Insurance Markets: Simulating Risk
Community Rating vs. Experience Rating
Community Rating
- A way of establishing the price for an insurance policy.
- Starts and ends with a described/defined geographic community (i.e., Boston); everyone within that defined community pays the same premium. The premium is established based on the people who live in the defined area.
- Consequence of this system is that people who have less illness in effect wind up supporting people who have more illness in a given year.
- A young runner would pay the same premium as an elderly diabetic with community rating; in effect the young, healthy runner who doesn
- t use many health care services would be subsidizing the cost of care for the elderly person with diabetes who would utilize more health care services.
- Note that community rating practices tend to include more expensive people who are not in the workforce and can therefore result in higher premiums
Experience Rating
- Another way of establishing the price for an insurance policy.
- Everyone pays the same premium within a GROUP. but the group is not a geographic group; it is some type of organizational group (e.g., the employees of Boston University)
- Created to be cheaper than community rating for employed groups. The expectation is that the total health care costs for the employer group would be less per person than in the community rated group.
- Goal of this arrangement is to enable groups (largely employer groups) to pay less for their insurance because the experience within that group is likely to cost less overall than a community rating group which includes all the people who are not in the workforce (perhaps because they are sick and/or elderly).
- All members of a specific group would pay the same premium; your group's premium would be different from another groups premiums. For example, a group of bank executives might pay a lower premium as a group compared to a group of coal miners. This is because miners have increased health risks as a result of the nature of their occupation and would likely cost more to insure than a group of bankers who do not face the same occupational health risks.
The main difference between community rating and experience rating is geography and inclusion.
Note: The ACA returns to community rating practices in the health exchanges