Earlier this year, I described why there will be significant and true rate shock stories this fall as community underwriting will go into effect for almost all fully insured small group plans:
PPACA is changing the means of how groups are underwritten for non-grandfathered policies that went into effect on or after January 1, 2014. The new policies are underwritten based on a modified community rating system that allows for consideration of the age of people in the underwritten group, their locations (which can still tie a lot of statistical probabilities of cost and health status) and smoking status. The community that they are rated against is the entire pool of small groups that an insurance company insures….
Right now under experience and/or statistical underwriting, there are significant premium differentials between groups with members who are the same age, location and smoking status. This system has its own set of entrenched winners and losers… Statistical and experience underwriting gives better rates to groups that historically have lower health care costs. Those groups tend to have more men then women, and fewer than typical number and severity of pre-exisiting conditions for each age cohort. Conversely, groups that have more women than men and have greater than expected number of people with expensive conditions, tend to get much higher rates than average and median….
On average, the total cost of premiums to insure the same people in the same groups with experience or statistical underwriting versus community underwriting will be the same. However the distribution of those costs will be wildly different. Groups that are more male and/or healthier in general will see significant rate increases due to underwriting changes. Groups that are more female or statistically likely to be sicker than average will see flat rates or decreases.
The change in underwriting assumptions for the small group market only applies to companies that are “fully insured.” Fully insured is a term of art. It means the insurance company collects a premium and takes on all of the risk of claim expenses being higher than projected. If a group of three people have two of the three covered lives go to the trauma center in a benefit year, the insurance company eats a massive loss on the group. That loss should be covered by the thousands of other covered lives in other small groups. If that same group has a total of seven claims for the entire year totalling $800 and that $800 is entirely deductible dollars, the company will have given the insurance company a massive check for peace of mind only. There would be no refund.
There is a loophole for companies that think they want to take on additional risk to reduce their premiums.
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