The difficulty of legislating premium rate increases

For months, the idea of controlling healthcare costs by limiting premium increases has been a sleeper item in the healthcare reform bill. In recent weeks, this idea has become a marquee issue, most notably with its inclusion as a centerpiece of the president's healthcare reform proposal.

Will top-down legislative control of premiums help to control costs? The complex inner-workings of health insurance can be obscured by only looking at premium rates and not examining the underlying cost drivers. These drivers include unit cost changes, medical inflation, utilization changes, member behavior, plan changes, premium "true-up", and various leveraging.

This briefing paper by Milliman principal Jon Shreve demystifies the inner-workings of health insurance premium changes. It offers policy makers a primer in how rates are set and how underlying dynamics affect premiums.