State of the Industry: Age-rate bands

Prevailing state regulations allow insurers to vary premium costs over a range of age groups, for example, at a ratio of 5-to-1 between older and younger people because older people typically use more healthcare. However, in the exchanges, PPACA limits the range to just 3-to-1, beginning with 2014 coverage plans.

For example, if a 21-year-old’s 2013 annual premium is $1,200, a 60-year-old’s annual 2013 premium might be $6,000 in a typical state. In 2014, under the 3-to-1 rate band, the younger individual would pay $1,800 or 50% more, and the older individual would pay $5,400, or 10% less.

Forty-two states currently have bands of 5-to-1 or greater, according to America’s Health Insurance Plans (AHIP).

“The premiums and benefits that people will be shopping for in the exchanges in October reflect this new change in age rates,” says Robert Zirkelbach, AHIP press secretary. “So that’s already been implemented into the policies.”

Zirkelbach says age-rate restrictions are one of the factors causing 2014 exchange premiums to be higher in comparison to 2013 rates. Many PPACA critics have warned of premium “rate shock” for next year.

Taxes on insurers, covering adult children up to age 26, richer benefit plans and other reform policies will also contribute to higher prices for coverage, Zirkelbach says. It’s not just the age-rate limitation. AHIP has advocated for a longer time frame to phase in the new ranges, rather than jumping to 3-to-1 overnight, but lawmakers weren’t open to changing the rule.

“We’ll talk about it to the extent that it helps explain what’s happening to premiums and help explain some of the changes that people are experiencing,” he says.

The policy increases the likelihood that younger, healthier people will wait to purchase health insurance until after they get sick or injured, thus driving up costs overall, as the risk pool skews toward those with greater healthcare needs.

New limits will increase premiums 30% for those ages 21 to 29, according to Oliver Wyman Consulting.

Younger individuals will have three choices:

• Purchase coverage at a higher rate;

• Purchase catastrophic coverage; or

• Pay a penalty for no coverage.