Final answer:
Group health plans issued on an experience-rated basis do not make premium changes retroactively; such changes are prospective. Charging an actuarially fair premium to a group as a whole could result in financial losses if the premium does not account for high-risk individuals. Setting premiums based on risk may cause high-risk individuals to opt out of insurance due to high costs.
Step-by-step explanation:
The statement that group health plans that are issued on an experience-rated basis can make both premium reductions and premium increases retroactive for 12 months is false.
Typically, experience-rated policies adjust premiums based on the claims history of the group, but these adjustments are made prospectively, not retroactively.
When an insurance company charges the actuarially fair premium to a group as a whole, rather than separately to each subgroup, it risks losing money if the average premium does not sufficiently cover the higher risk within that group.
This is because an actuarially fair premium should reflect the risk level of each individual or subgroup. For instance, if the company were selling life insurance separately to each group, the actuarially fair premium would be different for each group based on each group's unique risk factors like family cancer histories.
If they offered life insurance to the entire group without being able to differentiate based on those risk factors, the company would need to calculate a single premium that averages the risk across all members, potentially undercharging high-risk individuals and overcharging low-risk individuals.
If insurance premiums are set at actuarially fair levels for each risk group, those in higher-risk categories may face prohibitive costs, leading them to forgo insurance coverage entirely.
Such selectivity can negatively impact the insurance market, as it creates a scenario where only the highest risk individuals, who are the most costly to insure, are the ones purchasing insurance.