Like many of our everyday costs, the price of group health insurance continues to rise. This affects both a business's operating expenses and potentially the personal budgets of its employees. So, how are the premiums determined?
To begin, let's clarify what health insurance premiums are. A health insurance premium is the monthly cost you pay for your health insurance policy. In the case of group health coverage, premiums are determined for each employee who joins the plan (including any additional cost for a spouse and/or dependents, if applicable), and then all these individual premiums are combined to determine the total premium for the group. That's the amount the business has to send to the insurance carrier each month to pay for the insurance. In most cases, an employer pays at least 50% of the employee's premium, while the remainder of the cost is paid by the employee through his/her payroll deductions. The cost to the employer can be substantial, however the benefits to the employee are many.
So, what is the cost? The amount that businesses in the small group market must pay for health insurance is primarily determined by Affordable Care Act (ACA) guidelines.
CAN IMPACT RATES | CAN'T IMPACT RATES |
Age of enrollees | Group medical claims history |
Location of business | Health status of enrollees |
Tobacco usage by enrollees (except in states where it's banned) | Industry or business type of the group |
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.
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 Roy and Jill have four kids, ages 19, 17, 15, and 11, their total family premium would be the cost of their own premiums, plus the cost of the premiums for their 19, 17, and 15-year-old kids. Their 11-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. Two years down the road, when Roy and Jill’s kids are 21, 19, 17, and 13, they’ll have to pay premiums for all four of them.
How does location affect health insurance premiums?
The ACA states that small group health insurance premiums can vary by geographic location, but these variations cannot be due to the overall health status of people in those areas. This policy prevents insurance companies from charging higher premiums in a specific region just because the residents tend to have 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 are set. You can be assured that other groups in your area with similar demographics will pay the same rates. In contrast to the large group health insurance market, there is no opportunity to negotiate with insurers in the small group market.
It is important to mention that the rules for rating differ for large group plans. In the large group market, insurers are allowed to determine premiums based on the group's claims history, the industry type, and factors such as the ages of employees and the business's location.
How are our premium dollars spent?
In addition to spending premium dollars on medical claims, insurers use a portion of this money toward administration, salaries, overhead expenses, and marketing. One provision the federal government created to limit how much of the premium is spent on administration costs is the medical loss ratio (MLR) rule.
The MLR rule ensures that health insurance companies spend a larger percentage of consumers' premiums on medical claims and quality of care improvements than they keep for profit, marketing, and admin costs. For the small group market, insurance companies are required to spend at least 80% of their premium income on medical-related expenses, leaving 20% for admin costs.
PeopleKeep 2024
Gusto 2018
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