The Impact of Access Regulation on Health Insurance Market Structure. C. Rate Limits


Most states restrict either the factors that insurers may consider in setting health insurance rates in either the small group or individual health insurance markets, and also the extent to which insurers can vary rates for allowable factors. HIPAA does not speak directly to the issue of rate setting in either statute or regulation, although many consumer advocates have sought guidance on whether various provisions of HIPAA (e.g., requiring “risk spreading” for eligible high-risk individuals) implies that the states need to limit insurers’ rating practices for those persons. The following sections consider three common rating restrictions in state law: rating on health status and age, respectively, and limits on insurers’ composite rates.

Health status. In 1999, 45 states limited the degree to which insurers could rate up small groups for health status (see Table 3). Of these states, 21 states prohibited rate variation on health status of more than 2:1; 13 states required pure or modified community rating – that is, they prohibited insurers from considering health status at all in setting rates.

Fewer states restrict insurers’ use of health status to rate in the individual health insurance market, although a significant number of states enacted and implemented such legislation between 1995 and 1999. In 1999, 16 states limited rating on health status in the individual market; eight required pure or modified community rating in this market.

Age. States are much less likely to restrict age as a rating factor than they are to constrain health rating. In 1999, 16 states limited the degree to which insurers could use age as a rating factor in the small group market (see Table 4), while 11 states did so in the individual market. Only New York prohibits the use of age as a factor entirely in the small group market, while other states impose constraints on age ranging from 1.5:1 to 5:1 (the latter being a “constraint” that probably approximates and may even exceed an unconstrained actuarially justified age slope). In the individual market, New York and New Jersey prohibit the use of age as a rating factor, while other states specify limits ranging from 1.5:1 to 5:1.

Composite rate bands. Rather than (or in addition to) constraining the use of specific factors such as health and age, some states have implemented composite rate bands that impose limits on the total rate variation among groups or individuals taking into account all allowable rating factors. In 1999, 15 states had composite rate bands in the small group market, while 10 had them in the individual market (see Table 5).