The Regulation of the Individual Health Insurance Market. Factors Utilized in Rating Practices in the Absence of State Regulation


Medical underwriting (examining health status) is the process that insurers use to evaluate an application for insurance.  An insurance application is an offer, by the applicant to the insurer, to enter into an insurance contract.  In states that allow medical underwriting, the insurer may evaluate an applicant’s health status and then accept that offer, decline it, or make a counteroffer with different benefits, a different premium, or both.  Insurers use information reported by the individual, as well as medical records.  Based on this examination, there are generally three possible outcomes:

  • An applicant answers a variety of health status questions and is underwritten as a “standard risk” and receives an offer of insurance at standard rates that are generally lower than those for an employee or dependent in the group market.  This occurs because the person is found to be healthy at time of policy issue, rather than being of “average health” typical of an employee or dependent of an employee that is covered by a group plan offered through their employer.
  • An applicant with some past or current health conditions might be offered a policy at higher rates than average (called a “rate up” offer) or with coverage of certain specified conditions excluded for a period of time (called a “pre-ex” offer, for a pre-existing condition).  Some applicants may be offered a policy with an elimination rider which specifies that coverage is provided except for the particular condition(s) that existed prior to the issuance of the policy.
  • Some applicants with more serious health conditions will be denied coverage since the insurer would not be able to charge a sufficient premium in an underwritten market to pay for the average claims for these individuals.

Prior health care claims are examined to determine if premiums need to be adjusted to sufficiently cover expected claims in the future.  As mentioned above, insurers are generally prohibited from singling out policyholders for premium increases, but will look at the experience of the class of individuals with the same policy when considering rate changes.

Age can be used in determining premiums with insurers usually charging older people higher premiums than younger people.  Premiums also generally rise as the group of policyholders gets older.

Gender is a factor in some policies with insurers often setting higher premiums for women of childbearing age than they do for men.  However, for older individuals, insurers may charge more for men than women.

Particular types of business or industry present higher or lower risk to the individuals working within them.  Insurers often charge people in higher-risk occupations, such as the construction trades, higher premiums than they charge to people in lower-risk occupations, such as office workers.

Geographical location is taken into consideration because higher premiums are charged for residents and workers in locations where health care expenses are typically higher.

Family composition is more important than the number of persons in the family when determining health insurance policy premiums.  Insurers often set lower premiums for a parent with a child than they do for a couple.  Similarly, they may set different premiums for other kinds of families.

Lifestyle or participation in wellness activities has become more important in recent times as interest in cost containment has increased.  Insurers have long charged higher premiums to smokers than nonsmokers, but have recently also begun to charge higher premiums for obese enrollees and lower rates to people who participate in health plan “wellness programs.”

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