The Rural Implications of Geographic Rating of Health Insurance Premiums

In 2014, the Patient Protection and Affordable Care Act (ACA) will eliminate the practice of medical underwriting in the individual and small group markets, require guarantee issue to consumers regardless of health status, and reduce the number of factors that health plans may use to vary premium rates. These rating factors will include age (maximum difference of 3 to 1); tobacco use (maximum 1.5 to 1 difference); family composition; and geographic region. Under law and the implementing regulations states will devise the Affordable Insurance Exchange rules that will specify the extent to which health plans may vary rates across rating areas.

In this brief, researchers at the University of Southern Maine’s Muskie School of Public Service examine the implications of geographic rating, the practice of adjusting insurance premiums to reflect regional differences in the cost of health care, on risk pooling and insurance premiums. This study found no clear pattern among states’ use of geographic rating, suggesting that insurers could be using geographic ratings for purposes other than regional cost differences, which could ultimately undermine the efforts of the ACA to pool high-risk individuals and reduce disruptions to the insurance markets.

Key Points:

  • There is no clear pattern of geographic rating factors favoring rural or urban areas.
  • This lack of a clear pattern suggests that health plans may use geographic rating for business purposes other than adjusting for underlying cost/price differences.
  • Geographic rating could reduce insurance risk pooling and be used as a proxy for experience rating.
  • To limit the effect of market segmentation resulting from geographic rating, rate bands could be imposed on area rating factors.

The researchers conclude with a discussion of strategies that federal and state policy-makers might use to help ensure that premium variations based on geography are justified.