Earlier this week, we reviewed how small group underwriting currently works. Most small groups are underwritten on either an experience review of claims history or statistically rated based on a review of risk factors. One of the larger cost risk factors is being female.
PPACA is changing the means of how groups are underwritten for non-grandfathered policies that went into effect on or after January 1, 2014. The new policies are underwritten based on a modified community rating system that allows for consideration of the age of people in the underwritten group, their locations (which can still tie a lot of statistical probabilities of cost and health status) and smoking status. The community that they are rated against is the entire pool of small groups that an insurance company insures.
Yesterday, we looked at why actuaries and underwriters like big groups. Healthcare cost distribution is extremely lumpy.
Small groups and individuals are almost impossible to accurately price. Big groups allow statistical approximations to approach population realities while the error bars on a small group are massive. Massive error bars make underwriters and actuaries cry…Random noise becomes more important in small group sizes.
Right now under experience and/or statistical underwriting, there are significant premium differentials between groups with members who are the same age, location and smoking status. This system has its own set of entrenched winners and losers.
Why should we expect to see hundreds of stories of rate shock this fall?
Why there will be rate shock stories this fallPost + Comments (19)