January 1, 2010
Is 'Community Rating' in Health Insurance Fair?
By Uwe E. Reinhardt
One controversial feature of the health reform bill winding its way
through Congress is "community rating." The term has a mellow ring but
is apt to be divisive.
"Community rating" refers to the practice of charging a common premium
to all members of a heterogeneous risk pool who may have widely varied
health spending for the year. It inevitably makes chronically healthy
individuals subsidize with their insurance premiums (rather than through
overt taxes and transfers) the health care used by chronically sicker
The purpose of any insurance, of course, is to do precisely that:
redistribute the financial burden from the unlucky to the lucky members
of a risk pool.
(Professor Reinhardt then provides calculations for an example of two
cohorts, A and B, representing populations segregated into two pools
with different risks, as is characteristic of our price-competitive
market for individually sold health insurance.)
Would it be "fair" that the healthy individuals of cohort A pay a pure
insurance premium of only $2,450 a year, while the sicker citizens in
cohort B must pay $6,600? This is, after all, how health insurance now
is priced in most states for individuals.
Or does "fairness" require that the two groups be merged into one large
national risk pool A & B, whose risk profile is shown in the right-most
column of the table. If each member of this merged pool is to pay the
same pure premium, then the latter will have to be $4,525 to break even.
Such a premium would be said to be "community rated" over these two
distinct risk pools.
Relative to their premium in a perfectly risk-segregated market, the
community-rated premium of $4,525 will cost members of low-risk cohort A
$2,075 more and the sicker members of cohort B $2,075 less than they
would have paid in a risk-segregated market. Is that "fair"?
So what should the political leaders of this imaginary country do? It
would be interesting to have your reaction. It is, after all, the very
question our political leaders are tackling this moment.
Should you choose to respond, would you indicate your age?
(You can post a response by clicking on "Post a Comment" at the end of
the full article at the following link. You can also recommend specific
Posted response of Don McCanne, San Juan Capistrano, CA (response # 9):
One of the more obvious examples of this dilemma is the disagreement as
to the premiums that should be charged for the healthier population in
their twenties as opposed to the less healthy population, on average, in
their fifties and early sixties. Congress has already decided that
strict community rating through a single premium for everyone will not
apply to age differences, but they remain conflicted as to how much of a
transfer will occur from the younger healthier individuals to the older
less healthy individuals. They seem to believe that the concept of such
a transfer is "fair," but they are not in agreement as to what level of
transfer exceeds their concept of fairness.
My wife and I are in our seventies and benefit from Medicare, a program
in which there is a transfer to us from those in their twenties, many of
whom are uninsured. Is that fair?
Of course the issue is further complicated by our nation's very high
health care costs since there is a need to transfer from the wealthy to
lower income individuals, if, in fact, we agree that we should have a
financing system that allows everyone to have the essential health care
that they need. The many other complexities introduced by our fragmented
health financing system, using public and private sources, complicates
the process of finding the right premium for the right coverage, for the
right amount of cost sharing, with the right amount of subsidies to
support the premiums and the cost sharing.
With our unique health financing system already overburdened with
profound administrative waste, it doesn't seem rational to try to expand
coverage by assigning inevitably inequitable premiums to benefit
packages within fragmented private plan risk pools. That just adds to
the complexities, inequities and administrative waste.
It would be much more efficient and equitable to remove the risk bearing
function from the private insurers, thereby eliminating premiums, and
replace our dysfunctional health care financing system with a single
universal risk pool covering everyone. Each person would pay into the
pool their fair share, based on ability to pay, by funding it through
This could easily be accomplished through an improved Medicare for all.
But some may not consider this fair either if they reject the concept of
social solidarity, the concept on which community rating is based.