Overview: How insurers price group health coverage depends on whether they look at the specific group's history or average risk across a broader population.

When an insurer calculates the premium for a group health plan, it must estimate the total expected medical costs for that group in the coming policy year. Two fundamentally different methodologies exist for doing this.

Experience Rating

Experience rating prices a group's coverage based on that group's own historical claims and medical utilization. The process works roughly as follows:

The insurer gathers the group's actual claims data for the prior 12–36 months
An adjustment is made for IBNR claims (Incurred But Not Reported — services rendered but bills not yet submitted)
Individual claims above a pooling point (e.g., $100,000) are removed and replaced with a flat pooling charge, so that one employee's cancer treatment doesn't devastate the group's future rates
A medical trend factor adjusts the historical data upward for projected medical inflation and utilization changes
A credibility factor (Z) is applied based on group size — larger groups have more statistically predictable experience and receive higher credibility scores (Z closer to 1.0); smaller groups are blended with industry average ("manual") rates using the formula:

Projected Claims = [Z × Group's Past Claims] + [(1 − Z) × Manual Rate]

Administrative expenses, broker commissions, and profit margin are added to reach the final premium

Experience rating is used primarily for large employer groups (typically 51+ or 101+ employees, depending on the state). It rewards employers whose workforces have low claims with lower premiums, and it gives employers with high-claims workforces a financial incentive to invest in wellness programs.

Community Rating

Community rating does not look at any individual group's history. Instead, the insurer prices coverage based on the average expected cost of healthcare for all enrollees in a defined geographic area (the "community"). Everyone in the same area, with the same plan, pays the same base rate.

There are two forms:

Pure community rating: All enrollees pay identical premiums regardless of age, gender, tobacco use, or health status. Only geography and plan design affect the price. New York State mandates pure community rating in its individual and small-group markets.

Modified (adjusted) community rating: The most common form in the United States, and what the ACA requires for small-group and individual markets. Premiums can vary from the community baseline based on only four permitted factors:

Age — with a maximum 3:1 ratio (a 64-year-old cannot be charged more than three times what a 21-year-old pays for the same plan)
Geographic rating area — reflecting local healthcare cost differences
Family size — individual vs. couple vs. family coverage
Tobacco use — up to a 1.5:1 surcharge (some states prohibit this)

Health status, medical history, claims experience, and gender are never permitted rating factors under modified community rating.

Community rating is mandated for small-group markets under the ACA to prevent insurers from pricing small businesses with sick employees out of the market. Without it, a five-person firm with one employee undergoing chemotherapy could face premiums so high that coverage becomes unaffordable for all five.

Method	Basis	Who it affects	Used for
Pure community rating	Area-wide average; no individual factors	Same price for everyone	Rare; some state-specific markets
Modified community rating	Area average + age, geography, family, tobacco	Limited variation	ACA small-group and individual markets
Experience rating	Group's own claims history	Reflects the group's specific risk	Large employer groups