A community rating is a method of providing health insurance without regard for the health risk factors of any individual person. Instead, the community rating method creates a blanked rate for everyone in a certain geographical or social area. This form of health insurance rating can be pure or modified to allow some adjustment of rates based on demographics.
In insurance, the word premium refers to the base amount a customer will pay for coverage. This figure does not include co-pays, which are the amount the policy holder must pay on a particular type of bill before the insurance will pay the rest. The premium can either be a flat rate, as in a community rating system, or it can be calculated based on policy holder risk, as in a risk rated system.
In a risk rated insurance market, the insurance company uses something called medical underwriting. This means the company investigates the health history of the policy holder to determine his or her premium for coverage. The premium may also be influenced by basic demographics such as age, race, and gender. The company can also take into account personal characteristics such as whether the person is obese and whether he or she smokes. Healthy people have the greatest advantage in a risk rated insurance market since their premiums will be lower than those of sick or high risk people.
By contrast, a community rating system sets a flat premium regardless of personal or health characteristics. Instead, premiums are calculated based on the average risk of the entire population covered by the insurance. Work place health insurance sometimes follows the community rating standard. Some employee rights groups have recognized that such a system may lead to a bias against people with high health risks because the healthy people in the group may fear that an influx of sick people will cause their insurance premiums to rise. That observation aside, high-risk people are generally better off in a community rating system because they pay the same rate as a healthy person regardless of their health.
In a pure community rating system, the premium must be a flat rate with no exceptions. A modified system allows for some rate variations. These variations can be based on demographics or personal habits such as age and whether or not the person smokes. They cannot be based on any form of medical underwriting.
The fairness of the community rating system has often fallen into question. Some argue that no one should have to pay more just because they got sick, as getting sick is not usually something an individual can control. Others argue that it is unfair for healthy people to pay higher premiums because smoking or obesity has caused illness in a segment of the population.
