Provisions of the Patient Protection and Affordable Care Act (PPACA) are causing shifts in the marketplace on all sides. All agree that three major factors, integral to the act, will drive costs up:
- Medical Loss Ratio
- Rate Band Compression
- Modified Community Rating
- Guaranteed Issue
Medical Loss Ratio:
This mandates that a Carrier (Blue Cross Blue Shield, Cigna, Aetna etc,) cannot spend less than 85% of each premium dollar on claims costs, for groups with more than 100 employees, or 80% if the group has less than 100 employees. This regulation will mean that carriers will have to reduce overhead and limit choice in plans in order to maximize profits. This will reduce the choices to employers and leave little flexibility in plan design.
Rate Band Compression:
The premium for the oldest age band cannot have an underwriting ratio greater than 3:1 compared to the youngest age band. In other words, if the premium for a certain plan cost $100 per month for a 20-year-old, the rate for a 64-year-old for the same plan cannot be higher than $300 per month. This 3:1 ratio will cause health insurance companies to raise the rates for the lower age bands in order to have enough premiums to cover the higher age bands.
Modified Community Rating:
From an employers’ perspective, groups that have unfavorable demographics and poor claims experience will receive more favorable rates than before, and because of this, groups with good claims experience and better demographics will have their rates go up to offset this mandate.
PPACA mandates that insurers sell policies to ANY person or small group with less than 100 employees, which will ensure that the added costs associated with these groups be spread across all users, thus increasing costs as a whole.