TN Insurance Bulletin (2014-09-15): Composite Rating

STATE OF TENNESSEE DEPARTMENT OF COMMERCE AND INSURANCE 500 JAMES ROBERTSON PARKWAY NASHVILLE, TENNESSEE 37243-5065 615-741-2176 BILL HASLAM GOVERNOR JULIE MIX MCPEAK COMMISSIONER TO: FROM: RE: DATE: BULLETIN All Licensed Insurers Writing Small Group Coverage in Tennessee Julie Mix McPeak, Commissioner f Composite Rating September 15, 2014 ~ 1!4.PW& The use of family composite premiums can serve to reduce administrative burdens for both carriers and small group employers, and has historically been a well-established practice in the marketplace. This bulletin sets out to provide guidance to companies wishing to take advantage of a composite rating methodology for their small employer customers. TENN. CODE ANN.§ 56-7-26-102 and Tenn. Comp. R. & Regs. 0780-01-92 and 93 provide the authority under which the commissioner reviews and approves filed rates and rating methodologies for health insurance issuers. This bulletin does not seek to require a carrier to provide family composite premiums. A carrier may choose to continue to use the filed member level rates, summing the premiums for all members in a small group. If a carrier does offer the family composite approach in the market, it must be made available for each small employer in the market. The only method available to a carrier that uses a family composite premium approach is the method described below. Development of Aggregate Small Group Premiums For each covered employee and his/her covered dependent(s), the premium must be determined as follows: For each covered adult age 21 or older: Calculate the rate for each person by multiplying the base rate by the applicable age and geographic area factors. A tobacco use factor must not be applied at this time. For each covered child age 0 to 20: Calculate the rate for each of the oldest three children by multiplying the base rate by the applicable age and geographic area factors. A tobacco use factor must not be applied at this time. Age and geographic area factors are determined at the time that coverage is quoted to the group. The small group's aggregate premium prior to any tobacco use factors is equal to the sum of the premiums determined for each covered employee and his/her covered dependent( s). Allocation of Premium to Small Group Members Once the small group's aggregate premium has been calculated, it must be allocated back to covered employees based on the tier factor applicable to each employee's family composition (e.g., employee only, employee + spouse, employee + children, and employee + family). Tennessee will require standard tier definitions and factors for all carriers using a composite premium approach. The standard tier definitions and factors are as follows: Employee only= 1.00 Employee + spouse= 2.00 Employee+ children (including all covered children up to age 26) = 1.85 Employee + family (including spouse and all covered children up to age 26) = 2.85 Note that all children under age 26 are considered to meet the definition of "children" for employee+ family and employee +children tiers. Final Employee Premium Final employee premium = [group aggregate premium] I [weighted employee count] x [employee's tier factor] For example, consider the following group of employees: Employee A: Employee + spouse + 2 children = Employee + family Employee B: Employee + spouse Employee C: Employee+ spouse+ 3 children= Employee+ family Employee D: Employee + 4 children= Employee +children Employee E: Employee only Using the applicable tier factors and family composition of each employee, the tier-factor weighted employee count is calculated as follows: Employee A: Employee + family= 2.85 Employee B: Employee+ spouse= 2.00 Employee C: Employee+ family= 2.85 Employee D: Employee +children= 1.85 Employee E: Employee only= 1.00 Weighted employee count= 2 x 2.85 + 1 x 2.00 + 1 x 1.85 + 1.00 = 10.55 To calculate the final monthly premium for each employee, the aggregate small group premium is divided by the weighted employee count and multiplied by each employee's applicable tier factor. Continuing with the example above, and assuming the total monthly premium for the group is $5,275, each employee's monthly premium is calculated as follows: Employee A: $5,275 I 10.55 x 2.85 Employee B: $5,275 I 10.55 x 2.00 Employee C: $5,275 I 10.55 x 2.85 Employee D: $5,275 I 10.55 x 1.85 Employee E: $5,275 I 10.55 x 1.00 Group total Recalculation of Average Monthly Premiums = $1,425 = $1,000 = $1,425 = $925 = $500 = $5,275 Throughout a small group's policy period, employees may come and go and employees may qualify for special enrollment periods due to various life events. The methodology described above determines an employee's monthly premium based on a census of employees and their covered dependent(s) at the time the group's policy is issued. The average monthly premium for each of the tiers must remain in effect throughout the entire policy period and may not increase or decrease to reflect changes in the small group's census. The average monthly premium must be recalculated annually, based on the census at the time the policy is rated. Application of Tobacco Use Factors The family composite premiums do not include a tobacco use factor. If a tobacco use factor is employed, it must be applied to the specific individual, and is applied to the premium that the individual contributed to the aggregate premium (as calculated in section A). This additional premium is then added to the monthly premium for that individual based upon the tier allocation. For example, assume the spouse of Employee C is a tobacco user and had premium of $600 contributing to the aggregate $5,275, and that the carrier has a tobacco use factor of 50%. The total premium for Employee C and family would be $1,425 plus $300 ($600 at 50%) for a total of $1,725. Application of any tobacco use factor is subject to all requirements of federal regulation.