Group Chap 15: Principles of Health Regulations

Question 1

Problems in an Unregulated Market

Answer 1

1. Ideal market
a. Customers would have most complete information possible

b. As needed to purchase most suitable policies

c. At a fair and adequate price

d. Insurers hold reserves sufficient to pay all future liabilities

2. Actual market
a. Unregulated market would be unstable because one dishonest company would have unfair competitive advantage

b. Almost all regulations originally written in response to a specific consumer problem

Question 2

Goals of Regulation

1. Prevent carrier insolvency
2. Ensure products are of good value
3. Prevent less serious problems
4. Maintain fairness between competing companies
5. Raise tax revenue
6. Advance social goods
7. Constraints on regulation include budgets and social acceptance
8. Regulation shuld be fair, honest, and cost-efficeitn

Answer 2

1. Prevent carrier insolvency
a. Monetary loss to policyholder
b. Delay in necessary medical treatment
c. Anxiety and stress of dealing with loss of coverage

2. Ensure products are a good value
a. Benefits don’t match consumer’s needs
b. Premiums too high

3. Prevent less serious problems

4. Maintain fairness between competing companies

5. Raise tax revenue

6. Advance social goals

7. Constraints on regulation include budgets and social acceptance

8. Regulation should be fair, honest, and cost-efficient

Question 3

Legal Basis

Answer 3

1. Philosophical balance between simplicity and complexity

2. Simplicity
a. May rely on other standards (i.e. reserves certified by MAAA)

b. May rely on general understanding (i.e. advertising not misleading)

3. Complexity
a. Needed when markets are complex

b. Needed when simplicity has not been effective

c. Complexity may accumulate over time
- Difficult to re-write regulations in order to simplify
- No compelling reason to invest the effort to simplify
- Simplification may be controversial, difference in opinions

4. Regulatory structure to complexity
a. Constitution – simple, stating broad principles

b. Laws – simple, addressing specific issues
- Enacted by elected governments
- Set forth general standards for protection
- Implemented or administered by executive department
- Expected to stand without change for many years

c. Regulations – detailed and complex, addressing specific issues
- Promulgated by agencies
- Designed to implement laws
- Administered by agencies
- Specific standards
- Likely to change from time to time

d. Administrative directives or bulletins – address specific issues, timely

e. Each level of regulation gains authority from prior levels

Question 4

Regulatory Enforcement of Legal Framework

1. Licensing
2. Information Gathering
3. Prior Approval
4. Enforcement
5. Receivership

Answer 4

1. Licensing
a. Establishes which companies are subject to regulation
- Must demonstrate not likely to become insolvent
- Must have a minimum level of capital
- Must agree to follow rules of jurisdiction
- Must have a reasonable business plan

b. Unique legal name for each company
- Simple: provide company’s name for a list
- Complex: submit detailed financial or product information

c. License agents to monitor sales practices

2. Information Gathering
a. Varies widely between regulatory bodies and by type of coverage

b. In some cases, no information gathered unless an apparent violation

c. Purposes for information gathering include
- Monitoring financial soundness
- Confirming compliance with regulation
- Providing information to consumers
- Designing new regulations

3. Prior Approval - where prevention is more effective than a cure
- Policy form language
- Premium rate levels
- Reinsurance arrangements
- Dividend payments
- Mergers
- Investments
- Other actions

4. Enforcement – regulation without enforcement can be ignored
a. Often relies on consumer complaints
b. Requires the company to make the consumer whole
c. Imposes fines or other penalties
d. Ultimate penalty is to withdraw company’s license
e. Sometimes consumer may not understand legal requirements
- Necessary to determine whether a violation occurred
- Appropriate action may be to educate consumer
- May put the burden on company to ensure consumer understands benefits and provisions before buying policy

f. Company may dispute violation
- Requires an investigation
- May be settled in judicial system

5. Receivership
a. Receiving and reviewing special reports

b. Regulator manages company

c. Company is liquidated

Question 5

Solvency Regulation

1. Capital Requirement
2. Guaranty Funds
3. Reserves

Answer 5

1. Solvency regulators include
a. Dept. of Insurance
b. Dept. of Health
c. Dept. of Corporations
d. Other agencies

2. Capital Requirements
a. Capital is required to protect against adverse deviation in experience

b. Capital defined as the difference between assets and liabilities

c. Capital also called “net worth”, “surplus”, “free reserves”

d. Minimum capital required before beginning operations

e. Required capital is a function of the risk characteristics of the specific business and assets

f. US regulators use risk-based capital formula to estimate needed capital

g. In Canada, the Office of the Superintendent of Financial Institutions (OSFI) oversees capital requirements through the Life Insurance Capital Adequacy Test guideline o In the US, RBC formulae have been adopted by NAIC for annual statements

h. Formulae vary between life/health, property/casualty, managed care

i. Determine ratio of TAC (total adjusted capital) to RBC
- Standardized way to identify carriers with financial problems
- Lower ratio indicates greater possibility of financial problems
- Ratio is used as red flag by regulators, if problem is indicated, examiners are used to analyze company
- Analysis could find that problems are not as severe as indicated by formula or that capital relief has already been provided
- Company could be placed in “runoff” mode where no new business can be sold until capital levels return to adequate level

3. Guaranty Funds
a. Monetary assessment of all similar insurers to cover financial consequences of an insolvency

b. Life and Health Insurance Guaranty Association Model Act

c. Purpose of the Model act is to protect against loss of benefits
- Payment of current claims and cash values
- Continuation of coverage

d. Model act establishes separate accounts
- Life insurance and annuities
- Health insurance

e. Association is established and empowered to make two types of assessments
- Administrative, legal, and other expenses
- Payment of claims and providing continued coverage

f. Certain insurers may be exempt from participation in funds - Hospital/medical service organizations
- HMOs
- Self-funded employer-sponsored plans
- Healthcare ministries which are exempt from state and federal insurance laws

4. Reserves
a. Defined in Health Reserves Guidance Manual – developed by Accident and Health Working Group of the NAIC, assisted by AAA

b. Claim reserves and liabilities – contractual obligation to pay future claims

c. Contract reserves – portion of premium in early years needed to pay higher claim costs in later years

d. Provider liabilities – obligation to make future payments to providers under a risk sharing arrangement

e. Premium deficiency reserves – extent to which future premiums plus current reserves are not sufficient to cover future contractual claim payments and expenses

Question 6

Consumer Protection Regulation

1. Disclosure of Key Features to Potential Customers
2. Reasonableness - Not unfair, unjust or discriminatory
3. Fairness - Prohibits discrimination among classes

Answer 6

1. Large body of consumer protection law
a. Grew over time in response to specific perceived problems

b. Typically states investigate a problem, witnesses testify

c. Some areas have little regulation, some areas have a lot

d. Regulation is minimal for dental, medical stop-loss, group

e. More extensive and complex for comprehensive medical, Medicare supplement, long-term care

f. Wide variation and disagreement on the appropriate type and level of consumer protection regulation needed

g. Provider network adequacy and accurate provider directory disclosure has been a major consumer protection focus of the NAIC recently

2. Disclosure of key features to potential customer
a. Standardized “shopper’s guide”
b. Outline of coverage
c. Summary of benefits
d. Illustration of results of policy under various scenarios
e. Wording may be specified by regulation, or subject to approval
f. Policy language may be required to include certain information, in a prominent place, of a specified font size
g. Application form may be required to be attached, and to contain tables of future guaranteed costs or benefits

3. Reasonableness – not unfair, unjust, or discriminatory
a. May require mandated benefits be included

b. May forbid certain exclusions

c. Benefits must be reasonable in relation to premiums
- Loss ratio is used to measure reasonableness
- Primarily used for small groups
- ACA minimum loss ratio of 80% for small employer group coverage

d. Large group major medical rates are not as big of a concern to regulators
- Competitive marketplace usually takes care of issues

e. ACA has minimum loss ratio of 85%Loss ratio definitions between ACA and state laws often vary
- State ratios tend to be simpler and tend to be prospective
- ACA ratios are more complex and may also be retrospective (carrier would have to pay back rebates if ratio is not met)

4. Fairness – prohibits discrimination among classes
a. Insurers use underwriting and risk classification as much as possible, setting rates differently for different classes, or refusing issue to others
- Risk classification gives a carrier a competitive advantage
- Failing to use risk classification can destroy a market
- Some argue that charging rates that match the risk is more fair
* (Some feel that subsidizing poor risks is more fair)

b. Dominant public opinion is that everyone should be able to purchase insurance at an affordable price

c. Regulation must strike a balance between prohibiting discrimination and preserving the private market for insurance