Community rating refers to a health insurance regulation that limits what an insurance company can charge for premiums. At its most fundamental, community rating is a price control. A full community rating prohibits premiums from being based on things like health, age or gender. Instead, everyone purchasing a particular plan would pay the same price. Before the ACA (Obamacare), just one state had a full community rating law – New York. Six other states had what’s called adjusted community rating, which only restricts premiums from being based on health status. Thirty-two states had no restrictions on rates at all, while 11 states, including Utah, allowed rates to vary but put a cap on how much.
Under the ACA, beginning in 2014, federal regulation superseded those state laws, restricting rate variation to four factors: individual vs. family; where people live; age; and tobacco use.
As discussed in “Obamacare Failed, Here’s Why and How to Really Fix Health Care,” despite its proponents’ promises that the ACA would decrease premiums by $2,500, premiums actually increased 25 percent more than if we’d never passed the regulations. These rating restrictions are a big reason why.
While a regulation that forces the prices to be the same for everyone might sound like a good idea on the surface, researchers have found that what happens in practice is that prices increase for people who don’t use their insurance plans very much, and many of those people choose to drop coverage because of it. Because the resulting pool of people buying those insurance plans is much smaller and sicker, premiums increase even more for those who are left. So rather than helping the older or sicker populations, community rating instead harms them by making their plans even more expensive than they’d been without the regulation.
Decades of experience and research in this field, and into price controls in general, predicted price increases as a result of regulatory burdens like community rating. The natural experiment of the ACA’s regulatory burdens and the resulting massive price hikes have further confirmed those conclusions.
Utah Citizen Network: Obamacare Failed, Here’s Why and How to Really Fix Health Care
National Institute for Health Care Management: Community Rating and Guaranteed Issue in the Individual Health Insurance Market
Kaiser Family Foundation: Health Insurance Market Reforms: Rate Restrictions