Created in 1996, the NAIC model law, known as the Small Employer and Individual Health Insurance Availability Model Act, uses adjusted community rating for both small groups and individuals. (A previous model act, now obsolete, used rate bands.) For both the individual and small group market, insurers can vary premiums based only on geographical location, family composition, and age. Five-year age bands are used for the small group market, and one-year age bands are used in the individual market. Taking all factors into account, after a transition period of several years, the model allows a total range in premiums of no more than 2:1. While this is still a large variation in premiums, keep in mind that in a state without rate regulation, the range in premiums is sometimes 13:1 or higher.¹
The model also proposes a reinsurance system. Participating insurance carriers pay assessments and, in turn, another insurer “reinsures” for high-cost claims so that the original insurer will not pay more than $10,000 per year for any individual.
¹Review and comparison of premiums posted on www.carefirst.com on July 21, 2006, for CareFirst BlueCross BlueShield policies for two different hypothetical people: 1) an older woman in Washington, D.C. who qualifies for HIPAA (that is, she must be sold a policy even if she is in poor health), and 2) a young man in a medically underwritten policy (that is, he will not be sold a policy unless he is in good health). The older woman’s premiums were 13 times as high as the young man’s.
