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7 min read · Last updated September 16, 2026

A premium is what you pay to have coverage in the first place, which is a different number from what a hospital actually bills once you use it. How a hospital chargemaster price is set explains the gap between a hospital’s list price and what insurers and Medicare actually pay.

A health insurance premium is not the sum of whatever an insurer decides to charge. Federal rating rules restrict individual and small-group insurers to four permitted pricing factors and cap how much two of them can move the price. They also force a rebate when an insurer spends too little of the premium on actual care.

In this article

• The only four factors insurers are allowed to use
• The age ratio and the tobacco ratio
• Why geography moves the price so much
• The rule that forces insurers to send money back
• A worked comparison: two rating factors, one hypothetical plan
• Where to verify current details

The federal Centers for Medicare & Medicaid Services (CMS) enforces these rules. It lists exactly four factors individual and small-group insurers may use to vary a premium: age, tobacco use, geography, and family size. Every other characteristic, including a person’s health history, is off the table by law.

The only four factors insurers are allowed to use

Before the Affordable Care Act (ACA), the 2010 federal law that created these rules, insurers in many states could price individual policies based on a person’s medical history, current health conditions, or gender. The ACA’s market rating reforms eliminated that entirely for the individual and small-group markets. Today, an issuer can vary a premium based only on age, tobacco use, geography, and family size, according to CMS. CMS market rating reforms

States can add stronger consumer protections on top of these federal minimums, such as banning the tobacco surcharge outright. No state can allow insurers to price on a factor the federal floor excludes, like a pre-existing condition.

The age ratio and the tobacco ratio

Two of the four permitted factors come with a hard mathematical limit on how much they can move the price. Age can shift the premium within a 3-to-1 ratio, meaning the oldest priced adult age band cannot be charged more than three times what the youngest adult band pays for the identical plan. Age bands run in single years from 21 to 63, with children under 21 grouped into one band and adults 64 and older grouped into a separate top band.

Tobacco use can add a surcharge of up to 1.5-to-1, meaning a tobacco user’s premium cannot exceed 1.5 times what a non-user pays for the same plan. Both ratios are ceilings, not requirements. An insurer can choose to price age or tobacco use less aggressively than the cap allows, but never more.

Why geography moves the price so much

Geography is the factor with no fixed ratio ceiling at all, which is why it often drives a bigger price gap between two people than age or tobacco status combined. States divide themselves into rating areas, geographic zones that CMS requires be based on counties, three-digit zip codes, or metro and non-metro statistical areas. Those zones must reflect genuine differences in local health care costs, not an arbitrary boundary. Two people the same age, both nonsmokers, on the identical plan, can pay meaningfully different premiums if they live in different rating areas within the same state. Hospitals, specialists, and negotiated provider rates simply differ by region.

Family size works alongside these three factors. A plan covering a spouse and children is priced by combining the individual rates for each covered family member under the same age and tobacco rules, not by a separate family-level ratio. Comparing how these factors stack up across plans is part of why choosing the right plan takes more than looking at the sticker price alone.

The rule that forces insurers to send money back

Beyond how a premium is set, federal law also controls what an insurer is allowed to keep from it. The Medical Loss Ratio (MLR) rule requires individual and small-group insurers to spend at least 80% of premium revenue on medical claims and quality improvement, and large-group insurers to spend at least 85%. Anything spent above that share on administration, marketing, and profit is capped by requiring a rebate.

If an insurer falls short of its threshold in a given year, it must send the difference back to policyholders and employers as a rebate, typically issued each fall for the prior year. KFF (a nonpartisan health policy research organization) estimates insurers will pay out just over $759 million in these rebates in 2026 alone. That brings the cumulative total paid since the rule took effect in 2012 to roughly $15.1 billion. KFF: 2026 Medical Loss Ratio rebates

A worked comparison: two rating factors, one hypothetical plan

Rating factor	Maximum allowed variation	Applies to
Age	3-to-1 ratio (oldest adult band vs. youngest)	Individual and small-group markets
Tobacco use	1.5-to-1 ratio	Individual and small-group markets
Geography	No federal ratio cap	All markets, by state-defined rating area
Health status or medical history	Not permitted at all	Prohibited in every market since the ACA

Say a 30-year-old nonsmoker in a lower-cost rating area pays $340 a month for a specific plan. A 63-year-old smoker on the identical plan, in the same rating area, faces both the 3-to-1 age ratio and the 1.5-to-1 tobacco ratio. Multiplying $340 by both ratios gives a ceiling of $1,530 a month, though insurers are not required to charge the maximum the law allows. A move to a higher-cost rating area could push either person’s premium up further, with no comparable federal ceiling on that adjustment. For households where even the lowest-rated plan is a stretch, premium assistance programs apply on top of whatever the rating factors produce.

Where to verify current details

Rating rules apply the same way nationally, but the actual rating areas, age curves, and whether a state allows the tobacco surcharge at all vary by state insurance department. HealthCare.gov publishes the plain-language version of how Marketplace plans set premiums for a specific state and household. HealthCare.gov: how plans set your premiums

Frequently asked questions

Can an insurer charge me more because of a pre-existing condition? No. Federal law has prohibited pricing on health status or medical history in the individual and small-group markets since the Affordable Care Act took effect. The only permitted pricing factors are age, tobacco use, geography, and family size.

Why does my premium differ from a coworker’s who has the identical plan? The most common reasons are age and geography. Even on the same plan, a coworker in a different age band or a different rating area within the state can be charged a different premium under the same federal rules.

What happens if an insurer spends too little of my premium on actual care? The insurer must issue a rebate. Individual and small-group insurers are required to spend at least 80% of premium revenue on medical care and quality improvement, and large-group insurers at least 85%, or return the difference.

Can a state ban the tobacco surcharge even though federal law allows it? Yes. States can enact stricter consumer protections than the federal minimum, including limiting or eliminating the tobacco surcharge entirely, as long as they do not allow anything the federal floor already prohibits, such as pricing on health status.

Does the age rating ratio mean older adults always pay three times more? Not always. The 3-to-1 ratio is a ceiling on the ratio between the oldest and youngest adult age bands, not a guaranteed multiplier applied to every plan. An insurer can price age less steeply than the cap allows.