Understanding Risk Adjustment Factors In California
If you are a small business owner in California, you may have wondered why insurance companies are reluctant to offer health insurance to smaller groups. The answer lies in understanding risk adjustment factors in California.
Small Business Group Health Insurance
When a small business offers group health insurance to its employees, the company is likely to pick up a smaller portion of the monthly premiums than a larger corporation would. This places a larger financial burden on the employees themselves. As a result, small business employees are less likely to sign up for group health insurance than those employed by a larger company. The fewer individuals involved in a group health plan, the greater the risk of default on monthly premiums. In addition, a single sick employee can raise monthly premiums for the entire company within a small group health plan. Higher premiums may force small business employees to drop coverage in order to make ends meet.
Despite the risks posed by small businesses, the law places limits on health insurance companies.
Guaranteed Issue
Under California law, health insurance companies must offer health insurance to small businesses, which pose a greater financial risk, as well as to large companies. The offered insurance plan may come in the form of an HMO, PPO, or group health insurance plan.
Guaranteed Renewal
Health insurance companies look unfavorably on paying out on large medical claims. Serious illnesses and injuries take a bite out of their profit margins. California laws now protect small businesses from policy cancellation if an employee becomes ill or injured. Now, claims can only be cancelled due to fraud or non-payment of premiums.
Rating Protection
The law prevents insurance companies from charging higher premiums for enrollees with health problems. Rates are standardized regardless of diagnoses, history of healthcare claims, and family history of serious health problems. Under the law only three factors can be used to determine a health plan’s rates: age, location, and size of the covered family.
Enforcement
Not only are California insurance companies required to market, present, and offer all health insurance plans, even those few that are less expensive, they must document their activities. California insurance companies are required to file forms called SERRs that document the details of each insurance policy. These forms are used to help enforce California’s healthcare reform laws.
Determining Risk Factors
There are currently two methods of determining risk that are used by insurance companies. The first, Standard Employee Risk Rate is applied first. This method of determining risk takes into consideration the allowable risk factors of age, location, and size of the covered family. Insurance companies are obligated to include this information in the form of SERRs. These SERR forms are filed with regulatory agencies to ensure that they are following the law.
The second method that is applied after SERR is Risk Adjustment Factor or RAF. This is applied to the 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.
All of this information is reviewed by regulatory agencies to ensure lawfulness. This procedure helps make health insurance adjustment fair and universal.