Adjusted Community Rating

Adjusted community rating likewise prohibits insurers from varying premiums in a community based on health status or claims history, but it does allow insurers to vary rates (within limits) based on more factors than geography and family composition.

• The following states use adjusted community rating in the small group market: Connecticut, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, Oregon, Pennsylvania (only for some Blue Cross/Blue Shield plans and HMOs), Rhode Island (for insurance carriers after June 1, 2000), and Washington.
• The following states use adjusted community rating in the individual market: Maine, Massachusetts, Michigan (for Blue Cross and HMOs), New Jersey (for plans that do not include all of the mandated benefits of the standard community-rated plans, called “Basic and Essential”), and Oregon.¹

States with community rating and adjusted community rating do not allow pricing based on health status. This means that medical underwriting is not allowed either when policies are issued or when they are renewed.

Example: New Jersey’s use of adjusted community rating in the small group market

New Jersey applies the rules listed below to all small employers, including businesses that consist of only two employees who may be related (such as a husband and wife), as long as each works more than 25 hours per week.

• New Jersey uses adjusted community rating in the small employer market. It does not allow insurers to vary premiums based on health. However, it does allow insurers to vary premiums based on the following three factors only: gender, age, and geographical location. Taking all three of these factors into account, the most that insurers can vary their premiums from one small employer to another is 2:1. That is, for a given package of benefits, an insurer cannot charge one small employer more than twice the premium it charges to another small employer.
  
• Insurers² in the small employer market must also sell “standardized” plans to small businesses, with those standards promulgated by state regulation. (“Standardized” plans in the small employer market offer more benefits than the mandated minimum benefits that all state-licensed insurers must provide.) This allows employers to readily compare prices and to understand what they are purchasing. It also allows regulators to deal efficiently with complaints about coverage, because they know exactly what is covered—they don't have to review a specific plan to see whether or how a particular condition is covered.
  
• Insurers can vary the deductibles and copayments that they charge, but they must follow the state’s standards regarding the benefits they offer.
  
• Insurers can offer additional benefits by selling riders to their policies. They can also use a rider to offer a plan with fewer benefits than a particular “standardized” plan, although such plans must still offer the minimum mandated benefits required by state law.
  
• Insurers must demonstrate that they use at least 75 percent of premium dollars to pay medical claims. At the beginning of the year, when insurers set their premiums, they file a statement showing what they expect to spend on medical claims. At the end of the year, if the amount spent on medical claims is less than 75 percent of collected premiums, they must issue refunds to enrollees in their health plans to make up the difference.

According to the Managing Actuary of the New Jersey Department of Banking and Insurance, the state’s system has been effective in providing coverage to small businesses. It covers about 920,000 people out of a population of about 8.5 million. The small group market is stable in New Jersey, and the percentage of businesses that offer insurance to their workers is higher than the national average. For example, in 2002, 45.7% of New Jersey firms that employed fewer than 10 workers offered health insurance, compared to a national average of 36.8% for firms of this size.³

Community rating and adjusted community rating are particularly helpful in limiting variation in premiums for the smallest employers. New Hampshire, which has experimented both with rate bands and with adjusted community rating, provides an illustration of this. In 2003, the state dropped its adjusted community rating system and decided to use rate bands instead. The Center on Budget and Policy Priorities describes the problems this caused:

Under the law that New Hampshire enacted in 2003, health insurers in the state were permitted (beginning in 2004) to vary small business health insurance premiums substantially, based on the health and age of workers, firm size, geographic location, the firm’s industry, and other factors.3 Some firms in New Hampshire with disproportionately younger or healthier workers saw their premiums decrease or remain flat. Many other small firms, however, particularly the smallest firms with less healthy workers and those that were located in high cost areas of the state, had their premiums skyrocket when they renewed their health insurance plans. Due to the large premium increases faced by these small businesses, New Hampshire repealed the 2003 law in 2005 and essentially returned to its prior community rating system.⁴

The National Association of Insurance Commissioners (NAIC) Model Law for Adjusted Community Rating

 
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