Understanding the ACA’s Modified Community Rating Requirements

This week’s post is dedicated to explaining one of the many new provisions of the Affordable Care Act (ACA) which is scheduled to be implemented in 2014 – MODIFIED COMMUNITY RATING (MCR for the rest of this blog post).  Let me begin by stipulating which stakeholders this provision affects and which it does not:

MCR applies to health insurers in the Individual and non-grandfathered, fully insured, Small Group (less than 50 employees) markets, for plan/policy years effective on or after January 1, 2014.
MCR does NOT apply to large (50+ employees) fully insured groups, and partially self funded health plans of any size.  (Note: once large group plans are permitted to be marketed in the exchanges/marketplaces, such plans will have to implement MCR.

Now that we know the “who”, let me address the “what”….as in…what is MCR?  Beginning January 1, 2014, MCR restricts the factors insurance companies can use in establishing premiums to four (4) categories:

1. Family Size (rates for family coverage might start to look different than the simple “E+Spouse” or “Employee + 2” format we’ve grown accustomed to)
2. Geographic Area (zip code, county, etc.)
3. Age (no more than a 3:1 difference between oldest and youngest insured)
4. Tobacco Use (up to a 50% surcharge is allowed)

Further, MCR forbids the use of the following factors in establishing rates: Health Status; Medical Condition(s); Medical History; Genetic Information; and Evidence of Insurability (i.e., health questions).

Notice that GENDER is no longer included.  Also notice the rate differential attributable to age cannot exceed 3:1.  Heretofore, actuaries have used differentials as high as 7:1, and on average, closer to 5:1, to account for the difference in morbidity.  Historically, older insureds have paid more premium than younger insureds, to account for their statistically/historically higher use of health care.  Similarly, females of child bearing age have paid more than males in that same age band.  These actuarially derived rationales will no longer be permissible, beginning in 2014.
Click on the following link for a nice, “right brain” depiction of MCR –
http://www.wellmark.com/AboutWellmark/HealthCareReform/News/PDFs/HCR_SettingTheTable.pdf

A Society of Actuaries study has estimated the premium impact associated with various provisions of the ACA, including MCR,  to be, on average, +31.5% nationally, with some states seeing 80% increases (e.g., WI, OH); and others that have already implemented MCR and other reforms experiencing rate decreases of 12% (e.g. VT, MA).
Here’s what the premium impact looks like for the entire country…

Stay tuned…there will definitely be more to discuss on this topic!