ACA Rating Restrictions

Beginning in 2014, the Affordable Care Act (ACA) reforms the rating practices of health insurance issuers in the individual and small group markets by limiting the factors that can vary premium rates.

These rating restrictions do not apply to grandfathered plans, large group plans or self-funded plans.  The rating limitations will not apply to health insurance issuers that offer coverage in the large group market unless the state elects to offer large group coverage through the state Exchange (beginning on or after 2017).

The ACA’s rating restrictions for health insurance premiums are effective for plan years (policy years in the individual market) beginning on or after January 1, 2014.  The four rating restrictions include: 

All other rating factors are prohibited. This means that several factors commonly used by issuers to set higher premiums prior to 2014, such as health status, claims history, duration of coverage, gender, occupation, small employer size and industry, can no longer be used.

Small Group Market

The Department of Health and Human Services (HHS) has not issued specific guidance on determining group size for purposes of the ACA’s premium rating restrictions. However, for other ACA reforms, HHS uses state definitions of “small group” for 2014 and 2015. States generally define the “small group” as including employers with up to 50 employees but methodologies vary.

In the final rule, HHS directs issuers to use the per-member rating methodology in the small group market. According to HHS, per-member rating ensures compliance with the requirement that age and tobacco rating only be apportioned to an individual family member’s premium, enhances employee choice inside the Exchanges’ Small Business Health Options Program (SHOP) and promotes the accuracy of the ACA’s risk adjustment methodology.

States may require issuers to offer premiums based on average employee amounts where every employee in the group is charged the same premium. Also, according to HHS, the age bands, as implemented by the per-member-rating methodology, are consistent with the Age Discrimination in Employment Act of 1967 (or the ADEA).

Rating Factors

Age The premium rate charged by an issuer for non-grandfathered health insurance coverage in the individual or small group market may vary by age, except that the rate may not vary by more than 3:1 for adults. The final rule defines “adults” as individuals age 21 and older.

Geography States may establish rating areas based on certain geographic divisions – counties, three-digit zip codes or metropolitan statistical areas (MSAs) and non-MSAs. The final rule provides flexibility for states regarding the rating area configurations that will be presumed adequate by HHS. If a state does not establish rating areas, the default will be one rating area for each MSA in the state and one rating area for all other non-MSA portions of the state.

Family Size Under the ACA’s rating restrictions, issuers may vary premiums based on the number of individuals covered under a policy, or family size. The final rule instructs issuers to develop premiums for family coverage by adding up the rates of covered family members. However, no more than the three oldest covered children under age 21 may be included in the family rate. According to HHS, this cap on covered children will mitigate premium increases for larger families. The final rule does not contain a cap on the number of family members age 21 and older whose per-member rates are added into the family premium.

Tobacco Use The premium rate charged by an issuer for non-grandfathered health insurance coverage offered in the individual or small group market may vary for tobacco use, except that the rate may not vary by more than 1.5:1. The final rule clarifies that issuers may vary rates for tobacco only based on individuals who may legally use tobacco under federal and state law.  The final rule defines "tobacco use" as use of tobacco an average of four or more times per week within no longer than the past six months, including all tobacco products but excluding religious and ceremonial uses of tobacco. Tobacco use will be based on when a tobacco product was last used.

State Laws

The health insurance market is mainly regulated at the state level. Each state may have its own laws to regulate how issuers set their premiums, and these laws can vary widely by state and by insurance market. The ACA’s rating restrictions create minimum federal standards for varying rates in the individual and small group markets. In addition to the ACA, issuers will be required to comply with state laws that impose stricter rating standards.

For detailed information on the rating restrictions, the final rule can be found here.