Medical underwriting means each employee is considered individually, so that the overall health of everyone in your group determines the final premium. For very small employers, premiums can go up if you have one employee with a history of chronic illness (such as diabetes) or with a catastrophic illness.

The good news, though, is a group cannot be turned down because of the health of one individual, nor can one person be denied coverage when the rest of the group has been accepted. That's part of the Federal Health Insurance Portability and Accountability Act of 1997 (HIPAA), which also prevents insurers from charging different rates to individuals in the same group based on their health status. Insurers, however, are allowed to charge different rates within the group based purely on age or gender. Some states limit the extent to which insurers can "rate up," or increase premiums above the average, for groups with poor medical histories.

The second method, community rating, is the standard for setting health insurance premiums in some states and eliminates health status from the list of factors that insurance companies are allowed to consider when they set group insurance premiums. Pure community rating, rarely used, means that everybody in a particular geographic area pays the same premium for health insurance.

Pure community rating is uncommon because it's a good deal for older people — who would otherwise pay higher premiums — but not for people who are younger, according to the National Association of Health Underwriters. Most states don't use pure community rating because younger people feel they can't afford it, and drop out of the health plan. When younger people drop out of the group plan, only the sick and the elderly remain, which is not a boon for insurance companies and can cause them to cease operations in that state.

Modified community rating, however, is a common underwriting procedure among states that allow it, and depends on the employer's ZIP code to determine the group's premium. If you consider that most employees live within a reasonable distance of work, the geographic area used to calculate premiums is much smaller. In most cases, insurers use the employer's ZIP code, unless there are employees who live far away or completely out of state. In that instance, they'll use the employee's ZIP code.

Back to frequently asked group health insurance questions