Yahoo! Finance MoneyWatch on April 26, 2013
by Elizabeth O’Brien
Baby boomers with individual health plans stand to benefit big-time when public insurance exchanges launch on January 1. The centerpiece of the Affordable Care Act, these state-level marketplaces will improve boomers’ access to health coverage and may even bring down underlying premiums for those who don’t qualify for a government subsidy, experts say.
But boomers may not see those cost benefits unless they get some help from a different demographic: Their kids and their friends’ kids. If enough young people stay out of the market, then the risk pool in each group will be older and, presumably, sicker. And that will eventually drive up costs for everyone who remains. “The big factor is: How many young, healthy adults can we get to buy insurance?” said Carrie McLean, senior manager of customer service at the national call center of eHealthInsurance.com, an online insurance marketplace.
Roughly 29% of young adults between ages 21 and 29, or 11.2 million people, are uninsured. Starting next year, people of all ages must either buy health insurance or pay a penalty. (For 2014, that penalty will be $95 or 1% of income above a certain tax-filing threshold, whichever is higher, with exemptions for some consumers where available coverage doesn’t meet certain affordability thresholds.)
Everyone from insurers to consumer advocates is hoping that uninsured young people opt to get covered instead of paying the penalty—for their own protection, of course, and also to prevent adverse selection. Adverse selection is what happens when only people who have an immediate need for insurance, usually sicker people, buy the product. Insurers need enough young, healthy lives in the risk pool—those people who don’t use health care very often—to balance out the costs of those who do.
Most consumers haven’t wrapped their minds around what the health-care reform law means to them. And one thing many don’t recognize is how much the financial stability of the new state-level exchanges depends on uninsured young people joining the risk pool. On these marketplaces, consumers will be able to choose from a menu of insurance plans subject to new regulations designed to make the system fairer for all. And while they’re aimed at people buying individual policies and at small businesses, not at the majority of Americas who get coverage through their mid-or large-size employers, the government estimates that 25 million people will gain health coverage through the exchanges by 2022.
Early retirees and older freelancers will be among the biggest beneficiaries of the law’s insurance reformers, experts say. Those under the Medicare eligibility age of 65 who aren’t covered under a workplace plan often have trouble finding coverage due to pre-existing conditions. Nearly 15 % of people ages 55 to 64, or around 5.5 million people, were uninsured in 2010, according to the Kaiser Family Foundation, a nonprofit organization that conducts health policy analysis; but even many who are insured today will switch over new policies on the exchanges, experts predict. Beginning in 2014, no insurance company will be able to deny coverage or charge more due to pre-existing conditions, and in most states this represents a big change.
What’s more, new limits on the extra amount insurers can charge older people over younger ones will shift costs from boomers to millennials, experts predict. Today, premium differences for the same coverage between a 21-year-old male and a 64-year-old male can easily reach 5-to-1, according to the Kaiser Family Foundation, a nonprofit that studies health issues. (The difference is a little less pronounced for women.) The new law will limit these age bands, as they’re called, to 3-to-1. The result? Individual policy premiums are expected to stay stable, or even fall, for older consumers buying comparable coverage on the state-level marketplaces, even for those who make too much to qualify for government subsidies.
Premiums likely to rise for the young
Yet the big question remains: what will premiums look like for young people? America’s Health Insurance Plans, a trade group representing the health insurance industry, released an estimate earlier this year showing how the new age restrictions may affect premiums for a 24-year-old and a 60-year-old: the younger person, whose premium today is $1,200 annually, will see a 50% increase starting next year, while the older person, who pays $6,000 annually, will see a decrease of 10%.
Thomas Harte, an insurance broker in New Hampshire who is president-elect of the National Association of Health Underwriters, a trade group for health insurance professionals, says that many young adults already decline generous, employer-sponsored medical coverage. Come January on the individual market, he thinks generous government subsidies won’t be enough to persuade many young people to buy coverage. Many young and healthy adults view buying insurance as “not the right economic decision,” Harte said. “The 26-year-old will say, ‘I’ll pay the $95, no big deal,’” Harte said. These young people are taking a gamble by essentially self-insuring—they figure it isn’t worth paying thousands of dollars each year for medical coverage they likely won’t use. But if they’re wrong, of course, they can wind up in a big financial hole, Harte added.
If too few young people sign up, premiums on the state exchanges will eventually rise for everyone else who remains. Health plan utilization is one of the factors that insurers use to adjust their premiums. If more people in a given plan use it than expected, then insurers will eventually have to increase premiums to compensate. Before Massachusetts passed that state’s health insurance reform in 2006, requiring most people to be covered, the people who really needed medical insurance were the primary buyers, said Cathy Schoen, senior vice president for policy research and evaluation at the Commonwealth Fund, a private foundation working toward a high performance health system. After reform, “Bringing in healthy lives was a big boon across the marketplace,” Schoen said.
Nearly 10 million of the 11.2 million uninsured 20-somethings will qualify for either Medicaid or some level of premium subsidy, according to an analysis of Census Bureau data by the Young Invincibles, a youth advocacy group. The subsidies apply to anyone with gross incomes up to 400% of the federal poverty level—in 2013, $45,960 for an individual, $62,040 for a family or two, $78,120 for a family of three, or $94,200 for a family of four (higher levels apply in Alaska and Hawaii).
Subsidies could bridge the gap
Subsidies will be applied on a sliding scale, with those earning the least qualifying for the most help. They are structured as an immediate tax credit: the federal government will pay insurers premium support for qualifying customers, so the insured won’t have to pay a higher premium then wait for reimbursement. The Kaiser Family Foundation has a health reform subsidy calculator on its website that allows people to plug in their age and income and get an estimate of what they might expect to pay for coverage on the marketplaces for silver-tier coverage. A single 25-year-old person earning $25,000 will receive an estimated government tax credit of $1,664 toward annual premiums of $3,391, leaving an out-of-pocket cost of $1,726 per year, or $144 per month. The subsidy comes to just $66 annually for a 25-year-old earning $35,000, leaving that person to pay $277 monthly for coverage.
Still, there’s a segment of the young adult population that won’t qualify for any premium help and will likely see a rate increase in their individual policies. Higher-earning young men are more likely to see individual premium increases under the Affordable Care Act than young women, who are charged more today since they might become pregnant; starting in January, insurers will no longer be able to charge customers based on their gender. So picture for example a 25-year-old freelance tech consultant, working out of his pajamas in Silicon Valley. Because he’s likely to be making $50,000 a year or more, he won’t get a subsidy, and because he’s young and feels indestructible, he probably thinks he won’t get sick enough to need insurance. He might even decide that it makes more sense to pay for any potential medical bills out of savings than to fork over more than $3,000 per year for coverage.
What’s the message that will persuade these higher earners to buy coverage nonetheless? Most young people understand the financial value of insurance, said Jen Mishory, deputy director of Young Invincibles. That is, insurance can help protect your assets in the event of an unexpected injury or illness. “You never know when you’re going to tear your ACL,” Mishory said. The real challenge, she added, is making sure young people know what’s coming down the pike, and the action that’s required of them. People under 30 who balk at higher premiums will be eligible to buy lower-cost, high-deductible catastrophic plans to satisfy their insurance requirement, as will others who meet certain eligibility criteria.
Prices for insurance on the state-level marketplaces will likely become available to consumers by this summer, in advance of open enrollment on Oct. 1. Insurers are in the process of filing their rate proposals with the various state insurance commissioners, who must approve them. Vermont was early in posting its proposals online, and premium prices don’t differ much from those on the state’s tiny individual market today, said Robin Lunge, the state’s director of health care reform. However, Vermont’s experience won’t necessarily be representative of the country overall, since it’s one of the handful of guaranteed-issue states that already require insurers to take all comers, with high premiums for this protection.
Boomers planning to encourage their younger relatives to get covered should seize their opportunities, experts say. In the coming months, Enroll America will launch Get Covered America, an education campaign that will target mothers, among other groups, said Anne Filipic, president of the organization. In getting the word out to young people, she said, “Moms are a critical part of the equation.”