What Goes into Pricing a Group Health Insurance Plan?

A monthly insurance premium is the cost a business owner pays each month to cover employee health insurance benefits. Questions arise about where the cost of insurance comes from—how is the price of a premium determined? The premium amount may seem arbitrary or unnecessarily high, which can be frustrating for employers and employees.

There are many factors taken into consideration when an insurance premium is calculated that may not seem evident or obvious. Let’s take a look at how pricing is established.

Group health costs are a collection of all enrolled employees

For group health coverage, premiums are calculated for each employee who enrolls in an employer’s health plan (plus the cost to add a spouse and/or dependents). All of those individual premiums are added together to get the group’s total premium for a specific health plan. (Most employers require employees to pay some of the costs for their health insurance, and the employer takes care of the monthly payments to the insurance company.)

Medical underwriting and small group plan pricing

Medical underwriting is a process that evaluates whether to accept an applicant for health coverage and/or to determine the premium rate for a plan—all based upon several risk factors with the overall medical history of the group factoring into the premiums.

Depending on the insurance company's policies and on federal and state regulations, medical underwriting for high-risk candidates may lead to exclusion of coverage for certain conditions, denial of coverage altogether, or coverage offered only at a very high price.

Since 2014, medical underwriting is no longer used in the individual or small group (less than 50 employees) fully insured markets, due to Affordable Care Act rules. Instead, all individual and small group plans are guaranteed issue—which means that health plans must permit enrollment in a health plan regardless of health status, age, gender, or other factors that might predict the use of health services.

Which factors can affect your small group (under 50 employees) insurance rates?

Health insurance premiums can differ from one health plan to another based on how comprehensive the benefits are, the size of the insurer’s network, and other variables. The Affordable Care Act doesn’t allow small group insurance rates to be based on:

• The group’s overall medical claims history
• The health status of individual enrollees
• The group’s industry or business type

Premiums for any specific plan in the small group market can only vary based on three factors:

• The ages of employees and their dependents
• Tobacco use among employees and dependents
• The location of the business

Age of enrollees

The ages of your employees and their spouses/dependents are typically the most significant factor in determining your group’s total premiums.

The base rate is the rate for a 21-year-old. Premiums are typically lower for people younger than 21 and higher for people over 21. The maximum that older enrollees can be charged is three times the base rate for 21-year-olds.

For employees who have family coverage, the total premium is determined by adding together the age-based (and tobacco-based, if applicable) premiums for each family member. But if the family has more than three kids under the age of 21, premiums are only charged for the three oldest kids, although all of them are covered. (This only applies for children under the age of 21).

Tobacco use

Under the Affordable Care Act (ACA), group health plans can charge tobacco users up to 50% more for their health insurance premiums than non-tobacco users, and when they do this it is called a tobacco surcharge.

Geographic location

Under the ACA, small group health insurance premiums can vary based on geographic area.

Qualified Health Plans are permitted to impose higher rates on individuals and families who live in areas where medical costs are higher, and each state is responsible for establishing the rating areas to be used for these purposes. (An insurance plan is qualified if it’s certified by the Health Insurance Marketplace®, provides essential health benefits, follows established limits on cost, and meets other requirements under the Affordable Care Act. All qualified health plans meet the Affordable Care Act requirement for having health coverage, known as “minimum essential coverage.”

The difference in premiums has to be due to something other than the overall health of the people in each area. That means an insurance company can’t charge higher premiums in one area just because the people in that area tend to be in poorer health.

Instead, the geographic premium differences have to be based on factors like the cost of healthcare. So, premiums can be higher in areas where providers tend to charge higher prices for medical care and in areas where insurers don’t have as much leverage in negotiating lower prices with hospitals and doctors.

How are annual health insurance rates set?

Health insurance companies submit proposed rates for small group plans—and justification for those rates—to the state department of insurance. This is done annually.

Once the rates are approved by the state, they are set for a full year. This means that other employer groups in the same region with similar demographics will be paying the same rates. Unlike the large group health insurance market, there’s no wiggle room to negotiate with insurers in the small group ACA market.

Health insurance rate changes in Indiana

Over the past two years, the average cost of health insurance in Indiana has increased by 10% across all plans. The cost of a Bronze plan increased 13% — the largest change of any metal tier. Costs did not fall for any plans — in fact, the average cost of health insurance by each metal tier increased by at least 10% from 2020 to 2021. The cost of Silver plans increased the least.

Rates and health insurance policy information for Indiana were sourced from the Centers for Medicare & Medicaid Services (CMS) government website. The data used in this analysis was based on the CMS's Public Use Files (PUF).

Large employer groups are priced according to many additional factors.