Community rating is one of the Affordable Care Act (ACA) changes that applies to businesses classified as small-group employers, which as of January 1, 2016, means all employers with 1–100 employees. However, anticipating some difficulties with implementing the new guidelines, Congress passed the Protecting Affordable Coverage for Employees (PACE) Act, signed by President Obama on October 7, 2015. The PACE Act allows individual states to determine if employers with 51–100 employees continue to be classified as large-group or will instead be privy to the ACA’s original ruling, converting those employers to small-group when the calendar turns to 2016. Needless to say, you’ll have to find out the decision-making from the state your business is located in so that you’ll know your ultimate designation.
With the ACA law, newly classified small-group businesses’ health insurance plans have to be priced using community rating. This means that everyone pays the same rate within their geographic region, regardless of their individual health risks, occupation or illness history. If your company goes through this change, what does it mean? To explain, it’s important to know the advantages and disadvantages of this approach.
How Community Rating Works
According to the podcast “Health Care Reform: Fact or Myth?,” community rating premiums are not identical for everyone in an insurance pool, but the difference in rates is far smaller than it was before the ACA. In a community system, premiums are determined by a number of factors:
- Premium rates are based on family size, age, location and, in some states, tobacco use.
- In regions where health care costs more, premiums may be higher.
- The highest rate in a health plan can’t be more than three times the cost of the plan’s lowest rate.
- Rates are initially determined based on the entire pool’s health risk rather than individuals’ health risks.
Advantages of a Community Rating System
The new premium system has a number of advantages. First, a business won’t be disproportionately charged higher premiums because it made several health claims in past years. However, businesses with older employees might still end up with higher premiums than those with younger ones. The good news there is that the difference won’t be as high as in the past: Instead of featuring maximum rates that could be as much as seven times higher than the lowest rates, max rates can now be only three times higher, as mentioned above. Thus, the total savings for businesses with older employees (or employees with chronic illnesses) can be quite significant under a community system.
On an interesting note, employers can charge their employees higher premiums if they don’t participate in wellness programs. The increase can be as high as 30 percent more, so this gives employees an incentive to proactively choose a healthy lifestyle, which of course benefits both the individual employees and the businesses they work for in the long run.
Disadvantages of a Community Rating System
One big disadvantage is that premium prices may end up higher for businesses with predominantly young or healthier employees. In a sense, young members on your insurance plan are now subsidizing older, less healthy ones working for another employer. For those employers with generally healthy employees, you may not realize the same discounts with community rating that you received with risk rating. In addition, males may end up paying higher premiums than they would outside a community system because, while females historically paid higher premiums to cover costs such as pregnancy and maternity, the new rating system doesn’t allow premium differences based on gender. This means that businesses with a high percentage of male employees may see their premiums increase.
The community system also allows rates to be higher in certain geographic locations where it’s determined that health costs are higher. Businesses located in these regions may end up paying more for health care than similar businesses in a different region.
If your business is one that will face higher premiums when it switches to a community system, you do have other options. For example, some states offer transitional relief where you may be able to stay on your current plan through October 2017 to allow you time to figure out the best option for your business. You also may consider a level or balanced funded health plan. This is a self-funding approach that requires a bit more awareness of your claims spend, but could provide benefits on years when you have healthier than expected claims.
In summary, whether a community rating system is helpful or harmful to your small business really depends on your employee demographics and where you’re located. If your business is in a region where health care costs more or if you have mostly young or healthier employees, you may find your premiums going up significantly in 2016.
Stephanie Dwilson has extensive experience providing expertise on topics including health, law and marketing. She’s a science journalist published by Fox News, a marketing expert and an attorney with expertise in personal injury law. She’s also a small business expert featured by Businessweek and Millionaire Blueprints magazine and has worked as a marketing consultant for ministries and as a PR lead for one of the largest churches in America.