The Affordable Care Act requires insured small group health plans (now redefined as 50 and fewer people under the PACE Act of 2015, or Protecting Affordable Coverage for Employees) to use community rating starting on January 1, 2016. What is community rating, and how will it affect your insurance costs?
The set of classifications and statistical standards an insurance underwriter uses to set premiums is called “rating.” Generally, insurers will use medical rating, or medical underwriting, for large groups (those with more than 50 employees). A larger employer’s rates will depend on a combination of the expected claim costs, plus administrative costs and profit load.
Medical underwriting makes sense for large groups, because they are better at spreading risk than smaller groups. For example, if two or three people out of a group of 2,000 had a chronic health condition such as diabetes, the effect of the likely increase in claims would be fairly small. But the existence of just one employee with a chronic or serious health condition could make premiums unaffordable for an employer with only ten employees.
To solve this problem, some states have long required “community rating” for small groups. Under “pure” community rating, insurers charge all applicants the same premium for similar coverage, regardless of their age or health history. Instead of medically underwriting each group on a case-by-case basis, the underwriter uses composite demographic and claims information by geographic area to determine premiums. The underwriter would consider the cost of medical services in your area and estimate costs accordingly. Thus, if your employees live in a high-cost area where the population is older than average, you would probably pay more for your group coverage than an employer in a low-cost area whose population skews younger.
Pure community rating might sound good in theory, but younger (and presumably healthier) individuals and groups pay a higher share of costs than their experience would merit.
So what should you expect for 2016 rates? If your small group is typically young and healthy, your rates might go up. If your group is mixed or skews older, your rates might go down. For further analysis and information, contact the USI employee benefits office near you.