Report rebuts claim that ACA is unfair to young adults

A Robert Wood Johnson Foundation/Urban Institute analysis says health system reform's coverage provisions will help mitigate the effect of setting new age rating bands.

By — Posted March 18, 2013

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An Affordable Care Act provision that seeks to limit the amount by which insurance premiums can vary based on enrollees' ages won't result in young adults paying unreasonably high premiums, an analysis has concluded.

The impact of the ACA's new formula for setting age rating bands has attracted recent interest in Washington. Starting in 2014 under the law, insurers will be prohibited from selling nongroup coverage to an adult 64 or older for more than three times the premium they would assign to a 21-year-old for the same coverage. This translates into a maximum 3-to-1 premium ratio based on age, which narrows the gap between what younger and older people pay for insurance now.

Representatives of the insurance industry, in addition to GOP lawmakers on Capitol Hill, have warned that the new formula will force young adults to opt out of coverage because of the steeper premiums they will be required to pay.

Karen Ignagni, president and CEO of America's Health Insurance Plans, estimated that people from their 20s to their early 40s will see their costs go up under the revised age bands, increasing the likelihood that those in these age groups will forgo insurance until they become sick or injured. This scenario will boost the overall cost of health care, she said.

An analysis from GOP staff of several House and Senate committees, which referenced third-party sources on the effects of the ACA on premiums, said 80% of young adults with incomes above 138% of poverty and enrolled in nongroup single coverage will end up paying more out of pocket for insurance under the ACA's provisions than they do now.

But other research suggests that these claims are overblown. A Robert Wood Johnson Foundation report prepared by the Urban Institute acknowledges that tighter ratios will lead to increased premiums for younger adults and lower premiums for older adults. However, the study projects that other ACA coverage provisions will mitigate the negative effects that young people may experience from the new age rating bands.

“A lot of controversy swirls around health reform's limits on how much nongroup insurance premiums can differ by age starting in 2014. However, we find that when the approach outlined in the regulations is assessed in the context of all of the law's provisions, the concerns for young adults have frequently been overstated,” said Linda Blumberg, senior fellow at the Urban Institute's Health Policy Center and lead author of the report, in a statement.

Subsidies to offset premium increases

A large number of young adults who either are uninsured or covered through the individual market are going to be eligible for federal tax credits through the state's health insurance exchanges, said Andy Hyman, a senior program officer and director of the Robert Wood Johnson Foundation's coverage team. “They will have subsidies that will offset the cost of premiums.”

Many young people also will become eligible for Medicaid, which will require relatively little out-of-pocket spending, Hyman said. Many of those younger than age 26 will be able to get private insurance through their parents under the dependent coverage provisions in the law. “So when we say that this issue of so-called rate shock has been overstated, what we mean is that we're not taking into account all the provisions in the law” that protect young adults from increased out-of-pocket costs, he said.

Some believe that setting the age-based premium ratio at 5-to-1 — the formula typically used by health plans — would be more reasonable. But the report indicates that this ratio would undercharge young adults expected to gain new insurance under the ACA, based on their expected health care expenses, and overcharge older individuals. From an actuarial perspective, the 5-to-1 ratio might make sense, but it's difficult for older people who are not on Medicare to buy health insurance on their own, Hyman said.

By tightening the age bands in combination with other broad protections under the ACA, “you're really going to make health insurance more affordable,” he said. The American Medical Association has maintained that age rating to some degree is an acceptable practice but that premiums shouldn't be determined by a person's genetic information.

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How premiums will vary by age under the ACA

The Affordable Care Act's provision to narrow the maximum age-based premium ratio to 3-to-1 starting in 2014 will not result in “rate shock” that prompts younger people to opt out of insurance, according to a new report. But reverting to a 5-to-1 setup that insurers typically use would have the largest impact on those ages 21 to 27 and those approaching retirement age.

Age Average annual premium (3-to-1) Average annual premium (5-to-1) Difference
18-20 $3,050 $2,900 -$150
21-27 $4,850 $4,000 -$850
28-44 $5,840 $5,540 -$300
45-56 $8,930 $8,560 -$370
57+ $13,160 $14,930 $1,770
Overall $6,930 $6,660 -$270

Note: 57+ category does not include Medicare beneficiaries.

Source: “Why the ACA's Limits on Age-Rating Will Not Cause 'Rate Shock': Distributional Implications of Limited Age Bands in Nongroup Health Insurance,” Robert Wood Johnson Foundation/Urban Institute, March 4 (link)

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