On September 6, the Federal Register published amendments by the U.S. Department of Health and Human Services (HHS) to its May 2011 regulations that require disclosure and state review of “unreasonable premium increases” by health insurers. The amendments expand the definitions of the individual and small group health plan markets to explicitly include plans purchased by individuals and small groups through associations and similar organizations. The following analysis considers the effect of the amended regulations on Washington State’s rate review process and concludes that the HHS regulations do not preempt the Washington Legislature’s exemption of association plans from the modified community rating law for health plans sold in the small group market.
Association Plan Rate Regulation in Washington
Washington State has regulated association health plans as large group plans for over 15 years. The Washington State Legislature carved out a unique position in the health insurance market for trade associations in 1995. The Legislature exempted association plans from the small group community rating law enacted that year. An example of this statutory exemption originating in the Legislature’s dismantling of the state’s 1993 health care reform law provides:
Employers purchasing health plans provided through associations or through member-governed groups formed specifically for the purpose of purchasing health care are not small employers and the plans are not subject to [rules governing small group insurance rates]. [RCW 48.44.024]
In reaction to both the new small group community rating law and the exemption, the State Insurance Commissioner (OIC) required insurance carriers to file association plans rates as if the plan were a large group. Nothing in state law requires treatment of association plans as a large group; rather, in the absence of authority to regulate association plan rates as “small group” plans, the OIC decided to treat these plans as large group plans for all rate filing and review purposes.
Federal Preemption of State Insurance Regulation
Issues related to federal health insurance regulation and association plans first arose with passage of the Health Insurance Portability and Accountability Act of 1996 (HIPAA). Since Washington State regulates association plans as large groups, HIPAA provisions governing the small group market conflicted with state standards. The Centers for Medicare and Medicaid Services (CMS) issued a series of memos describing its view of the application of HIPAA insurance provisions to state regulations defining groups differently. In short, CMS believed that state classification of association plans were irrelevant to the application of federal law.
Despite these beliefs, no federal agency had issued any clarifying insurance regulation and no federal statute has yet directly defined or classified small employer purchases through associations. The latest HHS regulation governing rate review is the first time a federal agency has established a standard that declares small employer health plan purchases through associations to be purchases in the small group market. As a consequence, associations now wonder whether association plan rates must be calculated and merged in accordance with Washington’s small group community rating law.
HHS explains this lapse in clarifying regulation by noting that the agency was not familiar with the consequences of permitting associations to be defined differently by the states. Nevertheless, the first question to ask is whether the federal statute or regulation applies to the circumstances questioned or whether there is a conflict at all. A state law may be preempted in part as it applies to some circumstances but this preemption will not prevent enforcement of the state law as to other circumstances. Preemption does not “kill” a law; preemption substitutes the federal law for the state law under defined circumstances refined by prior court decisions.
In many instances state law addresses subjects not affected by the federal regulations. Even where the state law overlaps with federal law, the federal law may not apply to the particular circumstances, may not apply to the actor, or may be limited in scope. Preemption involves a comparison of federal versus state requirements. Where the federal law can be satisfied along with the state law, there is no preemption.
Applying these preemption rules, first, the HHS rules do not apply to “grandfathered health plans.”
Second, the HHS rules do not address community versus experience rating; rather, the rules require state regulators to review rates established for association plans in accordance with the member’s status as an individual, small group, or large group. The rules require review of rates which exceed 10% of the prior rates. [45CFR §154.200] Even in these circumstances, the rate is not “unreasonable” when CMS has determined that a state like Washington has an Effective Rate Review Program and in turn, that determination does not depend upon state approaches to regulation of association plan rates.
An association health plan rate increase is unreasonable:
“(2) When CMS adopts the determination of a State that has an Effective Rate Review Program, a rate increase that the State determines is excessive, unjustified, unfairly discriminatory, or otherwise unreasonable as provided under applicable State law.” [45 CFR §154.102]
Third, Washington state law does not require association health plan rates to be calculated in accordance with small group community rating laws. If the state rate review otherwise considers association health plan rates consistent with standards expressed in the HHS regulation, no conflict arises between state and federal law.
Fourth and finally, under the insurance provisions of the federal health care reform, federal community rating requirements do not take effect until January 1, 2014. [PHSA §2701] Given that federal law governs the subject of community rating but delays its effective date until January 2014, HHS cannot assert a preemption of state laws that do not require community rating. According to Milliman, these future rules will significantly increase health plan rates for some.
Other Federal Rating Requirements
In addition, the federal medical loss ratio rules which took effect last year apply to both grandfathered and non-grandfathered plans. [45 CFR § 158.102] However, the rules do not apply to self-insured associations; since, self-insured plans are not defined as health insurance issuers (carriers). [Federal Register /Vol. 75, No. 230 /Wednesday, December 1, 2010 at 74865] These loss ratio rules will require refinement at the state level to fit the existing state regulatory system.
HHS regulations governing health plan rates do not require use of community rating by health plan issuers. States are granted leeway in reviewing individual and small group rates in accordance with state standards so long as the rate review is conducted to ensure disclosure and justification of certain rate increases. The current medical loss ratio rules do not require use of community rating and nothing in the federal health care reform act preempts state laws that permit experience rating until 2014.