When it comes to traditional, individual health insurance, the insurer usually requires detailed information about the insured(s) past and present health history, thereby issuing health insurance plans on a personal basis. The process (also known as underwriting), consists of gathering and evaluating this detailed information and determining the premium.
The process is quite different in the Federal Employees Health Benefits (FEHB) program. The actuaries at each approved insurance carrier use the “single risk pool” method and their previous experience to estimate the cost of health expenses for the covered group. From there they divide that number by the number of insureds resulting in the single risk, per-person premium.
The health expenses are underwritten with FEHB, not the health histories. A pool member cannot be denied individual coverage nor can they be charged a different premium; the insurance company is not permitted to ask about individual health. Everybody pays the same per person.
However, in the 2015 FEHB open season, there was a new billing option introduced called self + 1. Couples without children were billed for just two persons for the first time, instead of three or more, no limit (“family”). For these couples without children (or for single parents with one child), these premiums had to drop.
Portions of the pool are underwritten in FEHB by the insurance carriers based on how many persons are to be insured for each enrollee. The name of this practice of underwriting the pool as a whole and then evaluating a sub-group is called “segmenting.”
Even though most premiums did drop, it wasn’t by much. In some cases, the premiums for self + 1 were, in fact, much higher than family. There was really no credible explanations besides these outliers, and instead, it just came down to “it is what it is.”
HHS has a rule for single risk pools:
Final Rule Released by HHS on Single Risk Pool
June 24, 2013
The Department of Health and Human Services (HHS) issued a final rule to implement the Affordable Care Act’s (ACA) single risk pool provisions on Feb. 22.
The final rule amends the proposed rule from Nov. 26, 2012. The provisions of the final rule apply to plan years that begin on or after the date of Jan. 1, 2014.
Single Risk Pool
Insurers are prevented from segmenting enrollees into separate rating pools with the intent to increase premiums at a quicker rate for individuals that are considered higher-risk, thanks to the single risk pool provision. Instead, annual rate changes and premiums are to be based on the health risk of the entire pool as a whole.
Regardless of this rule, a layer of granularity is added to the underwriting process by FEHB carriers. The carriers consider the claims experience of the self + 1 cohort separately from self only, meaning the self + 1 per person premiums would be set much higher.
The resulting national, fee-for-service premiums for self + 1 (In 13 of 15 cases) are substantially more than double the self only premiums.
Self only, self + 1, and family codes for FEHB enrollment are not meant to be used as separate rating polls, but in most cases they are.
An Example of Segmentation
Single feds, John and Mary, carry the same FEHB insurance. Each of them pays around $145 a month. Once they marry they change over to self + 1 while keeping the same carrier with the same exact benefits, meaning the only difference is two insured persons instead of 1. Their new premium then becomes $335 (2.3 times higher) a month instead of doubling to $290, and many people may wonder why that is.
The simple answer is that their insurer rated the self + 1 group separately. This increased their per-person increment and increased the premium for this couples as well as all other couples in the same self + 1 group.
If you have additional questions regarding segmentation or FEHB insurance, it is recommended that you reach out to an advisor for further clarification.