Massachusetts Health Insurance Rate Cap Creates Legal, Financial Problems

Published May 31, 2016

An emerging political battle in Massachusetts over insurance rate caps may foreshadow a problem on the national scene in the near future under President Obama’s sweeping health care reforms.

‘A Train Wreck’

In February, Massachusetts Goernor Deval Patrick (D) issued an emergency regulation allowing his administration to reject rate increases by the state’s health insurance companies. In April the Patrick administration used the authority to reject the insurers’ rate increases, leading to a court battle and a near-freeze in the Massachusetts small-group health insurance market that services about 800,000 residents.

After Judge Stephen E. Neel ordered insurers first to exhaust the existing insurance division appeals process, the state’s Division of Insurance appeals board sided with the insurers in June, finding the new rates justified and rejecting Patrick’s claims.

“This decision cannot stand,” Patrick said in a released statement. “We cannot continue to let small businesses and working people be victimized by out of control insurance premium hikes. This fight is not over.”

Patrick, who is in a fierce reelection contest with Republican Charlie Baker, a former health care executive, has come under heavy fire for his attacks on insurers. Emails from Robert Dynan, deputy commissioner of the Massachusetts Division of Insurance, referred to Patrick’s plans as a “train wreck” that could lead to “catastrophic consequences including irreversible damage to our nonprofit health care system.” The emails attracted national attention in the insurance community after being published by the Boston Globe.

Insurers Losing Money

In a press conference following the board’s decision, Massachusetts Association of Health Plans Executive Director Lora Pelligrini said Patrick’s approach didn’t attack the real cost drivers in the state.

“What the Patrick administration has engaged in is a failed policy,” Pellegrini said. “The real problem with health-care costs is the prices charged by certain providers who have a lot of market clout.”

Pellegrini said the Patrick administration’s attempts to impose rate caps threaten the continued existence of health insurance companies in Massachusetts. The three biggest Massachusetts health insurance companies are nonprofits, and in 2009 they posted massive financial losses. The rate caps are expected to lead to further losses of an additional $100 million, likely leading to their collapse.

Insurers Lack Cost Leverage

Gerald F. Kominski, associate director of the UCLA Center for Health Policy Research and professor at the UCLA School of Public Health, notes rate caps do not work in the United States because of structural factors in the design of the health care insurance industry.

“What is happening in Massachusetts is the government is attempting to enact a mechanism to protect consumers from unreasonable rate hikes,” Kominski said. “Gov. Patrick’s goal is consumer protection, but the health insurance companies have no effective mechanism at their disposal to control the prices on the services and providers they have to buy on behalf of their members, and they have no effective mechanism for controlling utilization of health services.”

Massachusetts is not alone in trying to cap the rates health insurers charge, Kominski notes. Pennsylvania has launched an investigation into nine of the state’s biggest health insurance companies and their rate increases, possibly signaling a move toward rate caps in the Commonwealth of Pennsylvania as well.

“This is why expenditures keep going up: The continued increasing utilization of high-cost services, our insatiable demand for health technology in all forms, the latest medications, unlimited access to hospital care, diagnostic testing, etc.,” Kominski said. “The rate cap by Gov. Patrick and other states does not give the companies a good mechanism to lower utilization or the prices they have to pay.”

Court Battle Expected

According Richard Epstein, a professor at the University of Chicago, the courts will eventually have to decide whether the Patrick administration has the legal authority to cap prices in Massachusetts.

“The new ratemaking procedures instituted by the governor preclude all profit mandates and have varying rates of return, so federal and state courts cannot simply run and hide from this case, constitutionally,” Epstein said. “If the courts ultimately knock it down, the government looks like a fool; if they keep this new ratemaking procedure on health insurance companies, then all the companies are either going to leave Massachusetts or go bankrupt.”

National Rate Caps Incoming?

Kominski says President Obama’s health care law contains a provision that may eventually turn into federal rate-capping authority.

“The health reform bill establishes a mechanism for Health and Human Services to review proposed premium increases,” Kominski said. “They do not have the authority to cap them, but to review the increases. And so I think [regarding] this rate capping in Massachusetts, this issue is going to play out in a number of other states and perhaps nationally.”

Epstein agrees this state-level problem could become a larger issue under Obama’s national reforms.

“We’ve seen what has happened with a similar problem on the federal level before, revolving around past public utility regulations,” Epstein said. “With the addition of price controls, rebates, bankruptcy potential, and a host of other legal issues, this could prove nightmarish for the courts to decide.”

Thomas Cheplick ([email protected]) writes from Cambridge, Massachusetts.