There are a variety of factors that affect how health insurance premiums are determined. These rules vary widely depending on coverage and, in some cases, the state in which the policy was issued.
Two types of ratings—community ratings and experience ratings—are at opposite ends of the spectrum, but there is also a middle ground, called a modified community rating, which is commonly used. This article will explain what these terms mean and how they are used.
A pure community rating means that everyone in a given area pays the same price for their health insurance. There were no changes based on age, medical history, tobacco use, occupation, etc. It’s a fairly rare method, but we did see certain types of coverage in certain areas.
For example, while the Affordable Care Act (ACA) allows insurers to vary premiums for individuals and small groups based on age, Vermont and New York do not allow it (Massachusetts has stricter rules than the federal government).
The entire state of Vermont is a single rating area (8 in New York and 7 in Massachusetts), which means that individual and small group premiums don’t change at all in Vermont, regardless of a person’s age or place of residence.
Vermont, New York and Massachusetts are also among the states that don’t allow individual and small group insurers to charge tobacco surcharges, further reinforcing those states’ True Community ratings.
Under the Affordable Care Act, insurers in the individual and small-group markets are not allowed to calculate premiums based on an individual’s medical history, but are allowed to charge tobacco users higher premiums unless the state has rules prohibiting it.
Several states require Medigap (Medicare Supplement) plans to use community ratings (this method is permitted nationwide, and some insurers use it even in states where it is not required).
For Medigap plans, community ratings mean that insurance companies cannot change premiums based on age or the health of enrollees over 65. However, premiums for people under age 65 enrolled in Medicare due to disability may still vary, depending on the state.
In most states, Medigap plans do not require community ratings, which means that most Medigap insurance companies use either question age ratings (premiums are based on the person’s age when they enroll) or attainment age ratings (premiums are based on a person’s age when they first enrolled and as increasing age).
Community-rated Medigap plans tend to be more expensive for 65-year-olds, but cheaper for older enrollees. On the other hand, issue-age and age-rated plans tend to be cheaper for 65-year-old enrollees and more expensive for older enrollees.
Modified Community Rating
Modified community ratings are more common than pure community ratings. The revised community rating methodology still allows for some variation in premiums, although premiums cannot vary based on an individual or group’s medical history.
The Affordable Care Act requirement for individual and small-group markets is a modified community rating methodology: insurers cannot use medical coverage (i.e. applicant or member medical records, claims history, genetic information, etc.) or gender ratings, but they Yes still allows premiums to vary based on age, tobacco use and geographic region.
For tobacco use, premium increases cannot exceed 50%, and some states further restrict or ban them altogether (some insurers choose not to impose a surcharge, even when permitted). For age ratings, premiums cannot vary by more than three to one, meaning that older applicants cannot be charged more than three times as much as a 21-year-old. Premium subsidies in the individual market are larger for older applicants to offset their higher insurance costs. But subsidies cannot be used to pay tobacco surcharges, so if insurers impose surcharges, tobacco users will pay more for their insurance.
While individual and small group premiums are based on per capita rates, the Affordable Care Act does limit the total premiums for extended families and only count up to three children under the age of 21 when determining family premiums. For example, a family with five children under the age of 21 will only pay premiums for three of those children, either in the individual market or the small group market.
The American Medical Association (AMA) expressed support for the revised community rating method used in the ACA, noting that it “strikes the balance between protecting at-risk populations and others.”
Notably, the AMA clarified that “the Modified Community Rating’s success in keeping health insurance affordable is related to the maximum number of insured persons, which can be guaranteed through individual liability requirements.” Although penalties for non-compliance have been removed since 2019, the ACA does include a personal shared responsibility clause (aka personal mandate). As a result, the federal government no longer penalizes uninsured penalties.
But the individual market has remained fairly stable since 2019, in large part because the ACA’s premium subsidy has kept premiums moderate for most enrollees. Enrollment in the individual market has climbed to record levels as the 2021 and 2022 U.S. rescue packages roll in.
Experience ratings are the opposite of community ratings. This means that the applicant’s or group’s medical history and claims experience are considered when determining premiums.
Experience levels are still available for large group plans. In most states, this means employer-sponsored plans with more than 50 employees, but in four states the small group market (modifying community rating rules) includes employers with up to 100 employees, while larger groups have 101 employees of employers with one or more employees.
Most large group plans are self-insured, which means that employers use their own funds to pay for employee medical expenses rather than buying insurance from an insurance company (most self-insured employers contract with insurance companies to manage the plan, but employers money is used to pay claims, not insurance companies).
But for large groups buying insurance from a health insurance company, experience ratings are allowed. This means insurers can look at the group’s overall claims history and take this into account when setting premiums for the group. This is true both when the group initially purchases the policy and at each annual renewal.
Due to the Health Insurance Portability and Accountability Act (HIPAA), individual employees within the group cannot be singled out for higher premiums because of their medical history. But the entire group can charge higher premiums because of the overall claims history.
Prior to the Affordable Care Act, this applied to groups of all sizes (unless a state had taken action to prohibit small groups from doing so; most states had at least some restrictions on rates for small group plans, depending on claims history) . But that changed in 2014, when the new group plan had to transition to a revised community rating methodology.
Premiums paid by employers for workers’ compensation insurance are also typically based on experience ratings, with employers paying higher premiums if their workforce has had more recent over-claims than the average business in their industry, and if their claims are lower than the industry average. Employers pay lower premiums. average for their industry.
Experience ratings, community ratings, and modified community ratings are different ways health insurers set their premiums. In most cases, the types of ratings that can or must be used are dictated by state or federal law, whose rules vary by insurance type. The Affordable Care Act ushered in an era of revised community ratings for the individual (self-purchased) insurance market, a dramatic change from how individual markets have historically worked in most states.
Thanks to HIPAA and the ACA, there are some important consumer protections in how health insurance premiums are set. In most cases, pre-existing conditions are not considered when determining premiums. Most state individual and group health plans use a modified community rating and medical history is not a factor. While experience ratings can be used by large group plans, higher premiums cannot be singled out based on an individual employee’s medical history.