In Tennessee a small-group health insurance rate may vary on four things and nothing else: whether the plan covers an individual or a family, the rating area, age, and tobacco use. That list is federal, it is closed by its own terms, and the federal record CMS publishes shows no Tennessee entry in its age rating ratio, state-established age curve, tobacco rating ratio or uniform family tier columns. So the question “what can they use against us” has a short answer here, and a usefully long explanation.
The closed list of four factors
The governing provision is 45 CFR § 147.102. Its opening paragraph states that with respect to the premium rate charged for coverage offered in the individual or small group market, “the rate may vary with respect to the particular plan or coverage involved only by determining the following,” and then names them: whether the plan or coverage covers an individual or family; rating area; age; and tobacco use.
Four factors. Not four categories of factor, and not four examples.
The sentence that does the real work
A permissive list on its own would still leave room for argument about what else might be allowed alongside it. The regulation closes that door in a single sentence at paragraph (a)(2):
The rate must not vary with respect to the particular plan or coverage involved by any other factor not described in paragraph (a)(1) of this section.
That is a prohibition written as an exhaustive negative. Anything not on the list of four is excluded by the list’s own terms, which is why this page can answer questions about claims history, diagnoses, industry, occupation and gender without needing a separate rule for each one. None of them appears in paragraph (a)(1), and paragraph (a)(2) does the rest.
How to read Tennessee’s position in the federal record
States are not spectators to this. Federal rules let a state set its own uniform age rating curve, its own tighter age or tobacco variation, or its own uniform family tier structure, and CMS maintains a published state-by-state table recording which states have done which.
Tennessee’s row in that table carries no entry in the small group age rating ratio column, none in the state-established age curve column, none in the tobacco rating ratio column and none in the uniform family tiers column. The table’s legend resolves what that means: where a cell is blank or a state is not listed, the federal default applies.
Two things about that reading are worth stating, because both are places a careless version of this page would go wrong. The first is that the finding is read from Tennessee’s own row. The table also carries footnotes, and a footnote defines what a column means — it is true of every state carrying an entry in that column and is not a statement about any one of them. A page that cited a footnote as a Tennessee fact would be reporting a class as a member. The second is that this is CMS’s published record, carrying its own revision stamp, and it is cited here on that basis rather than as something confirmed live this morning.
Age is permitted, and it is bounded
Age is a real rating factor in Tennessee and there is no point pretending otherwise. An older workforce rates differently from a younger one, and that is lawful.
What the regulation does is fence it. Variation by age is permitted within a limit the regulation itself sets for individuals age 21 and older, and for individuals under 21 it requires that “the variation in rate must be actuarially justified … consistent with the uniform age rating curve under paragraph (e) of this section.” The ceiling and the curve are federal instruments, and CMS’s state-by-state record shows no Tennessee entry in the column where a state’s own curve would be recorded.
The practical consequence for an employer is that age is a factor you can anticipate but not negotiate, and that a rate presented as varying by age within the federal band is behaving normally rather than penalizing your group.
Tobacco use, and how narrowly it is defined
Tobacco is the fourth factor and the most commonly misunderstood, because it is the only one that attaches to individual behavior rather than to a demographic or a map.
The regulation constrains it from more than one direction. It may “only be applied with respect to individuals who may legally use tobacco under federal and state law.” It must be defined on a stated basis: “tobacco use must be defined in terms of when a tobacco product was last used.” And it carves out an exclusion in plain words: “tobacco use does not include religious or ceremonial use of tobacco.”
That is a bounded, defined factor, not an open field for underwriting judgment. An employer asked about tobacco use during a quote is being asked about a factor with a written definition behind it.
Rating area: one address decides it, and it is not each employee’s
The geographic factor is where small-group rating differs most sharply from individual coverage, and it is the factor employers most often assume works the other way around.
In the small group market the rating area is not assembled from where employees live. It is set from a single address, and the regulation at 45 CFR § 147.102(a)(1)(ii)(B) says which one:
In the small group market, using the group policyholder’s principal business address. For purposes of this paragraph (a)(1)(ii)(B), principal business address means the principal business address registered with the State or, if a principal business address is not registered with the State, or is registered solely for purposes of service of process and is not a substantial worksite for the policyholder’s business, the business address within the State where the greatest number of employees of such policyholder works. If, for a network plan, the group policyholder’s principal business address is not within the service area of such plan, and the policyholder has employees who live, reside, or work within the service area, the principal business address for purposes of the network plan is the business address within the plan’s service area where the greatest number of employees work as of the beginning of the plan year.
For an employer with sites across Tennessee, that paragraph is the whole geographic question. One address governs the group. A registered principal business address that is only a service-of-process address and not a substantial worksite does not govern; the location where the greatest number of employees works takes over. And a network plan whose service area does not reach the governing address has its own fallback written into the same sentence.
Tennessee’s rating areas are drawn on counties. There is no zip-code overlay to reconcile — the county the governing address sits in is the input.
Where a Tennessee county line runs through a city
Because the areas are county-based and the input is a single address, a municipal boundary and a rating boundary can cross. Spring Hill is the clear Tennessee example: the city lies in both Maury and Williamson counties, and the federal rating-area table places those two counties in different rating areas. The line runs through the city.
Two employers inside the same Spring Hill city limits can therefore be rated on different geography, and an employer that relocates across town without leaving the city can change its geographic factor. Which area any particular Spring Hill employer falls into is not something this page resolves, and it should not be resolved from a map: the determinant is 45 CFR § 147.102(a)(1)(ii)(B) applied to that employer’s own principal business address, with the fallbacks above in play if the registered address is not a substantial worksite.
The general lesson is more useful than the example. Before comparing two Tennessee proposals, confirm which address each was rated from. If they were built from different addresses, part of the difference between them is geography rather than plan design.
What the list leaves out
The factors that are absent are the ones employers worry about most, and their absence is not an oversight.
Your group’s claims history is not a permitted rating factor. Neither is any individual employee’s diagnosis, prescription history or utilization. Neither is your industry, your occupation classification, or the gender mix of your workforce. Paragraph (a)(2) excludes each of them by excluding everything not named in the list of four.
The companion rule sits one section away. 45 CFR § 147.104 requires that an issuer offering coverage in the small group market “must offer to any individual or employer in the State all products that are approved for sale in the applicable market, and must accept any individual or employer that applies for any of those products.” Health status does not gate whether a Tennessee group can buy, and it cannot be priced in once the group has bought.
That guarantee is expressly subject to paragraphs (b) through (d) of the same section, which is where minimum group participation and minimum employer contribution requirements live. Those conditions are real and are applied by issuers, and they are set at state and issuer level rather than nationally. Guaranteed issue and participation requirements are two halves of one accurate sentence; either alone misleads.
When these rules apply, and when they do not
The section states its own reach. Its provisions “apply for plan years (in the individual market, policy years) beginning on or after January 1, 2014,”
and it “does not apply to grandfathered health plans” under the separate grandfathering rule.
There is a second boundary that matters far more to a Tennessee employer shopping today, and it is easy to cross without noticing. Federal agencies have described level-funded arrangements as a form of self-funding in which the plan sponsor makes set monthly payments covering estimated claims, administration and stop-loss premium. In the agencies’ own description, where such an arrangement is treated as self-insured “the essential health benefit requirements would not apply,” and these arrangements “are not generally treated as being subject to the guaranteed renewability and single risk pool requirements that apply to fully-insured small group market coverage.” The agencies noted that small employers moving to such arrangements “may be unaware that the self-funded plans they are offering to their employees may not include certain benefits that would have to be covered if the plan were fully-insured.” That description appeared in a proposed rule whose final version expressly declined to address the subject, so it is the agencies’ account of how the arrangement works rather than a requirement.
The point for this page is narrow and important: the closed list of rating factors is a rule of the fully-insured small group market. A proposal that sits outside that market is not governed by it, and two proposals are not comparable on rating rules until you know which market each is in.
One Tennessee layer sitting behind the rate you are shown
Finally, the rate itself does not reach an employer unreviewed. Tenn. Comp. R. & Regs. 0780-01-93-.03(1) provides that “all initial premium rates and forms for new policies and revised premium rates on any previously approved policies must be filed for approval for all health insurance coverage,” and the chapter containing it applies to coverage issued to any individual or small employer. Who conducts which review, and on what timetable, is a subject of its own. What belongs on this page is simply that the factors above are exercised inside a filed and approved structure rather than quoted freehand.
The bottom line
A small-group rate in Tennessee may vary only by whether the coverage is individual or family, by rating area, by age and by tobacco use, because 45 CFR 147.102(a)(2) forbids variation on anything else. CMS’s published state-by-state record shows no Tennessee entry in its age rating ratio, state-established age curve, tobacco rating ratio or uniform family tier columns, so the federal factors are the operative ones here.
Frequently asked questions
Can a Tennessee insurer rate our group on our claims history?
No. 45 CFR 147.102(a)(1) permits a small-group rate to vary only by whether the plan covers an individual or a family, by rating area, by age and by tobacco use, and paragraph (a)(2) closes that list by providing that the rate must not vary by any other factor not described in it. Claims experience, diagnoses, prior utilization and the health status of any particular employee are not on the list, so they are not available as rating factors.
Does Tennessee add its own rating rules on top of the federal ones?
CMS keeps a state-by-state record of rating variations, with separate columns for a state-established age rating ratio, a state-established age curve, a tobacco rating ratio and uniform family tiers. Tennessee’s row carries no entry in any of those columns, and the table’s legend resolves a blank as the federal default applying. That position is read from Tennessee’s own row rather than from the table’s footnotes, which define what each column means and are true of every state carrying an entry in it.
Which address decides our rating area if we have more than one location?
In the small group market the rating area follows the group policyholder’s principal business address, under 45 CFR 147.102(a)(1)(ii)(B). The regulation then defines that term: the principal business address registered with the state, or, where none is registered or the registered one is used only for service of process and is not a substantial worksite, the business address within the state where the greatest number of employees works. A network plan whose service area does not contain that address has its own further fallback in the same paragraph.
How is tobacco use defined for rating purposes?
Narrowly, and the regulation supplies the boundaries. It requires that tobacco use be defined in terms of when a tobacco product was last used, and it states that tobacco use does not include religious or ceremonial use of tobacco. The factor may also only be applied with respect to individuals who may legally use tobacco under federal and state law. It is a defined and bounded factor rather than an open question an underwriter answers by impression.
Do these rating rules apply to every plan an employer might buy?
No, and the exceptions matter when comparing proposals. The section states that its provisions apply for plan years beginning on or after January 1, 2014, and that it does not apply to grandfathered health plans. Separately, federal agencies have described level-funded arrangements as a form of self-funding, and have said that where such an arrangement is treated as self-insured the essential health benefit requirements would not apply and that these arrangements are not generally treated as subject to the guaranteed renewability and single risk pool requirements that apply to fully-insured small group coverage. A proposal outside the fully-insured small group market is not governed by the rules on this page.
About the author
Nate Jones, CPCU, is the founder of Wexford Insurance and Wexford Health Insurance, an independent agency placing small-business group benefits in 9 states. He reads a state’s rating position out of its own row in the federal record rather than out of a column footnote, because a footnote describes the column and is true of every state carrying an entry in it. Start with the Wexford Health Insurance quote form.