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