Rating Restrictions for Health Insurance Premiums

Effective for 2014, the Affordable Care Act (ACA) reforms the rating practices of health insurance issuers in the individual and small group markets by limiting the factors that can vary premium rates. These rating restrictions do not apply to grandfathered plans, large group plans or self-funded plans.

Under the ACA’s reforms, issuers may vary the premium rate charged to a non-grandfathered plan in the individual or small group market from the rate established for that particular plan only based on the following factors:


Age (within a ratio of 3:1 for adults)

Geography (rating area)

Family size (individual or family)

Tobacco use (within a ratio of 1.5:1)

All other rating factors are prohibited. This means that several factors commonly used by issuers to set higher premiums prior to 2014, such as health status, claims history, duration of coverage, gender, occupation, small employer size and industry, can no longer be used.

This Legislative Brief summarizes the ACA’s rating restrictions for health insurance premiums.


The ACA’s rating restrictions for health insurance premiums are effective for plan years (policy years in the individual market) beginning on or after Jan. 1, 2014.

On Feb. 22, 2013, the Department of Health and Human Services (HHS) issued a final rule to implement the ACA’s rating restrictions for health insurance premiums. The guidance in the final rule is effective for 2014 plan (or policy) years.



HHS has not issued specific guidance on determining group size for purposes of the ACA’s premium rating restrictions. However, for other ACA reforms, HHS uses state definitions of “small group” for 2014 and 2015. States generally define the “small group” as including employers with up to 50 employees. States have adopted different methodologies for counting employees. Most of the methodologies count eligible employees, but some states use methods that average the total number of employees or count the number of full-time equivalent employees.

Rating Methodology

In the final rule, HHS directs issuers to use the per-member rating methodology in the small group market. According to HHS, per-member rating ensures compliance with the requirement that age and tobacco rating only be apportioned to an individual family member’s premium, enhances employee choice inside the Exchanges’ Small Business Health Options Program (SHOP) and promotes the accuracy of the ACA’s risk adjustment methodology.

States may require issuers to offer premiums based on average employee amounts where every employee in the group is charged the same premium. Also, according to HHS, the age bands, as implemented by the per-member-rating methodology, are consistent with the Age Discrimination in Employment Act of 1967 (or the ADEA).



The premium rate charged by an issuer for non-grandfathered health insurance coverage in the individual or small group market may vary by age, except that the rate may not vary by more than 3:1 for adults. The final rule defines “adults” as individuals age 21 and older.

The final rule specifies the following standard age bands for use in all states and markets subject to the ACA’s premium rating restrictions:

  • Children: A single age band for children ages 0 through 20.
  • Adults: One-year age bands for adults ages 21 through 63.
  • Older adults: A single age band for adults ages 64 and older.

No state exceptions to the uniform age bands are allowed under the final rule. States can establish their own age curve within these bands. States may also establish separate age curves for the individual and small group markets.

Age for rating purposes is based on the date of policy issuance and renewal. However, for individuals who are added to the plan or coverage other than on the date of policy issuance or renewal, age may be determined as of the date they are added or enrolled in the coverage.


States may establish rating areas based on certain geographic divisions—counties, three-digit zip codes or metropolitan statistical areas (MSAs) and non-MSAs. The final rule provides flexibility for states regarding the rating area configurations that will be presumed adequate by HHS. If a state does not establish rating areas, the default will be one rating area for each MSA in the state and one rating area for all other non-MSA portions of the state.

The final rule provides that states may establish different rating areas for the individual or small group markets, but rating areas must apply uniformly within each market and may not vary by product. If a state merges its individual and small group markets, rating areas will apply uniformly in both the individual and small group markets in the state.

Also, the final rule clarifies that the ACA does not limit the amount by which rates may vary based on geography. Thus, states and issuers may determine the appropriate variation for the geographic rating area factor. However, HHS cautions that rating area factors should be actuarially justified to ensure that individuals and employers are not charged excessively high premiums that would make the ACA’s guaranteed availability protections meaningless.

Family Size

Under the ACA’s rating restrictions, issuers may vary premiums based on the number of individuals covered under a policy, or family size. The final rule instructs issuers to develop premiums for family coverage by adding up the rates of covered family members. However, no more than the three oldest covered children under age 21 may be included in the family rate. According to HHS, this cap on covered children will mitigate premium increases for larger families.

The final rule does not contain a cap on the number of family members age 21 and older whose per-member rates are added into the family premium.

The ACA uses per-member rating because the age and tobacco use factors must be attributable to individuals. However, some states use community rating and do not allow rating based on age or tobacco use. Under the final rule, states with community rating may require issuers in the individual and small group markets to use a standard family-tier methodology with corresponding multipliers and have the discretion to set the number of tiers in the family-tier structure. If a community-rated state does not adopt a uniform family-tier structure (with corresponding multipliers), per-member rating will apply in that state.

The final rule does not specify the minimum categories of family members that must be rated together on a family policy. Since state laws differ with respect to marriage, adoption and custody, HHS believes that states are in the best position to make decisions regarding family coverage practices. Thus, states have the flexibility to require issuers to include specific types of individuals on a family policy.

Tobacco Use

The premium rate charged by an issuer for non-grandfathered health insurance coverage offered in the individual or small group market may vary for tobacco use, except that the rate may not vary by more than 1.5:1. The final rule clarifies that issuers may vary rates for tobacco only based on individuals who may legally use tobacco under federal and state law.

The final rule defines “tobacco use” as use of tobacco an average of four or more times per week within no longer than the past six months, including all tobacco products but excluding religious and ceremonial uses of tobacco. Tobacco use will be based on when a tobacco product was last used.

Issuers in the small group market may apply the tobacco rating factor only in connection with a wellness program that allows a tobacco user to avoid paying the full amount of the tobacco factor by participating in a tobacco cessation program.

Also, if an enrollee provides false or incorrect information about their tobacco use, the final rule allows an issuer to retroactively apply the appropriate tobacco use rating factor to the enrollee’s premium. However, the issuer may not rescind the coverage.


The health insurance market is mainly regulated at the state level. Each state may have its own laws to regulate how issuers set their premiums, and these laws can vary widely by state and by insurance market. The ACA’s rating restrictions create minimum federal standards for varying rates in the individual and small group markets. In addition to the ACA, issuers will be required to comply with state laws that impose stricter rating standards.


The rating limitations will not apply to health insurance issuers that offer coverage in the large group market unless the state elects to offer large group coverage through the state Exchange (beginning on or after 2017).

Source: Department of Health and Human Services

This Legislative Brief is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.