The health-care law requires insurers to submit all rate increases over 10 percent to the federal government for review. While the Obama administration cannot reject the rate hikes, it can decide whether the proposed increase is "reasonable" or "unreasonable."
Anthem Blue Cross of California submitted 19 double-digit rate increases in 2012, 16 in the individual market and three for small group plans (the plan's public relations director Darrel Ng, however notes that it's average increase in the small group market was a much lower 6.5 percent). The federal government has only reviewed the small group increases at this point, and found all three to be reasonable.
Let's focus on the biggest increase submitted for a small group plan called Lumenos. It is a high-deductible plan with 18,321 members. And, on Feb. 2, Anthem proposed raising rates by an average of 17.85 percent.
Anthem chalked it up to three factors. The biggest category is something called "underwriting losses and gains," which essentially means whatever money is leftover after an insurer has paid all its claims. Exactly 46.87 percent of the rate increase was due to Anthem wanting to ensure that, after they cover costs, some amount of profits still exists.
An increase in administrative costs accounted for 32.7 percent of the rate increase, which covers expenses like marketing and processing claims. The smallest factor turned out to be increases in the cost of medicine, which made up 20.43 percent of the rate hike.
The forms get even more detailed as it goes into what parts of the health-care sector became more expensive. Here's part of the section where Anthem breaks down some of the factors that accounted for the rise in medical spending:
"The primary drivers of premium increases are associated with increases in the price of services primarily from hospitals, physicians and pharmacies, coupled with changes in consumption of services, also called utilization, by members," Anthem writes in its explanation of its rate filing. "Anthem anticipates small cost increases from higher utilization, while the majority of the cost increases are associated with higher prices for services."
In other words, Anthem points the finger at doctors as the real reason for a rate increase: If they keep charging higher prices, their argument goes, we have to charge higher premiums.
Anthem then walks through how it will spend its insurance dollars, should its rate hike move forward. This is important because it shows that the insurer will comply with the health-care law's "80/20 rule," which requires insurers to spend at least 80 percent of subscriber premiums on medical costs.
This is also where Anthem lays out how much of the premiums it plans to net after it pays out claims and covers administration (those "underwriting losses and gains" mentioned earlier): $21.50 per member, or 4.83 percent of the overall premium.
This is essentially what Anthem submitted to California regulators when it proposed the rate increase. It was then left to actuaries to check the company's math, looking over whether medical costs would increase, for example, as much as they expected.
California regulators said that Anthem's math checked out. Or, in insurer-speak: "The insurers past experience and projected future experience support the rate increase proposed."
That, in a nutshell, is how a double-digit rate hike moves forward. Anthem lays a case for a rate increase and regulators decide whether they buy it. For the three plans reviewed so far, regulators have bought the explanation.