Health Insurance Market Reforms: Rate Restrictions

What are rate restrictions?
Rate restrictions limit how much insurance companies can vary premiums charged to
individuals and businesses based on factors such as health status, age, tobacco use and gender.
How do insurance companies set premiums?
Currently, each insurance company has its own way of determining premiums, and each state
has different laws to regulate these practices. As a result, two individuals buying the same
health insurance policy might pay different premiums depending on which insurance company
they choose or which state they live in. For example, many health insurance companies set
premiums based on the health conditions and risk status of the people they cover. They
consider things like how old people are, what kind of jobs they have, their gender, and whether
they have been sick before. This assessment helps insurance companies predict how much
money they will spend on medical care for those people in the year ahead. Insurance
companies use a variety of methods to set their premiums so they do not lose money on people
who are sick or disabled and need a lot of care. Sometimes these methods, called rating
practices, can encourage healthier people to buy coverage while discouraging sicker people
from doing so by making premiums too expensive for them. Common rating practices include:
  Health status rating. Some insurance companies charge higher premiums to people
who have medical conditions, or a history of such conditions, that could increase the
chances that they will need health care. This is known as health status rating. For
example, an insurance company might charge a person who has asthma more for
insurance than a person who does not. Companies usually set the rate for an
individual or group at the time of initial enrollment. This is called the new issue rate.
When it is time for a policy to be renewed at the end of a year, insurance companies
may also adjust the premium for changes in a person’s health status during the prior
year. This is called experience rating. Adjusting rates through experience rating is
most common in group health insurance policies, but it also happens in individual
coverage sold through associations.
  Demographic rating. Most insurance companies charge higher premiums to people
based on their age, gender, or where they live. Typically, insurance companies
charge more for older individuals than for younger ones, known as age rating.
Insurers also charge higher premiums to women of child-bearing age, known as
gender rating, because they tend to use more health care services than men.
Insurers also charge more for people who live in areas where medical costs a
re high,
JUNE 2012
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2  HealtHInsurance Market reforMs: rate restrIctIons
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called geographic rating. These kinds of rating practices are used when a policy is
first issued and when it is renewed.
  Industry rating. Some insurance companies charge higher premiums to people who
work in industries and professions that tend to have higher health care costs. For
example, premiums can be higher for loggers, miners, construction workers, crop
dusters, bartenders, taxi drivers, parking lot attendants, hairdressers, and hospital
workers. Industry rating is typically applied in the group market, although premiums
for individual plans can also vary based on a person’s occupation.
  Durational rating. Some insurance companies, particularly in the individual market,
raise premiums for people who have been in a plan for a year or longer. This is
typically due to the expiration of preexisting condition exclusion periods, where the
insurance company does not have to provide coverage for a specified preexisting
condition, or the effect of initial medical underwriting wearing off. In other words,
the careful screening that people went through to buy the health coverage was a
reliable predictor of their health care costs in the first year, but is viewed as a less
reliable indicator of what costs may be in future years. Therefore, insurance
companies may raise premiums to adjust for health changes in the time since the
group or individual signed on to the policy.  As a result, if two otherwise identical
people are buying the same health insurance policy, but one is buying it for the first
time while the other is renewing the policy after one year, the renewing customer
would pay more for the same coverage due to durational rating.
How do rate restrictions work?
Each state has different laws to regulate how insurance companies set their premiums, and
these laws vary widely by state and by insurance market. In states that have adopted rate
restrictions, there are typically two types of restrictions. The first type of rate restriction is rate
bands, which prohibit insurance companies from varying their premiums beyond a certain
range from their average premium. For example, a rate band restriction could limit an
individual’s overall premium to no more than 125 percent of the insurance company’s average
premium rate. Rate bands may apply just to health status factors, or also to other individual
rating factors. For example, a state may limit premium variation based on age to a ratio of 5-to-1 for older to younger individuals. Thus, a small group with all older workers could pay up to 5
times the premium charged to a small group with all younger workers. The insurance company
could then further adjust the rate for health status, up to the limits of the rating band.
The second type of rate restriction is community rating, which is a method of setting premiums
so that risk is spread evenly across the community, with all individuals paying the same rate
regardless of their health status and other factors such as age, gender, and lifestyle
characteristics. A variation of community rating is adjusted community rating where insurance
companies cannot vary their rates based health status but can use other factors.
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HealtHInsurance Market reforMs: rate restrIctIons  3
How does the Affordable Care Act (ACA) affect rate restrictions?
Currently, federal law does not place any limits on the ways that insurance companies set their
premium rates. However, beginning January 1, 2014, insurance companies must meet the
ACA’s minimum premium rating rules for health plans for individuals and small businesses.
Under the ACA, health plans will be allowed to adjust premiums based only on the following
factors:
  Individual vs. family enrollment. Insurance companies will be allowed to vary rates
based on who is enrolled in the plan. Thus, different rates can be charged based on
whether the plan covers only an individual or a family (i.e., individual + spouse,
individual + dependents).
  Geographic area. Insurance companies will be allowed to charge more for people who
live in areas where medical costs are high.
  Age. Insurance companies will be allowed to vary rates based on age. However, the ACA
limits this variation by not allowing insurance companies to charge an older adult more
than 3 times the rate of a younger person.
  Tobacco use. Insurance companies will be allowed to charge more for people that use
tobacco products. However, the ACA limits this variation by not allowing insurance
companies to charge those that use tobacco products more than 1.5 times the non-tobacco user’s rate.
Thus, the major factors
that insurance companies
traditionally use to charge
higher premiums – such as
health status, the use of
health services, and gender
– will no longer be allowed
under the ACA. However,
the ACA does permit
employment-based health
plans to charge employees
up to 30 percent more on
their premiums (and
potentially up to 50
percent more) if they fail to
participate in a wellness
program or meet specified
health goals.
The rating restrictions in the ACA set a minimum floor, not a ceiling, so states can retain or
enact more stringent standards than federal law.
Figure 1
Rate Restrictions in the Individual Market,
June 2012
Source: Data available at www.statehealthfacts.org; compiled by the Center on Health Insurance Reforms, Georgetown University Health Policy Institute.
WY
WI
WV
WA
VA
VT
UT
TX
TN
SD
SC
RI
PA
OR
OK
OH
ND
NC
NY
NM
NJ
NH
NV
NE
MT
MO
MS
MN
MI
MA
MD
ME
LA
KY KS
IA
IN IL
ID
HI
GA
FL
DC
DE
CT
CO
CA
AR
AZ
AK
AL
Adjusted community rating (6 states)
Community rating (1 state)
No rate restrictions (32 states)
Rate bands (11 states and DC)
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4  HealtHInsurance Market reforMs: rate restrIctIons
Current Status and Trends
Individual Market
There are currently 18 states and the District of Columbia that have adopted some sort of rate
restriction on insurance companies in the individual market (Figure 1). Of these 18 states, 11
states and the District of Columbia have adopted rate bands while seven states have adopted
community rating. Of the seven states that have adopted community rating, New York allows
rating based only on geographic area, while the other six states use adjusted community rating.
The majority of states – 32 states – have not adopted any rate restrictions in the individual
market.
As noted above, the Affordable Care Act limits insurers from varying premiums based on certain
factors such as age, gender, tobacco use, or occupation. Some states have already implemented
such limits in their individual market. As of the end of 2011, 14 states prohibited insurance
companies from using a person’s gender as a factor in establishing premiums rates. Five states
did not allow companies to vary rates based on tobacco use, and two states had banned rating
on the basis of age. A person’s occupation is prohibited as a rating factor in 13 states.
1
Small Group Market
Rate restrictions are far
more common in the small
group market than in the
individual market. In the
small group market, 48
states and the District of
Columbia have adopted
some form of rate
restrictions (Figure 2).
Currently, 36 of these
states and the District of
Columbia require insurance
companies to adhere to
rate bands while the other
12 states have adopted
community rating. Of those
states with community
rating restrictions, 11
states have adopted
adjusted community rating,
while New York allows only geographic rating. Only two states, Virginia and Hawaii, do not
impose any sort of rate restrictions.
1
More detailed information on state individual market rate restrictions is available at www.statehealthfacts.org.
Figure 2
Rate Restrictions in the Small Group Market,
June 2012
Source: Data available at www.statehealthfacts.org; compiled by the Center on Health Insurance Reforms, Georgetown University Health Policy Institute.
WY
WI
WV
WA
VA
VT
UT
TX
TN
SD
SC
RI
PA
OR
OK
OH
ND
NC
NY
NM
NJ
NH
NV
NE
MT
MO
MS
MN
MI
MA
MD
ME
LA
KY KS
IA
IN IL
ID
HI
GA
FL
DC
DE
CT
CO
CA
AR
AZ
AK
AL
Adjusted community rating (11 states)
Community rating (1 state)
No rate restrictions (2 states)
Rate bands (37 states and DC)
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Many states also bar companies from using certain rating factors in varying small group
premium rates. As of the end of 2011, 15 states prohibited companies from varying premium
rates on the basis of gender. Sixteen had banned rating based on tobacco use, and two states
prohibited rating based on age. Thirteen did not allow insurers to vary premiums based on the
type of industry the business was in.
2
Transition to 2014
Individual Market
The ACA’s rate restrictions will result in greater changes for the individual market than for the
small group market. Currently, there are 18 states that limit how much insurance companies
can impose in premiums on individuals and small businesses based on factors such as health
status, age, tobacco use, and gender. By January 1, 2014, thestates must enforce the federal
rating standard or allow the federal government todo so. To have standards in place that meet
the ACA’s rate requirements may require changes to state law by2013.
Small Group Market
Although nearly all 50 states have adopted some form of rate restrictions in the small group
market, the ACA introduces minimum rating restrictions that limit rating variation to only the
four factors discussed above: type of enrollment (individual or family); geography; age; and
tobacco use. Because many states have rate restrictions that do not meet the federal rating
standard, these states will have to adjust their small group market rating laws by 2013 to
comply with the rate restriction provisions in the ACA.
2
More detailed information on state small group market rate restrictionsis available at www.statehealthfacts.org.
This fact sheet was prepared for the Kaiser Family Foundation by the Center on Health Insurance
Reforms, Georgetown University Health Policy Institute.