Regulatory limitations impact annual financial decisions
We are approaching the time of year when health insurers are beginning to calculate loss ratios and compile other financial data in order to evaluate the performance of their book of business. They will evaluate each market segment and product line, and make underwriting and rating decisions as to each. These decisions are affected by federal HIPAA requirements, as well as laws and regulations that exist in each state.
Health insurance rates are not heavily regulated in most states. State regulations may require rates to be filed, and they often are reviewed informally by regulators. However, most states do not review and approve rate filings prior to use. Therefore, with a few exceptions that may exist with respect to small group business, insurers may take annual rate actions and may "rate up" a poorly performing book of business. One of the frequent consumer criticisms of federal HIPAA is that, while it guarantees the renewability of coverage, it does not prohibit rating practices that can make the renewal unattractive.
Under the guaranteed renewability requirement of HIPAA, health insurers might not non-renew or cancel an insured's coverage unless the insured has done certain things, such as failed to pay premiums or committed fraud in procuring coverage. Exceptions to this rule exist when the insurer desires to discontinue a type of coverage or to withdraw from a market segment entirely.
Most states allow an insurer to "term and replace" an insured's existing coverage; this is generally referred to as a discontinuation of a type of coverage. To discontinue a particular type of coverage, the insurer must offer each group (that is subject to the discontinuation) the option of purchasing other comparable coverage that the insurer currently offers. The discontinuation may take effect with respect to all affected groups 90 days from the date of the notice of discontinuation. Most states do not require that the notice be tied to each employer's renewal date.
Some issues may arise as to whether minor tinkering to a product constitutes the discontinuation of an existing product. For example, many states take the position that material adjustments to copayment levels constitute a discontinuation of one product and the offering of a new product. Insurers should discuss proposed changes to their products with the applicable regulators to determine whether benefit plan changes are viewed as discontinuations.
Insurers also may withdraw from a market segment—such as Medicare, large group-commercial, small group-commercial and individual business—when it determines that its long-term business strategy does not include one or more of those market segments. Withdrawal from one of these segments is implemented by the insurer non-renewing all business written in the market segment in a given state or geographic service area. To withdraw from small group business, for example, an insurer must give each group 180 days notice prior to the non-renewal. Once the non-renewal notice has been given, the insurer may not write any new coverage in that particular market for an extended period of time, normally five years. During this moratorium, this insurer must continue to service the business that is in run-off, but may not issue any new contracts.
Annual underwriting decisions are significantly impacted by state and federal regulations. Health insurers should be aware of the implications of HIPAA's guaranteed renewability requirement and the related state regulations that impact the discontinuation of products and the withdrawal from market segments.
This column is written for informational purposes only and should not be construed as legal advice.
Barry Senterfitt is a partner in the insurance industry practice of Akin Gump Strauss Hauer & Feld LLP, and is located in the firm's Austin, Texas, office.
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