Understanding Community Rating Health Insurance

The cost of your company health insurance plan’s premiums has a lot to do with the pricing system your insurance company uses to calculate them. There are three main pricing systems used today by health insurance companies to determine costs for your organization: experience or “risk” rating, community rating, and modified community rating. Which pricing system insurance carriers are permitted to use is typically mandated by federal and state laws and has been affected in recent years by the Affordable Care Act. 

Looking to learn the basics regarding different health insurance premium pricing systems, and how they could affect your bottom line? Read on for more from the Employee Benefits Insurance Experts at AEIS. 

What is Community Rating in Health Insurance? 

According to healthcare.gov, community rating is a rule that prevents health insurers from varying premiums within a geographic area based on age, gender, health status, or other factors. This is known more technically are pure community rating. More specifically, the term “community rating” refers to a pricing system within the health insurance industry. If an insurer uses community rating, they adhere to a policy of refraining from charging higher premiums within a geographic area based on the above mentioned factors. 

What is Experience Rating in Health Insurance? 

Experience rating and community rating pricing systems are fundamentally opposed. In an experience rating pricing system, an insurance company charges premiums based on individual and group applicants’ health and medical history. The number and costs of claims are taken into consideration when premium costs are figured.   

Before the year 2014, most health insurers used the experience rating pricing system. Consumers’ premiums were by and large calculated based on their expected health care costs. This meant those with preexisting conditions (or individuals in the same applicant group) could be doomed to exorbitant health care costs.

Pure Community Rating vs Modified Community Rating

As described above, a pure community rated policy is one in which everyone in a geographic area has the same priced health insurance premium. No variation exists based on insureds’ age, health history, tobacco use, etcetera. This approach is a rare one. 

In 2014, the Affordable Care Act enacted extensive market rating reforms requiring that insurers use a modified form of community rating for small group insurance (large group is still usually experience rated). With the new legislation, the Centers for Medicare and Medicaid Services described that premiums could be varied “based on age (within a 3:1 ration for adults), tobacco use (within a 1.5:1 ratio and subject to wellness program requirements in the small group market), family size, and geography.” 

The ratios may seem tricky, but they essentially mean that for a health insurance plan to be in compliance with the Affordable Care Act, premiums could only require older insured individuals to pay three times what younger insureds pay and tobacco users to pay one and a half times what non-tobacco users pay. California prohibits Tobacco rating completely, so in California modified community rating is only based on age and geography. While similar, this modified form of community rating differs from pure community rating, where, as described, premiums can’t vary at all based on age or health status. 

Under the Affordable Care Act, states are permitted the choice to enact stronger consumer protections than these minimum ratio standards. 

What Pricing Systems do Insurance Companies Use? 

While most plans use modified community rating systems, the experience rating system is still being used by some large group plans. For example, in California, large group insurance companies (with 101 or more employees in CA, 51+ in certain other states) use experience rating whereas small group uses the modified community rating.  

Self-insured plans use experience rating because the cost of employee medical care is covered by both the employer’s own funds and a separate reinsurance policy (for catastrophic claims and claimants), not through the purchase of health coverage through an insurance company.

While many self-insured companies still have contracts with health insurance companies, these contracts are mainly for plan administration services, not for employee claim coverage. 

Even if a health plan uses experience rating, the Health Insurance Portability and Accountability Act (HIPAA) mandates that insurance companies cannot single out individual employees within the group health plan and charge higher premiums based on medical history alone. The group, however, can still be charged based on the group’s aggregate claim history data. 

Choosing the Right Health Insurance Coverage

There are many positives to pure community rating and modified community rating pricing systems. One of the downsides for small businesses is that they could mean higher premiums than you can reasonably afford to pay. Conversely, while they can be more risky, using experience rated partially or fully self-insured plans for certain groups can provide significantly better value if well designed and maintained. Striking the right balance between finding health coverage within your organization’s budget, and keeping and attracting the best talent, can be tough without an expert on your side.

As your benefits advisor, AEIS will work with you to determine your specific needs and prioritize your goals. We provide you with the solutions needed to streamline costs and improve your overall benefits package for years to come. 

For companies looking to take back control of their benefits plans, we offer comprehensive guidance on switching to alternative funded plans for increased flexibility and reduced costs. 

Health Insurance is Complex. AEIS Makes it Simple.

Looking for an experienced health broker? Advanced Estate & Insurance Services, Inc. (AEIS) has all the insurance services you need, all in one place. We offer a range of custom employee benefits insurance services, including employee benefits packages, compliance risk assessments, plan administration, and high net worth life insurance. 

AEIS brings more than 35 years of experience in the industry to your advantage. AEIS will walk with you through your health insurance questions and beyond for an easier, more complete benefits plan. We’re here to help. Contact us online or schedule a free phone consultation today.