Evaluating Federal and New Jersey Regulation of Rating Factors and Rate Bands

Abstract

Congress, in the Patient Protection and Affordable Care Act, established uniform rating factors and bands throughout the country as a means of curbing premium variations. These standards, which go into effect on January 1, 2014, identify the limited range of considerations on which insurance companies offering coverage in other than grandfathered plans in the individual and small group markets may base rate variations and also establish the maximum range of such variations. Insurers bound by the ACA’s rating provisions will not be able to base premium variations on health status or claims experience. Instead, they may only vary premiums using four factors: age; whether the plan covers an individual or family; rating area; and tobacco use. Federal law also established rate bands for two of these factors, permitting premium variations up to a maximum of 3 to 1 based on age and 1.5 to 1 based on tobacco use.

This Issue Brief examines these Federal rating provisions and how they interrelate with restrictions on rating factors and rate bands that New Jersey implemented first in 1992 and amended most recently in 2008. It first crystallizes the ways in which the ACA rating provisions are similar to and different from New Jersey’s and then assesses the degree to which Federal law preempts New Jersey’s existing laws. The Brief also identifies important policy issues that New Jersey must consider in implementing the Federal rating provisions, including that large group plans would become subject to the Federal rating restrictions if New Jersey elects to offer large group plans through the Exchange; whether to conform New Jersey’s definition of the small and large group markets to the Federal; and whether to regulate grandfathered plans, which are exempt from the Federal restrictions on rating factors and rate bands.

Keywords: Affordable Care Act, ACA, rate banding, rating factors, rating provisions, rate bands, New Jersey, preemption