Summary: As part of the debate over health care reform, some have proposed prohibiting insurers from denying coverage or charging different premiums to persons on the basis of their health status. Under such a "community rating" system, an insurer would have to charge each potential beneficiary the same premium for a given insurance plan. However, community rating could create financial incentives for insurers to attract only healthy clients because these people would, on average, pay more in premiums than they generate in claims. Insurers' profits would depend more on the plan's ability to attract health beneficiaries and would be less responsive to efforts to deliver high-quality service at the lowest price. Risk adjustment can mitigate the undesirable effects of community rating on insurers' incentives. This report describes how the federal government's previous experience with risk adjustment is relevant to implementing risk adjustment under health care reform and identifies features of health care reform that could affect the ability to adequately adjust risk.
