Q: How Are Small Group Health Insurance Premiums Calculated?

First things first: let’s define what health insurance premiums are. A health insurance premium is the monthly or quarterly payment for your health insurance plan. It’s like, say, your monthly cable bill.

For group health coverage, premiums are calculated for each employee who enrolls in the plan (plus the cost to add a spouse and/or dependents, if applicable), and then all of those individual premiums are added together to get the group’s total premium.

That’s the amount that the business has to send to the insurance company each month (or each quarter) to pay for the insurance, though most employers also require employees to pay some of the cost.

Now, how much are we talking here?

The amount that businesses in the small group market have to pay for health insurance is mostly based on Affordable Care Act (ACA) guidelines.

health insurance premium factors

Which factors can’t affect my small group health insurance rates?

Health insurance premiums can differ from one health plan to another based on how comprehensive the benefits are, the size of the insurer’s network, and other such variables.

But the Affordable Care Act doesn’t allow small group insurance rates to be based on:

  • The group’s overall medical claims history;
  • The health status of individual enrollees; or
  • The group’s industry or business type.

So, which factors can affect my small group insurance rates?

Premiums for any specific plan in the small group market can only vary based on three factors:

  • The ages of employees and their dependents;
  • Tobacco use among employees and dependents (except in states that prohibit the use of this factor); and
  • The location of the business.

How are age-based premiums calculated?

The ages of your employees and their spouses/dependents are typically the most significant factor in determining your group’s total premiums.

The base rate is the rate for a 21-year-old. Premiums are typically lower for people younger than 21 and higher for people over 21, though this may vary by state. The maximum that older enrollees can be charged is three times the base rate for 21-year-olds.

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For children up to age 14, the rate is a little more than three-quarters of the base rate. And for kids age 15 to 20, the rates increase with each successive year. Again, this can vary as states can create their own rates so long as they remain within the 3-to-1 ratio.

For employees who have family coverage, their total premium is determined by adding together the age-based (and tobacco-based, if applicable) premiums for each family member. But if the family has more than three kids under the age of 21, premiums are only charged for the three oldest kids, although all of them are covered.

So for example, if Bob and Lindsay have four kids, ages 17, 15, 13, and 10, their total family premium would be the cost of their own premiums, plus the cost of the premiums for their 17, 15, and 13-year-old kids. Their 10-year-old would be included on the plan at no charge.

However, that rule only works for more than three kids under the age of 21. Four years down the road, when Bob and Lindsay’s kids are 21, 19, 17, and 14, they’ll have to pay premiums for all four of them.

How are tobacco premium surcharges calculated?

Except in California, Connecticut, District of Columbia, Massachusetts, New Jersey, New York, Rhode Island, and Vermont, small group health insurance plans are allowed to charge tobacco users up to 50 percent more for their premiums—as long as the employee has an opportunity to avoid the surcharge by participating in a tobacco cessation wellness program.

Tobacco usage is self-reported by enrollees, and misrepresentation may result in the loss of health benefits or legal action from the insurance company.

Even in states where rates can be higher based on tobacco use though, some insurers don’t adjust premiums based on tobacco use.  

How does location affect health insurance premiums?

Under the ACA, small group health insurance premiums can vary based on geographic area.

But the difference in premiums has to be due to something other than the overall health of the people in each area. That means an insurance company can’t charge higher premiums in one area just because the people in that area tend to be in poorer health.

Instead, the geographic premium differences have to be based on factors like the cost of health care. So premiums can be higher in areas where providers tend to charge higher prices for medical care and in areas where insurers don’t have as much leverage in negotiating lower prices with hospitals and doctors.

How are health insurance rates set?

Health insurance companies submit proposed rates for small group plans—and justification for those rates—to state or federal regulators, depending on the state. This is done either quarterly or annually.

Once the rates are approved, they’re set. And you can rest assured that other groups in your area with similar demographics will be paying the same rates. Unlike the large group health insurance market, there’s no wiggle room to negotiate with insurers in the small group market.

It’s also noteworthy to point out that rating rules are different for large group plans. In the large group market, insurers can base premiums on the group’s claims history and type of industry, as well as factors like employees’ ages and the location of the business.

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