You asked for an explanation of “community rating” versus “experience rating” when insurers develop premium rates for an employer-sponsored health insurance policy and what Connecticut's law requires compared to other states.

Under “community rating,” an insurer charges all people covered by the same type of health insurance policy the same premium without regard to age, gender, health status, occupation, or other factors. The insurer determines the premium based on the health and demographic profile of the geographic region or the total population covered under a particular policy that it insures.

Under community rating, higher cost groups (e.g., groups made up of older or sicker people) are averaged out with lower cost groups (e.g., groups made up of younger or healthier people). The expenses of all participants are pooled together and then spread out equally across all participants.

“Adjusted community rating” is a rating method under which an insurer charges a particular group an amount that is derived by modifying the community rate for the group's specific demographic factors (e.g., age, gender, family composition, geography).

In comparison, an insurer uses “experience rating” when it predicts a group's future medical costs based on its past experience (i.e., the actual cost of providing health care coverage to the group during a given period of time; the group's claim history). Thus, the insurer calculates the group's insurance premium based on its own, not the overall community's, experience.

Most states impose rating restrictions on insurers with respect to developing premiums for small employer groups (i.e., an employer with 50 or fewer employees). Rate restrictions were enacted as a way to stabilize the small group insurance market. They are intended to prevent dramatic premium swings and normalize the premiums charged so that more small employers, and their employees, might be able to obtain, and afford to keep, health insurance.

Connecticut is one of nine states that require insurers to use adjusted community rating when developing rates for small employer groups. The other eight states are Maine, Maryland, Massachusetts, New Hampshire, New Jersey, Oregon, Vermont, and Washington. (The adjustment factors permitted vary by state and are described below.) New York requires community rating. The District of Columbia, Hawaii, Pennsylvania, and Virginia do not have rate restrictions for small employers.

The remaining 37 states impose “rate band” requirements on insurers developing premiums for small employers. Rate bands limit the amount by which an insurer can vary an employer's premiums based on health status from an index, or base, rate. The extent to which premiums can vary depends on the size of the rate band permitted and the factors that must be limited. On average, these states permit an insurer to vary a small employer's premium by up to plus or minus 25% from the index rate based on the group's experience. Most states with rate band requirements also permit insurers to vary premiums for age, gender, industry, geography, and group size to the extent the variation is actuarially justified.

Most states impose rating restrictions on insurers with respect to developing premiums for small employer groups (i.e., an employer with 50 or fewer employees). It is generally accepted that experience rating small groups is too burdensome on such employers and their employees because it can result in wide premium fluctuations year over year. For example, in a small group of 10 people, one chronically ill person or catastrophic medical event significantly impacts the group's total experience and, thus, premiums.

The National Association of Insurance Commissioners' model act regarding health insurance availability for small employers requires insurers to develop rates for small employers using adjusted community rating where the group's premium can only vary for (1) geographic area, (2) family composition, and (3) age. With respect to age, the model act permits age brackets in at least five-year increments that begin with age 30 and end with age 65 (NAIC Model Laws, Regulations and Guidelines 35-1). Most states have adopted rating requirements that differ from the model act.

New York requires health insurers selling small group policies to charge community-rated premiums. New York law defines “community rated” as a rating methodology in which the premium for all people covered by a policy or contract form is the same based on the experience of the entire pool of risks covered by that policy or contract form without regard to age, sex, health status, or occupation (N.Y. Ins. Law § 3231).

Under New York's law, an insurer may use a rate structure that sets rates based on family composition. Insurers may also establish separate community rates based on “reasonable geographic regions,” which may include a single county.

Adjusted community rating is a rating methodology under which a single rate applies to all small groups in the market, with limited adjustments allowed for specified “case characteristics.” Under this method, an insurer sets a base rate for a particular set of case characteristics. The group's actual premium rate is then determined by varying the base rate based on a group's specific case characteristics that state law permits insurers to take into account when setting premiums. Allowable case characteristics often include age, gender, industry, geographic area, family composition, and group size.

Connecticut. Connecticut law requires insurers to use adjusted community rating when developing premiums for small employer groups (CGS § 38a-567(5), (6), & (8)). It also requires any differences in the base premiums that an insurer charges for different health benefit plans to be reasonable and reflect objective differences in plan design. Any such differences cannot include variations based on the nature of the groups that the insurer assumes will select the particular health benefit plans.

An insurer may adjust the community rate (i.e., base premium) to reflect one or more of the following “classifications:”

1. age, but age brackets of less than five years are prohibited;

2. gender;

3. geographic area, but an area smaller than a county is prohibited;

4. industry, but the rate factor associated with any industry classification is prohibited from (a) varying from the arithmetic average of the highest and lowest rate factors associated with all industry classifications by more than 15% and (b) increasing by more than 5% a year;

5. group size, but the highest rate factor associated with group size is prohibited from varying from the lowest rate factor associated with group size by a ratio of more than 1.25 to 1.0;

6. administrative cost savings resulting from the administration of an association group plan or a plan written through the Municipal Employer Health Insurance Plan (MEHIP), as long as the savings reflect a reduction to the small employer carrier's overall retention that is measurable and specifically realized on items such as marketing, billing, or claims paying functions that the plan administrator or association takes on directly, except that such savings may not reflect a reduction realized on commissions;

7. savings resulting from a reduction in the profit of an insurer that writes small business plans or arrangements for an association group plan or a plan written through MEHIP, provided any loss in overall revenue due to a reduction in profit is not shifted to other small employers; and

8. family composition, but the insurer can use only one or more of the following billing classifications: employee; employee plus family; employee and spouse; employee and child; employee plus one dependent; and employee plus two or more dependents.

The law requires an insurer to collect data for all demographic rating classifications before quoting premiums to a small employer group. It prohibits an insurer from making inquiries regarding health status or claims experience of the small employer group, its employees, or their dependents, before quoting a premium.

Connecticut Exception. For plans issued through MEHIP or by an association group plan, at the option of the Comptroller or the association group plan's administrator, premiums charged or offered to small employer groups are not subject to the above rating requirements if certain conditions are met (CGS § 38a-567(22)). Specifically, such a plan will be exempt from the adjusted community rating requirement if, effective October 1, 2008, it:

1. covers small employer groups as a single group;

2. covers at least 3,000 employees;

3. charges or offers each small employer the same premium rate for each employee and dependent (i.e., community rates); and

4. is written on a guaranteed issue basis (i.e., accepts all applicants).

In addition, to qualify for this exception, an association group must be a bona fide group as set forth in the federal Employee Retirement and Security Act (ERISA). And it cannot (1) be a fictitious grouping (a grouping for rating purposes where a rate differentiation is based solely upon group membership) or (2) issue a plan that causes undue disruption in the insurance marketplace, as determined by the commissioner (PA 08-181, § 3).

Other States. Eight other states require insurers to use adjusted community rating for small employer groups: Maine, Maryland, Massachusetts, New Hampshire, New Jersey, Oregon, Vermont, and Washington.

Table 1 summarizes these states' requirements, including the factors (1) for which an insurer may vary a base rate and (2) that an insurer is prohibited from considering when developing premiums for small employer groups.

Table 1: Other States' Adjusted Community Rating Requirements

for Small Employer Groups

While adjusted community rating laws permit rate variations for certain case characteristics, they generally prohibit any rate variation for a group's claims experience and health status. In comparison, states that permit the use of rate bands permit insurers, in addition to varying for case characteristics, to vary a small employer's premiums based on the employees' health status as derived from claims experience.

The difference between the highest premium rate and the lowest premium rate that insurers can charge small groups for the same health insurance plan is larger under rating bands than under adjusted community rating.

● Assume that a state permits insurers to vary health insurance premiums based on three case characteristics: age, gender, and firm size.

● Then assume that the allowable variation between the highest and lowest premiums based on these factors is 3:1 for age, 1.5:1 for gender, and 1.2:1 for firm size.

● So far, the difference between the highest and lowest premium rate that can be charged is 5.4:1 (3 x 1.5 x 1.2 = 5.4).

● Now assume that the allowed variation based on health status can be as much as 2:1.

● Under these assumptions, the highest premium rate that may be charged a small group with the worst case characteristics and health status can exceed the lowest rate that a small group is charged for the same health insurance plan by more than 10 times, or 10.8:1 (5.4 x 2 = 10.8).

● If the lowest premium charged is $100 — calculated on a per-person-per-month basis — the highest premium can thus be set as high as $1,080.

(Source: Mary Beth Senkewicz, “Senate Health Bill Would Preempt States' Small Group Rating Rules,” Center on Budget and Policy Priorities, April 2006.)

Table 2 summarizes requirements in the 37 states that have adopted rate band laws for insurers developing premiums for small employers.

Table 2: Other States' Rate Band Requirements for Small Employer Groups

Source: Mila Kofman and Karen Pollitz, “Health Insurance Regulation by State and the Federal Government: A Review of Current Approaches and Proposals for Change,” Georgetown Health Policy Institute, April 2006.

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