The Four Permitted Rating Factors Under the ACA
Before the Affordable Care Act, health insurers in the individual and small group markets could use a wide range of factors to set premiums, including health status, claims history, gender, and occupation. The ACA eliminated most of these factors for ACA-compliant plans. For individual and small group market plans subject to the ACA's rating rules, insurers may vary premiums based on only four factors:
- Age
- Tobacco use
- Geographic rating area
- Individual vs. family enrollment
No other factor may be used to vary premiums for ACA-compliant plans sold in the individual and small group markets. Health status, pre-existing conditions, gender, occupation, credit history, and claims history are all prohibited rating factors under the ACA.
Community rating is the practice of charging all members of a defined group the same premium regardless of individual health characteristics. Under the ACA's modified community rating rules, all individuals in the same geographic rating area who are the same age and tobacco use status must be charged the same premium for the same plan. The insurer cannot charge a person with a chronic illness more than a healthy person of the same age in the same area on the same plan.
Age Rating
Age is the primary driver of premium variation under the ACA's rating rules. Federal regulations allow insurers to charge older enrollees more than younger enrollees, but cap the ratio at 3:1 — meaning the premium for the oldest allowed age cannot exceed three times the premium for the youngest. Some states impose tighter age rating ratios than the federal 3:1 limit.
The ACA's age rating applies within a single continuous age band. The regulation specifies how premiums may increase incrementally with age within that band. The practical effect is that premiums increase with each year of age, with the steepest increases occurring in later decades of life.
For family coverage, each family member's premium is calculated individually based on their age, and the premiums are combined. Federal rules provide that premiums are calculated using actual ages for the three oldest covered adults, with a flat rate for additional dependents beyond the first three. State rules may vary.
Premiums are recalculated at each plan year. When a policyholder's age crosses into the next rating band during a plan year, the premium does not change mid-year — the age as of the first day of the coverage period governs the annual premium. At renewal, the new age applies to the following year's premium calculation.
Tobacco Use
Federal regulations allow insurers to charge tobacco users up to 1.5 times the premium of non-tobacco users. This is a permissive cap — states may restrict or eliminate the tobacco surcharge, and several states do not allow tobacco rating at all. In states that prohibit tobacco rating, insurers must charge tobacco users the same premium as non-tobacco users of the same age in the same area.
The definition of tobacco use for rating purposes typically refers to tobacco use within a specified recent period, as defined in each state's regulations and the insurer's underwriting rules. Electronic cigarettes and similar products may or may not be included depending on state and plan rules.
An important limitation: premium tax credits (ACA subsidies) are calculated without accounting for the tobacco surcharge. This means the tobacco surcharge amount is not offset by the subsidy, and tobacco users who receive premium tax credits pay the surcharge out of pocket in addition to their net premium after subsidy.
Geographic Area
Premiums vary by geographic rating area, which reflects differences in the cost of healthcare services across different locations. States define geographic rating areas differently — some states use counties, others use multi-county regions, and some use statewide rating. The number of rating areas within a state varies.
Geographic variation in premiums reflects actuarial differences in the cost of providing coverage in different markets. Areas with higher average costs for hospital services, physician services, and prescription drugs will generally have higher premiums than lower-cost areas, even for the same type of plan. Cost differences across markets can be substantial.
The CMS geographic rating area guidance outlines the standards states must meet in defining their rating areas.
Plan Type and Metal Tier
The ACA established standardized actuarial value tiers for health plans, commonly called metal tiers: Bronze, Silver, Gold, and Platinum. Actuarial value represents the percentage of total average costs for covered services that the plan pays for a standard population. Bronze plans have an actuarial value of approximately 60 percent; Silver approximately 70 percent; Gold approximately 80 percent; and Platinum approximately 90 percent.
| Metal Tier | Actuarial Value | What It Means |
|---|---|---|
| Bronze | ~60% | Plan pays ~60% of covered costs on average; enrollee pays ~40% |
| Silver | ~70% | Plan pays ~70%; baseline tier for cost-sharing reductions |
| Gold | ~80% | Plan pays ~80%; lower cost-sharing, higher premium |
| Platinum | ~90% | Plan pays ~90%; lowest cost-sharing, highest premium |
| Catastrophic | N/A | Available only to those under 30 or with hardship exemptions |
Higher metal tiers have higher premiums and lower cost-sharing. Lower metal tiers have lower premiums and higher cost-sharing. The metal tier designation standardizes the benefit value for comparison purposes, though specific plan features within each tier vary by insurer and market.
Community Rating Explained
The ACA's modified community rating rules require that all enrollees in the same rating area, age, and tobacco use category pay the same premium for a given plan — regardless of their health status or claims history. Before community rating, insurers could and did charge people with health conditions much more than healthy people, or refuse to cover them at all.
Community rating is what makes the ACA's pre-existing condition protections financially functional. Without community rating, an insurer could technically cover people with pre-existing conditions but charge them prohibitively high premiums that amount to the same thing as exclusion. Community rating prevents that by requiring the same rate for everyone in the same permissible rating category.
The trade-off is that community rating pools healthier and sicker people together, which tends to raise premiums for the healthiest enrollees compared to a world where they could be rated individually. The ACA's individual mandate (significantly weakened after 2019) was intended to encourage healthy people to enroll anyway, keeping the risk pool balanced.
Short-term health insurance plans and certain association health plans are exempt from the ACA's community rating and pre-existing condition protections. These plans can use health status, medical history, and other factors prohibited for ACA-compliant plans. This is why they often have lower premiums but also why they may exclude coverage for pre-existing conditions, cap benefits, or decline to cover essential health benefits required of ACA-compliant plans. The premium difference reflects fundamentally different coverage, not just pricing.
How Employer Plan Premiums Differ
Employer-sponsored health plans operate under different rating rules than individual market plans. Large employer plans (generally those with 50 or more full-time equivalent employees) are not subject to the ACA's community rating requirements for premium-setting purposes. Large employers may negotiate rates with insurers based on the demographics and claims experience of their specific employee population.
However, large employer plans must still comply with the ACA's prohibition on discriminating based on health status within the enrolled group. The employer negotiates a group rate with the insurer, and employees within that group generally pay the same contribution rate regardless of individual health status.
Small group market plans (generally for employers with fewer than 50 full-time equivalent employees) are subject to the ACA's modified community rating rules in most states, treating small employers similarly to individual market consumers for rating purposes.
The Medical Loss Ratio Rule
The ACA's medical loss ratio (MLR) requirement limits how much of premium revenue insurers may spend on administrative costs, profits, and overhead. Insurers in the individual and small group markets must spend at least 80 percent of premium revenue on medical care and quality improvement. Large group market insurers must spend at least 85 percent. The remaining percentage is available for administration, marketing, and profit.
If an insurer fails to meet the applicable MLR threshold in a given year, they are required to issue rebates to enrollees for the excess. The MLR rule is designed to ensure that a specified share of premium dollars goes toward actual healthcare rather than insurer overhead.
The CMS publishes annual MLR reports showing compliance by insurer and market segment. The CMS MLR program page includes historical rebate data and current program information.
ACA-compliant individual and small group health insurance premiums may vary based on only four factors: age (up to 3:1 ratio), tobacco use (up to 1.5:1 in states that allow it), geographic rating area, and whether the enrollment is individual or family. Health status, pre-existing conditions, gender, and claims history are prohibited rating factors. Plans are categorized into metal tiers based on actuarial value. The ACA's medical loss ratio rule requires insurers to spend at least 80 percent of premium revenue on medical care. The complete regulatory framework is available through CMS's health insurance market reforms page.