What does “experience rating” mean in health insurance pricing?

Experience rating refers to a method of determining health insurance premiums based on the historical claims experience of an individual or a specific group. This approach takes into account the actual medical expenses incurred by the insured individuals over a defined period. By using this method, insurance providers can tailor premiums more closely to the risk associated with the particular group or individual, reflecting their unique usage of healthcare services.

The underlying principle is that groups or individuals with a higher volume of claims may pay higher premiums to account for their greater risk, while those with fewer claims may benefit from lower premiums. This contrasts with community rating, which pools risk across a larger population without considering individual or group claims history. Additionally, experience rating encourages healthier behaviors withingroups as they can see a direct correlation between their health outcomes and their insurance costs, thereby incentivizing preventive care.