Prior to the ACA, composite rating was the way insurers calculated their premiums for groups under 50. Factors such as plan design, family composition and individual factors, such as health status and claims history, age, gender, location, occupation, tobacco use and duration of coverage basically told insurance companies how much the employee’s financial obligation was within a group plan.
Community rating, however, prevents health insurers from varying premiums within a geographic area based on individual factors. A variation of community rating is adjusted or modified community rating, in which insurance companies cannot vary their rates based on health status but can use other factors.
Prior to the Affordable Care Act (ACA), states had their own laws regulating how insurers could set their premiums, but there were no overall rating restrictions at the federal level. Effective for plan or policy years beginning on or after Jan. 1, 2014, the ACA imposes modified community rating restrictions on all non-grandfathered health plans for individuals and small businesses.
The ACA’s modified community rating rules do not apply to the large group market unless a state permits health insurance issuers to offer coverage to the large group market through an Exchange, which cannot occur prior to 2017.
Under the ACA, insurance companies in the individual and small group markets are no longer able to base premiums on gender, health status, medical condition, medical history, small employer size, occupation or industry. Instead, health insurers will be able to adjust premiums based only on the following factors:
- Individual vs. family enrollment . Insurance companies are allowed to vary rates based on family size. Premiums for family coverage are determined by adding up the rates of covered family members. For large families, insurers cannot include more than the three oldest covered children under age 21.
- Geographic area . Insurance companies are allowed to charge more in places where medical costs are high. Under the ACA, states may set up rating areas based on certain geographic divisions, such as counties, three-digit ZIP codes or metropolitan statistical areas (MSAs) and non-MSAs). In general, the rating area is determined in the small group market by using the principal business address of the group policyholder (that is, the employer). In the individual market, the rating area is determined by using the address of the primary policyholder.
- Age . Insurance companies are allowed to vary rates based on age. However, the ACA restricts insurance companies’ ability to use this variation by limiting the rates for older adults to no more than three times the rates of younger consumers. Age is determined as of the date of policy issuance or renewal.
- Tobacco use . Insurance companies are allowed to charge people who use tobacco products up to 1.5 times more than non-tobacco users. However, insurers may only vary rates for tobacco use for individuals who may legally use tobacco.
In addition to the ACA’s requirements, states may have their own premium rating restrictions.
For more information on community rating or other ACA-related regulations, please e-mail us or call us at 954.375.7771.