Adjusted Community Rating and Its Role in Health Care Costs

Community rating is a method for pricing insurance that pools policyholders within a geographic area into a single risk pool (a “community”) and charges them the same premium regardless of health, gender or other factors.

The Affordable Care Act (ACA) mandates that insurers selling small group products use an adjusted community rating methodology that limits the number of factors used to calculate premiums and how much premiums can vary based on these factors.

These changes create uncertainty for insurers that they are expected to offset with higher premium rates.

(When you’re done reading, be sure to check out our infographic on the Affordable Care Act’s adjusted community rating provision.)

Then and now

Factors used to calculate premium rates for small businesses changed on New Year’s Day 2014. Here’s a before and after:

Before Jan. 1, 2014

  • Family size
  • Age
  • Gender
  • Geographic area
  • Occupation
  • Industry
  • Tobacco use
  • Weight
  • Health status
  • Claims history
  • And more

On or after Jan. 1, 2014

  • Family size
  • Age
  • Geographic area
  • Tobacco use

Note: States will retain the authority to determine the geographic rating areas (communities) within their borders, but the U.S. Department of Health and Human Services can review these determinations to ensure they’re “adequate.”

Closing the gap

Before the ACA, insurers in various states used age rating bands of up to 8:1 to spread premium costs over a range of age groups. Effective Jan. 1, 2014, the age rating band can be no more than 3:1 anywhere in the country.

This ratio compression is expected to result in higher premiums for younger individuals, as insurers account for the drop in premiums for older individuals.

Most small businesses should expect to see an increase in their health insurance premiums due to this age ratio compression. Those currently experiencing the lowest premiums will be hit the hardest. On the other hand, those with the highest premiums are expected to see a reduction.

Early bird special?

Many small businesses – especially those with younger, healthier workforces – chose to renew their health insurance policies before major provisions of the ACA went into effect on Jan 1, 2014, in an effort to dodge drastic rate increases.

They locked in lower rate hikes by doing so, with some claiming increases of less than 10 percent. But their employees also miss out on ACA-required benefits such as:

  • Maternity and newborn care
  • Prescription drug coverage
  • Preventive and wellness care
  • Elimination of all pre-existing condition exclusions
  • No annual dollar limits on essential benefits

Other small businesses waiting until 2014 to renew their policies expect rate increases as high as 50 percent, putting their ability to keep offering health insurance and remain competitive in serious doubt.

The young and the capricious

An additional point of uncertainty is that health insurance providers don’t know how many younger, healthier individuals will enter the marketplace (heeding the ACA’s individual mandate) or remain uninsured.

Many of these individuals could trade thousands of dollars in premium costs over the course of 2014 for a relatively small tax penalty for not having coverage. If that happens, premiums are expected to go up for everybody left in the insurance pool.

When it rains …

Though adjusted community rating is expected to be a driving factor in rising premiums, it certainly won’t be the only factor.

Regardless of company size, taxes and fees on insurers and the broader health care industry are expected to increase costs for most businesses by approximately 3.5-4 percent or $400 per employee per year. Examples of these taxes and fees include:

  • Transitional reinsurance fee – designed to help stabilize premiums in the individual health insurance market for those with pre-existing conditions
  • Insurer excise tax – this tax on health insurance carriers is expected to total $8 billion in 2014
  • PCORI fee – the Patient-Centered Outcomes Research Institute (PCORI) is a nonprofit, nongovernmental organization established by the ACA and tasked with researching the effectiveness of medical treatments, along with associated risks and benefits
  • Medical device sales tax – this tax on the sale of certain taxable medical devices will indirectly increase health insurance costs as manufacturers raise prices to cover the tax
  • Pharmaceutical manufacturer excise tax – annual fee on entities engaged in the business of manufacturing or importing branded prescription drugs

Strength in numbers

Small businesses that choose to offer employees group health insurance coverage are subject to the volatility of the marketplace. Moreover, small businesses carry bigger risk due to their size, which may lead to bigger premiums.

One way to ease the financial and administrative burdens associated with providing health coverage is to enter into a co-employment relationship with a professional employment organization (PEO). Under a co-employment relationship, these burdens pass to the PEO. Additionally, your employees get access to more comprehensive and cost-effective benefits through PEO-sponsored plans.

Learn how Insperity can help your business handle the effects of health care reform and other HR burdens.

7 Most Frequent HR Mistakes and How to Avoid Them
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