The ACA’s modified community rating will affect small employers’ premium costs

Health insurance premium rates charged to small employer groups, defined as having 2 to 50 employees, can vary widely based upon demographics and “medical underwriting” which evaluates the group’s projected health risk to determine price. The result is that different companies of the same size bear vastly different healthcare costs.

The Affordable Care Act (ACA) strives to make this particular healthcare insurance market a more level playing field. Beginning January 1, 2014, the legislation implements use of a universal “modified community rating” to determine the pricing of small employer group healthcare insurance premiums. The rating is based on the cost of care in a particular geographic area. Within each rated community, small employer groups will pay the same premium for employees of all ages and both genders without regard to health status and health history.

The rating system is called “modified” community rating because it allows for a small number of personal factors to influence pricing to some extent, but the ACA expressly prohibits rating based on health status, medical conditions, medical history, genetic information, and evidence of insurability. The only allowed rating factors in addition to geography will be age and tobacco use (within limits), and family size. All coverage will be guaranteed and there can be no limitations for pre-existing conditions.

Further clarification, as proposed by Medicare and Medicaid
The Centers for Medicare and Medicaid Services (CMS) have proposed the following rules to govern the ACA’s modified community rating.

CMS recommends that rating areas be limited to a maximum of seven per state.  And that each market will utilize a single risk pool.

With respect to rate differential based on age, ACA limits cost difference to a 3:1 ratio, where the cost for the highest age may be no more than three times the cost for a young adult. CMS is recommending to Health and Human Services (HHS) a “uniform age rating curve” that includes a single age band for children through age 20 and a single age band for adults at 64 and above, where, for each group, premium rates are the same. Between ages 21 and 64, a curve rate factor applies each year, increasing from a premium ratio of 1.000 at age 21 to the maximum 3.000 at age 64. The premium ratio for children age 0 through 20 is .635.

If enacted, states would have the option of applying for the approval of designating a uniform age curve other than the CMS age curve.

CMS recommends the rate differential for tobacco use not be greater than 1.5:1, although the factor charged by an insurer may be less for younger ages (charging for children under age 21 is discouraged). There is discretion in applying a definition of “tobacco use” which may be self-reported. Tobacco and age factors are considered multiplicative, so combined variation cannot exceed 4.5:1.

Cost will vary by coverage category, from single to family coverage. CMS recommends in determining a family’s total cost, premiums for no more than the three oldest family members who are under age 21 are taken into account. Cost for subscriber, spouse, and each child age 21 and above are considered separately under family coverage. Insurers may blend “per member rating” within a group based on average enrollee levels.
This article is the second in a series authored by Clark Schaefer Hackett and The Scheller Bradford Group to provide guidance on implementation of The Affordable Care Act (“ACA”). Read the first article here, and review these definitions that are crucial to understanding the ACA.

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