Copyright © 2008, The McGraw-Hill Companies, Inc.
problems are severe, and thus conditions that might have been easily and inexpensively
treated instead grow into more complicated and expensive ones.Calculating Health Insurance Premiums
Premiums for group health insurance may be determined by community rating, adjusted
(or modified) community rating, or experience rating.
When rates are determined by community rating, the insurer charges the same rates to
all employers in a given area for a given level of benefits. Strict community rating is not
often used with large employer groups, since groups who could qualify for a better rate
with another rating method usually would not be interested in a community rate, which
would leave the insurer with a “community” heavily slanted toward higher cost groups.
However, community rating may be used with small employers or coverage offered for
sale to individuals, since smaller groups are often not in a position to justify a better than
community rate regardless of their situation.
With adjusted (modified) community rating, the insurer may begin with the community
rate and then modify it on the basis of the age/sex demographics of the group covered, the
type of business, or other factors. For adjusted community rates, the insurer will have a
set of factors that are to be multiplied by the community rates to determine the rates for a
given group.Example 13.2.6 Greatest Lakes Health Insurance Corp.’s community rate for its
standard HMO plan in the Detroit metropolitan area is $280 single, $590 family. A
Detroit area school district wants to offer this HMO to its employees. Greatest Lakes
uses adjusted community rating. The rate factor for public schools is 1.15, while the
demographic factor for this school district is 0.844. Determine the premium for this
school district.Single Rate ($280.00)(1.15)(0.844) $271.77
Family Rate ($590.00)(1.15)(0.844) $572.65The type-of-business factor is usually determined by industry statistics. It can be dem-
onstrated that employees of certain types of businesses tend to generate greater expenses
than those of other types of businesses (though it is sometimes surprising which businesses
produce the higher claims). The demographic factor is usually calculated as a weighted
average of factors based on the typical expense of covering individuals of different ages
and sexes. The details of how these factors are determined will not be covered in this text,
other than observing that a group that includes a higher percentage of young members
would usually expect to see a lower factor than a group with more members who are older.
While in Example 13.2.6 adjustment was made for both industry group and demograph-
ics, a given insurer may adjust for only one but not both of these, or may take into account
other factors instead.
With experience rating, the rates for a group insurance policy are based on the past medi-
cal claims experience of that specific group. To set the rates, the insurer begins with the
medical claims from the group over some period of time (typically the prior 1 to 3 years),
adjusts them upward for assumed medical cost and utilization trends, and then applies a load
(essentially a markup) for administrative costs, a margin of error in case claims run unusually
high, and profit. There can be many other variations and adjustments made as well, but this
description provides a general summary of experience rating methods.Example 13.2.7 Zarofi re Systems offers a medical plan to its employees. Last
year, the 800 employees who participated in the plan incurred medical costs totaling
$3,457,089.The insurer uses a rating formula that bases each year’s rates on the prior year’s
claims, and then applies load factors of 1.05 for cost and utilization trends and 1.15
for administrative costs, including margin of error and profi t. Determine the rate per
employee for the coming year.13.2 Health Insurance and Employee Benefits 541