Underwriting And Funding Approaches

Health care cost-control has become of paramount importance as the cost of medical care has increased. Medical costs are a significant expense and a risk exposure that can have a substantial impact on an organization's overall compensation costs and operating results. In light of this, it is not surprising that many organizations have looked to innovative financial arrangements at the same time they restructure benefit design and health care delivery.

Community Rating

The early prepayment plans offered by the Blue Cross and Blue Shield organizations were offered as community-rated products. Under this financing approach, all insureds in a given geographic area paid a uniform rate. Because the Blue Cross and Blue Shield organizations were chartered with the intention of providing insurance to all those seeking coverage and because they negotiated contractual reimbursement arrangements with providers, this method of underwriting was possible in the early years when costs were lower and the Blue Cross/Blue Shield plans were the principal underwriter of medical care. HMOs at their inception also used community rating and, in order to be qualified under the Health Maintenance Organization Act of 1973, were required to adhere to specific rules regarding it. These requirements were relaxed with the 1988 amendments to the Health Maintenance Organization Act. Community rating is still used for individual subscribers and for smaller group contracts. However, community rating is much less popular in the group insurance market where larger organizations prefer to be experience rated rather than be rated with other organizations, which potentially have less-favorable risks.

Adjusted Community Rating

At times, an insurer will offer a plan sponsor insurance rates that have been calculated using adjusted community rates. The baseline claims data used to establish these rates are the claims and utilization patterns in the community at large. However, based on certain favorable characteristics of the plan sponsor's own past claims data, the insurer is willing to offer more favorable rates, which have been approved by the state's insurance department and the insurer's underwriting department, for a client that exhibits favorable claims characteristics.