12.2 Group Underwriting and Contribution/Participation
Key Takeaways
- Experience rating blends a group's own claims with the manual rate, weighted by the group's credibility factor.
- Contributory plans require 75% participation; noncontributory plans require 100% participation.
- High participation minimums force healthy lives into the pool to prevent an adverse-selection death spiral.
- Coordination of benefits stops an insured from collecting more than 100% of an actual covered expense.
- The birthday rule makes the parent with the earlier calendar birthday (month/day) the primary plan for a child.
Group underwriting evaluates the group rather than each member. The underwriter looks at the reason the group exists, its size, the age and gender distribution, the industry's hazard level, geographic location, the stability of the group's membership, and the group's prior claims history. Larger groups are more statistically predictable, so they earn better rates and are subject to less individual scrutiny.
Rating Methods
How the insurer sets the premium depends mostly on group size.
| Method | Typical Group Size | How the Rate Is Set |
|---|---|---|
| Community rating | Small groups | Same rate for all groups in an area, regardless of one group's claims |
| Manual (class) rating | Small to medium | Standard tables based on demographics and industry |
| Experience rating | Large groups (often 500+) | Adjusts the premium using the group's own claims history |
| Blended rating | Medium groups | Mix of manual and experience rating weighted by credibility |
Experience Rating, Worked Example
Experience rating rewards groups with good claims history and penalizes groups with poor history. Credibility is the statistical weight given to the group's own experience; bigger groups get higher credibility.
New Premium = (Credibility x Group's Own Claims) + ((1 - Credibility) x Manual Rate)
Suppose a group's own claims experience suggests a premium of $800,000, the manual rate for similar groups is $1,000,000, and the group's credibility factor is 70%.
- Group portion: 0.70 x $800,000 = $560,000
- Manual portion: 0.30 x $1,000,000 = $300,000
- Blended premium: $560,000 + $300,000 = $860,000
The favorable claims history pulled the premium below the manual rate, but only by the amount the group's credibility allowed.
Contributory vs. Noncontributory Plans
Who pays the premium drives the minimum participation requirement, the single most heavily tested numeric pair in group health.
| Feature | Contributory | Noncontributory |
|---|---|---|
| Who pays | Employer and employee share cost | Employer pays 100% |
| Minimum participation | 75% of eligible employees | 100% of eligible employees |
| Adverse-selection risk | Higher (employees may decline) | Lower (everyone is in) |
| Employee premium | Often pre-tax via Section 125 | None |
Exam tip: Memorize the pair. Contributory = 75% (because some employees may opt out, the insurer needs at least three of four to participate). Noncontributory = 100% (since the employer pays everything, every eligible employee is automatically enrolled). Questions love to flip these numbers.
Why Participation Minimums Exist
If only the sickest employees enrolled, claims would overwhelm premiums, the classic adverse-selection death spiral. Requiring a high participation percentage forces enough healthy lives into the pool to keep it balanced. In a noncontributory plan there is no opt-out, so 100% participation is automatic and adverse selection is essentially eliminated at the enrollment stage.
Coordination of Benefits (COB)
When a person is covered by two group plans (for example, one as an employee and one as a spouse's dependent), coordination of benefits prevents the insured from collecting more than 100% of the actual expense. One plan is primary (pays first up to its limits) and the other is secondary (pays the remaining eligible balance up to its own limits).
COB Worked Example
A covered medical bill is $1,000. The primary plan pays 80% of eligible charges; the secondary plan would pay 80% if it were primary.
- Primary pays: 80% x $1,000 = $800
- Remaining balance: $1,000 - $800 = $200
- Secondary pays the remaining $200 (it would have paid $800, so it covers the gap up to total allowed)
- Insured out-of-pocket: $0; total paid by plans: $1,000, never more.
For a child covered by both parents, the birthday rule decides which plan is primary: the plan of the parent whose birthday (month and day, not year) falls earlier in the calendar year pays first.
Contributory vs. Noncontributory Plans and Participation Rules
Group underwriting evaluates the group as a whole, not each member, relying on the natural insurable group and the law of large numbers. The single most tested mechanic is the participation requirement tied to who pays. In a noncontributory plan the employer pays the entire premium, so 100% participation is required, eliminating adverse selection because everyone is in. In a contributory plan employees share the cost, so insurers require a high minimum participation (commonly 75%) to keep healthier members from opting out and leaving a sicker pool.
| Plan type | Who pays | Required participation |
|---|---|---|
| Noncontributory | Employer alone | 100% |
| Contributory | Employer + employee | Typically 75% |
Experience Rating vs. Community Rating
Insurers price groups two ways. Community rating charges all groups in an area the same rate regardless of claims history, common in the small-group and ACA markets. Experience rating adjusts a larger group's premium to its own claims history, rewarding healthy groups and penalizing high-claims groups. The exam ties experience rating to large employers and self-funding decisions.
Worked Participation Test
A 200-employee firm offers a contributory plan requiring 75% participation. Only 130 employees enroll, which is 65%, below the threshold, so the insurer may decline to issue or re-rate the plan. If the employer makes the plan noncontributory by paying the full premium, all 200 are automatically covered, satisfying the 100% rule and removing adverse selection. This is why employers seeking simple compliance often choose noncontributory designs for base coverage.
Eligibility and Probationary Periods
New employees typically face a probationary (waiting) period before becoming eligible, then an eligibility/enrollment period during which they can enroll without evidence of insurability; missing it forces a late enrollee to provide evidence or wait for open enrollment.
Additional Exam Traps
- Noncontributory requires 100% participation; contributory typically requires 75%.
- Experience rating uses the group's own claims; community rating ignores it.
- A late enrollee loses guaranteed-issue and may owe evidence of insurability.
A contributory group health plan covers 40 eligible employees. What is the minimum number of employees that must participate for the plan to be issued?
A patient with two group plans incurs a $1,000 covered expense. The primary plan pays 80% of eligible charges, and the secondary plan also pays 80% when primary. Under coordination of benefits, how much does the patient pay out of pocket?