Medical Insurance Rate - Why Does It Change And How Is It Decided?
If you've ever wondered how your medical insurance rate is decided, this article has the answer. Insurance companies have two schemes to calculate the price of a medical insurance policy: community rating and experience rating. Community rating is the simplest scheme — everyone pays the same premium, regardless of their age or medical history. Experience rating takes into account an individual's medical history when calculating their premium, so people with good health are charged less and people with bad health are charged more.
This blog post will describe both types of schemes in detail and give advice on how you can find out what type of scheme your insurance company uses before signing up for a policy.
Highlights:
The terms, "community rating" and "experience rating" are used in the health insurance industry.
Community rating is the simplest and most common form of rate setting used by insurance companies. Rates are uniform for everyone within a certain tax-paying community.
Experience rating is based on your medical history: people with good health are charged less and people with bad health get charged more. We recommend using community rating for peace of mind, but experience rating is far more common so we cover it in this article too! Our advice on how to find out what scheme your company uses before signing up can be found at the end.
What Is Community Rating?
Community rating is one of the most well-known and simplest forms of rate-setting used by health insurers. It means that everyone within a certain tax-paying community pays the same premium regardless of their age or medical history. This helps control costs, as the older you get, the more likely it is that you've had to visit a doctor. Hence, people who have good health are charged less and people who have bad health are charged more.
The table below shows two families have identical family premiums, even though the cost of treating an older person is more than the cost of treating a younger person. This means that someone who is young and healthy gets charged less than someone who is old and sick.
Community rating was initially developed to control costs, but over time it became the most common method of rate setting across many markets including insurance, banking and credit cards. It helps the insurer spread the risk across a wide pool of people to ensure premiums are lower for those that need it most.
There are many advantages of community rating, but it is not without its drawbacks:
Pros:
1. Lower Monthly Premiums: Everyone pays the same premium for a given policy regardless of their age or medical history. As people generally have to pay more for insurance as they get older, the younger you are, the lower your premium will be. This means that young and healthy people can get very cheap medical insurance — in some cases less than $10 per month!
2. Peace Of Mind: You never need to worry about being charged too much for your health insurance as everyone pays the same amount, regardless of their health or age. This means that you can buy a health insurance policy and not worry about having to pay more in the future.
3. Simple: Community rating is one of the simplest forms of rate-setting, which is appealing to both the insurer and policyholder as it reduces the amount of work involved in calculating premiums. This means that companies tend to pass on these cost savings to their customers in the form of lower rates, which makes community rating more attractive than many other schemes.
4. No Waiting Period: Young people can get cheap health insurance with community rating without a waiting period. You are under 30 and you need health insurance? No problem! You can buy it now without having to wait until you're older.
5. Discrimination Is Limited: Since premiums are based on your age and your health, community rating is particularly useful for discriminating between healthy people and the sickly. This usually means that financial penalties are limited to those that are very sick or who have a poor chance of recovery. The following video explains this in more detail:
Cons:
1. Cost Of Providing Insurers With Information: In the case of community rating, the insurer has to collect all of this information from everyone in the community. This means that the cost of providing insurers with information about individuals is passed on to all members of the community.
2. Relies On Health Care Information: In order to be fair for everyone in a given community, health insurers rely on having comprehensive health records from everyone in that group. The more people that have medical histories, the more accurate your premium can be calculated and hence the lower your premium will be. The more people that refuse to divulge their medical history, the less accurate your premium can be calculated and hence the higher it can be.
3. Bad Health Does Not Always Equal A High Premium: Some people may have one bad year in an otherwise healthy life. This is not a good reason to charge them more for their health insurance, yet this is exactly what a community rating scheme would do as everyone's premiums are based on their past medical records.
What Is Experience Rating?
Experience rating is one of the other commonly used methods of rate-setting by health insurers. The only difference between community rating and experience rating is that in experience rating, it is assumed that all people have the same chance of getting better and therefore receiving a lower premium for having a good past. However, the rate-setting is still the same.
As you can see from the table below, in experience rating rates are higher for those who are young and healthy (the red box) and lower for those who are older and sick (the green box). This means that someone who is young and healthy pays less than someone who is old and sick.
Experience rating was initially developed to control costs when there was a lack of competition amongst insurance companies to purchase medical policies.
Conclusion For Health Insurance
Both community rating and experience rating are forms of rate-setting which are widely used in the health insurance industry. In order to get the best deal on your health insurance, we recommend you get quotes from all three insurers side by side and compare them afterwards. We explain how to do this at the end of this article.
How To Get Quotes From All Three Insurers Side By Side:
1. Go to each insurer's website and compare prices: Start by going to each insurer's website and looking at their prices for a similar plan you would want for yourself (e.g. $300 per month plan). Compare these prices from all three insurers side by side using different browsers (e.g.