A follow-up: “Rate shock” will hit all healthy people, not just the young and healthy

The following is a guest post by Sam Richardson, an instructor at the LBJ School of Public Affairs, UT-Austin. Sam is also a PhD candidate in Health Policy (economics concentration) at Harvard, where next month he will be defending his dissertation on quality-based provider payment. You can follow him on Twitter: @Prof_Richardson.

Responding to my post from this morning, Ashish Jha had two excellent questions via Twitter:

I didn’t look specifically at what does cause rate shock, but the obvious potential culprits are (1) guaranteed issue, meaning insurers can no longer deny coverage for higher-risk individuals or exclude care for pre-existing conditions; and (2) community rating, meaning insurers can no longer charge higher premiums for higher-risk individuals (though limited age rating allows older people to be charged premiums up to three times as high as those charged to younger people).

Most analysis of rate shock has focused on young, healthy people, because these people are most likely to drop out of the market and cause adverse selection problems. If the limits on age rating are playing a large role, we should expect older people not to experience rate shock. Taking Ashish’s suggestion, I calculated insurance premiums for a healthy 60-year-old living in Sacramento, comparing the Kaiser 50/5000 plan to Kaiser’s bronze plan on the exchange. California only published rates for 25-year-olds and 40-year-olds, but we can infer rates for 60-year-olds by using the HHS rate curve, available here.

It turns out that the premium for the pre-exchange 50/5000 plan is $317/month, and the bronze plan premium is $554/month, so the healthy 60-year-old faces a 75% premium increase. It is important to note that other states may have different experiences, but this result is similar to results Avik Roy found in Washington State.

It seems likely that, regardless of age, most or all healthy people in the non-group health insurance market in California will see substantial premium increases, even without purchasing more generous plans. Whether this is a bad thing depends on two issues: (1) the degree to which rate shock results in adverse selection in the exchanges, and (2) what the social contract should be. Regarding point (1), our best evidence, from the Massachusetts health insurance reform, suggests fears of adverse selection and death spirals are probably overblown.

But regarding point (2), the Obamacare exchanges represent a transfer from healthy people to unhealthy people (those who are currently uninsurable on the non-group market). This essentially insures people against the risk of becoming unhealthy and therefore uninsurable. Behind the veil of ignorance, this is insurance that many would probably choose to purchase, but it’s a debatable point, and I think this more philosophical idea is what the rate shock debate is fundamentally about.

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