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Flashpoint

August 18, 2013

FLASHPOINT: The Affordable Care Act’s youth problem

Young Americans may soon experience “sticker shock” when shopping for health insurance. A new survey of insurers estimates that premiums will almost triple for a hypothetical 27-year-old man next year, once all the federal health reform law’s rules take effect.

That could be problematic for its efforts to cover young people. More than a quarter of the 67 million Americans between the ages of 19 and 34 are uninsured. They may well stay that way if insurance becomes unaffordable.

That doesn’t have to be the case. Lawmakers can make health coverage more affordable by relaxing restrictions on what insurers can charge young adults — thus allowing them to offer lower premiums.

The Patient Protection and Affordable Care Act (PPACA) regulates the health insurance market in three main ways.

First, all Americans — with a few exceptions — must secure health coverage.

Second, because everyone must carry coverage, the law requires insurers to sell policies to whomever wants to buy them. They can’t deny coverage because of health status or history — a reform called “guaranteed issue.”

Third, in an attempt to control the cost of coverage, the law prevents insurers from charging older individuals more than three times what they charge younger beneficiaries — a rule called “community rating.”

The community rating rules were created to ensure that insurance companies don’t exclude sick people or those with pre-existing conditions by offering them only policies with sky-high premiums. They were also designed to ensure that coverage for older Americans not yet eligible for Medicare would be affordable.

The problem is a matter of facts. It costs six times as much to insure a 64-year-old as it does an 18-year-old. While we might like to think that we can cap a 64-year-old’s costs at three times the level of an 18-year-old’s, the math just doesn’t work. In the end, younger, healthier people will subsidize insurance for those who are older and sicker.

Even with federal subsidies, those higher premiums will be unaffordable for most young Americans, who are more likely to have lower incomes.

According to a five-city survey conducted by the American Action Forum, community rating will contribute to a 190-percent rate increase for younger, healthier people living in Milwaukee. Across all five cities, the average premium hike for young people will reach 169 percent.

To make matters worse, community rating-fueled premium hikes won’t just affect young people — by 2014, small businesses with up to 50 workers will face them, too. And by 2016, the hikes will hit all companies with less than 100 workers.

This will represent a dramatic rating shift for small employers in the 42 states where rates are based on a number of factors including broad age differentials.

In 49 states, employers with between 50 and 100 employees don’t have to shop in the small-group market but rather in a mid-market akin to the way larger groups purchase coverage. That grants them greater choice of health plans and more rate flexibility.

Lumping all these firms together may seem like a good idea because it will increase the size of the health insurance pool. But it will drive premiums up for everyone by moving more employers into the mandatory modified community rating structure.

If premiums spiral upward, millions of young people will choose not to buy coverage — whether on their own or through their employers — and instead pay fines the law prescribes for being uninsured. If there aren’t enough young people paying into the insurance pool to subsidize coverage for older Americans, premiums will shoot up even further.

This process can repeat itself again and again, resulting in what actuaries call a “death spiral” of higher and higher premiums — and lower and lower coverage rates.

For evidence, look to the eight states that adopted community rating and guaranteed issue rules in the 1990s. According to a study from Milliman, a consultancy, the insurance markets in all eight experienced death spirals to some degree. Two states ultimately abandoned their reforms.

Three others, however, took a different approach. They chose to relax their community rating rules. And their insurance markets have survived.

Federal lawmakers should learn from these state experiments and relax PPACA’s community-rating requirements, too.

Lawmakers must do everything they can to ensure that the Affordable Care Act actually makes insurance more affordable. Revising the community-rating rules is an effective way to do so.

Janet Trautwein is CEO of the National Association of Health Underwriters.

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