What are the rating options?
Q: What are the rating options?
A: The rating options are the various methods that an insurance company may use to determine the premiums to charge a small group for health insurance. Some states may have regulations on the acceptable rating options, but insurance companies may employ their own methods within these guidelines. They may also provide options to the employer in some cases. The most common rating method for small group health insurance is age banded rating. With this method, the insurance company provides a different rate for each employee, based on the age of that employee. Typically, the older the employee, the higher the premium that will be charged for that employee’s portion of the group health plan. These age banded rates are set by the insurance company by looking at claims history for persons under other group health plans that are of similar age. Rates usually increase with age because claims also increase with age as a person develops more health conditions as they get older. The insurance company may look at other factors in determining the age banded rates, such as the geographic location of each employee’s residence and their gender. Some insurance companies base rates on the geographic location of the business and not that of the employees.
Another rating option is called composite rating. Under a composite rating method, the insurance company will calculate one set amount that will be charged for each eligible employee enrolled in the group health plan. For companies that offer this rating option, they calculate the average premium based on the persons enrolling when the group health plan is first established. They add the total age banded rates together for all persons enrolling, and then divide that number by the number of employees. Composite rating allows for ease of record keeping for the employer and equals the amount of contribution he makes per employee, thus providing equally valued benefits to each employee. Most insurance companies will only allow composite rating if the total number of employees enrolled in the group health plan exceeds a minimum number, such as 10. A drawback of composite rating is that the younger employees will have a much higher COBRA payment then they would under age banded rating if they were to lose their job and find it necessary to accept COBRA continuation. Older persons accepting COBRA coverage under a composite rated group health plan would actually be paying less for COBRA than they would otherwise, if there age is greater than the medium age of the group.
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