Reform Alert - News from the Blues' Office of National Health Reform

CMS issues proposed rule: modified community rating

Update: April 19, 2013 - Michigan issues individual and small group 2014 market rules for plans sold on and off the Marketplace

Dec. 27, 2012

On November 20, 2012, the Centers for Medicare and Medicaid Services (CMS) issued a proposed rule regarding modified community rating.  

What is modified community rating?

Community rating is a way for insurance companies to calculate the average cost of insurance.  In this manner, an insurer evaluates the risk factors of an entire market area, and not those of any one individual person, when determining insurance premiums.  

Modified community rating allows for premium variation based on individual risk factors, with some limitations.  This concept helps maintain price fairness among high-risk individuals and the rest of the population as costs are spread across a group of people.

What are the changes to modified community rating?

Beginning January 1, 2014, modified community rating restricts rating factors to family size, geographic rating area, age and tobacco use. There are also limitations to the permitted rating factors.  For example, an insurer cannot charge a smoker more than 50% what it charges a non-smoker.  Age rating is limited to a 3:1 band beginning at age 21. In other words, an issuer cannot charge its oldest member more than three times what it charges a 21-year-old.

Rating based on health status, medical condition, medical history, genetic information and evidence of insurability are all strictly prohibited.   

Is modified community rating applicable to the large group market?

Modified community rating rules do not apply to the large group market unless a state permits health insurance issuers to offer coverage to the large group market through an Exchange, which cannot occur prior to 2017. If the state permits large groups to purchase coverage through an Exchange, then the modified community rating rules will apply to all insured large groups on and off Exchange.

When is age determined?

Age is determined as of the date of policy issuance or renewal.

Will states apply an age curve?

A uniform age rating curve will apply in each state. States wishing to determine their standard age rating curve must submit their proposed age curve to CMS. In states that do not establish their own standardized age curves, CMS’s standard curve will apply.

How will tobacco use be factored?

CMS specifically permits the tobacco factor to vary based on age. Age and tobacco factors are considered multiplicative, so combined variation cannot exceed 4.5:1.

Will there be uniform geographical rating areas within each state?

Yes.  The proposed rule provides discretion to states to establish geographic rating areas, but the rule generally requires that states establish no more than seven rating areas.  States may propose geographic rating criteria that differ, but must receive CMS approval. If a state does not establish rating areas, or if its rating areas are not approved by CMS, then CMS’s default geographic rating for a state will be one rating area for the entire state, though CMS could establish rating areas consistent with the limitations described above.

What is member level rating?

With the exception of pure community rating states (where age and tobacco use rating is prohibited), the rule requires “per-member rating.”  Specifically, the total premium for family coverage must be determined by adding the premiums for each individual family member. In determining the total premium for a family, premiums for no more than the three oldest family members who are under age 21 are taken into account.

Are there special rules for the small-group market?

Yes, issuers are explicitly permitted to establish blended rates within a group, wherein the “employee share” of premium charged to any one enrollee is based on average enrollee amounts. Further, states are permitted to require issuers to provide rates to small groups in this manner. However, the total premium charged to a small group must be based on member-level rate buildup.  

Where can I find more information?

More information can be found in the Health Insurance Market Rules proposed rule (as published in Federal Register on November 26).  To read more Reform Alerts, see BCBSM/BCN’s Health Reform site.

The information in this document is based on preliminary review of the national health care reform legislation and is not intended to impart legal advice. The federal government continues to issue guidance on how the provisions of national health reform should be interpreted and applied. The impact of these reforms on individual situations may vary. This overview is intended as an educational tool only and does not replace a more rigorous review of the law’s applicability to individual circumstances and attendant legal counsel and should not be relied upon as legal or compliance advice. As required by U.S. Treasury Regulations, we also inform you that any tax information contained in this communication is not intended to be used and cannot be used by any taxpayer to avoid penalties under the Internal Revenue Code.

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