Health Reform Law Has Small Insurers On Edge

United Security Life and Health Insurance Co. lost money in 2009. The next two years weren't much better.

So when it came time for the small Bedford Park-based insurer to set health care premiums in 2012, it said didn't have much choice but to raise rates. On Jan. 1, the company raised premiums between 12.9 and 23.2 percent for about 1,000 of its Illinois customers.

That landed the company in a dubious position: a mandatory review by the Department of Health and Human Services. Under the new health care law, health insurers that raise premiums by more than 10 percent in any given year are scrutinized to determine whether the increase is "unreasonable."

A week after the Obama administration slapped Lake Forest-based Trustmark Life Insurance Co. for what it called an "excessive" rate increase, small insurers like United Security fear they may be the next in line for a public shaming.

"Believe me, we're not looking for a battle here," said Robert Dial, United Security's vice president and chief compliance officer. "We have to do what we feel is necessary in order to basically survive. We're not at war, we're just trying to exist. We're just trying to stay in the business."

United Security, which provides health insurance for about 10,000 individuals and small groups in six states, is among three carriers in Illinois that have landed on the Health and Human Services review list. John Alden Life Insurance Co. and Time Insurance Co., both subsidiaries of Milwaukee-based Assurant Health, also made the list.

Although the government doesn't have authority under the law to order insurers to lower rates, its ability to challenge rate hikes and publicize them provides new transparency and protection for consumers, administration officials said.

But critics say the administration's stepped-up reviews and heightened scrutiny are more about showcasing the value of the new health law in the run-up to the 2012 elections, a charge the Department of Health and Human Services denies.

Some small insurers and industry observers also complain that the added scrutiny could be harmful for small and midsize carriers.

"This will capture a disproportionate amount of small group (insurers) as opposed to large group," said Robert Laszewski, president of Alexandria, Va.-based Health Policy and Strategy Associates, a consulting firm whose clients include insurance companies. "What might happen is you wind up running these guys out of the business, so only the big guys are left."

Small insurers like United Security don't have the benefit of spreading risk over a large pool of customers, Laszewski said. Further, the share of premiums paid out in benefits can vary significantly year to year. As such, if a firm racks up a series of high claims in one year and loses money, it cannot seek to claw back those losses in subsequent years without coming under government scrutiny.

"When you've got smaller blocks of insurance -- 500 people here, 250 there -- how do you justify having sufficient funds to pay huge claims?" Dial said. "Just last year we had one claim that ran over $1.6 million."

In an attempt to recoup those kinds of major losses, United Security opted to raise rates in certain pools of customers in 2012, triggering the mandatory review.

The Department of Health and Human Services has determined that most states, including Illinois, have sufficient authority and resources to conduct their own insurance rate reviews. In other states, the department conducts its own reviews.

Like the federal government, Illinois has no power to mandate that insurers decrease rates, but the state has the authority to call carriers back to the table if it deems an annual rate increase too steep, said Anjali Julka, a spokeswoman for the Illinois Department of Insurance.

Illinois has not made a final ruling on United Security or the Assurant affiliates, which, combined, raised or intend to raise rates for 26,026 people in Illinois. The proposed increases range from 11.1 to 23.2 percent this year.

But state and federal regulators will have more power to issue sanctions starting in 2014, when state-run health insurance exchanges are launched.

The exchanges, which are projected to cover as many as 12 million consumers nationwide, will have the authority to drop or exclude health insurance plans with a history of excessive rate increases or premiums deemed too high.

Targeting Trustmark

The government's new power to review the rate hikes, granted by the health care law President Barack Obama signed in March 2010, has been used only twice, with the latest example coming last week with Trustmark.

Kathleen Sebelius, the secretary of Health and Human Services, issued a press release ordering the Lake Forest insurer to "immediately rescind the rates, issue refunds to consumers or publicly explain their refusal to do so."

The administration claims that Trustmark's "excessive rate increases" would raise rates at least 13 percent for certain customers in Alabama, Arizona, Pennsylvania, Virginia and Wyoming.

Cindy Gallaher, a spokeswoman for Trustmark, said the company "respectfully disagree(s) with the assumptions and conclusions drawn" by the Department of Health and Human Services. "Our premiums are driven by the rising cost and increased utilization of medical services.

"Trustmark has been and will continue to be in compliance with all aspects of the Affordable Care Act."

Under the new law, insurance companies that provide small group and individual insurance policies are required to spend at least 80 percent of premium revenue on medical care. The remaining 20 percent can be used for administrative expenses and profit. If an insurer fails to meet the 80 percent threshold, it must refund its customers.

Gary Cohen, acting director of insurance oversight at the Department of Health and Human Services, said the administration's projections show that Trustmark will not meet the premium-spending criteria in each of the five states.

Trustmark, which blamed the rate hikes on the rising costs of hospital care, doctors services and prescription drugs, said it does not intend to alter the rates. If the company fails to spend at least 80 percent of premiums on medical care, Gallaher said, "We will, promptly and in accordance with (the law), rebate the difference to customers."

United Security's Dial and a spokeswoman for the Assurance affiliates hinted that they may follow similar paths. Both companies said their rate increases are necessary and justifiable.

"We know there's more awareness or scrutiny on rate increases, but the things that are driving rate increases are still a reality," said Susan Burkee, a spokeswoman for Assurant Health. "We're hoping that (regulators) will look at the data we're supplying them and come to the same conclusion."

Small increases

Laura Minzer, executive director of the Illinois Chamber of Commerce'sHealthcare Council, questioned the effectiveness of the review process.

Even though employers complain about sharp increases in health care costs and insurance premiums, they're unlikely to seek the government's insight on which policy to choose, she said.

When faced with sticker shock, "There are those who will shop around, those who will say we'll have to raise employee contributions, and others who are flat-out frustrated and disgusted," Minzer said. "But are they going to be looking to (the Department of Health and Human Services)? I don't think so."

Nationally, health care spending grew at historically low rates in 2009 and 2010, as consumers spooked by the recession avoided visiting the doctor, taking expensive prescription drugs or undergoing costly elective procedures, according to a government report released this month. Spending growth in each of those years was less than 4 percent, marking the two lowest growth rates in the last 51 years.

Even so, health insurance costs continue to rise for many Americans, according to a September report from the Kaiser Family Foundation. That study found that the annual premium for family coverage through an employer rose 9 percent in 2011, the biggest increase in six years.

Increases of more than 10 percent, industry observers said, haven't been out of the ordinary.

Some insurers and industry observers said the administration's move to pressure Trustmark is politically motivated and likely to be followed by a rash of similar rebukes in 2012, an election year, to illustrate to voters that the new health care law is working to keep costs down.

"The Obama administration has to sell the (law) to voters, and they've got to act like they're delivering on their promise to control health care costs," Laszewski said. "This is politics."

Cohen, of the Department of Health and Human Services, disputed that claim. The new law, he said, already has helped bring transparency by forcing insurers to justify how premiums are spent.

The review process is conducted by an independent team of actuaries who are professionally bound to "call it as they see it," Cohen said.

"I don't think it benefits anybody to come out with decisions that don't stand up to scrutiny," he said. "Our only purpose is to make sure the public has the information they need to make informed decisions. The more information we can get into the hands of consumers, the better the market functions."

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