Average Subscribers Credibility Number of Credibility
Per Month Factor Employees Factor
51-75 35% 51-74 0.35 76-100 45% 75-99 0.42 101-150 55% 100-124 0.47 151-200 65% 125-149 0.52 201-250 75% 150-174 0.57 251-300 85% 175-199 0.61 301-350 90% 200-249 0.67 351-399 95% 250-299 0.74 >– 400 100% 300-349 0.81 350-399 0.87 400-449 0.92 450-499 0.97 500+ 1.00
MVP Insurance Co. Excellus Health Plans, Inc. Large Group Credibility Factors Standard Credibility Table
Credibility Factors. Setting a credibility
factor is among the most important financial decisions health plans make in determining the basis for the rates their customers will pay, and, by extension, the health plan’s financial success. Credibility tables, filed with rating manuals, set out the degree claims experience will be used to determine rates, based
primarily on two variables, the size of the employer group or number of employees enrolled in the plan, and how far back claims experience for the company is available. Credibility factors vary among health plans and sometimes among their own products and licenses, but most plans use full experience rates for employers with at least 400 or 500 workers. Health plan credibility tables vary regarding the point at which claims experience becomes a significant part of the rate.
Neither HIP nor Empire HealthChoice Assurance, Inc., Empire’s Article 42 licensee, uses claims experience for employer groups of less than a hundred.113 Oxford gradually phases in claims experience for groups of seventy-five or more, based on the length of time they’ve been insured. The credibility tables in Table 8 represent a more aggressive approach, factoring in claims experience beginning at the minimum required for large groups, fifty-one or more workers.
Since claims experience represents a proportional factor in rates, ranging from 0 percent to 100 percent based on the size of the employer group, just how do health plans develop rates for the groups falling between community rating and full experience rating? They do that by using factors prohibited, under the CR/OE law, for individuals and small groups — age, sex, and industry.
Book Rates. Book rates, also known as
manual rates or adjusted community rates, are used by health plans to set an entire rate for smaller groups or flesh out a rate for groups not fully experience-rated. The age
and sex of enrollees, which actuaries consider to be the most accurate predictors of future claims experience, and the type of industry enrollees are engaged in are three principal factors used to derive these manual rates. Two health plans’ age and sex rating tables are shown in Table 9, one of which features a “unisex” rate factor (unrelated to its operations in New York) alongside the usual age and sex factors. When setting book rates, values in the age and gender columns are used to multiply the base rates of each group to achieve a rate reflecting the age and sex of an employer group’s workers.
For family contracts, rate swings related to gender and age are moderated, since most family tiers include a mix of old and young, and of male and female. For both individuals and family tiers, health plans generally calculate an average age/sex factor for the employer group, which is then applied to the base rate to arrive at the premium the group will pay. See Table 10 for examples.
Industry Factors. The type of work a firm
does is a third factor that goes into developing rates. Although the use of industry factors is not permitted in New York’s community- rated markets, they are universally used for Large Group rates, and are derived from statistical categories used by the federal government.
Developed in the 1930s to promote unifor- mity in data collection by federal agencies, the Standard Industrial Classification (SIC) system categorizes all “establishments” through four-digit codes. The SIC groups over 1,000 different kinds of economic activity into ten categories known as “divisions,” such as “agriculture, forestry, and fishing” and “mining.” Types of activities within divisions are differentiated by tacking on additional digits to further define the categories. Within the agriculture/crops category, for example, wheat farming is 111 and tree nut farming
113 When interviewed in 2008, Empire BCBS officials indicated that they were awaiting State Insurance Department approval
is 173. The North American Free Trade Agreement ushered in a new classification system, however, that most federal agencies now use, the North American Industrial Categorization System (NAICS, pronounced “nakes”). With twenty categories, it is more expansive, and is supplanting use of the SIC codes.
Health and life insurance companies either develop, or purchase from actuarial firms, data bases that break down long-time claims experience within different industries, and assign industry factors reflecting their average. These industry factors (with a value of 1 as the average claims experience) further adjust rates already reflecting an employer group’s
Table 9. Age and Sex Rating Factors – Two Examples
Age Band Male Female Unisex
<20 0.508 0.508 0.508 20-24 0.537 0.815 0.686 25-29 0.573 1.066 0.852 30-34 0.547 1.150 0.861 35-39 0.578 1.067 0.838 40-44 0.726 1.055 0.901 45-49 0.888 1.174 1.038 50-54 1.103 1.489 1.300 55-59 1.543 1.569 1.556 60-64 2.247 2.034 2.137 65+ 3.007 2.643 2.835
CDPHP Universal Benefits, Inc.
Sources: Rating manuals filed with the New York State Insurance Department by CDPHP Universal Benefits, Inc. (top) and Empire HealthChoice Assurance, Inc.
Age Band Male Female
<20 0.450 0.813 20-24 0.450 0.813 25-29 0.433 0.838 30-34 0.576 1.117 35-39 0.812 1.214 40-44 1.041 1.135 45-49 1.150 1.251 50-54 1.302 1.323 55-59 2.115 1.603 60-64 2.620 2.172 65-69 3.311 2.204 70+ 3.311 2.204
age and gender mix.
Health plans include exhibits listing the industry factors in their rating manuals. A five-page table for Empire HealthChoice Assurance’s Prism PPO is fairly typical of the industry factors many health plans use (Table 11).
At almost 100 pages, the industry factor appendix filed by MVP Health Insurance Company for the for-profit Article 42 licensee of nonprofit MVP Healthcare, Inc., is more detailed (Table 11). It contains a higher proportion of high-value factors, and a greater spread among factors (40 percent vs. 35 percent).
On the one hand, industry factors seem related to the occupational hazards of particular industries, and more properly a factor in workers’ compensation coverage than in health insurance. But on the other, while actuaries cite high turnover rates among hotel workers, it is difficult to explain why hotels and uranium mining would share the same industry factor. While there is some controversy over the use of industry factors within the actuarial profession, they remain a
cornerstone of experience rating, and another symbol of the trade-offs inherent in rating systems. A proponent of a socially oriented system might ask why bankers should pay less for health insurance than those who mow their lawns, clean their suits, or wait on their tables. A proponent of an actuarial approach would argue that orderly health insurance markets are dependent on accurately assessing each customer’s risk, and pricing it accordingly.
Under book rates, until the point at which an employer group reaches the credibility factor used by the health plans, it will be age, sex, and industry factors that determine the rate charged the group. Firms employing more women, or older men and women, or doing certain kinds of work, pay higher rates after the differentials are applied to the base rate.
Partial Experience Rating
Once the credibility factor threshold is reached, demographic factors are blended with the group’s claims experience to arrive at a partial experience rate. The weight that demographic factors or claims experience are given in developing the partial experience
Table 10. Family Policy Age and Sex Factors
Source: Empire HealthChoice Assurance PPO Rating Manual.
Age Band Male Age Factor Female Age Factor
<20 0.866 0.836 20-24 0.866 0.836 25-29 0.943 0.895 30-34 1.082 0.901 35-39 1.082 0.936 40-44 1.066 0.883 45-49 1.008 0.962 50-54 1.080 1.131 55-59 1.277 1.312 60-64 1.599 1.926 65-69 1.699 2.471 70+ 2.066 2.471
rates is determined by where the employer groups fall in the health plan’s credibility table. As Table 12 shows, however, a significant portion of the fully insured experience-rated market pays rates based wholly or in part on demographic factors, since actual claims
experience is used to develop rates for larger groups.
The long-running discussion about the role of actuarial techniques in New York’s markets plays out in an interesting way when small groups (fifty or fewer employees) and “small