Understanding the Risk Adjustment Factor with Group Health Plans in California:

Insurance is a game of risks. However, small business owners do not appreciate being denied coverage simply because the pose a significant risk. The laws in California have afforded small business owners some protection, but it is still important to understand what the risk adjustment factor is and how it will affect your group health insurance plan.

First, we need to start with risk selection. This is the process used by an insurance company to determine if it is advantageous for them to offer a group health plan to a small business. Larger businesses typically pose less risk to an insurance company simply because the majority of the employees will sign up for the plan. This is normally because large businesses typically pay most of the cost under this type of plan.

Small business owners are not as likely to pick up a large portion of the monthly premiums for a group health plan, which shifts the burden to the employees. Statistically, it has been shown that employees of small businesses are less likely to join a group health plan than their counterparts that are employed by large businesses.

This means that insurance companies tend to shy away from offering competitive group health plans to small businesses. In 1992, a law was passed in California that offered the same protections to small businesses that were previously enjoyed by large businesses when it came to purchasing group health insurance.

This law guarantees the following:

Guaranteed Issue - This means that every single small business is afforded the right to purchase any health insurance product that is sold by an insurance carrier for their employees. This "product" includes a specific list of benefits and the type of service delivery, either through an HMO or a PPO type insurance policy.

Guaranteed Renewal - This means that a carrier is not allowed to cancel a small business' group coverage in the event that one or more of the company's employee's becomes sick or generates higher health care costs. Under this law, a carrier may only cancel a policy for non-payment of premiums or in the case of fraud.

Rating Protection - This means that an insurance company may not set different rates for employees with good health or bad health. It can also be referred to as a "standard rate" which will apply for all employees under the group health plan.

Allowable Rating Factors - Under this law, only three rating factors may be used to determine the cost of health care coverage: Age, location and the size of a family.

Marketing Provisions - Insurance companies must, under this new law, offer, market and sell absolutely all of their small group health plan products. This prevents insurance companies from hiding certain beneficial plans from small businesses that may pose a risk.

Enforcement - Insurance companies are now required to file their documentation with state regulators. This documentation includes SERR documents and the description of a policy.

Now that you understand what protection is now being afforded under the law passed in California, we can move on to learning how RAF works and why it used in group health insurance plans.

There are two methods of determining risk that are currently used by insurance companies. The first, Standard Employee Risk Rate is applied first. This method of determining risk must follow the above allowable rating factors. Insurance companies are now obligated to file SERRs with regulatory agencies to ensure that they are following this new law.

The second method that is applied after SERR is Risk Adjustment Factor or RAF. This is applied to SERR to adjust the group rate and is determined by health histories and other information, After this is determined, the actual premium must fall within 90-110% of what the SERR determined.

Typically, this RAF factor is calculated by using a multiplier of .9 or 1.1. The first rate, determined using SERR, is then multiplied by either .9 or 1.1 to determine the final cost of the group health insurance policy.

<< Back