How are premium rates determined for small group employers?
In some states the law allows small group health insurance companies to determine their initial premium rates for each company using a process known as medical underwriting. Other states make small group health insurance companies use processes known as modified community rating or community rating to determine their initial rates.
When small group plans are medically underwritten, employees are asked to provide health information about themselves and their covered family members when they apply for coverage. When determining rates, insurance companies use the medical information on these applications. Sometimes they will request additional information from an applicant’s physician or ask the applicants for clarification. If a company is unable to obtain information necessary to accurately determine the risk of a particular applicant, it will underwrite more conservatively, meaning that the assumption relative to the missing information will be negative rather than positive. Example: A person has a history of high blood pressure but it is controlled with medication and he is not overweight. If the company is unable to determine if that individual smokes or if he has normal cholesterol, it will assume that the missing information is negative and rate accordingly.
In most states the amount a company can vary a group’s premium rates based on medical underwriting factors is limited to a certain percentage of the average small group insurance rate. This is known as a rating band requirement, and the specifics vary by state. Example: In a state with a rating band requirement of plus or minus 25%, a small group rate could vary no more than 25% above or below the average small group rate for that geographic area. So if the average premium was $100, a small employer’s rate could be anywhere from $75-125, based on the overall health
status of all of the group members.
The alternative to medical underwriting is known as community rating. Community rating requires insurers to charge all individuals who live in the same geographical area the same premium regardless of their age or health status. Example: One employer’s cost to insure a healthy 27-year-old non-smoking male with no health conditions would be the same cost another employer in the area would pay to insure a 55-year-old male smoker who is suffering from prostate cancer and a heart condition.
A variation on community rating used by some states is called modified community rating. With modified community rating, health plans may vary the community rate based on limited factors such as age, gender or smoker status. State modified community rating laws vary greatly. Some allow for many adjustment factors, but many allow for just a few. Example: In a state that allows modified community rating with a variation for age, an employer would pay more to insure the 55-year-old male smoker with cancer and a heart condition. However, the insurer would have to use the same rate when calculating premiums for the healthy 27-year-old male as it would for a male employee of a different company who is the same age but suffers from juvenile diabetes.
Annual premium changes for small employer group plans are based in part on the plan participants’ claims history and on the claims history of the company’s overall small employer group pool. Small employer group plan renewal rates also include a component to account for overall increases in the cost of providing health insurance coverage by the company, such as changes in laws that may impact operating costs. These costs are known in the industry as “trend.” Many states cap renewal rate increases for small employer groups at a specified percentage, plus trend.