Composite Rating for Small Group Employers

Composite Rating for Small Group Employers

by Posted on: May 12, 2015Categories: HR & Compliance   

Composite rating is the practice of lumping all eligible employees together and assigning a single rating, regardless of individual factors (such as age, gender or tobacco use) that may make somebody a higher or lower insurance risk. The composite premium is calculated by dividing the total group premium by the number of enrollees to arrive at an average enrollee premium amount.

Long used in group plan health coverage, the Affordable Care Act (ACA) changed how issuers determine a composite rating for their health insurance plans. Under the ACA, some fully insured group health plans will be required to comply with many of the same nondiscrimination rules that previously applied only to self-funded plans. (Note: These rules aren’t currently effective for fully insured plans—they’ve been delayed indefinitely, pending the issuance of regulations.)

Effective for 2014, the ACA also reforms the rating practices of health insurance issuers in the individual and small group markets by limiting the factors that can affect premium rates. These rating restrictions do not apply to grandfathered plans, large group plans or self-funded plans.

In addition, the ACA currently defines a small group market plan, or small employer, as those that employ, on average, up to 100 workers. However, beginning in 2016, states can change this definition to one that employs no more than 50 workers, on average.

Under the ACA’s reforms, issuers may vary the premium rate charged to a non-grandfathered plan in the individual or small group market from the rate established for that particular plan only based on the following factors:

Age: The rate can differ up to 3:1 for like individuals of different ages who are 21 years and older.

Family Size: Rates may differ based on whether coverage is for an individual or a family.

Geography: States can establish up to seven geographic rating areas to determine the collective health care risk of the residents.

Tobacco Use: Users of tobacco can be charged rates up to 50 percent higher than non-tobacco users.

All other rating factors are prohibited. This means that several factors commonly used by issuers to set higher premiums prior to 2014 (such as health status, claims history, duration of coverage, gender, occupation, small employer size and industry) can no longer be used.

As a result, some issuers no longer determine composite ratings for their group plans.

In response to this, many small employers want to know whether they can determine their own composite rating. However, their authority to do this is unclear at this time, as official guidance from the federal government has yet to be issued.

Until guidance is issued, it cannot be known for certain whether setting up an internal composite rating system will comply with federal nondiscrimination rules. An employer that implements a composite rating policy that is later found to be discriminatory faces a penalty of $100 per day, per participant or beneficiary deemed to have been discriminated against.

Yet, the Department of Health and Human Services (HHS) has also signaled in a final rule issued in March 2014 that states could make their own rules on composite rating, subject to HHS approval.

This action, coupled with existing rules addressing discrimination and composite ratings, have allowed some employers to tentatively move forward with different approaches.

Currently, when setting employee contributions, employers have two options:

  1.  Set the employee contribution as a percentage of the group premium (for example, older employees and smokers could pay more).
  2.  Generate a composite rate where each employee’s contribution is the same, except for variation due to single coverage and/or family size.


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