Our Perspective

Small Group Composite Rating Explained for 2015

On Mar 11, 2014, HHS published a final rule (101 pages) that addressed how carriers could “composite rate” in 2015 and beyond. The cure is worse than the disease. HHS’s definition of composite rating is not composite rating at all. HHS is allowing states to define their own version of “composite rating” subject to approval by HHS.

Per-Member Rating in Small Group

For all new, non-grandfathered plans effective in 2014 and later, carriers must develop the total premium by using “per-member” rates. Under per-member rating, the carrier charges a rate associated with the age of each enrolled member. The carrier can only charge a rate for up to three kids under 21yo in a family. The premium associated with the coverage for a given employee’s family coverage is the total of the age rates associated with each ratable member of the employee’s family. The total premium charged to the group will fluctuate during the plan year with enrollment changes. For example if an employee covers herself and one child and delivers a second child during the plan year, the addition of the second child would require additional premium even though her coverage tier remains EC.

Composite Rating Defined by HHS in Final Rule

Important, even though HHS refers to this as “composite rating” it is clearly not…As an alternative to per-member rating, carriers would be allowed to bill for each member using “average” adult and child rates established in the beginning of the plan year. Carriers would have to develop rates using the statutory age bands, then average the rates for adults and children. The rates would still be charged on a member basis and fluctuate with membership changes, however it would prevent employers from being affected by changes in the age of adult members during the year. A snippet of the regulation explains:

[Carriers may] calculate an average enrollee premium amount for covered individuals age 21 and older, and calculate an average enrollee premium amount for covered individuals under age 21. The premium for a given family composition is determined by summing the average enrollee premium amount applicable to each family member covered under the plan, taking into account no more than three covered children under age 21.

Carriers offering rates under this “composite” option would not be able to use tobacco use as a rating factor because of dissonance between state and federal law. Under federal law, premium surcharges associated with tobacco use cannot be socialized across the group. The surcharge must be applied only to the rates associated with tobacco users. The Texas Department of Insurance considers tobacco use to be a health status. State law prohibits carriers from varying rates for members within a group plan on the basis of health status.

Carriers who choose to offer HHS’s version of “composite” rates to employers, must offer it as an option alongside the option of per-member rating. They must give each employer the choice of their preferred method. This could create a degree of adverse selection as employers who anticipate hiring younger employees during the plan year would opt to take the per-member approach while employers expecting to hirer older employees (or pick up older dependents) would opt for the composite option.

Example of Various Rating Methodologies

This document illustrates how small group rates are applied to each age and shows various rating methodologies. The age-band table on the left represents the statutory structure of age variation for a given plan. At the top to the right of the age table is a member-level census showing a four employee group with dependent participation. The age rate associated with each member’s age is shown in the “Age Rate” column in that table. The table below the census shows the adult and child average rates, which would be established at installation. The last column of the census shows the associated adult or child rate for each ratable member. The “Rating Methodologies” table shows how traditional composite rates could be derived from the total premium associated with the members’ age rates. In order to comply with various discrimination laws, the employer would use something like this to establish the contribution levels for each tier of coverage. The last table shows each employee and the rate for each under each of the three rate methods.

Comments and Perspective

HHS’s version of composite rating is simply another method for per member rating that allows carriers to charge employers using adult and child averages with those averages being locked in at the beginning of the plan year. The rates are still charged specific to each covered member.

In our opinion, this new “composite” method does nothing but create an additional layer of administrative complexity to an already complicated issue. Technically, various laws prohibiting discrimination would prevent an employer from requiring older employees to pay a higher contribution because of their age. To avoid violating those laws, employers would still have to develop a composite basis for setting employee contributions.

By addressing this topic in this manner, HHS seems to prohibit any other form of “composite rating” unless the state establishes a formal approach and obtains approval from HHS for that approach to be used. The small group rating requirements continue to remain extremely disruptive to the small group market and employer administration. Self-funded plans for small employers and large group plans are not subject to these small group rating rules. Remember, small group will include employers with up to 100 employees in 2016.

As we have seen with other provisions, carriers may disregard elements of this rule they don’t like. Many have done so with elements of other provisions. Our state does not intend to enforce the provisions of ACA and it is unclear if the federal government has the authority to enforce this provision within our state.

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