Community Rating and Risk Rating

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Question: Two systems of pricing health funding products exist, community rating the older of the two and risk rating. By applying economic principles discuss: 1 What would happen if the two systems freely co-exist in the same market? 2 The merits and demerits of the two systems By economic concepts is meant, at least: 1 The law of supply and demand 2 Pooling of like and unlike risks (i.e. Rothschild and Stiglitz (1976) Introduction: In this paper I will look to critically examine the two systems of pricing health funding products that do exist namely, the community rating system and the risk rating system. By applying economic concepts such as the law of supply and demand and pooling of like and unlike risks, I will look to gain further insight into how these two systems actually operate and what would be the case if the two systems had to co – exist within the same market. With the community rating system being the older of the two, its relevance and applicability in today’s health insurance market will also be made mention off. Finally, I will conclude this paper by discussing the advantages and disadvantages of each system. Background: Community rating system Community rating refers to the practice of charging a common premium to each and every member within a so called heterogeneous risk pool regardless of the fact that people within the pool face different health risk and thus spend varied amounts on health care each year. ( Reinhardt, 2010) Such a system prevents insurers from altering rates based on health status or even previous claims history. (Reinhardt, 2010) In a community rated market, when the insurer calculates the premium to be charged, they consider the risk factors of the entire market population and not just the individual risk each person faces. There are two forms of community rating

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