Member-Level Rating: Not Dead Yet

The government’s ability to make bad decisions is truly impressive.

Back in December, we reported that the administration had clarified that composite rating was indeed permissible in the small group market. This was big news because, several months earlier, HHS said in the Final Rules implementing the Market Reforms that the law compels member-level rating because the age and tobacco status factors must be attributable to individuals.

In December, though, HHS basically said “we never said carriers can’t composite rate” (yes, they did). In the proposed rule on payment parameters for 2015, HHS said that carriers had the option of continuing to composite rate in the small group market as long as a member-level rating methodology was used to determine the total rate for the group – in other words, carriers must add up the rates for each covered individual based on their age (and tobacco status if that’s used as a rating factor) to come up with a total, but then they can average the rates that the members actually pay. They go on to say that carriers that choose to composite rate must hold those rates throughout the plan year and make adjustments only at renewal time.

So far so good, right? Well then HHS begins to ramble, explaining that it is considering developing uniform tiered-rating structures that would apply nationwide. They discuss the merits of two-tier and three-tier rates and make it clear that at some point they’ll issue additional rules for the carriers to follow.

Well, we have those rules now, and they’re pretty dumb: carriers that want to composite rate can only use two-tiered composite rates – one rate for adults, a separate rate for children. What, exactly, the new rule means isn’t that important. The important part is that 1) carriers, in general, don’t like the rule and 2) they probably don’t have time to make the necessary changes to their systems before the new rules go into effect in 2015 (since quotes for 2015 will be delivered in the next few weeks).

Sooo…. the net effect of all of this is that a lot of carriers will be moving to member-level rating next year, which creates some serious problems:

Problem #1: It’s very difficult to quote

If everyone gets their own rates based on their age, their dependents’ ages, and maybe smoking status, then quotes could be 60 pages long (and even bigger for groups with 51-100 employees when they are redefined as small groups in 2016). Spreadsheeting the rates will be difficult, as agents have already learned from working with small group carriers that are rating on a member-level basis this year.

Problem #2: It’s difficult to develop a contribution strategy

This is the biggest problem for employers because, no matter what they do, someone is going to be unhappy. If the oldest employees are charged three times as much as the youngest employees in the group (and even more than that if there are employees under age 21), there’s no contribution strategy that will be fair to everyone. If the employer pays a percentage of the premium, the oldest workers still pay 3 times as much as their younger co-workers. If the employer provides employees with a defined contribution amount, younger workers could have money left over and older workers could pay hundreds more per month. And if the employer manually composite rates and charges each employee the same amount, which is permissible, then that could lead to age discrimination in the employer’s hiring practices as older applicants will be significantly more expensive than younger applicants. It’s a no-win situation.

Problem #3: It’s difficult to explain

If it’s difficult to explain the various options to an employer, it’s even harder to explain to employees. No matter what the contribution strategy is, employees aren’t going to get it. And if the group offers a dual-option, it’s twice as hard to explain.

The administrative burden alone could be enough to cause some small employers to drop their group health coverage, but there’s an even bigger issue. Unless the employer manually composite rates, any other contribution strategy will result in significantly higher rates for older individuals on the group – so high, in fact, that their contribution may exceed 9.5% of their household income. If it does, they can bail on the group, go to the individual market, and get a premium tax credit. For most small employers, this won’t result in a penalty, but remember that the way “small group” is defined by HHS is different than the way “small group” is defined by the IRS, and in 2016 companies with 51+ workers will be considered small by HHS (and will need to member-level rate) and large by the IRS (and will be subject to the mandate). What a mess.

From the broker’s standpoint, it’s clear that, if the two-tier rating structures remain in place, a lot of carriers will switch to member-level rating, which in turn will force a lot of older workers into the individual market and could cause a lot of small employers to drop their coverage altogether as the group begins to break apart. Therefore, it’s imperative that agents have an individual solution to help enroll these individuals in qualified plans and help them apply for a government subsidy. That’s where HPA can help.

Last but not least, it is possible that this issue could be fixed at a state level, but it is going to have to happen state by state. HHS will consider other composite rating methodologies and has actually approved some other ways of tiering the rates in about half-a-dozen states. This will no doubt be high on the agenda of the various state Health Underwriters chapters and will likely be something that states that want to preserve the small group market will take a look at sooner rather than later.

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