Welcome to American Health Line's new Q&A feature, Expert Explanations, where we ask experts to provide insight on a health policy issue.
For our latest Q&A, Justin Giovannelli -- a research fellow and faculty member at Georgetown University's Health Policy Institute -- discusses the Community Rating pricing mechanism for insurers and the new Adjusted Community Rating requirement under the Affordable Care Act. Under the law, insurers still must use Community Rating but they are allowed to modify rates based on age, family size, tobacco use and location of residence.
What is the wisdom behind requiring insurers to use Community Rating under the ACA but allowing them to modify rates based on those 4 factors?
Prior to health care reform, insurers in most states were allowed to charge higher premiums to people based on their medical history or their use of health services, among many other factors. This made it hard for people in less-than-perfect health to find affordable coverage, and made it more likely that they would be uninsured.
The ACA establishes adjusted community rating: insurers can't raise premiums based on health status, or medical claims, or gender, or most of the other factors that they often used when setting rates in the past. They are allowed to vary premiums based on how many people are enrolled in the plan and can charge more to someone who lives in an area where health costs are high. (Both of these factors are generally allowed even in a "pure" community rating system.)
Finally, they can consider a person’s age or tobacco use when setting rates—but only within limits.
The idea is that these reforms will work together with others in the health law—particularly the premium subsidies and the requirement that people maintain health coverage—to make insurance more affordable for most Americans.
Insurers will still be restricted by how they set premiums under ACR based on tobacco use and age. Can you briefly describe these restrictions?
Insurers are prohibited from charging an older adult (someone who is 64 or older) more than three times the rate of a younger adult (someone who is 24 or younger). And in general, age-related premium increases have to be gradual—a 40 year-old pays only marginally more than a 39 year-old, who pays only marginally more than a 38 year-old, and so on.
If you're an adult who routinely uses tobacco, an insurer may be able to charge you up to 50% more in premiums. However, if you get your coverage through a small employer, your insurance company is required to offer you the chance to avoid paying the surcharge by participating in a tobacco cessation program.
Prior to the ACA, some states required partial compliance with Community Rating. Other states did not have any requirement. What issue(s) if any did this discrepancy create for (i) insurers (ii) states (iii) consumers?
Before the ACA, each state had complete discretion to decide whether to adopt premium rate restrictions. Most states imposed at least some limitation on the rates insurers charged small employers, although the type and extent of these restrictions varied significantly. In contrast, most did not restrict rating factors in their individual markets. Only a small minority of states required adjusted community rating in either their individual or small group markets.
The variation in how states approached rating—and related regulatory issues, like guaranteed access to insurance and mandates to purchase coverage—meant that consumers who were otherwise similar could have substantially different experiences trying to obtain coverage, depending on where they lived.
Under the ACA, there is now a minimum federal rating standard that consumers can expect nationwide. At the same time, because states have authority to be more restrictive than the law's minimum requirements—for example, they can completely prohibit age or tobacco rating—cross-state variation will likely continue.
Now that all states must enforce ACR (or allow the federal government to enforce it for them), what challenges or problems do you think states have faced to comply?
The ACA gives states considerable flexibility over implementation of the reforms. Almost all of the states retained primary responsibility for regulating and enforcing the market changes, including the new rating rules. These states stepped up to the plate for their consumers, sometimes by adopting legislation or regulations to implement the requirements, in addition to working behind the scenes to build oversight capacity.
Part of these efforts has centered on improving the effectiveness of state programs to review insurers’ rate filings. With assistance from federal grants, most states acted to enhance their legal authority to review rates, expanded the reach of that oversight to additional markets and products, and have brought greater resources to bear on the review process.
The ACR provision is not applicable to certain health plans (i.e. employer-sponsored, self-insured, grandfathered). Why are these plans exempt from the provision?
The ACA's rating rules apply to new plans purchased by individuals and small employers.
They do not apply to coverage for large employers, to businesses that self-insure, or to so-called "grandfathered" plans.
Large employers, because of their size, tend to have greater leverage to negotiate rates with insurers and thus were viewed as having comparatively less need for rating protections. However, starting in 2017, states can allow large employers to purchase coverage through the new insurance exchanges. If a state opts to do this, the law's adjusted community rating requirements will apply to large group coverage, as well.
Self-insured employers bear the financial risk of their employees' health claims themselves and are not covered by many of the law's insurance market rules.
Grandfathered plans are plans that were in existence at the time health reform was enacted, in March 2010, and that have not undergone significant changes since then. Because the authors of the ACA wanted to reduce disruption for people with existing coverage, the law does not apply many reforms—including the rating rules—to any plan that maintains its grandfathered status.
Compiled by Santosh Rao, Associate Editor