Brian Murphy Partner View Bio

Community Rated versus Experience Rated What it Means to Your Business’s Employee Benefits

The rising cost of insurance premiums is a challenge for many businesses regardless of size. As health care is reformed, some small companies, including yours if it has under 100 employees, may pay more to cover employees because of changes to the Affordable Care Act coming in 2016. This is due to the expanded definition of “small business” and mandate for using a community rating to set premiums.

Community Rated versus Experience Rated

Health insurance providers use rate restrictions to determine premiums for groups and individuals. Premiums based on a community rating allocate risks evenly across a community. This means that everyone pays the same, regardless of age, gender or health and wellness. With experience rated standards, premiums are adjusted based on the health history of those covered. Premiums are typically lower for healthier groups and individuals.

Currently, your small business has the option to choose coverage based on the rating methodology that works best for your circumstances. However, restrictions may apply come January 1, 2016, when the Affordable Care Act redefines small businesses from 50 employees and under to now include companies with up to 100 full-time equivalent (FTE) employees. Some companies that were once considered large are now small and must comply with community rating. If your company previously benefited from an experience rating, using the community rated pool could increase the health care rates you pay.

Adjusted Community Restrictions

Premiums based on health history or preexisting health conditions of insured individuals are not allowed with the Affordable Care Act changes. However, the act allows the use of a modified or adjusted community rating, which can consider the following factors:

  • Age
  • Family Size
  • Geographic Area
  • Tobacco Use

Keep in mind that states are allowed to enforce standards stricter than federal requirements. For example, New York uses community rating instead of the adjusted community rating, to which insurance policies for small groups and individuals must comply.

The Cost Shift

Unless you are self-insured, a large business or grandfathered, your premiums will most likely be affected. If your business becomes a small entity under the Affordable Care Act revisions and previously used experience rating, your costs will likely increase. The benefit of lower rates for healthier individuals in your group, typically provided with experience rating, will no longer exist. This means lower premiums for these covered individuals will go up, thus increasing your total cost.

Health Care Options for Moving Forward

To manage the anticipated cost increase, several options are available:

  • Drop health insurance as a benefit and steer employees to individual plans available through state or federal exchanges. The downside may come in the loss of valuable employees or missing out on highly sought-after job candidates
  • Perform your own diligence and use the state or federal government exchange portals for small businesses to determine coverage and cost. These public exchanges have plans ranging from Bronze to Platinum, where the Bronze plans require the highest out-of-pocket expenses for those covered
  • Use a private benefits exchange. Private exchanges are not part of the Affordable Care Act but are growing in popularity. Legitimate private exchanges, like Lawley Marketplace, offer defined contributions, so you will be better able to manage health insurance costs while offering your employees more benefit choices

Regardless of the option chosen, being proactive in managing insurance cost is beneficial to your business’s bottom line. Talk with our employee benefits team to determine which benefits solution is right for your specific needs.

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