If a carrier expresses your group’s premium as flat per-enrollee tiers, Tennessee requires its own CMS-authorized tier structure in place of the federal default — four family-composition tiers with state-mandated factors, instead of the federal default’s two. And the first thing to get straight is the direction of that sentence, because it inverts easily: the two tiers are the federal rule, not the Tennessee one. Tennessee’s method is the alternative that federal law lets a state establish, and that CMS has to authorize.
The second thing to get straight is that Tennessee does not force a carrier to composite at all.
The two tiers belong to the federal default
The relevant regulation is 45 CFR 147.102(c), and the default method sits at (c)(3)(iii)(B). Its first clause is the hinge: “Unless a state establishes and CMS approves an alternate rating methodology, calculate an average enrollee premium amount for covered individuals age 21 and older, and calculate an average enrollee premium amount for covered individuals under age 21. The premium for a given family composition is determined by summing the average enrollee premium amount applicable to each family member covered under the plan, taking into account no more than three covered children under age 21.”
CMS restates that in ordinary language on its own state-by-state page: “…for plan years beginning on or after January 1, 2015, issuers in the state must composite using the federal default method of two tiers: one tier for all adults and a second tier for all children under 21.”
One tier for adults, one tier for children — that is the federal fallback that applies where a state has not established something else. Tennessee established something else.
What compositing is, and the one thing it cannot do
Underneath every small group premium is a per-member calculation. 45 CFR 147.102(c)(1): “The total premium for family coverage must be determined by summing the premiums for each individual family member. With respect to family members under the age of 21, the premiums for no more than the three oldest covered children must be taken into account in determining the total family premium.”
A composite — the regulation calls it an average enrollee premium — does not replace that calculation. It takes the total the calculation produces and re-expresses it as a small number of flat per-enrollee amounts, so that two employees in the same tier are billed the same regardless of their own ages. The federal rule permits this on one condition, and the condition is the reassuring part of the whole subject. 45 CFR 147.102(c)(3)(ii): “Subject to paragraph (c)(3)(iii) of this section, nothing in this section prevents a state from requiring issuers to offer to a group health plan, or an issuer from voluntarily offering to a group health plan, premiums that are based on average enrollee premium amounts, provided that the total group premium established at the time of applicable enrollment at the beginning of the plan year is the same total amount derived in accordance with paragraph (c)(1) or (2) of this section, as applicable.”
Read the proviso twice. The composited total must equal the same total the per-member calculation produces. Compositing redistributes; it does not inflate. What changes is the per-employee line — and therefore what a payroll deduction looks like next to an employee’s age — not what the group pays.
What CMS’s record says about Tennessee, and what it does not
CMS maintains a state-by-state table of rating variations, and Tennessee’s row is worth reading cell by cell rather than as a summary. One cell in that row is marked: the column for a state-specific composite premium method. The column that marks states requiring issuers to average enrollee premiums is, for Tennessee, empty.
Those two cells read together are what keeps this post honest. Tennessee is recorded as holding a CMS-authorized alternate method. Tennessee is not recorded as requiring compositing. The accurate formulation is that Tennessee does not force compositing, but where a carrier does offer composite premiums, Tennessee’s CMS-authorized method — not the federal two-tier default — is the one that governs.
CMS’s own footnote defining that column says it, and also says where to go next: “State-Specific Composite Premium Method: the state has received authorization from CMS to require that all issuers use an alternative method to the federal default method using two tiers. In a state that has an approved alternate composite premium method, issuers that offer composite premiums in addition to per-member premiums must use the state-specific method when compositing premiums. If the state requires composite premiums, the state-specific composite premium method is the only billing method allowed. Employers and issuers in states with an approved alternate composite premium method should check with the state department of insurance to assure understanding of the alternate composite method.”
One caution about that passage: it is the footnote defining the column, and it is true of every state carrying that mark. It is not a finding about Tennessee. Tennessee’s membership comes from its row.
Tennessee’s tiers, in the Insurance Division’s own words
CMS sends the reader to the state department of insurance, and in Tennessee the document is there. A bulletin titled “Composite Rating,” dated September 15, 2014, addressed “TO: All Licensed Insurers Writing Small Group Coverage in Tennessee,” sets out the method.
It opens by disclaiming any requirement: “This bulletin does not seek to require a carrier to provide family composite premiums. A carrier may choose to continue to use the filed member level rates, summing the premiums for all members in a small group. If a carrier does offer the family composite approach in the market, it must be made available for each small employer in the market. The only method available to a carrier that uses a family composite premium approach is the method described below.”
Then it states the structure: “Tennessee will require standard tier definitions and factors for all carriers using a composite premium approach. The standard tier definitions and factors are as follows:”
- Employee only = 1.00
- Employee + spouse = 2.00
- Employee + children (including all covered children up to age 26) = 1.85
- Employee + family (including spouse and all covered children up to age 26) = 2.85
Those factors are structure, not price. They describe the relationship between the tiers, and they are mandated rather than left to each carrier — which is precisely what makes Tennessee’s method an alternative to the federal default rather than a local variation on it. A group billed on a composite basis in Tennessee should see four tiers standing in those proportions, and an employer comparing two composite quotes here is comparing the same tier definitions on both.
Two different age lines, and why that is not a contradiction
There are two ages in play and they answer different questions.
The aggregate underneath is still built the federal way, which under 45 CFR 147.102(c)(1) takes account of no more than the three oldest covered children under age 21. Tennessee’s tier definitions, by contrast, count covered children up to age 26 for the purpose of deciding which tier a family falls in.
That looks like an inconsistency and is not. One age line governs whose rates enter the total. The other governs tier membership — which flat amount an employee is billed. A family with an adult child still covered under the plan sits in a tier that counts that child, while the aggregate the tiers are drawn from was assembled under the federal children rule. Keeping the two straight is the difference between understanding a Tennessee composite bill and arguing with it.
The tier amount is frozen for the policy period
Both the federal rule and the Tennessee bulletin lock the amount down once the year starts. 45 CFR 147.102(c)(3)(iii)(A) requires an issuer to “Ensure an average enrollee premium amount calculated based on applicable enrollment of participants and beneficiaries at the beginning of the plan year does not vary during the plan year.”
Tennessee’s bulletin says the same thing about its own tiers: the average monthly premium for each tier “must remain in effect throughout the entire policy period and may not increase or decrease to reflect changes in the small group’s census,” and “must be recalculated annually, based on the census at the time the policy is rated.”
For an employer this is the practically useful consequence of the whole mechanism. Hiring partway through the year does not re-price the tiers for everyone already enrolled, and neither does a departure. The recalculation happens once a year, on the census as it stands when the policy is rated.
Tobacco sits outside the average
One factor is deliberately held out. 45 CFR 147.102(c)(3)(iii)(C) requires that the average enrollee premium amount calculated for any individual covered under the plan not include any rating variation for tobacco use; that variation is instead determined on the per-member rate for the individual who uses tobacco and applied to that individual’s own premium.
The effect is worth stating plainly, because employees ask: a composite does not spread one person’s tobacco rating across their colleagues. It stays attached to the individual it belongs to.
Where the authority sits, and one citation that does not resolve
The rule to cite for the Commissioner’s authority over rates and rating methodologies in Tennessee is Tenn. Comp. R. & Regs. 0780-01-93-.03, part of the chapter governing form and rate filings for health insurance coverage subject to the Affordable Care Act, effective February 20, 2012.
The 2014 bulletin also names a Tennessee Code section on its own face, and that number is not a well-formed Tennessee Code citation. We rendered the scanned page and read it visually rather than trusting a text extraction, and the malformed number is genuinely printed there. It cannot be reconciled while the Tennessee code itself sits behind a subscription container that returns no statutory text to an ordinary reader. So cite the rule, not the number on the bulletin.
Two more caveats belong with any use of this material. The bulletin is from 2014; it is the only composite-rating bulletin in the Department’s live archive, with no successor and no rescission notice found, and CMS still carries Tennessee’s designation — consistent, but not the same as confirming it against current statute. And the federal composite provisions themselves apply for plan years beginning on or after January 1, 2015.
Who reviews and approves a filed rate before any of this reaches you is a separate question, answered by a different body on a different schedule. The only approval in this post is CMS authorizing Tennessee’s methodology — one federal act, and the reason your per-employee line has the shape it does.
The bottom line
The two-tier method is the federal default, and Tennessee’s CMS-authorized method is the alternative to it: four family-composition tiers with state-mandated factors, set out in the Insurance Division’s 2014 Composite Rating bulletin. Tennessee does not force a carrier to composite at all — but a carrier that does composite in Tennessee must use Tennessee’s method.
Frequently asked questions
Does Tennessee require our carrier to use composite billing?
No, and this is the half that is most often stated backwards. CMS’s state-by-state record has one column marking the states that require issuers to average enrollee premiums, and Tennessee’s cell in that column is empty. What Tennessee holds is a CMS-authorized alternate composite premium method, which governs compositing where a carrier chooses to offer it. The Insurance Division’s own bulletin says so in its own words: it “does not seek to require a carrier to provide family composite premiums,” and a carrier “may choose to continue to use the filed member level rates, summing the premiums for all members in a small group.”
How many tiers does Tennessee’s method use, and how many does the federal default use?
The federal default uses two, and Tennessee’s CMS-authorized alternative uses four. This is the point that inverts most easily. 45 CFR 147.102(c)(3)(iii)(B) begins “Unless a state establishes and CMS approves an alternate rating methodology,” and then describes calculating an average enrollee premium amount for covered individuals age 21 and older and another for covered individuals under age 21. CMS restates it as “the federal default method of two tiers: one tier for all adults and a second tier for all children under 21.” Tennessee’s method, published in its 2014 Composite Rating bulletin, uses four family-composition tiers instead: employee only, employee plus spouse, employee plus children, and employee plus family.
Does compositing make the group’s premium higher?
The regulation does not allow it to change the group’s total. 45 CFR 147.102(c)(3)(ii) permits average enrollee premiums only “provided that the total group premium established at the time of applicable enrollment at the beginning of the plan year is the same total amount derived in accordance with paragraph (c)(1) or (2) of this section, as applicable.” Paragraph (c)(1) is the per-member calculation. So compositing redistributes the same total across employees differently; it does not inflate it. What changes is the shape of the per-employee line, and therefore what a payroll deduction looks like relative to an employee’s age.
If someone joins or leaves mid-year, do the tier amounts change?
No. 45 CFR 147.102(c)(3)(iii)(A) requires that an average enrollee premium amount calculated on enrollment at the beginning of the plan year “does not vary during the plan year.” Tennessee’s bulletin states the same requirement for its own tiers: the average monthly premium for each tier “must remain in effect throughout the entire policy period and may not increase or decrease to reflect changes in the small group’s census,” and “must be recalculated annually, based on the census at the time the policy is rated.” Mid-year census movement does not re-price the tiers.
Where is Tennessee’s composite method actually published?
In a bulletin from the Tennessee Department of Commerce and Insurance, Insurance Division titled “Composite Rating,” dated September 15, 2014 and addressed to all licensed insurers writing small group coverage in Tennessee. CMS publishes the fact that Tennessee holds an authorized alternate method, and its own footnote directs employers and issuers to check with the state department of insurance for the method itself. Carry one caveat with the citation: the bulletin is from 2014, it remains the only composite-rating bulletin in the Department’s live archive with no successor and no rescission notice found, and we could not confirm it against the current Tennessee statutes, which are not readable at the Department’s Laws link.
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 Tennessee group’s billing tiers against the state’s CMS-authorized composite method, so an employer knows whether the per-employee line was built the federal default way or Tennessee’s way. Start with the Wexford Health Insurance quote form.