Topic:
HEALTH INSURANCE;
Location:
INSURANCE - HEALTH;

OLR Research Report


July 3, 2008

 

2008-R-0377

COMMUNITY VERSUS EXPERIENCE RATING HEALTH INSURANCE

By: Janet L. Kaminski Leduc, Senior Legislative Attorney

You asked for an explanation of “community rating” versus “experience rating” when insurers develop premium rates for an employer-sponsored health insurance policy and what Connecticut's law requires compared to other states.

SUMMARY

Under “community rating,” an insurer charges all people covered by the same type of health insurance policy the same premium without regard to age, gender, health status, occupation, or other factors. The insurer determines the premium based on the health and demographic profile of the geographic region or the total population covered under a particular policy that it insures.

Under community rating, higher cost groups (e.g., groups made up of older or sicker people) are averaged out with lower cost groups (e.g., groups made up of younger or healthier people). The expenses of all participants are pooled together and then spread out equally across all participants.

“Adjusted community rating” is a rating method under which an insurer charges a particular group an amount that is derived by modifying the community rate for the group's specific demographic factors (e.g., age, gender, family composition, geography).

In comparison, an insurer uses “experience rating” when it predicts a group's future medical costs based on its past experience (i.e., the actual cost of providing health care coverage to the group during a given period of time; the group's claim history). Thus, the insurer calculates the group's insurance premium based on its own, not the overall community's, experience.

Most states impose rating restrictions on insurers with respect to developing premiums for small employer groups (i.e., an employer with 50 or fewer employees). Rate restrictions were enacted as a way to stabilize the small group insurance market. They are intended to prevent dramatic premium swings and normalize the premiums charged so that more small employers, and their employees, might be able to obtain, and afford to keep, health insurance.

Connecticut is one of nine states that require insurers to use adjusted community rating when developing rates for small employer groups. The other eight states are Maine, Maryland, Massachusetts, New Hampshire, New Jersey, Oregon, Vermont, and Washington. (The adjustment factors permitted vary by state and are described below.) New York requires community rating. The District of Columbia, Hawaii, Pennsylvania, and Virginia do not have rate restrictions for small employers.

The remaining 37 states impose “rate band” requirements on insurers developing premiums for small employers. Rate bands limit the amount by which an insurer can vary an employer's premiums based on health status from an index, or base, rate. The extent to which premiums can vary depends on the size of the rate band permitted and the factors that must be limited. On average, these states permit an insurer to vary a small employer's premium by up to plus or minus 25% from the index rate based on the group's experience. Most states with rate band requirements also permit insurers to vary premiums for age, gender, industry, geography, and group size to the extent the variation is actuarially justified.

RATING REQUIREMENTS FOR SMALL EMPLOYER GROUPS

Most states impose rating restrictions on insurers with respect to developing premiums for small employer groups (i.e., an employer with 50 or fewer employees). It is generally accepted that experience rating small groups is too burdensome on such employers and their employees because it can result in wide premium fluctuations year over year. For example, in a small group of 10 people, one chronically ill person or catastrophic medical event significantly impacts the group's total experience and, thus, premiums.

The National Association of Insurance Commissioners' model act regarding health insurance availability for small employers requires insurers to develop rates for small employers using adjusted community rating where the group's premium can only vary for (1) geographic area, (2) family composition, and (3) age. With respect to age, the model act permits age brackets in at least five-year increments that begin with age 30 and end with age 65 (NAIC Model Laws, Regulations and Guidelines 35-1). Most states have adopted rating requirements that differ from the model act.

Community Rating

New York requires health insurers selling small group policies to charge community-rated premiums. New York law defines “community rated” as a rating methodology in which the premium for all people covered by a policy or contract form is the same based on the experience of the entire pool of risks covered by that policy or contract form without regard to age, sex, health status, or occupation (N.Y. Ins. Law 3231).

Under New York's law, an insurer may use a rate structure that sets rates based on family composition. Insurers may also establish separate community rates based on “reasonable geographic regions,” which may include a single county.

Adjusted Community Rating

Adjusted community rating is a rating methodology under which a single rate applies to all small groups in the market, with limited adjustments allowed for specified “case characteristics.” Under this method, an insurer sets a base rate for a particular set of case characteristics. The group's actual premium rate is then determined by varying the base rate based on a group's specific case characteristics that state law permits insurers to take into account when setting premiums. Allowable case characteristics often include age, gender, industry, geographic area, family composition, and group size.

Connecticut. Connecticut law requires insurers to use adjusted community rating when developing premiums for small employer groups (CGS 38a-567(5), (6), & (8)). It also requires any differences in the base premiums that an insurer charges for different health benefit plans to be reasonable and reflect objective differences in plan design. Any such differences cannot include variations based on the nature of the groups that the insurer assumes will select the particular health benefit plans.

An insurer may adjust the community rate (i.e., base premium) to reflect one or more of the following “classifications:”

1. age, but age brackets of less than five years are prohibited;

2. gender;

3. geographic area, but an area smaller than a county is prohibited;

4. industry, but the rate factor associated with any industry classification is prohibited from (a) varying from the arithmetic average of the highest and lowest rate factors associated with all industry classifications by more than 15% and (b) increasing by more than 5% a year;

5. group size, but the highest rate factor associated with group size is prohibited from varying from the lowest rate factor associated with group size by a ratio of more than 1.25 to 1.0;

6. administrative cost savings resulting from the administration of an association group plan or a plan written through the Municipal Employer Health Insurance Plan (MEHIP), as long as the savings reflect a reduction to the small employer carrier's overall retention that is measurable and specifically realized on items such as marketing, billing, or claims paying functions that the plan administrator or association takes on directly, except that such savings may not reflect a reduction realized on commissions;

7. savings resulting from a reduction in the profit of an insurer that writes small business plans or arrangements for an association group plan or a plan written through MEHIP, provided any loss in overall revenue due to a reduction in profit is not shifted to other small employers; and

8. family composition, but the insurer can use only one or more of the following billing classifications: employee; employee plus family; employee and spouse; employee and child; employee plus one dependent; and employee plus two or more dependents.

The law requires an insurer to collect data for all demographic rating classifications before quoting premiums to a small employer group. It prohibits an insurer from making inquiries regarding health status or claims experience of the small employer group, its employees, or their dependents, before quoting a premium.

Connecticut Exception. For plans issued through MEHIP or by an association group plan, at the option of the Comptroller or the association group plan's administrator, premiums charged or offered to small employer groups are not subject to the above rating requirements if certain conditions are met (CGS 38a-567(22)). Specifically, such a plan will be exempt from the adjusted community rating requirement if, effective October 1, 2008, it:

1. covers small employer groups as a single group;

2. covers at least 3,000 employees;

3. charges or offers each small employer the same premium rate for each employee and dependent (i.e., community rates); and

4. is written on a guaranteed issue basis (i.e., accepts all applicants).

In addition, to qualify for this exception, an association group must be a bona fide group as set forth in the federal Employee Retirement and Security Act (ERISA). And it cannot (1) be a fictitious grouping (a grouping for rating purposes where a rate differentiation is based solely upon group membership) or (2) issue a plan that causes undue disruption in the insurance marketplace, as determined by the commissioner (PA 08-181, 3).

Other States. Eight other states require insurers to use adjusted community rating for small employer groups: Maine, Maryland, Massachusetts, New Hampshire, New Jersey, Oregon, Vermont, and Washington.

Table 1 summarizes these states' requirements, including the factors (1) for which an insurer may vary a base rate and (2) that an insurer is prohibited from considering when developing premiums for small employer groups.

Table 1: Other States' Adjusted Community Rating Requirements

for Small Employer Groups

State

Permitted Factors

Prohibited Factors

Maine

Me. Rev. Stat. Ann. tit. 24-A 2808-B

+/- 20% of the community rate for: age, industry or occupation, and geography.

Additional adjustments permitted for: family composition, smoking status, participation in wellness programs, and group size.

Gender, health status, claims experience, and policy duration.

Table 1: -Continued-

State

Permitted Factors

Prohibited Factors

Maryland

Md. Code Ann., (Insurance) 15-1205

+40% to -50% of the community rate for: age and geography (four defined areas of the state).

(Effective June 30, 2011, +/- 40% of community rate for age and geography as defined.)

Additional adjustments are permitted for family composition.

After adjusting for age and geography, may apply a discount of up to 20% for participation in a wellness program.

(Provision sunsets June 30, 2011.)

Additional administrative discount may be offered to a small employer that purchases other insurance products from the same insurer.

Health status, occupation, and anything else not specifically permitted.

Massachusetts

Mass. Gen. Laws Ann. ch. 176J, 3

The amount an insurer charges a small group cannot exceed two times the lowest amount that could be charged within that class of business in that group's geographic area.

The base premium may be adjusted for: age, industry, participation rate, an approved wellness program, and tobacco usage. The resulting amount must fall within a rate band of 0.66 and 1.32 of all products offered to small groups.

Additional adjustments may be made outside the rate band for: family composition, geography, and group size.

The commissioner must name at least five distinct geographic regions of the state. An insurer's adjustment value must range from (1) 0.8 to 1.2 for each geographic region and (2) 0.95 to 1.1 for group size.

Anything not specifically permitted.

Table 1: -Continued-

State

Permitted Factors

Prohibited Factors

New Hampshire

N.H. Rev. Stat. Ann. 420-G:4

An insurer must develop a “health coverage plan rate” for each product offered to small employers. Variations in rates between products must be solely due to variations in coverage design or provider contracts.

A small employer's premium must be calculated by adjusting the health coverage plan rate for one or more of the following case characteristics: age, group size, and industry.

Age adjustments must be in five-year bands and as otherwise specified in law. The maximum rate differential allowed after making all adjustments is a 3.5 to 1 ratio.

Additional adjustments are permitted for family composition.

An insurer's rating methodology does not include incentives, if approved by the insurance department, to participate in wellness and fitness programs.

Health status, claims experience, coverage duration, geography, and any other group characteristic.

New Jersey

N.J. Stat. Ann. 17B:27A-25

Rates may vary between the highest rated small group and lowest rated small group by no more than 200%.

Adjustments are permitted for: age, gender, and geography.

Age classifications must be, at a minimum, in five-year increments. There must be up to six geographic areas, none smaller than a county.

Different rates may be established for individuals and family units.

Anything not specifically permitted.

Table 1: -Continued-

State

Permitted Factors

Prohibited Factors

Oregon

Or. Rev. Stat. 743.737(8)

An insurer must establish a “geographic average rate” for its small employer health benefit plans. Rate variation between different plans must be based solely on objective differences in plan design.

Effective January 1, 2008, the premium charged a small employer can vary by +/- 50% of the geographic average rate when adjusted for: (1) the employer's premium contribution level, policy duration, and provision of benefits not required by law and (2) the enrollees' ages; participation level; tobacco use; participation in health promotion, disease prevention, or wellness programs; and family composition.

An additional adjustment of up to 5% of the small employer's annual premium is permitted for the group's expected claims experience. (For small employers with more than 25 employees, the +/- 50% rule does not apply to this adjustment.)

Anything not specifically permitted.

Vermont

Vt. Stat. Ann. tit. 8, 4080a

The insurance commissioner must establish rules that permit variations by one or more risk classifications, but premiums charged cannot vary from the community rate by more than +/- 20%.

The rules must permit a discount or other premium reduction for enrollees' participation in health promotion and disease prevention programs that comply with federal law. The discount cannot exceed 15% of the premium charged, provided that, together with any other variations by rule, the premiums do not deviate by more than +/- 30% from the community rate.

Adjustments permitted for family composition.

Medical underwriting and screening is prohibited (i.e., health status).

Age, gender, geography, industry,  claim experience, and policy duration are prohibited unless permitted by rule.

(Current rules phased out permissive deviations for the above items as of January 1, 2003.)

Table 1: -Continued-

State

Permitted Factors

Prohibited Factors

Washington

Wash. Rev. Code 48.21.045

Age, geography, family size, and wellness activities.

Age brackets must be at least five-year increments from age 20 to 65. The adjustment for an age group cannot exceed 375% of the lowest rate for all age groups.

A wellness activity discount must reflect actuarially-justified differences in use or cost attributed to such programs.

Anything not specifically permitted.

Rate Bands

While adjusted community rating laws permit rate variations for certain case characteristics, they generally prohibit any rate variation for a group's claims experience and health status. In comparison, states that permit the use of rate bands permit insurers, in addition to varying for case characteristics, to vary a small employer's premiums based on the employees' health status as derived from claims experience.

The difference between the highest premium rate and the lowest premium rate that insurers can charge small groups for the same health insurance plan is larger under rating bands than under adjusted community rating.

An Example of How Rate Bands Work:

● Assume that a state permits insurers to vary health insurance premiums based on three case characteristics: age, gender, and firm size.

● Then assume that the allowable variation between the highest and lowest premiums based on these factors is 3:1 for age, 1.5:1 for gender, and 1.2:1 for firm size.

● So far, the difference between the highest and lowest premium rate that can be charged is 5.4:1 (3 x 1.5 x 1.2 = 5.4).

● Now assume that the allowed variation based on health status can be as much as 2:1.

● Under these assumptions, the highest premium rate that may be charged a small group with the worst case characteristics and health status can exceed the lowest rate that a small group is charged for the same health insurance plan by more than 10 times, or 10.8:1 (5.4 x 2 = 10.8).

● If the lowest premium charged is $100 — calculated on a per-person-per-month basis — the highest premium can thus be set as high as $1,080.

(Source: Mary Beth Senkewicz, “Senate Health Bill Would Preempt States' Small Group Rating Rules,” Center on Budget and Policy Priorities, April 2006.)

Table 2 summarizes requirements in the 37 states that have adopted rate band laws for insurers developing premiums for small employers.

Table 2: Other States' Rate Band Requirements for Small Employer Groups

State

Rate Band Requirements

Alabama

Allowed: health (+/-25%), age (4:1), group size (+/-15%), gender,

family composition, geography

Prohibited: industry

Alaska

Allowed: health (+/-35%), industry (15%)

Renewal: trend plus 15% for claims, health, and duration

Arizona

Allowed: health (60%)

Renewal: trend plus 15% for claims, health, and duration

Arkansas

Allowed: health (+/-25% per class)

Renewal: trend plus 15% for claims, health, and duration

California

Allowed: health (+/-10%), age, geography, and family composition

Colorado

Allowed: health (+ 10%/-25% including industry), smoking (15%)

Prohibited: gender and group size

Renewal: trend plus 15% for claims, health, and duration

Delaware

Allowed: health (+/-35% per class), industry (15%), gender, and geography

Prohibited: group size

Renewal: trend plus 15% for claims, health, and duration

Florida

Allowed: health (+/-15%), geography, and family composition

Prohibited: industry

Renewal: trend plus 10% for claims, health, and duration

Table 2: -Continued-

State

Rate Band Requirements

Georgia

Allowed: health (+/-25%), group size (+/-15%), age, gender, industry, and geography

Renewal: trend plus 15%

Idaho

Allowed: health (+/-50% per class), age defined

Renewal: trend plus 15% for claims, health, and duration

Illinois

Allowed: health (+/-25% per class)

Renewal: trend plus 15% for claims, health, and duration

Indiana

Allowed: health (+/-35%)

Renewal: trend plus 15% for claims, health, and duration

Iowa

Allowed: health (+/-25% per class), group size (1.2), age, and gender (must be a blended rate)

Prohibited: industry

Renewal: trend plus 15% for claims, health, and duration

Kansas

Allowed: health (+/-25% per class), industry (15%)

Renewal: trend plus 15% for claims, health, and duration

Kentucky

Allowed: health (+/-50% per class), age (5:1), gender, industry, and geography

Renewal: trend plus 20% for claims, health, and duration

Louisiana

Allowed: health (+/-33% per class)

Renewal: trend plus 20% for claims, health, and duration

Rate bands apply to groups of three to 35.

Michigan

Commercial carriers:

Allowed: +/-45% for health, industry, age, and group size

Adjusted community rating for Blue Cross/Blue Shield and HMOs:

Allowed: +/-35% for industry and age (HMOs are also allowed to use

group size in this overall band)

Renewal: trend plus 15% for changes in case characteristics but must

stay within band above

Insurers that offer coverage to groups of one may increase premiums by 25%.

Minnesota

Allowed: +/-25% for health, claims, duration and industry; age (+/-

50%); 20% between geographic areas

Prohibited: gender

Renewal: trend plus 15% for claims, health, and duration

Table 2: -Continued-

State

Rate Band Requirements

Mississippi

Allowed: health (+/-25% per class)

Renewal: trend plus 15% for claims, health, and duration

Missouri

Allowed: health (+/-25% per class), industry (10%)

Renewal: trend plus 15% for claims, health, and duration

Rating restrictions apply to groups of three to 25.

Montana

Allowed: health (+/-25% per class), industry (15%)

Prohibited: gender

Renewal: trend plus 15% for claims, health, and duration

Nebraska

Allowed: health (+/-25% per class), industry (15%)

Renewal: trend plus 15% for claims, health, and duration

Nevada

Allowed: health (+/-25% per class), industry (15%)

Renewal: trend plus 15% for claims, health, and duration

New Mexico

Allowed: health (+/-20% per class); 250% band for age, gender, geography, industry, and smoking

Prohibited: group size

Renewal: trend plus 10% for claims, health, and duration

North Carolina

Allowed: +/-20% for age, gender, family composition, geography,

claims experience, and administrative costs

Renewal: trend plus 15% for claims, health, and duration

North Dakota

Allowed: health (+/-20% per class), industry (15%), age (4:1)

Prohibited: gender

Renewal: trend plus 15% for claims, health, and duration

Rating restrictions apply to groups of two to 25.

Ohio

Allowed: health (+/-35%); industry (+/-15%)

Renewal: trend plus 15% for claims, health, and duration

Oklahoma

Allowed: health (+/-25% per class); industry (15%)

Renewal: trend plus 15% for claims, health, and duration

Rhode Island

Allowed: health (+/-10%); age, gender, and family composition

Adjustment for health allowed only for carriers that used health status prior to June 1, 2000. “Adjusted community rating” (with adjustments for age, gender, and family composition) applies to all others.

South Carolina

Allowed: health (+/-25% per class), group size (20%)

Renewal: trend plus 15% for claims, health, and duration

Table 2: -Continued-

State

Rate Band Requirements

South Dakota

Allowed: health (+/-25% per class), industry (15%), age (3:1)

Renewal: trend plus 15% for claims, health, and duration

Tennessee

Allowed: health (+/-35% per class), industry (15%)

Renewal: trend plus 15% for claims, health, and duration

Rating restrictions apply to groups of three to 25.

Texas

Allowed: health (+/-25% per class), industry (15%), group size (20%)

Renewal: trend plus 15% for claims, health, and duration

Utah

Allowed: health (+/-30% per class), industry (15%), group size (20%)

Renewal: trend plus 15% for claims, health, and duration

West Virginia

Allowed: health (+/-30% per class), industry (15%)

Renewal: trend plus 15% for claims, health, and duration

Wisconsin

Allowed: health (+/-30% per class)

Renewal: trend plus 15% for claims, health, and duration

Wyoming

Allowed: health (+/-35% per class), industry (15%)

Renewal: trend plus 15% for claims, health, and duration

Source: Mila Kofman and Karen Pollitz, “Health Insurance Regulation by State and the Federal Government: A Review of Current Approaches and Proposals for Change,” Georgetown Health Policy Institute, April 2006.

JLK:ts