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INS-41-07-00005-A Market Stabilization Mechanisms for Individual and Small Group Market
6/25/08 N.Y. St. Reg. INS-41-07-00005-A
NEW YORK STATE REGISTER
VOLUME XXX, ISSUE 26
June 25, 2008
RULE MAKING ACTIVITIES
INSURANCE DEPARTMENT
NOTICE OF ADOPTION
I.D No. INS-41-07-00005-A
Filing No. 568
Filing Date. Jun. 06, 2008
Effective Date. Jun. 25, 2008
Market Stabilization Mechanisms for Individual and Small Group Market
PURSUANT TO THE PROVISIONS OF THE State Administrative Procedure Act, NOTICE is hereby given of the following action:
Action taken:
Amendment of sections 361.5 and 361.7(a), renumbering of sections 361.6–361.7 to sections 361.7–361.8 and addition of new section 361.6 to Title 11 NYCRR.
Statutory authority:
Insurance Law, sections 201, 301, 1109, 3233; and L. 1992, ch. 501; L. 1995, ch. 504
Subject:
Market stabilization mechanisms for individual and small group health insurance market.
Purpose:
To create a new market stabilization process in the individual and small group market, to share among plans substantive cost variations attributable to high cost medical claims.
Text of final rule:
The title of Section 361.5 is amended to read as follows:
Section 361.5 Pooling of variations in costs attributable to variations in specified medical conditions (SMC) beginning in 1999 through 2006.
Section 361.5 is hereby amended to add a new subdivision (k) to read as follows:
(k) Reporting requirements, payments to the pools, or collections from the pools under this section shall not be required in 2005 or 2006.
Sections 361.6 and 361.7 are hereby renumbered 361.7 and 361.8 and a new section 361.6 is added to read as follows:
361.6 Pooling of variations of costs attributable to high cost claims beginning in 2006 for individual and small group policies, other than Medicare supplement and Healthy New York policies.
(a) In each pool area a risk adjustment pool is established in connection with individual and small group health insurance policies, other than Medicare supplement insurance policies and Healthy New York health insurance policies. Each pool shall operate independently; that is, all calculations and payments described below are made for each pool independently of any other pool.
(b) The annual funding amount for all pool areas combined is as follows:
(1) $80,000,000 for 2007;
(2) $120,000,000 for 2008; and
(3) $160,000,000 for 2009 and each calendar year thereafter.
(c) The annual funding amount for each pool area is in proportion to the annualized premiums in that pool area. For 2007 and each calendar year thereafter, each pool participant shall provide to the superintendent annualized premium information on or before February 28. The superintendent shall advise carriers of the funding amount for each pool area within sixty days of receipt of annualized premium information from all carriers.
(d)(1) Each carrier's share of the total funding payable to or from the pools shall be determined based on the carrier's high cost claims in its areas of operation.
(2) In order to implement the phase in of the new specified medical condition pooling process, on or before November 10, 2006 each carrier shall report to the superintendent its annualized premium amount as of December 31, 2005 and its cumulative calendar year claims paid in 2005 for individual standardized direct payment health maintenance organization policies, individual standardized direct payment point of service policies, all other individual health insurance policies, and small group health insurance policies, using the form in subdivision (h) of this section for each pool area. The superintendent will provide carriers with an estimate of potential pool receivables or liabilities using this 2005 data for advisory purposes only.
(3) Each following year, beginning in 2007, on or before February 28, each carrier shall report to the superintendent its annualized premium amount as of December 31 of the preceding year and its cumulative calendar year claims paid in the preceding year for individual standardized direct payment health maintenance organization policies, individual standardized direct payment point of service policies, all other individual health insurance policies, and small group health insurance policies, using the form in subdivision (h) of this section for each pool area. In 2007, the superintendent provided carriers with a second estimate of potential pool receivables or liabilities using 2006 data, for advisory purposes. Payments to the pools, or collections from the pools, shall be required beginning in 2008 and shall be based upon the data from the preceding calendar year.
(4) Cumulative calendar year claims paid shall include the total of all claim payments on behalf of an insured individual from January 1 through December 31 of the preceding year, regardless of when the services were provided.
(5) Cumulative calendar year claims paid shall include payments for hospital and medical services, prescription drug payments, capitation payments, and regional covered lives assessments paid pursuant to section 2807-t of the Public Health Law or percentage surcharges paid pursuant to section 2807-j or section 2807-s of the Public Health Law. Carriers that include the covered lives assessments shall convert the family covered lives assessment into a per member assessment component in order to be included with claims expenses attributable to any one member.
(6) Cumulative calendar year claims paid shall not include amounts paid in satisfaction of the percentage surcharge requirement set forth in section 2807-j(2)(b)(i)(B) of the Public Health Law or interest paid out by a carrier pursuant to section 3224-a(c) of the Insurance Law.
(7) Each carrier's submission shall be signed by an officer of the carrier certifying that the information is accurate.
(8) If a carrier makes a submission after February 28 and the carrier is a pool payer, the carrier's payment into the pool will be increased by one percent interest per month. If a carrier makes a submission after February 28 and the carrier is a pool receiver, the carrier's distribution will be reduced by one percent per month.
(e) The superintendent shall calculate each carrier's share of the total funding payable to or from the pools pursuant to the example in subdivision (i) of this section for each pool area as follows:
(1) Identify the total claims paid by each carrier for the following types of policies: individual standardized direct payment health maintenance organization policies, individual standardized direct payment point of service policies, all other individual health insurance policies, and small group health insurance policies, other than Medicare supplement and Healthy New York insurance policies.
(2) Identify the total claims paid in excess of $20,000 for each insured by type of policy.
(3) For each carrier for each type of policy, divide the claims paid in excess of $20,000 by the total claims paid (the amount specified in paragraph (2) of this subdivision divided by the amount specified in paragraph (1) of this subdivision) to determine the high cost claim ratio.
(4) Calculate the average high cost claim ratio for all carriers for all types of policies combined and multiply that ratio by the total claims paid for each carrier for each type of policy (a carrier's amount specified in paragraph (1) of this subdivision multiplied by the average high cost claim amount specified in paragraph (3) of this subdivision.)
(5) Subtract the amount calculated in paragraph (4) of this subdivision from the amount in paragraph (2) of this subdivision for each carrier for each type of policy to determine the adjustment needed to equalize high cost claims and determine if the carrier is a net contributor or receiver.
(6) Sum the net contributions of all carriers who are net contributors in the pool area to determine the total net contribution.
(7) Divide the pool area funding amount by the total of paragraph (6) of this subdivision and multiply by the amount identified for each carrier for each type of policy in paragraph (5) of this subdivision to determine the carrier's net pool contribution or distribution.
(f) Billings will be done by the superintendent beginning in 2008 within thirty days of receipt of submissions from all carriers, and payments will be due from carriers within five business days from the date billed. Payments made after the due date shall include interest at a rate of one percent per month. Subsequent to the billing date, but within the calendar year, carrier data that formed the basis of the billing will be audited. In the event audits necessitate post-billing adjustments, the adjustments will be charged or credited in the next year's billing or distribution. Additional payments due from any carrier whose data errors caused it to underpay, or refunds due back from any carrier whose data errors caused it to be overpaid, shall include a one percent interest charge per month from the original due date or payment date.
(g) A carrier shall, with respect to distributions from the pools attributable to each type of policy, as determined in paragraph (7) of subdivision (e) of this section, without reduction for contributions owed on other types of policies:
(1) refund the distributions directly to insureds based upon the type of policy that caused the payments to be received without consideration of minimum loss ratio provisions; or
(2) submit a detailed plan to the superintendent for approval:
(i) demonstrating how the distribution will be applied to reduce future premium rates for the type of policy whose insureds caused the payments to be received, or
(ii) providing a detailed explanation as to how the distribution was considered in the development of premium rates for that year.
(h) Claim Submission Form.
Claims Paid From January 1 – December 31, ( )
Carrier:
Pool Area:
Total annualized premium for individual standardized direct payment health maintenance organization (HMO) policies, individual standardized direct payment point of service (POS) policies, other individual health insurance policies, and small group policies: .
* Do not include Medicare Supplement Policies or Healthy New York Policies.
** For each insured determine the cumulative claims paid from January 1 through December 31 and report the total claims paid for all insureds for each type of policy listed above.
***At each dollar level (Attachment Point), report all claims paid over that attachment point level amount from January 1 through December 31 for any insured. Cumulative total claims paid above the ZERO attachment point level would equal the total claims paid by the carrier for all insureds for the period.
(i) Chart for calculation of pool amounts.
1
3
4
5
6
Albany Region
Total Claims Paid
Claims Paid in Excess of $20,000
High Cost Claim Ratio (Column 2 Divided by Column 1)
Claims Paid Multiplied by Average High Cost Claim Ratio (Column 1 Multiplied by Column 3 Average)
Adjustment to Equalize High Cost Claims (Column 2 Minus Column 4)
Pool Amount Owed or Receivable (Predetermined Total Pool Amount Divided by Column 5 Total Net Contributions Multiplied by Column 5)
Carrier A Dir Pay HMO Dir Pay POS Dir Pay Other Small Group Carrier A Net Contribution or Distribution Carrier B Dir Pay HMO Dir Pay POS Dir Pay Other Small Group Carrier B Net Contribution or Distribution Total Net Contributions All Net Contributions Total Net Distributions All Net Receivers
Section 361.6 is renumbered to be 361.7 and the opening paragraph of subdivision (a) is amended to read as follows:
361.7(a) The pools shall be administered either directly by the superintendent, or in conjunction with a firm, performing at least the following functions:
Final rule as compared with last published rule:
Nonsubstantive changes were made in section 361.6(c), (d)(3), (8).
Text of rule and any required statements and analyses may be obtained from:
Andrew Mais, Insurance Department, 25 Beaver St., New York, NY 10004, (212) 480-2285, e-mail: Amais@ins.state.ny.us
Regulatory Impact Statement, Regulatory Flexibility Analysis, Rural Area Flexibility Analysis and Job Impact Statement
Non-substantive changes were made to sections 361.6(c), 361.6(d)(3), and 361.6(d)(8) of the regulation. These changes do not require revision of the Regulatory Impact Statement, Regulatory Flexibility Analysis for Small Businesses and Local Government, Rural Area Flexibility Analysis, and Job Impact Statement.
The non-substantive changes made in sections 361.6(c), 361.6(d)(3), and 361.6(d)(8) of the regulation changed the date for health plans to submit to the Department annualized premium amount and cumulative calendar year claims paid. The submission date was changed from January 31 to February 28. The Department changed this date in response to comments received from an interested party representing health plans. The party indicated that the January 31st date could be difficult for some health plans to meet. In addition, the party stated that some health plans may not be able to accurately calculate claims data by January 31 because claims from October, November, and December may not have even been submitted yet by providers. In order to accommodate these concerns, the submission due date was changed to February 28. This non-substantive change was made in the three sections listed above because all of the sections contained references to the submission date.
Assessment of Public Comment
The regulation amends Section 361.5 and adds a new Section 361.6 to 11 NYCRR to establish a new market stabilization mechanism as required by Section 3233 of the Insurance Law.
The Department received comments from an interested party representing health plans. These comments duplicate comments received in 2006 and 2007 about the regulation, and are addressed below.
Comment:
The proposed regulation will result in a substantial cross-subsidy flowing from the small group market to the individual market. The statutory intent of Section 3233 is to stabilize risks within each market, not by pooling the two markets together.
Response:
The Department disagrees with the interested party's interpretation of Section 3233 of the Insurance Law. The legislature enacted Section 3233 of the Insurance Law to assure the orderly implementation and ongoing operation of open enrollment and community rating in the individual and small group markets. The Department has consistently interpreted Section 3233 to require pooling of the individual and small group markets together, as evidenced by the fact that under all prior pooling methodologies the individual and small group markets were pooled together. Moreover, Section 3233(c)(2) specifically contemplates the pooling of individual and small group health insurance and provides that the funds received by an insurer or health maintenance organization (HMO) pursuant to such regulations be applied to reduce the premiums of the particular class of contracts issued pursuant to Sections 4321 and 4322 of the Insurance Law whose subscribers caused the payments to be received. Additionally, if the individual and small group business were not pooled, appropriate risk adjustment would not occur in the individual market, as that market contains a disproportionate number of the high-risk individuals.
Comment:
The proposed regulation will create a penalty for health plans with strong cost controls. The interested party suggested changing the formula to prevent this problem. The suggested change to the formula was to divide the number of members with high cost claims by total members instead of dividing the high cost claims by the total claims.
Response:
The Department has not reviewed any evidence showing that particular health plans have significantly better cost controls than their competitors. Nor has the Department received evidence showing that if health plans were to have better cost controls, those health plans would be penalized under the high cost claims pooling methodology. In fact, if a health plan were to maintain slightly superior controls, the superior controls would impact all of that plan's claims, not just those over the high cost claim threshold, so the denominator of the health plan's claim ratio would be reduced along with the numerator, and the reductions would tend to neutralize one another.
With regard to switching from a dollar claims ratio to a ratio based on the number of members with high cost claims, the original pools established in 1993 were based on estimated numbers of high cost members (determined based on member demographics). HMOs argued that they were unfairly penalized because their demographics tended to be more favorable than other health plans. HMOs also suggested that this form of pooling rewarded inefficient carriers who had inadequate cost controls. Consequently, those pools were phased out and, at the suggestion of health plans, replaced by pools based on average claim cost factors of members with specified medical conditions. The health plans then argued that the new pools were too complex. Recently, those pools were also phased out, and replaced by the currently proposed method, which uses a straight forward dollars-to-dollars high cost claim ratio. The interested party now suggests this mechanism, too, penalizes efficient health plans. However, the interested party's recommended change would return to a pooling methodology similar to the original 1993 methodology.
Regardless of the form of pooling, those health plans and classes of business with a lower proportion of sicker, higher cost insureds will be required to contribute funds to help stabilize the rates of health plans and classes of business covering a larger proportion of sicker, higher cost insureds. Each of the different forms of pooling arrive at approximately the same result, and accomplish essentially the same degree of risk adjustment, regardless of how a health plan's relative exposure is measured, or the efficiencies of a health plan's operations. The proposed methodology in the Fifth Amendment to Regulation 146 uses the same threshold for defining high cost claims as is used in the reimbursement calculations for the direct payment stop loss funds, which has been favorably received by health plans.
Comment:
The claim threshold used in the regulation is too low, and uncapped. The threshold should be set at $100,000 in order to only adjust for unusually high cost claims. The higher threshold would reduce variations related to plans that are better able to manage care and costs. It was suggested to only reimburse a percentage of claims over $100,000 (approximately 70%), instead of the calculation used under the proposed regulation. It was further suggested that the threshold be capped at $500,000 because small health plans already purchase stop-loss protection.
Response:
When developing the regulation the Department modeled hypothetical pool results using various claim thresholds and actual industry claim experience. The Department found that thresholds of $10,000 and $15,000 would develop more immediate risk adjustment relief; that a $20,000 claim threshold could develop adequate risk adjustment and market stabilization levels within a three year phase-in period; and that a $100,000 threshold would produce no realistic or meaningful risk adjustment. With respect to only reimbursing a percentage of claims, such as 70%, this would cause the pooling to be further diminished. However, the Department will continue to review outcomes as 2007 claims data is tabulated to assess the adequacy of the $20,000 level to determine whether more or less risk adjustment is needed.
With respect to capping claims at $500,000, very few claims come in over $500,000, and excluding those claims due to potential stop-loss coverage that had been previously purchased would only have a nominal impact on pool results. Moreover, since carriers must pay premiums to purchase stop loss coverage, with reinsurers' pricing established at amounts sufficient to cover at least the amount of the expected claims in any year, factoring out recoveries would also require factoring in equivalent or greater reinsurance premium payments. This would add significant complexity to the process, which health plans have historically argued against.
Comment:
By using a high cost claim threshold of $20,000, the individual direct payment HMO and point-of-service (POS) policies would be receiving duplicative benefits, as they are reimbursed for a percentage of claims from $20,000 to $100,000 from the Direct Payment Stop Loss Funds established pursuant to Sections 4321-a and 4322-a of the Insurance Law. The interested party suggested taking the stop loss recoveries into account when calculating amounts under the market stabilization pools.
Response:
The Direct Payment Stop Loss Funds were established in 1999 pursuant to Sections 4321-a and 4322-a of the Insurance Law, a separate statutory mandate from Section 3233 of the Insurance Law, which provided for the establishment of the market stabilization pools in 1992. The Direct Payment Stop Loss Funds were created to provide additional state subsidies to the individual direct payment market, and were not meant to replace the market stabilization pools. Although the previous market stabilization pools did not take the direct payment stop loss recoveries into consideration, the Department reviewed the suggestion of taking the payments from the Direct Payment Stop Loss Funds into consideration under this proposed amendment. The Department determined that if the stop loss recoveries were taken into consideration, the standardized individual direct payment HMO policies could become payors, which would undermine the intent of Section 3233 of the Insurance Law. Section 3233 is meant to equalize the risk of high cost persons throughout the individual and small group markets by encouraging each HMO and insurer to insure high costs persons (who are mostly found in the individual direct payment market). Even with the relief provided through the Stop Loss Funds, direct payment HMO policy premium rates still significantly exceed premium rates on other community rated business. If direct payment policies become payers, the direct payment market would be adversely impacted — a circumstance that would run counter to the statutory intent.
Comment:
An interested party stated that an example provided to health plans of high cost claim calculations under the pooling methodology is inconsistent with the proposed regulation.
Response:
The example is not inconsistent with the proposed regulation. The example refers to total net contributions of all net contributors, so it adjusts amounts down if the total contributions of net contributors exceed funding, as provided in Section 361.6(e)(7).
Comment:
Section 361.6(c) and (d) of the regulation require data submissions by January 31st of each year. The interested party expressed concern that while plans may know their premium income by that date, plans may not accurately know their claims data because claims from October, November, and December may not even have been submitted by providers. The interested party also stated that the proposed regulation fails to provide advance notice of payment or receipt from the pools needed for rate setting. The interested party stated that the amount due each March (or April, if the January 31st date is changed) will not be known when the plans are setting their rates in the end of the prior year.
Response:
To address the submission deadline concern raised by the interested party, the Department changed the January 31st date to February 28th. In addition, the Department has extensively discussed the prospective nature of the regulation with interested parties. To address concerns that the regulation operate prospectively, the proposed regulation went into effect October 4, 2006 but does not require payments to the pools until 2008. Moreover, the Department collected 2005 and 2006 claims data from health plans, as required under Sections 361.6(d)(2) and (3), and provided plans with model year estimates of pool receivables or liabilities. These estimates gave the health plans adequate notice of their responsibilities under the proposed regulation so that health plans may consider the amounts when developing premium rates. Moreover, under the new methodology health plans should be able to predict contributions and distributions from year to year.
Comment:
The approach to distributions found in Section 361.6(g) is too vague, subjective, and potentially unfair. It was suggested that 361.6(g) be modified so that as long as the health plan reasonably considered distributions from the pools when developing rates, the health plan would not be required to provide refunds because the results differed from pricing assumptions. The interested party also stated that Section 361.6(g)(2), which allows for a submission of a detailed plan for the Superintendent's approval, will not be transparent, and will purposely steer subsidies to particular markets.
Response:
According to Section 361.6(g) of the proposed regulation, when health plans receive monies from the pools, they have options. Health plans may refund the monies to subscribers based on the type of policies that caused the money to be received; health plans may submit a detailed plan to the Superintendent, demonstrating how the distribution will be applied to reduce future premium rates for the type of policy whose insureds caused the payments to be received; and/or health plans may provide a detailed explanation as to how the distribution was considered in the development of premium rates for that year. Thus, health plans have options as to how they handle pool distributions. Further, since Section 361.6(g) specifies what must be included in the detailed plan that must be submitted to the Superintendent, the Department is not subjectively determining how the monies must be applied in each case. The purpose of the regulation is to stabilize risk in the individual and small group markets, so that the money will be distributed in the areas where the high risk is concentrated.
