Rates (2013), http://www.naic.org/documents/committees_b_ha_tf_related_docs_aca_fees.pdf.

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Consumers should: ! Compare the expenses in the Annual Statement28 to those in the rate filing to ensure that

the insurer is not attributing higher-than-average expenses to its ACA-compliant policies, and particularly not to its Exchange policies. In fact, expenses in connection with ACA-compliant policies should be lower than the insurers expenses on pre-ACA policies, for the reasons explained in the next section.

2. Changes in the ACA likely to result in reduced expenses for insurers in 2016

Just as with trend, several changes the ACA has made or has caused to happen have the potential to reduce insurers expenses in the future. Consumers should argue that the actuary should:

! Reduce the expenses included in the rate to take account of the savings below. a. Savings due to the structure of the Exchange and the individual mandate Insurers have traditionally had to market extensively and establish their own broker networks to sell insurance. Now, they need do neither. The Exchange allows them to reach all their potential customers without establishing a broker network. And the law requires people to either buy their product or pay a penalty, which will be far higher for 2016 than it was for 2014 or 2015. Insurers expenses are thereby reduced. The administrative expenses the insurer includes in its rate filing therefore also should be reduced. b. Savings from the elimination of underwriting Insurers have traditionally had large underwriting departments. These departments are dedicated to determining whether or not to insure an applicant and what, if any, restrictions to impose, such as excluding coverage for certain medical conditions. Insurers have also traditionally used rating methodologies containing multiple rating factors and rating tiers. The ACA eliminates underwriting. It bars insurers from declining people or limiting their coverage based on health status and requires all insurers to use the same standardized four-factor rating methodology. Thereby, it eliminates the need for essentially all personnel who did underwriting and rating, thus reducing administrative costs.

c. Savings from decreased marketing expenses Beginning well before the start of the first Exchange open enrollment period on October 1, 2013, insurers have benefitted from an unprecedented marketing effort paid for by consumers, taxpayers and others. Administration officials, including President Obama himself and non-profit groups, have been campaigning for people to buy private insurance. Foundations, including Missouri Foundation for Health, have generously funded Navigators and Certified Application Counselors (CACs) to help people buy private insurance. In addition, some of the 28 Annual Statements are available at the NAIC website at https://eapps.naic.org/insData/. The first five are free; each additional is $10.

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same foundations and other non-profits have funded public interest groups and coalitions whose purpose is to educate the public about the ACA and the private insurance it makes available. The extensive coverage the media have given to the ACA and particularly to the Exchanges, whether positive or negative, has also increased public awareness of the ACA and its requirement that people either buy insurance or pay a penalty. The insurers allocation for marketing expenses thus should be reduced to take into account the marketing expense it need not incur due to the marketing being undertaken and paid for by the government -- i.e., taxpayers -- foundations, consumer groups and others. d. Savings from reduced compensation to agents and brokers

As people become accustomed to buying insurance through the Exchanges, fewer people will use agents. Thus, insurers spending for agent compensation will inevitably decline. Some insurers, in fact, have already reduced their compensation to agents. The percentage of the premium the insurer allocates to commissions under the Exchange system should therefore be less than it was before that system was established. In addition, even on business that has originally been written through agents, insurers need not continue paying the agent a renewal commission. Consumers should ask the actuary:

! How much in commission expense did he attribute to renewal commissions? e. Savings from narrow networks

The prevalence of narrow networks among the insurers selling through the Exchanges has been well publicized. Insurers have argued that such networks reduce premiums and improve quality by forcing providers to compete to be in the network.29 Some evidence suggests that narrow networks reduce costs by emphasizing primary care.30 Consumers should ask the actuary:

! Did he consider and quantify potential cost reductions from narrow networks in projecting expenses for the rating year?

Consumer groups should also argue that such reductions -- e.g., savings in administrative costs resulting from dealing with a limited number of providers -- would be in addition to other reductions resulting from delivery system reforms or reduced payments per service to providers described above.31

29 Bob Herman, Insurers draw Heat for Error-riddled provider directories, (Nov. 19, 2014), http://www.modernhealthcare.com/article/20141119/NEWS/311199972. 30 Dan Cook, Narrow network research reveals cost savings, (September 9, 2014), http://www.benefitspro.com/2014/09/09/narrow-network-research-reveals-cost-savings. 31 The purpose of this guide is neither to advocate nor condemn narrow networks, but rather only to ensure that to the extent insurers use such networks, all cost savings they produce should be fully incorporated into the rate.

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3. Efforts to prevent insurers from passing certain types of expenses through to consumers Missouri, as well as virtually all other states, has permitted insurers to include all their administrative expenses in their rates, thus requiring enrollees to pay for those expenses.32 There is little precedent in the health insurance area for challenging this practice. However, consumers may wish to argue that health insurers not be permitted to pass through particular types of expenses, such as expenses for resisting claims the insurer was ordered to pay or amounts spent on issue advertising campaigns. Consumers should ask the actuary:

! What expenses not directly benefitting policyholders have been passed through to them in rates?

C. Analyzing profits 1. Insurers earn profits in two ways: a. They earn profits on underwriting -- their pure insurance business. Their underwriting profit is the difference between the premiums they collect and the claims and expenses they pay. b. They earn profits by investing the money they take in. They receive investment income both on the premiums they collect and on their surplus, which is the amount they retain over and above what they project they need to pay claims and expenses. Life and some types of property/casualty insurers hold premiums for many years before paying out the claims those premiums cover and thus earn huge amounts of investment income. Therefore, for their rates not to be excessive, those insurers must pay out more in claims and expenses than they collect in premiums. Health insurers pay claims much more quickly than do life and many property/casualty insurers. Nevertheless, many health insurers, particularly those with large surpluses, earn very substantial investment income and may need to have a low underwriting profit, or even an underwriting loss, to prevent their rates from being excessive. Accordingly, some insurers include 0 percent for underwriting profit in their rate filings. This indicates that they believe their investment income is sufficient to produce an adequate total return. On the other hand, other carriers include underwriting profit provisions of 0.5 percent, 3 percent, 6 percent or more. Consumers may challenge the underwriting profit provision in several ways.

! First, based on data contained in the insurers Annual Statement, they can calculate the total return. This takes into consideration both underwriting and investment income that the insurer would earn with the underwriting profit it proposes. Consumer groups should

32 Under Californias Proposition 103, however, enacted by the voters in 1988, property/casualty insurers may not require their policyholders to pay for certain types of expenses, including lobbying expenses, certain litigation expenses, issue advertising campaigns, and executive compensation exceeding a certain threshold.

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ask that the insurers underwriting profit be disallowed, and its rate reduced, to the extent that its proposed underwriting profit combined with its investment income would result in an unreasonably high rate of return.

! Second, consumers should look for other profits the company earns that make additional

underwriting profit unnecessary. For example, Note 25 in the Notes to Financial Statements section of the Annual Statement sets forth the extent to which the companys reserves have turned out to be either too low -- i.e., actual payments turned out to be higher than projected payments -- or too high -- i.e., actual payments were less than projected payments. If the latter, consumers should verify that the difference between the companys estimated payments and its actual payments is already included in its underwriting profit. If not, that difference is additional money that can reduce or eliminate the companys need to earn an underwriting profit.

Notably, in addition to a provision for underwriting profit, insurers may include a provision for after tax risk charge, capital and contingency margin, volatility provision, margin for uncertainty, margin for adverse deviation or some similar phrase. With all these characterizations, the insurer is seeking to include within the rate an extra amount that will enable it to earn a reasonable profit even if it ends up insuring a less healthy group of people than it projected and pays out more than it has projected. Such provisions were at least arguably defensible in the world before the ACA, since in the unlikely event that an insurer paid out substantially more than it projected, the insurer would be responsible for paying the entire difference. However, under the ACA three programs known as the 3 Rs (risk adjustment, risk corridors and reinsurance), discussed in section E below, substantially reduce the likelihood an insurer will sustain a loss and the size of any loss it does sustain. Nothing under the ACA justifies an insurers including in its rate filing any margin for contingencies or making unduly conservative assumptions regarding other elements of the rate filing, such as trend, as a hedge against unexpected losses. 2. Consumers may seek special considerations for proposed rate increases by non-profit plans.

The preceding discussion of underwriting profits is equally relevant to for-profit and non-profit plans. However, regarding proposed rate increases by non-profit plans, consumers may be able to raise another issue: the legal duty non-profits have not to accumulate excessive surplus and thus not to include in their rates a contribution to surplus -- i.e., an underwriting profit if their surplus exceeds a certain level. While almost all Missouri health insurers are for-profit, Blue Cross of Kansas City is non-profit.33

33 All Blue Cross plans were originally non-profit. In the 1990s, however, Blue Cross plans began converting to for-profit status. Blue Cross of Missouri, headquartered in St. Louis, converted to for-profit status in 1998; as a condition of its conversion, the Missouri DOI and Attorney-General ordered that it establish an independent foundation with the value of its assets, which is now the Missouri Foundation for Health. Like many other formerly non-profit Blue Cross plans, Blue Cross of Missouri is now a division of Anthem Blue Cross, which is owned by WellPoint. Blue Cross of Kansas City, in contrast, remains non-profit.

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As noted above, surplus is the amount insurers hold that exceeds the amount necessary to pay their projected claims.34 Insurers should hold enough surplus to ensure that even under the most pessimistic assumptions they will be able to pay all claims. However, beyond some point additional surplus is unnecessary to protect policyholders. In for-profit companies, such excess surplus goes to the benefit of the shareholder/owners, since the stock they hold reflects the value of the companys entire surplus. But non-profits have no shareholders. They owe a duty not to shareholders but either to the general public or the companys policyholders. In either case, those owed a duty receive no benefit from surplus that exceeds the amount necessary to protect policyholders. A substantial argument can be made that non-profit insurers should not be permitted to include a provision for an underwriting profit or a contribution to surplus in their rates if their surplus exceeds the level necessary to protect policyholders. What is that level? To measure surplus, the NAIC and the states have developed a formula, based on the type of business a company does and the riskiness of the assets it holds, which calculates the minimum amount of surplus the company must hold to do business. The ratio of the company's actual surplus to that minimum is called the Risk-Based Capital ratio, or RBC ratio. As a practical matter all insurance departments require insurers to have RBC ratios of at least 200 percent, while the Blue Cross Association has established a minimum RBC ratio of 375 percent for Blue Cross plans and has historically considered a plan to be strong if its RBC ratio exceeds 500 percent. Neither the NAIC nor the Blue Cross Association has established a maximum surplus standard. However, in 2005 the Pennsylvania Department of Insurance issued an order establishing a 550 percent RBC level as that at which a non-profit Blue plan may not include an allowance for risk and contingencies in its rate filings. It also established the 950 percent RBC level as presumptively excessive.35 While the order is not binding in other states, it provides a credible basis on which to argue that a non-profit plan with an RBC ratio of more than 550 percent should not be permitted to include any contribution to surplus in its rates and that a non-profit plan with more than a 950 percent RBC ratio should set its rates at a level at which it neither has an underwriting profit nor retains investment income. According to its most recent annual statement, Blue Cross of Kansas Citys RBC ratio is 975. D. Ways to ensure that savings resulting from Risk-Adjustment, Reinsurance and Risk Corridors are included in the rate 34 Health insurers may refer to their surplus as reserves. But reserves are funds set aside for claims insurers project they will pay out. Surplus is a separate category of funds in addition to that amount. 35A Lewin Group report commissioned by the Pennsylvania legislature reached similar conclusions. That report found that "surplus levels that produce RBC ratios in the range of 500% to 900% can be justified to protect against underwriting swings that could jeopardize a Blue plan's standing with state insurance regulators and the Blue Cross Blue Shield Association." The Lewin Group, Considerations for Regulating Surplus Accumulation and Community Benefit Activities of Pennsylvania's Blue Cross and Blue Shield Plans, iv, (June 13, 2005). The negative implication of this conclusion, obviously, is that surplus levels that produce RBC ratios exceeding 900% cannot be justified.

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As noted in the previous section, insurers are substantially protected from losing money by three separate programs authorized by the ACA known as the 3 Rs Risk Adjustment, Reinsurance and Risk Corridors. Risk Adjustment is a permanent program; the Reinsurance and Risk Corridor programs expire after 2016. All three programs not only substantially insulate insurers from unexpected losses but also enable them to reduce their rates. 1. Reinsurance Under the reinsurance program, insurers receive payments for a portion of their high-cost claims: They receive 50 percent of their claims costs above a threshold amount up to $250,000. For 2014, HHS originally established a threshold amount of $60,000, but then reduced it to $45,000. For 2015, HHS originally authorized an increase in the threshold to $70,000, but then decided to keep it at $45,000. For 2016, HHS has proposed a threshold of $90,000, but whether that threshold will actually be implemented is uncertain.36 In its Regulatory Impact Analysis of March 2012 regarding the 3 Rs, HHS explained that [r]einsurance will attenuate individual market rate increases that might otherwise occur because of the immediate enrollment of higher risk individuals, and concluded that it is anticipated that reinsurance payments will result in premium decreases in the individual market of between 10 and 15 percent, based on work done by Actuarial Research Corporation.37 HHS further explained that a reinsurance program in New York similar to that authorized by the ACA reduced rates between 15 percent and 30 percent.38 Consumers should ask the actuary:

! What did he assume the reinsurance threshold to be when he set rates for 2014 and 2015, and what did he assume the company would receive in reinsurance payments for those years?

! What did the company in fact receive for 2014, and what does he anticipate the company will receive for 2015?

! Based on what the company actually received for 2014 and what he projects it will receive for 2015, and based on HHSs estimate that the reinsurance program should reduce rates by 10-15 percent, is his estimate of the impact of the reinsurance program on 2016 rates reasonable?

2. Risk Corridors Under the risk corridor program, the government pays insurers for a portion of their losses if they lose more than a certain amount, and the insurer pays the government a portion of its profits if it makes more than a certain amount. Specifically, each insurer has a target amount based on its premium. If an insurer's claims costs are within 3 percent of that target amount, it makes no payment to and receives no payment from the government. If, on the other hand, the insurer's

36 All individual, small group and large group insurers, plus all self-funded plans administered by TPAs, pay into the program, and the program then pays the individual insurers. 37CCIIO, Establishment of Exchanges and Qualified Health Plans, Exchange Standards for Employers (CMS-9989-FWP) and Standards Related to Reinsurance, Risk Corridors and Risk Adjustment (CMS-9975-F), Regulatory Impact Analysis, 42, (March 2012). 38Id. at 43.

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claims costs are between 3 percent and 8 percent less than that target amount -- and thus its profits are higher than it projected -- it must pay the government 50 percent of the difference between its actual claims costs and 97 percent of its target amount. Conversely, if the insurer's claims costs are between 3 percent and 8 percent more than its target amount -- and thus its losses are more than it projected -- the government will pay the insurer 50 percent of the difference between its actual claims costs and 103 percent of its target amount.

In addition, if the insurer's claims costs deviate -- either up or down -- by more than 8 percent of the target amount, a different formula applies: If the insurer's claims costs are below the target amount by more than 8 percent, the insurer pays the government 2.5 percent of the target amount plus 80 percent of the difference between its claims costs and 92 percent of its target amount. Conversely, if the insurer's claims costs are more than 8 percent above the target amount, the government pays the insurer 2.5 percent of the target amount plus 80 percent of the difference between the insurer's actual claims costs and 108 percent of its target amount. Insurers are therefore insulated from substantial losses: No matter how much money they lose above 108 percent of their target amount, the government is on the hook for 80 percent of it. And in final regulations released in May 2014, HHS made clear that the ACA requires that the government make full risk corridor payments even if government payments to insurers substantially exceed insurer payments to the government.39 Consumers should ask the actuary:

! Did he assume the insurer would be paying into or getting paid by the risk corridor program in connection with 2014 rates when he set those rates? How much did the insurer in fact pay into or get paid by the risk corridor program for 2014?

! Did he assume the insurer would be paying into or getting paid by the risk corridor program in connection with 2015 rates when he set those rates? How much does he now estimate that the insurer will pay or be paid by the risk corridor program for 2015?

! How much does he assume the insurer will pay or get paid by the risk corridor program in connection with 2016 rates? Based on his prior estimates of the risk corridor program's effects and its actual effects, and on the structure of the risk corridor program, is his estimate of its effects on 2016 claims costs reasonable?

3. Risk Adjustment Finally, under the risk adjustment program, insurers that end up with a less healthy than average group of enrollees receive payments from insurers with a healthier than average group of enrollees. Blue Cross companies in particular, and to a lesser extent other well-recognized insurers, are likely to benefit from the risk-adjustment program. The Blues have traditionally argued that because people know and have confidence in the Blue Cross name, those with adverse health conditions are disproportionately likely to seek coverage from Blue Cross. Therefore, under the risk adjustment program, Blue Cross companies would receive payments from other insurers, which have healthier enrollees than do the Blues. The Blues should therefore be able to reduce their rates by the amount they are likely to receive from insurers with healthier risks. 39 79 Fed. Reg. 30243.

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To reflect this, the actuary should multiply the amount he projects the company would collect in premiums by a factor of less than 1.00. Were a Blue Cross plan to use a risk adjustment factor of 1.00 or greater, it would be assuming exactly the opposite of what the Blues have consistently argued in the past. It would be assuming that its covered population will be at least as healthy as those in the less well-known plans. Consumers should ask any Blue Cross actuary:

! If he used a risk adjustment factor of 1.00 or greater he should explain the discrepancy between that value and the Blues traditional argument.

IV. Actions consumers can undertake to challenge proposed rate increases for 2016 Even though insurers do not file their rates in Missouri and even though the Insurance Department has no authority to approve or disapprove health insurance rates, consumers can have an effect on Missouris health insurance rates. In particular, they can seek to have the actuarial justification supporting proposed increases made public and to have the HHS Rate Review Office, the HHS-run Exchange in Missouri or the Missouri Department of Insurance hold a hearing on the rate filing, as explained below.

A. Ask the state and HHS to make public the actuarial justification supporting the proposed rate.

At the earliest possible opportunity, consumers should ask HHS to make public the actuarial justifications that will be filed in support of rates proposed for 2016. Consumers may wish to send a letter first, then follow up with an FOIA request if they do not receive a satisfactory response. Or they may wish to file a FOIA request without first sending a letter. If HHS fails to respond within 20 days of filing the FOIA request, consumers are free to file an FOIA lawsuit. The argument that federal law requires HHS to disclose rate filing information is compelling: HHS cannot properly keep from the public what it acknowledges it is keeping from the public, and HHS is not even making public what it says it is making public. First, HHS is not making public the Part III Actuarial Memorandum, which insurers in Missouri file with HHS (and would file also with the Missouri Insurance Department if Missouri reviewed health insurance rates). Although the Actuarial Memorandum is not considered a trade secret under established legal standards, HHS has to date kept it from the public to the extent that an insurer designates it as non-public. It has also kept from the public any other data an insurer designates as non-public. Moreover, it has taken the position that it must keep the entire rate filing from the public while it is determining what should be non-public, even though its own FOIA regulations provide that the entire rate filing except what it has found to be trade secret is public information.40

40 HHS has not attempted to make its own determination of what in Part III is trade secret. Instead, HHS treats the entire Part III as confidential until it notifies issuers that it plans to make Part III public, which it has never done while rates are proposed. See Defendants Motion for Extension of Time to File Responsive Pleading at 1,

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Notably, according to HHS staff, the department is at least two years behind in reviewing insurers designations of rate filing data as trade secret and has not made public even redacted versions of the Actuarial Memorandum for any filing made after April 2013. Moreover, the only Actuarial Memoranda available before April 2013 are those for the handful of states in which CMS is reviewing rates. In many of those states information designated confidential by the insurer has been redacted. The statement at the CMS website that Part III of the Preliminary Justification is available at the website is therefore incorrect. The CMS website also states that Part II of the Rate Filing Justification is posted at Healthcare.gov, and the rate review regulation states that CMS will promptly make the information contained in Part II public.41 However, Part II is not made available promptly enough to help consumers. To the contrary, in November 2014 part II information was released as part of the Unified Rate Review Template on the day open enrollment for 2015 began -- too late for consumers to comment on proposed rate increases and, in appropriate cases, to urge HHS to deem a rate unreasonable. Because insurers proposing to raise rates must file their Rate Filing Justifications with HHS regardless of whether the state or HHS reviews them, HHS has the power to make rate filings public not only in Missouri but in all states. Therefore, Missouri consumers may wish to work with consumers in other states to petition HHS to make all such filings public.

B. What consumers can do if the HHS Rate Review Office, the HHS-run Exchange and the Missouri DOI all decline to either hold a hearing or make the rate justification public In Missouri, insurers do not file their rates with the department. Therefore, HHS has the legal responsibility to review proposed rate increases exceeding 10 percent, although it has no power to reduce them. Neither HHS nor the state reviews proposed increases of less than 10 percent. Therefore, insurers can implement such increases at will. Nevertheless, insurers must file all proposed rate increases, including those of less than 10 percent, with HHS. Under the rate review rule HHS must make all rate filings public. With respect to proposed increases of 10 percent or more, which HHS reviews, consumers can petition HHS to hold a hearing. If HHS declines to do so, consumers can submit evidence and argument to HHS as to why it should deem a proposed increase unreasonable. In addition, for proposed increases of less than 10 percent, even though the DOI has no authority to disapprove rates, the director still has the authority to hold a hearing. He also has the ability to call for -- though not require -- the insurer proposing such a rate to reduce it. Consumers could take the following actions:

Consumers Council of Missouri v. Dept of HHS, Case No. 4:14 CV 01682 (2014).; 45 C.F.R. 154.215(h)(2); 45 C.F.R. 5.65 41 45 C.F.R. 154.215(h)(1).

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! Analyze the rate filing to determine whether the insurer has considered all the ACA provisions that could reduce costs in 2015 and has fully reflected those cost-savings in its rates.

! Call into question certain unexplained estimates or assumptions, as well as those the insurer has made and disclosed. For example:

o Trend. The company may disclose the trend it is using for 2016 without

explaining anything about how it derived that trend or by including only a concluding and unhelpful explanation. If the trend the insurer is using substantially exceeds relevant trend data that is public, consumers can reasonably argue that the insurers trend for 2016 is presumptively excessive. Examples of public trend data are the annual increase in national health expenditures, trend for 2016 that other carriers are using or Wall Street analysts are projecting, or trend for previous years that the company and others have used.42

o Expenses. The company may disclose the various expense components it

includes in the rate or the overall expense factor without disclosing its actual expenses from previous years. Consumers can calculate the companys true overall expenses based on data it discloses in its Annual Statement. If the companys expense factor for the ACA-compliant policy for which it is filing rates is substantially higher than its expense factor as set forth in its Annual Statement, consumers can reasonably argue that its expenses in the rate filing are presumptively excessive.

o Profit and contingencies. The company may disclose its underwriting profit

factor without providing any support for it. Consumers can calculate the rate of return that the underwriting profit factor plus the companys investment income would produce, based on data the company discloses in its Annual Statement. If that rate of return substantially exceeds the average rate of return for the health insurance industry or for the individual health insurance market, consumers can reasonably argue that the rate is excessive.

o Non-public information. Consumers may ask for a description of the data and

analysis, if any, that HHS is keeping non-public and an explanation of how the public disclosure of such data and analysis could cause competitive harm. (Any answer, as well as no answer at all, will have some benefit. If HHS does not respond or responds only with conclusory generalizations, that can be used in FOIA requests and litigation. If the department responds with a specific explanation, consumers can further refine their arguments -- to be made to the department, the press, the public and potentially in court -- as to why the information should not be kept confidential.)

o Hearing. Consumers may want to ask the attorney general to seek a hearing

before the DOI, based on the issues explained above. Even though Missouri law 42 See, e.g., PWC, Healthcare spending growth projected to slow in 2014, http://www.pwc.com/us/en/health-industries/behind-the-numbers/key-findings.jhtml, (last accessed Dec.9, 2014).

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does not expressly authorize the AG to appear before the DOI, the AG may view his authority as encompassing such intervention.

o News media. Based on the information described above, consumers may set up

meetings with reporters and editorial boards to explain the importance of making public the data and analysis that purport to justify a proposed rate increase. Consumers may also wish to try to draw attention to the states keeping information non-public by announcing that they are asking HHS to disclose the purported justification for proposed rate increases. The press and consumers clearly have a common interest in making such information public.

C. More actions consumers can take if HHS makes the rate justification public but declines to hold a hearing Based on the data the state makes available, consumers can do or arrange for their own analysis and submit it to the HHS Rate Review Office or the HHS-operated Exchange. In particular, they can explain why, based on the data the company has disclosed and as explained in section III above, the factors it has included for trend, expenses and/or underwriting profit are excessive. By replacing the actuarys selection for trend, expenses and profit with more reasonable selections and plugging those selections into the formula in the rate filing, consumers can recalculate a reasonable rate and recommend that HHS deem the insurers proposed rate unreasonable.