What does the term community rating mean as it applies to health insurance?
Health insurance carriers have different methods for determining the cost of a health insurance policy. The amount paid for health insurance coverage is referred to as a “premium.” If a health insurance carrier employs community rating to determine premium cost, then all insured members within the group in that state will pay the same premium. Community rating does not account for differences in the anticipated medical costs among the individuals that comprise the group. Community rating combines the older or sicker group of policyholders with higher medical costs with the younger or healthier group of policyholders with lower medical costs. The combined costs are shared equally among all policyholders, with higher risk individuals paying less than they should and lower risk individuals paying more than they should.
There are two types of community rating. A health insurance policy that is subject to pure community rating varies the premium only on benefit design and family composition. The only variation in premium will be the level of benefits offered or the number of family members and gender makeup of the family. The other type of community rating is defined as modified community rating. Insurance plans under a modified community rating will adjust premiums based on a limited number of factors such as age, gender, or tobacco use. Modified community rating assigns the insured members into groups within a state and segments the groups using the limited demographic factors. All members of a group are charged the same premium regardless of health history.
The opposite rating method from community rating would be experience rating, which assigns the health insurance premium based on differences in demographics, lifestyle choices such as tobacco use, the individual’s health history and current health condition. Underwriting review is used by insurance companies to assess risk and assign premium cost for individuals that will comprise a group of policyholders. When an application is underwritten, the health insurance carrier will evaluate lifestyle choices, physical condition, health history and other factors to determine the effect of those factors on premiums assigned to the individuals comprising the group.
Community rating in the past was very popular but lost favor with health insurance carriers who wanted a more accurate method to assign higher premiums to policyholders with higher risk factors. In addition, the carriers wanted to attract healthier clients by offering lower premiums that reflected lower medical costs. Although community rating reduces premium inequities among insured members, it can create an increase in the number of uninsured, especially younger individuals. Because younger individuals would experience a higher premium from subsidizing the older members, they would forgo coverage because it is too expensive.
The success of community rating in increasing access to healthcare coverage has had less than positive results according to a study of eight states sponsored by America’s Health Insurance Plans and conducted by Milliman, Inc. in 2007. In states that adopted community rating, individual health insurance markets deteriorated in terms of market size, premium stability, and availability of insurance options.
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