The Regulation of the Individual Health Insurance Market. State Rate Reforms

12/01/2008

A handful of states have enacted rating reforms for the individual health insurance market, prohibiting or restricting insurers from charging higher premiums based on health status or the risk of having future medical claims.  These rating restrictions are generally of two types: rate bands and community/adjusted community rating.

Rate bands limit how much insurers can vary premiums for each policyholder based on the health and claims of the policyholder.  These limits force insurers to spread some of the risk more broadly across all policyholders. The extent to which premiums can vary depends on the size of the rate band and the factors that insurers can consider when setting premiums.

The rate band sets an upper and lower limit around an “average” premium.  For example, if an average individual premium is $200 a month and a state allows an insurer to vary premiums by plus or minus 50 percent from the average premium, this allows a three-fold variation in premium from $100 (50 percent of the average) to $300 (150 percent of the average).  Some states that use rate bands also allow variation based on factors other than health status, such as age and geographic location.

States that use rate bands also often limit price increases for individuals who renew their policies.  In such a state, an individual whose health has deteriorated will not suddenly be charged significantly higher premiums.  This limit is based on the health status and past claims experience of the individual and may be in addition to any increase that would otherwise apply to all policyholders due to increases in the cost of medical care.

Community rating, sometimes called pure community rating, requires insurers to charge the same premiums for everyone with the same policy. Insurers are not allowed to vary rates based on the health status or claims of the person.  In theory, the price reflects the value of the benefits and not the risk factors of the people who purchase the policy.  The community rate may be different for different insurers based on the claims experience (and other factors such as administrative costs) of people enrolled with that insurer.  At the time of renewal, premiums are based on the claims experience of all people with the policy, so that people who had claims for health expenditures are not charged higher rates than others with the same policy who may not have submitted any claims.  Variation is allowed depending on the family composition of the person(s) applying for the policy.

Adjusted or modified community rating likewise prohibits insurers from varying premiums based on health status.  All persons in the same community are charged the same premiums, but premiums can vary by geography.  Additional variation may be allowed for age, but adjustments for gender are usually not allowed.

The amount of variability among states in the extent of regulation surrounding insurers’ premium rates reflects states’ attempts to balance the challenges of greater access to private health coverage with the policies’ affordability.  Additionally, states change rating practices over time in response to changing markets and political circumstances.

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