The Department of Health and Human Services (HHS) has issued a preliminary version of the regulation aimed at controlling "unreasonable" rate increases at the national level.

The draft regulation requires carriers to publicly disclose any individual or small group health insurance rate increases higher than 10 percent. The regulation is still open to comment and subject to change. Double-digit increases will trigger a review by state or federal regulators to determine if they're justified. States will get the first shot at scrutinizing the rate hikes. If HHS determines a state lacks the ability to do a thorough actuarial review of premium increases, federal regulators step in. States are eligible for federal grants to bolster their review capabilities and 45 states have taken advantage of the program to date.

This 10 percent threshold can be adjusted on a state-by-state basis over time. After 2011, a state-specific threshold would be set for the disclosure of rate increases, using data that reflect each state's cost trends.

Significantly, neither the regulation nor the Affordable Care Act gives HHS the power to deny rate increases. If they determine a premium hike sought by a carrier is unjustified it will post that finding on a government website, but the increase will still be permitted unless a state regulator prevents it. Most states already review rate increase proposals and some can deny rate increases on individual and small group medical insurance coverage.

How it Works

The mechanics of the rate review are described in the proposed regulation. If they want a rate increase over 10 percent or greater, the carrier will need to notify HHS and post its justification on the insurer's web site. The HHS will consider whether:

• The rate increase results in a projected future loss ratio below the Federal medical loss ratio (MLR) standard.
• One or more of the assumptions on which the rate increase is based are not supported by substantial evidence.
• The choice of assumptions or combination of assumptions on which the rate increase is based is unreasonable.

The timing of the rate increase is determined by state law, so HHS' review cannot delay implementation of the rate change. What it will do, however, is require disclosure of a great deal of information, bringing an unprecedented amount of transparency to the rate setting process. The new regulation provides a strong incentive for insurers to do a thorough review of their justifications before asking for big rate increases.