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Community Rating vs. Experience Rating in Health Insurance

Rating rules for health insurance vary based on the type of insurance
There are a variety of factors that go into how health insurance premiums are determined. The rules vary significantly depending on the type of coverage, and in some cases, on the state where the policy is issued.

Two types of rating—community rating and experience rating—are on opposite ends of the spectrum, but there's a middle ground too, called modified community rating, which is commonly used. Let's take a look at what these terms mean and how they're used.

Community Rating

Pure community rating means everyone in a given area pays the same price for their health coverage. There's no variation based on age, medical history, tobacco use, occupation, etc. This is a fairly rare approach, but we do see it in some areas for some types of coverage.

For example, although the Affordable Care Act (ACA) allows insurers to vary individual and small group premiums based on age, Vermont and New York do not (and Massachusetts has a more restrictive rule than the federal government's requirements).

And the entire state of Vermont is one single rating area (versus eight in New York and seven in Massachusetts), which means individual and small group premiums don't vary at all in Vermont, regardless of a person's age or where they live.

Vermont, New York, and Massachusetts are also among the states where individual and small group insurers are not allowed to charge a tobacco surcharge, further solidifying true community rating in those states.

Under the Affordable Care Act, insurers in the individual and small group market are not allowed to base premiums on a person's medical history, but they are allowed to charge tobacco users higher premiums unless a state imposes rules to prohibit this.

There are several states where Medigap (Medicare Supplement) plans are required to use community rating (this approach is allowed nationwide, and there are some insurers that use it even in states where it's not required).

For Medigap plans, community rating means that the insurer cannot vary premiums based on age or health status for enrollees who are over the age of 65.3 Depending on the state, however, premiums may still vary for people under the age of 65 who are enrolled in Medicare due to a disability.

In the majority of the states, community rating is not required for Medigap plans, which means most Medigap insurers instead use issue age rating (with premiums based on the age the person was when they enrolled) or attained age rating (with premiums based on the person's age when they first enroll and as they grow older).

Community-rated Medigap plans tend to be more expensive for 65-year-olds, but less expensive for older enrollees. On the other hand, issue-age and attained-age rated plans tend to be less expensive for 65-year-old enrollees, and more expensive for older enrollees. 

Modified Community's Rating

Modified community rating is much more common than pure community rating. A modified approach to community rating does still allow for some variations in premiums, although premiums cannot vary based on a person or group's medical history.

The Affordable Care Act's requirement for the individual and small group markets is a modified community rating approach: Insurers cannot use medical underwriting (i.e., an applicant or member's medical records, claims history, genetic information, etc.) or gender rating, but they are still allowed to vary premiums based on age, tobacco use, and geographic area.

Although individual and small group premiums are based on per-person rates, the Affordable Care Act does limit total premiums for larger families by only counting up to three children under the age of 21 when the family's premiums are determined. For example, a family with five kids under the age of 21 will only pay premiums for three of them, in both the individual and small group markets.

The American Medical Association (AMA) has expressed support for the modified community rating approach used in the ACA, noting that it "strikes a balance between protecting high-risk individuals and the rest of the population."