How Health Insurers Determine Small Group Rates

Most of us (75% of all working Americans) still get our health insurance through our employers, and premiums are going up. In 2011, the average annual premium was $5,429 for individual coverage and $15,073 for a family. Those averages represent a respective 8% and 9% increase from 2010, and a whopping 113% hike for family coverage since 2001! (Source: Kaiser Family Foundation Employee Health Benefits 2011). While we can’t take the sting out of the hit on your wallet, we can help you understand how insurers determine small group rates and who qualifies for them.

Small group rates typically apply to firms with two to 50 employees, although some states permit groups of one to allow the self-employed to take advantage of group rates. Small group coverage is usually fully insured, meaning your employer buys an insurance contract from an insurance company or an HMO, which then assumes full financial risk for paying all claims.

All small group plans in the U.S. are offered on a guaranteed-issue basis. That means no member of the group can be denied coverage because of current or past health status. However, many states do allow the insurer to establish exclusionary and look-back periods for pre-existing conditions for new enrollees without prior creditable coverage.  Other eligibility requirements may be based on the number of hours employees must work in a week and the percentage of employees who must participate in the plan.

A number of factors determine what premiums any given group will be charged. These include: individual state rules and rating requirements; the overall health status or risk factors across state or local residents; cost of local health care and hospital services; mandated benefits; the types of products a group chooses; premium taxes or assessments; and the level of deductible or other cost-sharing the employer purchases.

There are two basic methods insurance companies use when computing the percent of cost-sharing members pay in a group health plan: experience rating and community rating.

• Community rating estimates the overall medical expenses of a group plan based on an analysis of the geographic region where the plan will be offered. Under the community rating, everysubscriber to that plan will pay the same amount.
• Experience rating takes into consideration the medical history and projected future medical costs of each individual plan subscriber (or an aggregate of all of a company’s employee subscribers). Anyone who is expected to incur greater medical expenses will pay a higher premium. Because this was seen as a way to deny, limit or drop coverage, a number of states now require that insurance companies use the community rating model in the small group health insurance market.