If you’re helping employees navigate an ICHRA, you’ll inevitably field the question: why does my individual health plan cost what it costs?
Unlike traditional group plans, individual health plans — also called individual & family plans (IFPs) — are priced using a very specific, regulated formula. Understanding these individual health plan pricing factors makes it a lot easier to explain premium differences to employees, and to set realistic ICHRA allowances. Here’s a breakdown of exactly what drives IFP pricing.
There are four factors that determine IFP pricing: Age, family composition, geography, and smoking status.
Under the Affordable Care Act (ACA), individual and family plans can only be priced according to four factors: age, family composition, geography, and smoking status. That’s it. Carriers aren’t allowed to factor in gender, medical history, or any other personal health attributes. Here’s how each one works.
Age
Age is the biggest driver of IFP pricing, and it’s tightly regulated to keep things fair. Premiums increase by a set amount each year, typically starting at age 21 and increasing through age 64, after which pricing holds steady. By law, the oldest enrollee on a given plan can’t be charged more than three times what the youngest adult enrollee pays, which is a rule commonly known as the 3:1 age rating ratio.
Age is locked in based on the member’s age at the start of the plan year. If your ICHRA plan starts January 1, pricing is based on the employee’s age on January 1. If someone enrolls mid-year, (say, after a Qualifying Life Event (QLE) like a marriage or new child) their premium is priced based on their age when that coverage actually starts.
Family composition
This is one of the biggest differences between individual plans and traditional group coverage. Group plans usually charge a flat family rate regardless of how many kids are on the plan.
IFPs don’t work that way. Every person added to the plan is individually rated:
- Spouses are priced based on their own age, and that premium is added to the primary member’s.
- Dependents also add cost, typically priced by age (dependents 21-26 are priced as adults). Costs generally cap out at three or four dependents.
If there’s a spouse on the plan, the first three children increase cost and additional children don’t. Without a spouse, the first four children increase cost and additional children don’t. The oldest dependents (the priciest ones) are the ones counted toward that cap.
Geography
IFPs are priced by insurance Rating Area, which are geographic regions that carriers use to set pricing based on local risk and demographics. Rating areas are usually made up of neighboring ZIP codes, but they don’t always follow county or metro lines exactly. Because carriers price differently based on the health costs and risk profile of each area, identical plans can cost up to 50% more in one rating area than another just a short distance away.
Smoking status
Smoking status is the only health-related question carriers are allowed to ask when pricing an IFP, and it can add up to 30% to the premium in some cases.
What information carriers can’t use to price your plan
Thanks to ACA protections, carriers cannot price individual plans based on medical history, gender, or any other personal characteristic. This is by design, and it’s meant to guarantee access to coverage without letting carriers penalize people for their health status.
Why does IFP pricing matter to ICHRA?
Because IFP pricing changes based on age, location, family size, and smoking status, the “right” ICHRA allowance can look very different from one employee to the next, even within the same company. Understanding these individual health plan pricing factors is a key piece of setting allowances that are both fair to employees and realistic for your budget.
Need help thinking through ICHRA allowance strategy? If you’re using Zorro, reach out to your Customer Success Manager to talk through how pricing factors affect your employees’ options.
