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Insurer, state in surprise accord

Harvard Pilgrim will limit rates and drop suit

By Robert Weisman
Globe Staff / July 3, 2010

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Harvard Pilgrim Health Care has struck a deal with state regulators to voluntarily limit its insurance rate increases for individuals and small businesses, a move the Patrick administration held up as evidence its bold campaign to hold down health costs is working.

The settlement was a surprise, coming just a week after an insurance appeals panel overturned a cap on Harvard Pilgrim’s rates imposed by the state Division of Insurance. The state agency deemed the increases proposed by Harvard Pilgrim and other insurers to be excessive. Other insurance carriers continue to appeal rate caps on their policy premiums.

“Thousands of small businesses and families will have lower insurance premiums,’’ Governor Deval Patrick said yesterday, hailing the deal with Harvard Pilgrim. “That is real relief at a time when working people need it and in a context where, frankly, the increase in rates at double-digit pace, year over year over year, defies logic or explanation.’’

Harvard Pilgrim said it agreed to the settlement, which it said would result in a loss of millions of dollars in premium revenue, in order to end the collision with the state and get on with business.

Indeed, the three-month showdown has caused considerable uncertainty for all involved — from insurers to small employers and individuals. It began when regulators rejected 234 out of 275 rate hike requests from insurers on April 1, includ ing 25 of 26 from Harvard Pilgrim. And many in the insurance industry believe the clash has distracted policy makers from attacking the cost of medical care reflected in ever-rising bills from hospitals and doctors across the state.

Cost savings under the deal are “not very significant,’’ suggested Lora Pellegrini, president of the Massachusetts Association of Health Plans, a trade group representing health insurers in the state.

“The governor has wasted a lot of time on this without bringing significant and meaningful relief to small businesses,’’ Pellegrini said. “This has really felt like an election year gimmick that was repudiated by his own administration.’’ She was referring to last week’s decision by an appeals board, made up of three lawyers from the state insurance division.

Under the settlement, Harvard Pilgrim, based in Wellesley, agreed to raise rates for small firms and individuals by a range of 7 to 11 percent. Initially, it requested rate increases averaging 8 to 12 percent for those policyholders.

The agreement covers the 12-month period between April 1, 2010, and March 31, 2011, but the insurer agreed not to impose the increase retroactively to April. By not “retrobilling’’ customers for the four months through July, the insurer effectively is boosting its rates by an average of about 7.7 percent for the year, in line with the ceiling state officials had sought. That was the level another insurer, Neighborhood Health Plan of Boston, agreed to in a settlement with the state last month.

Harvard Pilgrim officials said that at the agreed upon rates they expect to lose between $5 million and $10 million for the April-through-July period and to only break even in the market for small firms and individuals for the next eight months.

“We made a financial sacrifice as a way of bringing this to closure,’’ said Eric H. Schultz, chief executive for Harvard Pilgrim. “We also want to begin the real work of creating solutions that will lower the medical cost trend’’ through new products and legislation. “Both parties had an aligned interest to find a workable solution.’’

As part of the agreement, Harvard Pilgrim will withdraw from a lawsuit six state insurers filed in Suffolk Superior Court in April, seeking to have the rate caps invalidated. Harvard Pilgrim, the state’s second-largest health insurer, is the largest insurance company to settle with the state so far. Its settlement may put pressure on other carriers to reach their own deals, and on all health insurers to get tougher in negotiations with hospitals and doctors to rein in escalating health care costs.

Insurance Commissioner Joseph G. Murphy yesterday invited other insurers to resolve the issue rather than continuing to fight it out in administrative appeals and through the courts.

“We’re going to continue to use all the tools we have to get costs under control,’’ he said. “However, we are reasonable people, and my door is open to other companies that want to have discussions.’’

Patrick administration officials and Harvard Pilgrim executives both had strong incentives to settle their rate dispute, according to industry and government players involved in the standoff.

The state faced pressure to settle after the appeals panel overturned Murphy’s rejection of Harvard Pilgrim rates, and called into question the state strategy of rejecting outright scores of rate requests. Harvard Pilgrim, for its part, was grappling with the confusion of business customers who couldn’t plan their budgets because they didn’t know what their rates would be. And the insurer was in some danger of losing customers to rivals whose rates remained capped.

Other health insurers said they were pushing forward with their challenges to the rate cap despite the Harvard Pilgrim settlement.

“We’re still actively pursuing our appeal,’’ said Patti Embry-Tautenhan, vice president at Tufts Health Plan of Watertown. “But we would be willing to discuss a settlement that includes having the Division of Insurance take into account medical expenses.’’

Jay McQuaide, vice president at Blue Cross Blue Shield of Massachusetts, the state’s largest health insurance company, said the carrier was “looking forward to reaching a resolution that will achieve rates that allow us to cover the costs of the benefits in these plans.’’

Insurers and state officials agreed on one thing: The focus is shifting to the costs of medical care by hospitals and other providers.

But a hospital industry official said she would be opposed to reopening existing contracts with insurers in the absence of legislation that would pave the way for redesigning health care delivery and payment systems.

“The payers and providers agree that we need to change the system, but it’s really government that’s dragging their feet,’’ said Lynn Nicholas, president of the Massachusetts Hospital Association. “They’re more concerned about casinos.’’

Michael Levenson of the Globe staff contributed to this report. Robert Weisman can be reached at weisman@globe.com.

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