From the perspective of an insurance carrier’s operations,
one of the most significant provisions of the Affordable Care Act (ACA) is the new individual and
small group rating methodology defined by the Department of Health and Human
Services (HHS) under their proposed Health Insurance Market Rules. The change may
seem simple—rating individual families and small group plans on the member-
rather than subscriber-level—but it creates huge downstream ripples within a
carrier’s operations.
We’ll take a look at a lot of those ripples in the future,
but let’s start by reviewing the proposed change in rating methodology.
How It (Often) Works
Today
Let’s start with rating for individual direct-to-consumer
plans. Rating methodologies vary from carrier to carrier, and some states
prescribe specific methods, but here’s a typical one.
Rate = (Base Rate * Age Factor * Tier Factor * Health Risk Factor)
In this model, you start with the base rate defined for the
product (say, $238 per month) and then adjust it based upon the age of the
subscriber, the type of coverage being purchased (e.g. individual coverage or
family coverage) and then by a factor based upon the health history of the family—that
painful list of dozens of questions beginning “Has anyone applying for coverage
been treated for [insert long list of dreadful diseases and conditions here].”
So, suppose you have the following family of four:
Bill (age 36)
Sandra (35)
Mark (10)
Sarah (8)
Bill selects a PPO plan with a base rate of $238.25 per
month and fills out an application, including completing the health
questionnaire. Because he is 36, Bill is assigned a subscriber age factor of
.79, and because he chooses family coverage his contract has a tier factor of
2.68. Based upon some health conditions Sandra and her son Mark have, the
carrier’s underwriters assign a health risk factor of 1.1.
So, Bill’s final rate for family coverage is:
$238.25 * .79 * 2.68 * 1.1
Which equals $554.87
per month.
Note that in this case Sandra's age and the fact that she and Bill have two
children do not figure into the equation. The rate is based
off the oldest adult (Bill) as well as the fact that they selected family
coverage, and the rate would be the same whether they have one child or four.
The rate also doesn’t change if they have another child and add coverage for
the baby.
How It Will Work in
2014
Under the proposed HHS rule, the rates for Bill’s family will
be calculated a little differently starting in 2014. One of the big ACA changes
is that rates can no longer be based upon members’ health history, so that
health risk factor will go away. Now, only age, tobacco use, and “geolocation”
(basically, the county in which the family lives) can be taken into account.
Here’s the kicker. The family rate must now be determined by
adding up the rate for each individual family member. The rule also stipulates
that no more than three children under the age of 21 can be
taken into account. (Any children after the first three can be added for no additional cost.)
So, let’s rate Bill’s family under the new methodology.
Bill’s monthly premium will be the sum of the rates for each of the members in
his family. Each member’s rate will be calculated as follows:
member rate = (base rate) * (age factor) * (tobacco factor) * (geo factor)
Instead of filling out a lengthy health questionnaire, Bill
simply has to indicate whether each person he is covering uses tobacco. In his
family’s case, only Bill does. So here’s the calculation:
Bill’s rate = $152.62 * 1.22 * 1.35 = $250.34
Sandra’s rate = $152.62 * 1.18 * 1 = $179.36
Mark’s rate = $152.62 * .635 * 1 = $96.52
Sarah’s rate = $152.62 * .635 * 1 = $96.52
Total Family Rate = $620.62
Now, suppose Bill and Sandra have a third child, Nellie. Under
the original rating method, they just add Nellie to their family coverage and
their premium stays the same. Under the new rating methodology, Nellie gets
rated separately and Bill’s coverage goes up by $96.52.
If they have a fourth child, under the new method, the premium
would not increase since only the first 3 family members under 21 are
counted.
Small Group Rating
The impact on small group rating is very similar, for the
proposed rule does away with former “composite rating” approaches commonly used
with groups.
Under composite rating, every employee in the company who
purchases a plan pays the same as his or her fellow employees, varying only by
the coverage tier selected (e.g. employee only, employee + spouse, employee +
children, or employee + family). The rates themselves are determined by the
characteristics of the group as a whole, such as average employee age, average
employee health risk, geography, and size of the group. The rates for the year are
determined during the sales process at the start of the benefit year. If a new
employee is hired mid-year, he or she can buy coverage for the same price that
his or her new co-workers pay.
That is all going to change under the new proposed rules.
Starting in 2014, a group’s total rate is going to be the sum of the rates determined
for each employee, and the rate for each employee will be the sum of the rates
for family members being covered, just as we saw for Bill in the individual
example above. A small business, in other words, will be just a collection of
individual families, with each member in the group rated separately.
In other words, if you have a small business with 12
employees, go through the same pricing exercise for each employee like we did
for Bill’s family above. Sum those 12 employees together, and you have your
total group rate. Hire a new employee mid-year, and that new employee will be
rated separately and the total group price will go by whatever that new
employee is priced to pay.
I’ll let others debate the merits of
the “family unit” approach versus the “build up” approach in terms of fairness,
accuracy, and efficiency. From an operational perspective, though, it greatly
changes things. We'll take a look next at a few of the challenges it poses to
various operational areas within an insurance carrier.
