approved by the Insurance Department. Health plans submit schedules of community rates with their rate manuals each year.
While community rating of individuals and small groups is mandatory in New York for all licensees, any health plan may voluntarily community rate Large Group employers. Blue Cross Blue Shield plans continue to do so to some extent, although that business is evaporating due to market pressures.
Only Article 44s are required to community rate traditional HMO products for the Large Group market. That requirement is another example of some unsettled regulatory issues between HMOs and state officials. The obligation to community rate Large Group products is somewhat in flux, since underlying regulatory provisions refer to the CR/OE law, which only applies to small groups. In addition, if an out-of-network benefit is included, usually in a POS product, the products can be experience rated. As noted earlier, many health plans are offering managed care look-alike products, which are not subject to the Large Group community rating requirement.
In the Insurance Department’s Regulation 145,108which implements the CR/OE law, key provisions deal with how health plans aggregate the claims experience of their insured population into a pool that will determine the community rate. While the statute applies to individual policy forms or contracts, the regulation requires health plans to combine the experience of different policies sold when they provide “substantially similar benefits.” Under the regulation, contracts with differences related to deductibles, coinsurance amounts, the number of days or visits covered, or addition or deletion of benefits that do not substantially alter premiums are still considered substantially similar, and the experience must be pooled to develop a premium rate.
While health plans vary slightly in how they implement the community rating provisions, in practice rates are developed by aggregating claims experience under major product categories. HMO products are usually pooled separately from PPO or indemnity products. Total claims costs in the previous year for all the contracts or forms within the product category are added up (along with health plan administrative expenses, profits, etc.) and divided by the number of people covered under the policies in a given year. This figure is often called the “claims PMPM” (i.e., per member per month). This claims PMPM is then adjusted to reflect “trend” or expected changes in medical costs. Expected administrative expenses and profits are added in, and premium totals are then adjusted for the varying levels of benefits and cost-sharing, and optional riders that consumers may choose under the separate contracts. Although different levels of benefits and utilization are reflected in the premiums for each contract, rates on differing levels may not vary due to differences in the risks of policyholders. Plan A might have a lower rate than Plan B because the actuarial value of the benefit design is lower, but not because Plan B’s enrollees incur more claims than those of Plan A.
As part of an investigation into health plans’ adherence to minimum medical loss ratio standards, in 2008 the Insurance Department began reevaluating how health plans combine various products and pools. State regulators are concerned that health plans are reporting in a way that disguises loss ratios well below statutory minimums for some products. Health plans argue that they are following the law and regulations, and that aggregating policy forms does exactly what the law intended — provide a premium subsidy to high-loss ratio products from lower- loss ratio products. The resolution of this
ongoing dialogue could alter how the law is implemented going forward.
Tiers. New York’s health plans use “tiers”
to differentiate rates to be paid by different sizes of families for both individual and group coverage. Although two-tier rates for individuals and families were once the norm, health plans, led by for-profit insurers, have moved to three-tier and four-tier rate structures. Three-tier rates typically include: 1) individual, or employee; 2) “two-party” or “double”; and 3) family. Four-tier rate structures typically include: 1) individual, or employee; 2) an individual/employee and spouse; 3) an individual/employee and his or her child or children; and 4) family.
Under a two-tier rating structure, smaller families subsidize larger families. Four-tier structures provide lower rates for a parent/ child family than for an individual/employee and spouse family, but the lowest subsidy for larger families. Individual rates do not vary across tier systems. In the group market, health plans sometimes make all three rating structures available and allow the employer group to choose, but sometimes limit options within a given region. A four-tier structure has become the most common, in part because in a rate-conscious market it provides more targeted rate differentiation (see Table 6).
Some employer groups, particularly public employees and unions, still maintain two-tier systems.
Regions and Area Factors. Following tiers,
regional “area factors” are the most elemental way that health plans alter rates for both community- and experience-rated contracts. Claims experience under the groups of policies is aggregated into the respective regions. Regions can be defined by where members receive their care, where members reside, or where the employer group is located. The regional components must be consistent with laws and regulations and approved by the Insurance Department. Regions containing less than one county, for example, are prohibited. Area factors are then developed by reviewing the claims costs by region and also considering expected cost differences by region. For rating purposes, health plans then apply these area factors to a base rate to reflect varying costs of arranging for health services in a single county or a group of counties.
For a community-rated HMO product, for example, Empire BlueCross divides its 28-county territory into three regions: New York (New York City’s five counties, plus Nassau, Rockland, Suffolk, and Westchester counties); Mid-Hudson (Dutchess, Orange,