Controlling health insurance premiums was a primary goal of health care reform. Before the Affordable Care Act (ACA), small group health insurers could vary premiums for a number of reasons, such as a group’s overall health status, size, age, gender, history or industry. As a result, some small groups had significantly higher premiums than others. Small groups could even face large premium increases based on a new diagnosis for a single employee.
For small group health insurers, these discriminatory premium variations are no longer allowed. Under the ACA, small group health insurers can only consider four factors when varying premium rates.
Individual vs. Family Coverage: Small group health insurers are allowed to vary rates based on who is enrolled in the plan. Different rates can be charged depending on whether the plan covers only an individual or a family.
Rating Area: Rating areas allow insurers to charge more in areas where medical costs are higher. Under the ACA, each state is authorized to establish their own rating areas; otherwise, federally-established default rating areas will be used.
A state’s rating areas must be based on the following geographic boundaries: counties, three-digit zip codes, or metropolitan and non-metropolitan statistical areas. The Centers for Medicare & Medicaid Services may evaluate rating areas to confirm whether they are actuarially justified, not unfairly discriminatory, reflect significant differences in health care costs, lead to stability in rates over time, and apply uniformly to all issuers in a market.
Age: Small group health insurers are allowed to vary premium rates based on age. However, variations cannot exceed a 3:1 ratio for those 21 and older. In other words, premiums for the highest price age groups cannot be more than three times the lowest price age groups.
The ratio is calculated using three uniform age bands:
- Child (0-20): A single age band with the same actuarially justified premium rate based on a standard population.
- Adult (21-63): One-year age bands with increasing rates based on an age-rating curve.
- Older Adult (64+): A single age band with the same premium rate.
Tobacco Use: Small group health insurers can also vary premium rates for tobacco users, though variations cannot exceed a 1.5:1 ratio. (Premiums for tobacco users cannot be more than 1.5 times higher than for non-users.) The regulations define tobacco use as using tobacco an average of four or more times per week within the past 6 months, excluding religious or ceremonial usage, and includes all tobacco products.
At Setnor Byer Insurance & Risk, we are committed to guiding you through the ever-changing health care landscape. Check back with us periodically for informational updates about the Affordable Care Act. In the meantime, if you have specific questions, contact us.
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