Community rating

Community rating is most often found as part of health insurance systems in various countries

Community rating is a concept usually associated with health insurance, which requires health insurance providers to offer health insurance policies within a given territory at the same price to all persons without medical underwriting, regardless of their health status.

Pure community rating prohibits insurance rate variations based on demographic characteristics such as age or gender, whereas adjusted or modified community rating allows insurance rate variations based on demographic characteristics such as age or gender.

Concept

Community rating, as a basis for premium calculation, is fundamentally different from the usual method of determining insurance premiums, i.e. risk rating. In a risk rated insurance market, an insurer calculates the premium payable by a potential policy holder in order to enter into an insurance contract on the basis of various factors particular to that individual, such as the risk of a claims occurring, and the value of any such a claims during the term of an insurance policy. In a community rated market, the insurer may not calculate premium on the basis of the risk factors attaching to the particular person wishing to effect an insurance contract, but rather the risk factors applying to all persons within the market as a whole. Thus, in a community rated market, the insurer evaluates the risk factors of market population, and not those of any one person when calculating premiums.

• Health insurers vary premium rates based on case characteristics, such as:
  • benefit design
  • family composition
  • demographic characteristics:
    • age
    • gender
    • geographic location
    • occupation
    • industry
  • lifestyle factors:
    • tobacco use
  • health status and claims history

• Community rating — prohibits insurers from varying rates based on health status or claims history
  • Pure community rating — allows insurers to vary rates based on benefit plan and family size only
    • Limited variation in rates by geographic area is sometimes included in the pure community rating category (e.g. New York)
  • Adjusted (modified) community rating — allows insurers to also vary rates based on demographic characteristics (e.g. age and gender) and lifestyle factors (e.g. tobacco use)
• Guaranteed issue — requires insurers to issue insurance to any eligible applicant without regard to health status or other case characteristics
  • The federal HIPAA Act of 1996 requires that all small group (2 to 50 employee) health insurance be guaranteed issue
  • Five (Maine, Massachusetts, New Jersey, New York, Vermont) of the seven states which require community rating for individual health insurance also require its guaranteed issue

Practical effect

In practical terms, community rating occurs most often occurs in regard to the determination of health insurance premiums, but is also used in determining premiums for flood insurance, and potentially any other type of insurance. In regard to health insurance it results in providers not evaluating health-related factors such as a potential policy holder's state of health, but rather the state of health of everyone within the market. A health insurer will not evaluate the age, sex, or health status of a policy holder, but rather that of the market or population as a whole, and therefore will charge the same premium to all persons within that market or population for any one health insurance plan.

Where a health insurer charges the same premium for any one health insurance plan, regardless of health status, age, or gender, this is commonly referred to as a "pure" community rated system. Where an insurer may vary premiums based on demographic characteristic such as age or gender, but not based on health status, this is referred to as an "adjusted" or "modified" community rated system.

Since community rating is a disincentive for profit-motivated insurers, it is usually mandated by government in systems in which it exists by force of law, with risk-rated health insurance prohibited.

A concept of "open enrollment" often accompanies community rating where it exists in order to ensure health insurance providers extend coverage to all those who seek insurance and do not simple refuse to cover sick or "high risk" individuals. Some form of risk equalization also often exists in a community rated system.

Occurrence

A system of pure or modified community rating is used by law in the determination of health insurance premiums in a number of jurisdictions, including:

• Australia
• Holland
• Ireland
• within the United States:
  • Community rating for individual and small group (2 to 50 employees) health insurance:
    • Maine — age rating limited to 150 percent; gender rating illegal; individual guaranteed issue
    • Massachusetts — age rating limited to 200 percent; gender rating illegal; individual guaranteed issue
    • New Jersey — age and gender rating combined limited to 350 percent; individual guaranteed issue
    • New York — age and gender rating illegal = pure community rating; individual guaranteed issue
    • Oregon — age rating limited to 200 percent; gender rating illegal
    • Vermont — age and gender rating combined limited to 150 percent; individual guaranteed issue
    • Washington — age rating limited to 350 percent; gender rating illegal
  • Community rating for small group (2 to 50 employees) health insurance only:
    • Colorado — age rating unlimited; gender rating illegal
    • Connecticut — age and gender rating unlimited
    • Maryland — age rating limited to 280 percent; gender rating illegal
    • New Hampshire — age rating limited to 400 percent; gender rating illegal
    • Rhode Island* — age and gender rating combined limited to 400 percent; *health status rating limited to ± 10% of community rating
  • No community rating, but age rating limited and/or gender rating illegal:
    • Age rating limited in the individual health insurance market: to 300 percent in Minnesota and to 500 percent in North Dakota and South Dakota
    • Age rating limited in the small group health insurance market: to 300 percent in Minnesota and South Dakota
    • Gender rating illegal in the individual health insurance market in: Minnesota, Montana, North Dakota
    • Gender rating illegal in the small group health insurance market in: California, Michigan, Minnesota, Montana, North Dakota