Employment Based Insurance — Community Rating Insurance Vs Experience Rating Insurance
In the US, the rapid development of private health insurance was driven by the effectiveness and rising hospital and medical care cost. Hospitals as its purpose became places in which people came to get medication and to get well. But, not all patients are able to pay for hospital and medication care.
In European nations, we can see the different approach compare to US counterpart. Consumer driven development of health insurance in European is different with the quality health care providers in US who are seeking the firm income from patients. Hospital, doctors, medical persons and physician are controlling over the “Blues,” which is a major sector of health care industry. Controlling over it meaning a guaranteed the reimbursement would continue to be generous — cost control— would remain became steady as result.
The rapid growth and wide adaptation of employment based insurance was drive by accident during work hours and to manage disease for patients who employed in the company. Over 75 % of employed population in US had employment based insurance through their employer or another person employer. Among the unemployed who were not in the labor force, around 40 % were covered and included in employment based insurance through a spouse or former employer. With employment based insurance, employers commonly pay almost of the premium that buys health insurance for their employees.
The growth of employment based insurance appealed commercial insurance companies to this lucrative field of health care and compete against the “Blues” for getting customers. The commercial insurers changed the entire dynamics of private health insurance. The new dynamic was called experience rating insurance. We will have the discussion of experience rating insurance can be applied to individual as well as employment based insurance.
Under experience rating insurance, the amount of premiums is set according to the experience of each group in using health services. Because the customers who rarely use health care, each pays a premium of $200 per month. In the middle-risk customer who are older, their risk of illness is higher, and their premium is $400 per month. The bottom of the group, who have high rates of disease, are charged a premium of $600 per month. The average premium income then is set $400 per member per month.
In the case of community rating insurance , insurance company assign the same three groups and needs the same $400 per member per month to cover health care plus administrative costs for these groups. The premiums is set by the principle of community rating insurance. For a applied private health insurance policy, all subscribers in a community give the same amount of premium.
Health insurance provides a mechanism to distribute health care more in accordance with human need rather than exclusively on the basis of ability to pay. To achieve this goal, funds are redistributed from the healthy to the sick, a subsidy that helps pay the costs of those unable to purchase services on their own.
In the scenario above, community rating insurance achieves this redistribution in two ways:
Within each group (high risk, middle risk, and low risk), individuals who become sick get benefits in excess of the premiums they pay for, whereas people who remain in healthy pay premiums while receiving few or no health benefits.
Among the three groups, the least risk group, who use less health care than their premiums are worth, help pay for the most risky groups, who use more health care than their premiums could buy.
Experience rating insurance is far less redistributive than community rating insurance. Within each group, those who become ill are subsidized by those who remain well, but among the different groups, healthier groups do not subsidize high-risk groups (mine workers). Thus the principle of health insurance, which is to distribute health care more in accordance with human need rather than exclusively on the ability to pay, is weakened by experience rating insurance.
In the early years, Blue Cross plans set insurance premiums by the principle of community rating insurance, whereas commercial insurers used experience rating insurance as a “weapon” to compete with the Blues. Private commercial insurers such as Healthy Insurance Company could offer lesser premiums to low-risk groups such, who would naturally choose a Healthy commercial plan at $200 over a Blue Cross plan at $400. Experience rating insurance helped commercial insurers overtake the Blues in the private health insurance market.
But in contrast, many private and commercial insurers hesitant to market policies to high-risk groups, this leaving Blue Cross with high-risk patients who were paying relatively low premiums. To survive the stiff competition from the commercial insurers, Blue Cross had no choice but to seek younger, healthier groups by abandoning community rating insurance and reducing the premiums for those groups. In this way, many Blue Cross and Blue Shield plans switched to experience rating insurance. Older and sicker groups became less and less able to afford health insurance without community rating.
Elderly and those with chronic illness may have point of view that experience rating insurance is discriminative against them. However in group of healthy persons, they have different angle of this situation. They might query why they had better voluntarily carry-over their wealth to sicker people through the insurance subsidy. Among different groups, however, healthy people have no economic inducement to voluntarily pay for community rating insurance and subsidize another group of sicker people. This is why community rating insurance cannot survive in a market-driven competitive private health insurance system.
Thus, health insurance was in the beginning an attempt by society to figure out the problem of unaffordable health care under an out-of-pocket payment system, but its very capacity to make health care more low-cost created a new problem. The solution of insurance fueled the problem of rising costs. As private health insurance became largely experience rated and employment based insurance, persons who had low incomes, who were chronically ill, or who were elderly found it increasingly difficult to afford private health insurance.©