For large group medical plans, insurers typically set premiums using:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Large groups generate a statistically credible volume of claims, so insurers use experience rating: the group's own past loss experience is the primary driver of its premium. A group with better-than-average experience earns a lower rate, while a group with heavy claims history pays more, reflecting its expected future costs. This approach works because the law of large numbers makes a large group's claims relatively predictable from year to year. Small groups, in contrast, lack credible individual experience and are commonly priced through community rating or similar pooling methods that spread risk across all groups in an area.
Why the other options are wrong
- B) Community rating pools all insureds in a defined geographic area so that the healthy subsidize the sick and rates do not follow one group's claims. It is characteristic of the small-group and individual markets, not large-group experience rating.
- C) The age of the oldest member is not the rating basis for a large group. Pricing weighs the group's claims experience, demographics, industry, and benefit design, not a single member's age.
- D) Premiums are not fixed by the state. Insurers file their rates with regulators, but for large groups the group's own claims experience drives the negotiated price.
Memory hook
Experience rating = your group's past claims set your group's future premium.