Rate bands set limits on the amounts that insurers can vary premiums based on health status. Rate bands also list and limit other factors that insurers can consider when setting premiums. Typically, insurers will establish an “index rate” or average premium. A rate band essentially sets a floor below and a ceiling above that index rate. That is, a rate band limits the amount by which an insurer can increase premiums above the index rate for people who are in poor health, as well as how much an insurer can discount premiums below the index rate for people who are in excellent health.
Example: If a state allows an insurer to vary premiums from the index rate by plus or minus 25 percent, the total variation between the lowest and highest premium will be about 67 percent.
The math: The index rate for monthly premiums in Plan A is $400. In a state that allows rates to vary plus or minus 25 percent based on health status, a healthy person may have premiums as low as $300, and a sick person may have premiums as high as $500. $500 is about 67 percent higher than $300.
Similarly, states may set a maximum amount that insurers can vary premium rates from the index rate based on age or on another factor from the bulleted list on page X. To calculate the total variation allowed in the insurer’s premiums, multiply the amounts that premiums can vary for each factor.
Example: Plan A charges older people premiums that are four times as high as premiums charged to people aged 20. Sally is 60 years old and has health problems. Jane is healthy and age 20. Sally’s premiums are 1.67 times higher than Jane’s due to her health, and four times higher than Jane’s due to her age. All together, her premiums are (4 x 1.67 =) 6.68 times higher than Jane’s premiums. Therefore, if Jane is charged $300, Sally will be charged about $2,000 per month.
Finally, some states allow insurers to set different premiums for different “classes of business.” These include groupings of small employers that are expected to have expenses for claims and administration that are significantly different from other businesses. These differences may result from different systems used to market and sell plans to employers, the transfer of the class of business from another insurer, or when insurance is provided through an association of small businesses rather than for one business. For example, in some states, insurance policies offered to associations of small businesses are priced independently from insurance products offered to individual small businesses. In addition, in some states, carriers may price HMOs that they offer to small businesses independently from PPOs that they offer to small businesses.
For small groups, the following states use rate bands that allow limited variation based on health and allow limited variation based on other factors: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Delaware, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Michigan (for most commercial carriers, but not for nonprofits or HMOs), Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island (for insurance carriers that used health status before June 1, 2000), South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia (only for certain policies), West Virginia, Wisconsin, and Wyoming.¹
In the individual market, the following states use rate bands: Iowa, Idaho, Kentucky, Louisiana, Minnesota, New Hampshire, New Mexico, Nevada, Ohio (on standard products), South Dakota, and Utah.²
States that use rate bands also often limit price increases for individuals and groups that renew their policies. For example, at renewal, states that use rate bands often prohibit increases of more than 10 or 15 percent based on the group’s health status or claims experience.³ This means that, if an insured person’s health status has worsened, his or her premiums will not suddenly wildly increase.
Unfortunately, in the individual market, many states do not prohibit insurers from reexamining health status (re-underwriting) or increasing premiums based on the duration of coverage. So, even if consumers enroll in reasonably priced policies, they can find themselves unable to afford renewing their policies if they have become ill or have other health problems.4
Example: Kansas limits price increases based on claims experience, but insurers can consider other factors when increasing premiums. On renewal, Kansas allows group insurers to increase premiums based on only three factors: 1) a business trend rate—that is, if the price of an insurance product increases by a certain amount for all small groups; 2) a change in the characteristic of a particular group—for example, if the group’s members are now older on average; and 3) a group’s utilization (the medical claims of the particular group). The adjustment for utilization cannot be more than 15 percent annually. Taking all three factors into account, premiums for a group cannot be increased by more than 75 percent annually. In addition, the Insurance Department reviews insurers’ rates and the insurers’ past cost experience.
The Insurance Department reports that without the law, some companies would use steeper increases—the Department has negotiated with companies to moderate proposed premiums or to implement premium increases over a several year period instead of all at once.5
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¹Mila Kofman and Karen Pollitz, Health Insurance Regulation by States and the Federal Government: A Review of Current Approaches and Proposals for Change (Washington: Georgetown University Health Policy Institute, April 2006), available online at http://www.allhealth.org/briefingmaterials/HealthInsuranceReportKofmanandPollitz-95.pdf.
²Summary of Key Consumer Protections in Individual Health Insurance Markets (Washington: Georgetown Health Policy Institute, April 2004), available online at http://www.healthinsuranceinfo.net/newsyoucanuse/discrimination_limits.pdf. A December 2005 Blue Cross survey differs slightly in its categorization of state rating laws. It does not include New Hampshire as using rate bands but adds West Virginia as a state that does.
³However, the overall price increase in a group’s premiums may be much higher than this because states allow additional increases based on the trend in insurance prices (for example, because the price of health care has increased) and based on changes in the age, gender, or other characteristics of the group’s membership.
4Denise Harris and Kathleen Stoll, Protecting Consumers from Unfair Rate Hikes: The Need for Regulation of Health Insurance Renewal Premium Increases (Washington: Families USA, 2003).
5Source: Personal communication with Craig Van Aalst, Policy Examiner, Kansas Insurance Department, June 7, 2006.