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Document Reveals Commerce Pressured PreferredOne to Make Unreasonable Assumptions to Justify Low Rates

Last week news broke from the Star Tribune that the Minnesota Department of Commerce “asked” PreferredOne to lower rates.  At the same time the Star Tribune was developing their story, I was looking into the same documents on the Commerce website and found other insurers were also pressured to lower rates, which I reported on in American Experiment’s blog.  However, it wasn’t clear how far Commerce went to pressure companies because, as I noted, there is a “troubling lack of transparency and consistency in insurance regulatory filings.”

Since then I reread the Commerce press release from September 6, 2013 announcing the “Lowest Average Health Insurance Rates in the Country for MNsure.”  The release basically admits to pressuring every insurer for lower rates.  The release states the following, “Minnesota’s nationally-recognized, thorough rate review process resulted in premiums for Minnesotans four to 37 percent lower than had originally been filed – providing border-to-border options for consumers across all metal levels.”

Still, this isn’t smoking-gun evidence anything inappropriate happened in the rate review process.

In fact, Commerce clearly wanted people to see these rate reductions as evidence of the success and effectiveness of Minnesota’s rate review process.  The release went into some detail on how the process works:

Minnesota is one of 31 states in the country that can deny rates requested by insurance companies based upon whether the rates are justified.  The [Commerce] Department’s actuaries conduct statistical analyses and closely scrutinize the assumptions that health insurance companies use to develop rates. The new plans and rates recently approved that will be available during open enrollment include many consumer protections.

All this sounds good, but we now know the health plans sold in the individual market failed to include one key consumer protection: No one was protected against overzealous and irresponsible actions by the Department of Commerce to pressure unjustifiably low rates.

As a result the lowest rates in the country, Minnesota is now the only state in the country where insurers are not collecting enough in premiums to cover their costs.  All this is leading to rate shock and harmful volatility in the market.

Regulators will undoubtedly continue to argue they were simply acting “in the public interest to make sure the rates requested are justified.”  However, the emerging facts surrounding PreferredOne’s rate review process—including new information in a document I recently reviewed—increasingly point to irresponsible behavior.

One strong piece of evidence is the fact that regulators asked PreferredOne for additional reductions when the regulators already knew the company’s rates were at or below the rest of the market.  PreferredOne would not have known this at the time and surely would not have agreed to set rates lower if it knew it made them such an outlier.

However, if there is a smoking gun in the regulatory record, it’s a July 8, 2013 letter from PreferredOne’s Milliman actuary, which reveals the actuary changed two key assumptions to justify reducing the assumed sickness rate (morbidity) of the insurance market to, in turn, justify their initial 26 percent rate reduction.  As the letter explains, the actuary reduced the morbidity assumptions “due to removing the 5% pent-up demand assumption on the uninsured and reducing the amount of MCHA [high risk pool] members entering the individual market from 40% to 5.0%.”

No clear-headed actuary or regulator could agree it was reasonable to assume only 5 percent of MCHA members would enter the individual market.  MCHA—the Minnesota Comprehensive Health Association—is the state’s high risk pool that has provided coverage to people with preexisting conditions since the 1970s.  It will be shut down at the end of this year and every member had the opportunity to switch to new coverage in the individual market during open enrollment last fall and winter.  The new coverage offered better benefits at a more affordable price, especially for people who qualified for subsidies.  So, switching was a no-brainer for MCHA members, most of whom were active health care users very aware of the limits of their health plan.  The idea that only 5 percent of MCHA members would wake up to these benefits in 2014 is altogether unreasonable.

Notably, the actuary covered their tracks in their letter by saying this change was only made “after conversations with [PreferredOne] senior management.”

The fact that the actuary and the senior management would even propose such an unreasonable change in their assumptions to justify lower rates strongly suggests, if not proves regulators were exerting inappropriate pressure on the company to lower rates.

Without such pressure, it’s just too hard to imagine a professional actuary and senior management making this change because it is so clearly aimed at creating a lower rate level, not a justified rate level.

It’s much easier to imagine closed door high pressure negotiations between senior insurance company managers and senior Commerce staff, without the presence or input of an actuary.

Ultimately, it appears Commerce regulators approved PreferredOne’s changed assumptions, which allowed the initial rates to be lowered by 26 percent.  Even more assumptions must have been changed later on to justify lowering rates an additional 14.7 percent, which combined resulted in the 37 percent reduction.

We now know 62 percent of MCHA members switched to better coverage in the individual health insurance market.  Set aside the obvious pressure placed on insurers to lower rates, by just allowing PreferredOne to assume only 5 percent of MCHA members would enter the market, Commerce regulators are, in part, responsible for the substantial losses the company is experiencing right now and the 63 percent rate hike being imposed on their current enrollees.

Nothing protected consumers from overzealous Commerce regulators.  Maybe, if the rate review process were more transparent, consumers would not be facing the rate shock of a 63 percent premium increase today.  Clearly, Commerce’s rate review process needs a serious audit and overhaul.

And this may not be the end of the story.  It’s not yet known how much other insurers altered their actuarial assumptions to accommodate pressure for lower rates.  Consumers deserve to know.

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