Overview: Understanding what drives premium differences — and what the ACA prohibits — is essential for both exam preparation and client communication.

Health insurance premiums are not arbitrary. They are built from actuarial projections of expected claims costs, loaded with administrative expenses, profit margins, and reserve requirements. Underwriters and actuaries work together to ensure that the premium charged reflects the actual expected cost of covering a given individual or group.

Rating Factors in ACA-Compliant Individual Plans

The ACA restricts the factors insurers may use to set premiums in the individual and small-group markets to just four:

Age: Older applicants can be charged more, but the ratio is capped at 3:1 — a 64-year-old cannot be charged more than three times the premium of a 21-year-old for the same plan. Some states (New York, Vermont) apply even stricter community rating rules that eliminate age-based variation entirely.
Geographic rating area: Healthcare costs vary dramatically by location. A plan in rural Alabama costs less than the same plan in Manhattan because provider rates, utilization patterns, and cost of living differ. States are divided into rating areas (often by county) and premiums reflect local market conditions.
Tobacco use: Insurers may charge tobacco users up to 50% more (a 1.5:1 ratio) than non-users. Some states — California, Massachusetts — prohibit tobacco rating entirely.
Family size: Premiums scale with the number of individuals covered on the policy.

The following factors are explicitly prohibited in ACA-compliant individual and small-group markets:

Health status, medical history, or pre-existing conditions
Gender
Claims experience
Genetic information

Rating Factors in Group Insurance (Experience Rating)

For large-group employer plans (generally 51+ employees, though some states use 101+), insurers use experience rating — setting premiums based on the group's historical claims data. If a company's employees generated $2 million in claims last year, the insurer uses that experience to project next year's costs and price the renewal accordingly.

Individual employees within a group plan are not medically underwritten. HIPAA prohibits the employer or insurer from charging any individual employee more than their coworkers based on personal health status. But the employer's overall premium can rise based on the collective group's health experience.

For small-group plans (1–50 or 1–100 employees, depending on state definition), the ACA requires community rating rules similar to the individual market, restricting premiums to age, location, tobacco, and family size.