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Community rating refers to a health insurance pricing system where health insurers can’t charge people within a geographic area higher premiums based on their age, gender, health status, or claims history.
Since 2014, the Affordable Care Act has required health insurers to use a modified form of community rating that allows premiums to vary mainly based on an enrollee’s age. This means ACA-compliant plans are only allowed to charge older enrollees up to three times what younger enrollees pay. Some states also allow insurers to charge higher premiums for tobacco use.
This approach differs from pure community rating, where premiums are not allowed to vary at all based on age, gender or other demographic or health characteristics.
Prior to 2014, most health insurers used risk rating – where premiums are based on prior or expected health care costs – to determine rates in the individual and small group markets. The ACA ended that practice and replaced it with the modified form of community rating described above. As a result, premiums today are only allowed to vary based on an enrollee’s age and – in some states – tobacco use.
All insurers offering ACA-compliant major medical plans use community rating in the individual and small group markets. On the other hand, insured health plans in the large group market continue to be risk rated.
The use of community rating means that insurers are not allowed to charge prohibitive prices to applicants who have health issues. Its use has dramatically expanded access to health insurance across the U.S.
But there is a tradeoff: community rating has caused some healthy enrollees to pay more for health insurance than they did in the pre-ACA risk rated individual market.