I’m already dreading getting next year’s rate increase on health insurance. It’s always so confusing too. Are health insurance rates set by the state? Will they be set by Obamacare?
Dear Number Cruncher,
The answer is rates are set sort of by the state, sort of by “Obamacare”, and sort of neither.
Most states require insurers to have their rates approved before they can sell health insurance to residents. This was true even before health reform. After health reform, states were given more resources to oversee rate reviews.
The actual rate is not set by the state. Rather, the insurer presents evidence that shows what they believe the rate should be. This will include some profit for the insurer, or surplus for non-profit insurers.
Health reform requires the insurer to spend a certain percentage of the money they collect from customers (“premiums”) on medical care and related activities (such as disease management). This is called the “medical loss ratio” or “MLR”.
So even though the government does not set the actual rate, the rules set what the insurer can use to justify raising rates. And if they are wrong – and don’t need as much to pay for medical bills and other allowable costs – they have to pay back their customers. Given that paying thousands of people refunds is a hassle, insurers are motivated to avoid overestimating the rates.