What is a potential disadvantage of community rating?

Community rating is a health insurance pricing strategy where premiums are set based on the overall health status and demographic characteristics of a defined community, rather than on the individual risk factors of policyholders. One significant potential disadvantage of community rating is that it may prevent insurers from adjusting premiums based on the individual risk of their customers.

This approach means that individuals who may pose a higher risk—such as those with pre-existing health conditions or higher expected healthcare costs—could pay the same premiums as healthier individuals. This can lead to a situation where insurance companies might have limited incentives to manage risk or improve efficiency, potentially resulting in higher overall costs for the insurance pool. By not allowing premium adjustments based on risk, community rating can create sustainability challenges for insurers and may ultimately lead to higher premiums for all members of the community, as the costs of covering higher-risk individuals are spread across a larger base without differentiation.

The other options suggest benefits or features of community rating. For instance, the guarantee of lower premiums for high-risk individuals reflects a protective aspect, while promoting competition and increasing transparency are often associated with benefits in overall market dynamics. However, these aspects do not capture the essential challenge of maintaining a balanced insurance pool when individual risk factors cannot be accounted for in premium pricing.