By
Jeremy McLendon
Agents, Healthcare Platform
June 9, 2023
Health insurance brokers play a crucial role in ensuring employers have access to quality healthcare services while also managing clients' financial risks. When it comes to determining health insurance premiums, carriers use various pricing methods. Two common approaches are composite pricing and age banding pricing. Here we will explore the differences between these two pricing structures and understand how they can impact policyholders and how both can change from state to state.
Composite pricing is a method where the insurer sets a single premium rate for an entire group or pool of policyholders, regardless of their age. This means that everyone within the group pays the same premium, regardless of whether they are young or old. The premium rate is typically based on the average risk and cost of healthcare services for the entire group.
Simplicity: Composite pricing simplifies the premium calculation process for both the carrier and policyholders. There is no need to consider age as a factor, making it easier to understand and administer.
Affordability for older policyholders: Since the premium is not age-based, older individuals can benefit from lower premiums compared to age banding pricing, where older age groups usually face higher premium rates.
Cross-subsidization: Younger and healthier individuals may end up subsidizing the healthcare costs of older and less healthy policyholders. This can lead to higher premiums for the younger age group.
Limited customization: Composite pricing does not take individual risk factors into account, resulting in less personalized premiums. Those who are younger and healthier might pay more than they would under an age banding structure.
Age banding pricing involves setting different premium rates based on specific age ranges or bands. Carriers determine the premium for each age band by considering the risk and healthcare costs associated with that particular group. Premiums generally increase with age, reflecting the higher probability of healthcare utilization and associated expenses.
Fairness: Age banding pricing allows for a more accurate assessment of individual risk and healthcare costs. Premiums align with the expected healthcare needs of each age group, preventing younger policyholders from overpaying for coverage.
Tailored premiums: Carriers can offer more personalized pricing based on age, leading to greater customization and affordability for policyholders.
Higher premiums for older individuals: Age banding pricing can result in higher premium rates for older individuals. As age increases, healthcare utilization tends to rise, and insurers adjust premiums to reflect this heightened risk.
Complexity: Calculating premiums based on age bands can be more complex and may require more administrative effort from carriers.
When it comes to health insurance pricing, carriers employ different strategies to determine premiums. While composite pricing simplifies the process and can be more affordable for older individuals, age banding pricing offers a fairer and more personalized approach. It is essential for policyholders to understand these pricing structures and evaluate which option aligns better with their needs, risk profile, and budget.
Ultimately, whether you opt for composite or age banding pricing, the primary goal is to ensure you have comprehensive health coverage that meets your specific requirements while providing adequate protection against unexpected medical expenses. Your choice in using composite or age banding pricing could also depend on your state and the laws surrounding healthcare. Every state has specific requirements for both age banding and composite pricing.
To learn more about what is available to your clients no matter their state, set up an appointment with one of our licensed representatives. MyHealthily creates a customizable approach for brokers and their clients to ensure quoting and enrollment in complete healthcare benefits is simple and transparent.
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