Health plan companies develop rates using estimates of future claim costs, administrative expenses, and how much in reserves they need to hold.
Claim costs: The amount a company expects to pay for health care services and goods, such as physician services, hospital fees, and prescription drugs, on behalf of all policyholders with similar policies.
Administrative expenses: The cost of running a health plan. These costs can include:
Salaries of employees
Costs to maintain computer systems to pay claims
Costs to manage the provider network (signing up doctors, setting payment rates, etc.)
Commissions for agents and brokers (called “producers”)
Taxes, fees, and assessments that health plans pay to the state or federal government
Other costs to administer the policy -- for example, fraud detection and prevention activities
Contribution to reserves: Money that the insurance company has left after paying for claims and administrative expenses. The reserves are needed to pay for claims and administrative expenses in years when the plans do not collect enough premiums to cover those costs.
Individual and small group health insurance rates are determined for a particular plan of benefits from a particular network of doctors and hospitals based on the combined medical costs of everyone in that market for a particular age, tobacco use, and geographic area. This is called community rating. The rates are based on the costs of the entire market within a geographic area.
The rising cost of medical care affects rates. With community rating, your premium may go up even if you haven’t received any medical services, if the average cost of services has increased.
Approve: If the filing is clear and justifies the filed rates, the filing is approved and the health plan company is notified that the rates may be used.
Object: If the information in the filing is not clear or does not justify the filed rates or rate increase, the Department of Commerce sends an objection letter to the filing company.
This objection must be sent within 60 days of when the Commerce receives the filing. If no objections are sent within 60 days the rates are “deemed” approved, which means the company can go ahead and use them.
The filing company then has 30 days to provide a complete filing, or the filing may be closed without approval.
If the filing company fails to justify the filing within the 30 days or any longer period approved by Commerce, the filing is permanently closed.
After the filing is closed, the company can make another rate filing.
All health plan rate filings must meet these criteria:
Lifetime and anticipated loss ratio meets the state's minimum of 71 percent to 82 percent
Rates are sufficient to cover expected claims and expenses
Rates provide a reasonable value to the insured
The filing is complete, correct, and understandable
To demonstrate that the above criteria are met, the filing must include:
Historical information, such as when issued and any changes in benefits, rates, or profitability
Historical experience including premiums, claims, enrollment, and durational/seasonal patterns since inception of policy forms
Statistical reliability of historical experiences
Assumptions used in projecting the future loss ratio -- anticipated changes in claim cost per person and enrollment – as well as the reasons for a rate increase, such as benefit changes, population changes, tax, and fee changes.
Your premium will not go up solely because you have claims just as it will not go down solely because you do not have claims. Insurance is a pooling of risks so individuals pay a share of the pooled experience in exchange for not assuming the full risk of their own medical costs. If you have an individual or small employer policy, your premium is based on the claims of everyone with your type of policy. If you have coverage under a large employer health plan, your premium is based in part on the claims of everyone in the group.