Understanding Community Rating in Health Insurance: What It Means for Your Business

Healthcare costs in New England are among the highest in the country, putting significant pressure on businesses, and in many cases are surpassing national averages. With Massachusetts leading the nation in per capita healthcare spending (New England Journal of Medicine), employers are grappling with a complex and costly system. A key factor influencing these costs is community rating, a health insurance pricing method that impacts how much you pay for coverage. In this article, we’ll break down what community rating means, how it affects your business—especially if your workforce is healthy—and explore alternatives that could give you more control over costs.

What is Community Rating?

Community rating is a health insurance pricing method where premiums are set based on the average risk of a broad group, not individual health status. Everyone in the “community” pays the same rate for identical coverage, regardless of their medical history. However, adjustments can be made for factors like:

• Age
• Tobacco use
• Geography
• Family size

Under the Affordable Care Act (ACA), community rating is required for small group and individual markets, ensuring that employees with pre-existing conditions aren’t priced out of coverage. For New England businesses, this system is a double-edged sword—offering fairness but sometimes at a steep cost.

New England’s Healthcare Mess: Why It Matters

New England’s healthcare landscape is notoriously challenging. High costs and strict regulations make it a tough environment for employers offering health benefits. Here are some key statistics:

• Premiums above average: Most of New England’s single and family premiums exceed national benchmarks.
• Highest spending: Massachusetts spends more per capita on healthcare than any other state.
• Regulatory burden: State mandates—like expanded coverage requirements—increase premiums beyond what’s typical elsewhere.

For businesses, this means higher baseline costs before community rating even comes into play. If your employees are healthy, you might feel the sting even more, as community rating spreads risk across a pool that includes sicker, costlier groups.

How Community Rating Impacts Your Business

Community rating has pros and cons, particularly for New England employers. Let’s dive into how it affects you.

Pros of Community Rating

• Stable costs: Premiums don’t fluctuate based on individual employee health, making budgeting easier.
• Access for all: Employees with chronic conditions get coverage at the same rate, helping you attract and retain talent.
• Simplicity: Uniform rates streamline benefits administration.

Cons of Community Rating

• Overpayment for healthy groups: If your workforce is healthier than average, you’re subsidizing higher-risk individuals, leading to inflated premiums.
• Limited customization: Plans are standardized, reducing flexibility to tailor benefits to your needs.
• State-driven costs: New England’s mandates amplify premiums, leaving little room for negotiation.

For businesses with a healthy workforce, community rating can feel like a penalty. You’re locked into paying for the region’s high healthcare costs, even if your employees rarely use services.

Alternatives to Community Rating: Gaining Control

If community rating doesn’t suit your business, especially with a healthy workforce, there are options to explore. Businesses open to innovative approaches can consider alternatives.

Experience Rating for Larger Groups

Experience rating bases premiums on your group’s actual healthcare usage, not the community average. Available for businesses with 50+ employees, it offers:

• Lower premiums if your claims are below average.
• A direct reflection of your workforce’s health, rewarding healthier groups.

This approach gives larger New England employers a way to escape the one-size-fits-all trap of community rating.

Self-Funding Approaches: Level Funding

For small to mid-sized businesses, level funding—a hybrid self-funding model—provides flexibility. Here’s how it works:

• You pay a fixed monthly amount covering expected claims, admin fees, and stop-loss insurance (to cap risk).
• If claims are lower than projected, you may get a refund or credit.
• You avoid some state mandates under ERISA, potentially lowering costs.

Level funding blends the predictability of fully insured plans with the savings potential of self-funding, making it a compelling option for cost-conscious employers.

What’s Best for Your Business?

Community rating ensures some access to health insurance, but it’s not always the most cost-effective choice for New England businesses—especially those with healthy employees. With premiums soaring and state mandates adding complexity, alternatives like experience rating and level funding offer a chance to take control. Understanding your options is the first step to finding a solution that fits your workforce and budget.

Need help navigating these choices? At NARFA, we specialize in tailoring health insurance strategies for New England employers. Contact us to explore how we can lower your costs and optimize your benefits.