Understanding how rating under the ACA works in the Small Group Market is essential for health insurance brokers and their clients. Let’s break down the key components that influence premium calculations in this market.
Core Rating Criteria for Small Group Plans
- Age Rating Ratio (3:1 Ratio):
- The ACA permits insurers to vary premiums based on age, with a maximum ratio of 3:1. This means that the premium for a 64-year-old cannot exceed three times that of a 21-year-old.
- This ratio ensures that while older adults may pay higher premiums, the difference is capped to maintain affordability across age groups
- Member-Level Rating (Per-Member Rating):
- Premiums are determined based on the individual age of each enrolled member. This approach calculates the total premium by adding the individual rates of all covered members.
- Family Composition: For dependents under 21, only the three oldest are rated; additional children under 21 are covered without extra charges. Once a dependent turns 21, they are individually rated.
- Age Bands:
- Ages 0-14: Children within this range are assigned a single rate, simplifying premium calculations for young dependents.
- Ages 15-20: Starting at age 15, premiums increase incrementally each year, reflecting the rising health risks associated with aging. However, rate increases only occur at renewal. For example, if you’re 20 when your group’s plan renews on 12/1/2024, you’ll keep your 20-year-old rate until the next renewal. Even if you turn 21 midyear, your rate won’t change until the plan renews again, ensuring rate stability throughout the plan year.
- Age 21-63: Individuals aged 21 through 63 are rated individually, with premiums increasing with age, up to the 3:1 federal limit.
- Ages 64 and Over: Once a member turns 64, they remain in a single rate band. The premium for individuals aged 64+ is capped and does not increase further.
- Geographic Rating Areas:
- California’s Structure: The state is divided into 19 geographic rating areas, which can influence premium rates based on regional healthcare costs.
- Nevada Structure: the state is divided into 4 geographic rating areas, which influence premium rates based on regional healthcare costs.
- Tobacco Use Rating:
- The ACA allows for a tobacco use surcharge of up to 1.5:1. However, California and Nevada prohibit using tobacco use as a rating factor in small group health plans, ensuring that tobacco users are not charged higher premiums.
- Risk Adjustment Factors:
- Risk Adjustment factors were previously used to adjust premiums based on the health status of a group, these factors are no longer utilized in California’s small group market, promoting a more standardized approach to premium calculations.
Dependent Rating Structure
- Three-Child Limit Under Age 21: The ACA stipulates that for dependents under 21, only the three oldest are considered in premium calculations. Any additional children under 21 are covered without extra charges.
- Dependents Aged 21 and Over: Each dependent aged 21 or older is individually rated, contributing separately to the total premium.
Illustrative Example
- Consider a family with the following dependent children as of 01/01/2025.
- Child 1: 21 years old
- Child 2: 19 years old
- Child 3: 18 years old
- Child 4: 16 years old
- Child 5: 14 years old
- Premium Calculation
- Employee and Spouse: Each has an individual premium based on age.
- Dependents 21 and Over:
- Child 1 (21 years old): Individually rated
- Three Oldest Dependents Under 21:
- Child 2 (19 years old)
- Child 3 (18 years old)
- Child 4 (16 years old)
- Additional Dependents Under 21:
- Child 5 (14 years old) – No additional premium charges.
As children age and reach 21, they transition to individual rating, and the next oldest under-21 dependents are included in the count of three.