Aetna headquarters in Hartford

Washington – For years, insurance giant Aetna charged individual health insurance policyholders in Connecticut  premiums far exceeding industry norms compared to what it paid out on medical claims. The oversized rates were allowed by the Connecticut Insurance Department and only ended with the implementation of Obamacare.

An analysis of nearly six years of Aetna’s filings at the Connecticut Insurance Department, obtained by The Connecticut Mirror in large part through a Freedom of Information request, shows that before approval of the Affordable Care Act, no other health insurer in Connecticut has had such a consistently good margin on any line of business like Aetna had on the policies it sold individuals. In fact, few insurers across the United States enjoyed that kind of margin, regulators and analysts say.

Yet in the eight years that Aetna has been selling individual health insurance policies in Connecticut, state regulators have never rejected the company’s request for a rate increase.

The medical loss ratio

Health insurers gamble that they will take in more money in premiums than they have to pay out in claims, a formula known as the medical loss ratio.  Companies’ adjusters try to control this ratio by predicting how much risk their company is taking on.

There is a link between the medical loss ratio and profits: The lower the medical loss ratio, the less spent on health care, and the more spent on overhead costs, including profit.

In 2011, the Affordable Care Act changed the rules for Aetna by setting a limit on the amount of premium dollars a company can earn over the claims, taxes and fees it has to pay. It requires insurers to pay out on claims at least 80 percent of the premiums collected on individual policies and 85 percent of the premiums earned on group policies.

Before the ACA changed things, Aetna’s expenses for claims on policies sold to Connecticut residents seldom rose much higher than 55 percent of premiums paid. That left the company with around 45 percent revenue on the policies.

That’s a much better ratio than other health insurers in the state, whose ratios averaged 70 percent to 80 percent, and much better than the national average, said Timothy Jost, a professor at Washington and Lee University School of Law and a consultant for the National Association of Insurance Commissioners.

“That strikes me as very low,” Jost said of Aetna’s medical loss ratios. “At the time the 80 percent ratio was adopted [under the ACA], most insurers were not far from that.”

Aetna spokeswoman Susan Millerick said Aetna expected a medical loss ratio of 60 percent in its individual market for 2008 and a little higher in 2009. But those ratios never materialized because the recession kept people who were concerned about paying co-pays and deductibles from using medical services, she said.

Nevertheless, Aetna continued to request rate increases “on the assumption that the book of business might deteriorate,” Millerick said. That means Aetna expected its healthier customers to shop for a more favorable rate over time, leaving a less healthy risk pool in its individual market, Millerick said. But that never happened because the company continued to sign up new healthy customers who had been screened by the company for pre-existing conditions and other factors that might make them bad risks.

Millerick said the gains Aetna made selling individual policies in Connecticut were “not typical,” but welcomed. “If the Connecticut experience occurred in other markets, we would not be leaving other markets,” Millerick said.

Approval almost every time

Although individual health insurance policies still represent only a fraction of Aetna’s business in Connecticut, the market has exploded in the past five years. The company earned about $6.8 million from these policies in 2007 — a figure that swelled to $59 million by 2012.

Millerick said the rates the company charged were competitive, as evidenced by its rapid growth in the individual market — from 2,600 policyholders in 2006 to 32,000 today.

“We believe this growth reflects that our products were well-priced and attractive …,” she said.

But others say insurers like Aetna were able to lower their medical loss ratios by selling policies with high co-pays and deductibles that dissuaded people from seeking medical help and by putting other limits on care.

“The less money you put into medical care, the more money you have for overhead, bonuses…and profits,” said Blake Hutson of Consumers Union.

Despite the company’s favorable medical loss ratios, the Connecticut Department of Insurance continued to approve the rate increases Aetna requested.

The records that are available – the Department of Insurance says it has destroyed all records filed before 2007 to comply with state recordkeeping statutes — show state regulators never rejected a rate increase request for the policies Aetna sold to individuals in Connecticut.

The company asked for five rate increases on individual policies from 2009 to 2013. Only once, in March 2010, did state regulators modify a rate increase request of 15 percent by Aetna — approving only an 8 percent hike.

“It is outrageous that a big company like Aetna would spend that small amount of premium dollars on medical costs and still have the audacity to ask for rate increases year after year,” said Wendell Potter, a health policy consultant who worked for Cigna for 15 years, part of that time at the insurer’s Bloomfield offices.

The ACA forced Aetna to close the big gap it had enjoyed between premiums earned and claims paid out, requiring the company to pay rebates to its customers for overcharges.

Rep. Joe Courtney, D-2nd District, a strong supporter of the Affordable Care Act, said the health care law’s reforms were way overdue because they gave state insurance departments strict guidelines to control rates on health care policies.

“I thank God for the [ACA’s] medical loss ratio which provides protection to consumers,” Courtney said.  “The new law will mean the end of the bad old days.”

Courtney said before the ACA established strict medical loss ratios “double digit rate increases were kind of par for the course.”

Potter testified at a Senate Commerce, Science and Transportation hearing last week that aimed to determine how well the ACA’s restrictions on medical loss ratios are working.

He said Wall Street pressured insurers to have a large gap between premiums and medical expenses because they assess the financial health of a company by the direction that the medical loss ratio is going year after year.

“I once saw a competitor’s stock price drop 20 percent in a single day when the company reported that its [medical loss ratio] for the quarter had increased by just one and a half percent,” he said.

But now that all insurers must abide by the limitations of the ACA, “the perception of [insurers] on  Wall Street has been more positive than before,” said committee chairman Sen. John Rockefeller, D-W-Va.

No standard

One reason Aetna had such a good medical loss ratio is that the standard the state used to evaluate Aetna’s rate increase request, was, in fact, no standard at all.

Before the ACA set its 80-85 percent rule, the state’s insurance department said it based its decisions on rate increase requests by following the National Association of Insurance Commissioner’s “model guidelines” that set a standard of a 55/45 medical loss ratio.

Paul Lombardo was the chief actuary at the department who signed off on many rate increases.

“Prior to the Affordable Care Act, we did not have any statutes or regulations concerning medical loss ratios,” Lombardo said. “But we followed the NAIC guidelines.”

The NAIC had guidance for  a medical loss ratio of  55/45, but that was considered a floor or a minimum given the benefits provided. But this was not considered an exact target.

Jost, the consultant to the NAIC, said the 55 percent number may have come up at a conference as the absolute floor when it comes to medical loss ratios.

“That was an absolute minimum,” Jost said. “That wasn’t what we were expecting and it is really serious if an insurer hit that number.”

Steve Ostlund, head of the Health Actuarial Task Force for the NAIC, agrees.

The NAIC “would never set a standard that low,” said Ostlund. He is life and health actuary for Alabama’s department of insurance and the NAIC’s expert on medical loss ratios. “Fifty-five percent was like the minimum. That was not a recommendation.”

Lombardo said the Connecticut Insurance Department reviewed an insurer’s past claims experience and projected trends in determining whether the company deserved a rate hike. But he said the process was inexact, resulting in “a lot of crystal ball gazing” in predicting how many claims a company would have to pay in the future.

“For a company to expect a certain [medical loss ratio] and actually get that is unheard of,” Lombardo said.

Lombardo said Aetna’s rates were appropriate. What happened, he said, is that Aetna was lucky in having fewer claims than expected, perhaps a result of its growing business.

“When you get new customers, you get a population that is healthier,” he said.

Mickey Herbert, former president and CEO of ConnectiCare, and now a consultant for the Massachusetts insurer Harvard Pilgrim, said Aetna isn’t much of a risk taker and was trying to improve its financial health by raising as much money in premium dollars as it could.

“They are a conservative company,” he said.

Herbert also said “actuarial projections are a bit of a crapshoot” and he could not fault the Connecticut Insurance Department for erring on the low side in its predictions of Aetna’s future claim expenses.

“The worst thing that could happen to a department of insurance is for a company to fail,” he said.

Aetna had to downshift quickly after the ACA was approved in 2010.

About six weeks after the ACA became law, to try to get closer to the 80 percent ratio, Aetna asked the Connecticut Insurance Department to allow it to lower its rates by 10 percent.

“Aetna says it expects to pay rebates on these plans for 2011 and is trying to stabilize rates at a reasonable level over a period of years,” said the insurance department in its decision to allow the decrease.

Donna Tommelleo, spokeswoman for the Connecticut Insurance Department, said the agency’s current commissioner, Thomas Leonardi, had nothing to do with the agency’s practice of using a 55 percent medical loss ratio as a guideline.

“The NAIC model law predated Commissioner Leonardi.  By the time he was appointed commissioner in 2011, the ACA medical loss ratio of 80/85 percent was the law,” Tommelleo said.

Like most state insurance departments, Connecticut’s agency is funded by an assessment on every insurance company that does business in the state, based on premium dollars collected.

According to the NAIC, the Connecticut Insurance Department’s budget will be $27 million this year.  Even though Connecticut is a small state, the NAIC ranked it 20th among all states and the District of Columbia in the amount of premiums insurers collected from customers in 2012, about $30 billion.

Aetna issues rebates

Under the ACA, Aetna was forced to issue more than $2.1 million in rebates in 2012 for policies that were in effect the year before. It continued to miss the 80/20 loss ratio and was forced to pay more than $1 million last year in rebates to individuals who held Aetna policies in 2012. Aetna was also required to issue rebates in 16 other states this year.

Aetna was not the only company that has had to issue rebates to customers because of problems with medical loss ratios.

ConnectiCare was required to issue more than $1.3 million in rebates to individuals who purchased their plans in 2011 and nearly $4.3 million in rebates to companies who purchased small groups plans in 2012.

“In certain business segments, ConnectiCare Insurance Company Incorporated experienced lower medical expenses in 2011 and 2012 than assumed in pricing,” said company spokeswoman Jenna Hagist.

ConnectiCare was required to issue rebates because its medical loss ratio for small group health plans was 75.4 percent in 2011 and the medical loss ratio for individual health plans was 73.2 percent in 2011, Hagist said.

Other insurers issued rebates, too, and these went to businesses and even government entities that purchased group policies. The town of Vernon, for instance, received a $169,852 rebate check last year from Cigna for a group policy for city employees.

An official from the Centers for Medicaid & Medicare Services said that in 2011, 24.5 percent of health insurance companies failed to meet the required standard in at least one market. But no one issued more rebates in Connecticut than Aetna and ConnectiCare.

CMS is expected to issue its latest medical loss ratio report in June. That will determine whether Aetna, and other Connecticut health insurers, will have to cut new rebate checks to customers because they continue to have poor medical loss ratios.

Aetna was one of several insurance companies that protested the Department of Health and Human Service’s regulations concerning medical loss ratios when they were posted in January of 2011.

“First and foremost, it is important to recognize that imposing an MLR does not make premiums more affordable,” wrote Steven Kelmar, an Aetna lobbyist. “We are very concerned that a minimum MLR could have the counterproductive impact of increasing premiums.”

Kelmar said the new regulations would strip Aetna of money to invest in fraud prevention and other procedures that would “improve quality and constrain cost.”

In 2012, the company spent $7 million supporting conservative groups that opposed the ACA.

The company also backed out of plans to participate in insurance exchanges in Connecticut, Maryland and other states when it determined the premiums it would be allowed to charge might not bring in enough money. In its Connecticut filing, Aetna said the rates for individual policies in the exchange should be raised by 20 percent to account for “pent up” medical needs of people in poor health who were previously uninsured.

But, in this case, the Connecticut Insurance Department questioned Aetna’s numbers and projections.

Aetna then announced it was not interested in participating in the Connecticut exchange, Access Health CT.

Courtney said there was a lot of concern among consumer advocates in Connecticut that the department of insurance did not negotiate rates with the insurers who are offering policies in the exchange, ConnectiCare, Anthem Blue Cross & Blue Shield, United Health and HealthyCT.

“We’re at a point right now where the rates are done, and it’s kind of a mixed bag,” Courtney said.

Despite its decision to stay out of Access Health CT, Aetna plans to continue to sell policies to individuals in Connecticut.

It asked the Connecticut Insurance Department  to approve another rate hike — in the amount of 8.75 percent — for individual policies the company is selling in the state this year.

Aetna said it needed to raise rates to cover the cost of complying with the ACA’s requirement that insurance policies offer “essential benefits,” including maternity care, and mental health and prescription coverage.

The department of insurance approved the increase.

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Reporting for this story was made possible by the Fund for Investigative Journalism.

Editor’s note: A clarification of medical loss ratio and profits has been included to help readers better understand the connection. 

Ana has written about politics and policy in Washington, D.C.. for Gannett, Thompson Reuters and UPI. She was a special correspondent for the Miami Herald, and a regular contributor to The New York TImes, Advertising Age and several other publications. She has also worked in broadcast journalism, for CNN and several local NPR stations. She is a graduate of the University of Maryland School of Journalism.

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