Community Rating vs. Experience Rating in Health Insurance

Rating rules for health insurance vary based on the type of insurance

Group of employees talking with papers and coffee mugs

PeopleImages / Getty Images

There are a variety of factors that go into how health insurance premiums are determined. The rules vary significantly depending on the type of coverage, and in some cases, on the state where the policy is issued.

Two types of rating—community rating and experience rating—are on opposite ends of the spectrum, but there's a middle ground too, called modified community rating, which is commonly used. Let's take a look at what these terms mean and how they're used.

Community Rating

Pure community rating means everyone in a given area pays the same price for their health coverage. There's no variation based on age, medical history, tobacco use, occupation, etc. This is a fairly rare approach, but we do see it in some areas for some types of coverage.

For example, although the Affordable Care Act (ACA) allows insurers to vary individual and small group premiums based on age, Vermont and New York do not (and Massachusetts has a more restrictive rule than the federal government's requirements).

And the entire state of Vermont is one single rating area (versus eight in New York and seven in Massachusetts), which means individual and small group premiums don't vary at all in Vermont, regardless of a person's age or where they live.

Vermont, New York, and Massachusetts are also among the states where individual and small group insurers are not allowed to charge a tobacco surcharge, further solidifying true community rating in those states.

Under the Affordable Care Act, insurers in the individual and small group market are not allowed to base premiums on a person's medical history, but they are allowed to charge tobacco users higher premiums unless a state imposes rules to prohibit this.

There are several states where Medigap (Medicare Supplement) plans are required to use community rating (this approach is allowed nationwide, and there are some insurers that use it even in states where it's not required).

For Medigap plans, community rating means that the insurer cannot vary premiums based on age or health status for enrollees who are over the age of 65. Depending on the state, however, premiums may still vary for people under the age of 65 who are enrolled in Medicare due to a disability.

In the majority of the states, community rating is not required for Medigap plans, which means most Medigap insurers instead use issue age rating (with premiums based on the age the person was when they enrolled) or attained age rating (with premiums based on the person's age when they first enroll and as they grow older).

Community-rated Medigap plans tend to be more expensive for 65-year-olds, but less expensive for older enrollees. On the other hand, issue-age and attained-age rated plans tend to be less expensive for 65-year-old enrollees, and more expensive for older enrollees. 

Modified Community Rating

Modified community rating is much more common than pure community rating. A modified approach to community rating does still allow for some variations in premiums, although premiums cannot vary based on a person or group's medical history.

The Affordable Care Act's requirement for the individual and small group markets is a modified community rating approach: Insurers cannot use medical underwriting (i.e., an applicant or member's medical records, claims history, genetic information, etc.) or gender rating, but they are still allowed to vary premiums based on age, tobacco use, and geographic area.

Although individual and small group premiums are based on per-person rates, the Affordable Care Act does limit total premiums for larger families by only counting up to three children under the age of 21 when the family's premiums are determined. For example, a family with five kids under the age of 21 will only pay premiums for three of them, in both the individual and small group markets.

The American Medical Association (AMA) has expressed support for the modified community rating approach used in the ACA, noting that it "strikes a balance between protecting high-risk individuals and the rest of the population."

But it's noteworthy that the AMA clarified that "the success of modified community rating in keeping health insurance affordable is linked to the maximum number of individuals being insured, which can be assured by an individual responsibility requirement."

The ACA does include an individual shared responsibility provision (aka, the individual mandate), but the penalty for non-compliance was eliminated as of 2019. So there is no longer a federal penalty for being uninsured, but the individual market has nevertheless remained quite stable since 2019.

Experience Rating

Experience rating is the opposite of community rating. It means that an applicant or group's medical history and claims experience is taken into consideration when premiums are determined.

Experience rating can still be used by large group plans. In most states, this means employer-sponsored plans with more than 50 employees, but there are four states where the small group market (with modified community rating rules) includes employers with up to 100 employees, and large groups are those with 101 or more employees.

The majority of large group plans are self-insured, which means the employer covers the cost of employees' medical care using its own funds, as opposed to purchasing coverage from an insurance company (most self-insured employers contract with an insurer to administer the plan, but the employer's money is used to pay claims, as opposed to the insurer's).

But for large groups that purchase coverage from a health insurance company, experience rating is allowed. This means the insurer can look at the group's overall claims history and take that into consideration when setting premiums for the group. This is true both when the group initially purchases the coverage, and at each annual renewal.

Due to the Health Insurance Portability and Accountability Act (HIPAA), individual employees within the group cannot be singled out for higher premiums due to their medical history. But the group as a whole can be charged higher premiums due to overall claims history.

Prior to the Affordable Care Act, this was true for groups of all sizes (unless a state had taken action to prohibit this for small groups; most states had at least some restrictions on how much rates for small group plans could vary based on claims history). But that changed in 2014 when new small group plans had to transition to a modified community rating approach.

The premiums that employers pay for workers' compensation coverage are also typically based on experience rating, with employers paying higher premiums if their workforce has recently had more excessive claims than average businesses in their industry, and lower premiums if their claims have been lower than the average in their industry.

Was this page helpful?
Article Sources
Verywell Health uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Centers for Medicare and Medicaid Services. The Center for Consumer Information & Insurance Oversight. Market rating reforms. state specific rating variations. Updated June 7, 2017.

  2. Centers for Medicare and Medicaid Services. Market rating reforms. state specific geographic rating areas.

  3. Boccuti C, Jacobson G, Orgera K, Neuman T. Medigap enrollment and consumer protections vary across states. Kaiser Family Foundation. July 11, 2018.

  4. Centers for Medicare and Medicaid Services. Market rating reforms.

  5. U.S. Centers for Medicare & Medicaid Services. Overview: Final rule for health insurance market reforms.

  6. American Medical Association. Modified community rating.

  7. Keith K. Marketplace effectuated enrollment data stable; Report shows slight increase in risk scores. Health Affairs. July 27, 2020.

  8. U.S. Department of Labor. Compliance assistance guide—health benefits coverage under federal law.

  9. Kaiser Family Foundation. Health insurance market reforms: rate restrictions. June 2012.

Additional Reading