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The Massachusetts Division of Insurance appeals board, in a blow to Gov. Deval Patrick, sided Thursday with a leading state insurer that has been locked in a premium dispute with his administration.
The case has taken on a political tinge, as some of the state's top insurance companies have alleged Patrick was challenging them both to appeal to middle-class voters and to undercut one of his leading re-election rivals, Republican Charles Baker.
Baker spent a decade as president of Harvard Pilgrim Health Care before resigning last July to run for governor. Patrick, a Democrat, has suggested Baker sides with the insurers in the ongoing dispute.
Harvard Pilgrim, the state's second-largest private insurer, had appealed an April decision by the Division of Insurance that denied 235 of 274 business premium increases proposed by the company and some of its leading competitors.
The board concluded Thursday that given the market conditions, Harvard Pilgrim "has illustrated and proved that there are valid reasons that explain and justify its differential reimbursements to providers."
Other companies, including Blue Cross Blue Shield of Massachusetts, the state's largest private insurer, are still awaiting decisions on their appeals.
Massachusetts Association of Health Plans President Lora Pellegrini hailed the decision, saying it justified the original move by insurers to hike rates. She said the ruling by the appeals board bodes well for other insurers.
Consumer Affairs Undersecretary Barbara Anthony said the administration is reviewing the decision and weighing whether to ask Attorney General Martha Coakley to appeal the decision to the Superior Court.
"We strongly disagree with the hearing officers' decision," said Anthony. "They've substituted their judgment for the judgment of the commissioner."
On April 1, Insurance Commissioner Joseph Murphy announced he was rejecting the premium increases the industry proposed for small businesses with up to 50 employees. Murphy deemed the proposed hikes "excessive."
The insurers initially appealed to a Superior Court judge, but he ruled they had not exhausted their appellate remedies. The companies returned to the division's appeals board, and Harvard Pilgrim won its case Thursday.
Anthony said the ruling affects about 25 of the 235 proposed rate increases. Besides Blue Cross, other insurers who have appealed include Fallon Community Health Plan and Tufts Health Plan.
Patrick issued a statement vowing to continue to fight the rate hikes, saying unchecked premium increases are discouraging employers from hiring amid the recession.
"We cannot continue to let small businesses and working people be victimized by out-of-control insurance premium hikes," the governor said.
House Republican Leader Bradley H. Jones Jr. said the reversal showed the administration was "playing politics with health care."
"Insurance premiums have been going up for years and Governor Patrick has failed to provide a comprehensive plan to address the true issue of rising health care costs," the North Reading Republican said in a statement.
E-mails obtained after a public records request filed by The Associated Press showed the head of an Insurance Division finance unit had warned the premium caps could cripple the companies financially and would most likely cause "a train wreck."
In one April 6 e-mail, Deputy Insurance Commissioner Robert Dynan said the caps could cause insolvency at the insurance companies, including Blue Cross and Harvard Pilgrim.
Dynan also wrote the caps were imposed "against my objections," as well as without his input.
Dynan heads the insurance division's Financial Surveillance Unit. His primary responsibility is to guarantee that health insurers in Massachusetts remain financially secure so they can provide the coverage customers purchase.
Patrick and Murphy dismissed Dynan's criticisms, saying he would not normally be involved in the rate-setting process. Dynan himself wrote Murphy a letter of apology just before the administration complied with the AP's public records request and released his e-mails.
The insurers argue they should be allowed to charge rates that cover their costs and ensure they remain solvent.
They also contend that limiting the premiums they charge customers, while not capping the cost charged to them by providers, including doctors and hospitals, put an unfair financial burden on their companies.
Provider costs are the subject of pending legislation.
Small business owners said the higher premium rates are threatening to derail any economic recovery.
"This is an emergency situation," said Jon Hurst, president of the Retailers Association of Massachusetts. "This type of increase ... means that small businesses will lay off employees, close their doors, or drop health coverage."