Small Group Employers Internal Composite Rating Systems

        Composite Rating for Small Group Employers


Until guidance is issued, it cannot be known for certain whether setting up an internal composite rating system will comply with federal nondiscrimination rules. An employer that implements a composite rating policy that is later found to be discriminatory faces a penalty of $100 per day, per participant or beneficiary deemed to have been discriminated against.

Yet, the Department of Health and Human Services (HHS) has also signaled in a final rule issued in March 2014 that states could make their own rules on composite rating, subject to HHS approval.

This action, coupled with existing rules addressing discrimination and composite ratings, have allowed some employers to tentatively move forward with different approaches.

Currently, when setting employee contributions, employers have two options:

     1) Set the employee contribution as a percentage of the group premium
     (for example, older employees and smokers could pay more).

     2) Generate a composite rate where each employee’s contribution is the
     same, except for variation due to single coverage and/or family size.

Composite rating is the practice of lumping all eligible employees together and assigning a single rating, regardless of individual factors (such as age, gender or tobacco use) that may make somebody a higher or lower insurance risk. The composite premium is calculated by dividing the total group premium by the number of enrollees to arrive at an average enrollee premium amount.