• Chart of the day: Subsidies change everything

    There has been an expression of concern among some analysts about the three-to-one age-based community rating of premiums in the ACA exchanges. You can basically throw all that out the window for most subsidized consumers, those with incomes below 400% of the federal poverty level. Want to see the evidence in a chart? It’s on the LDI site. Take a look!


    • It’s also importnat to note that risk adjustment makes the 3:1 age-rated premium ratio non-binding. As risk adjustment becomes more aggressive, the young and the old begin to look more and more similar to the health plans in average cost terms. As risk adjustment causes the average costs of the young and the old to converge, in a competitive market, the premiums will also converge. Given that the risk adjustment that is going to be used in the exchanges is quite aggressive (concurrent rather than prospective models), the age-rated premium ratios are likely to be non-binding. Some recent work by Tom McGuire et al. has highlighted this interesting interaction between premiums and risk adjustment. This means that while rate shock to the young may occur, the source of the rate increase on the young will not be the 3:1 ratio, it will be aggressive risk adjustment.

      See my blog post on this topic here: http://timothyjlayton.wordpress.com/2013/02/26/age-based-rate-bands-for-health-insurance-premiums/

    • Aged-based community rating? How about diseased based community rating. Or ethnic based community rating. Or left-handed community rating. Any modifier to community rating makes it, ipso facto, not community rating. The subsidy in ACA is from the nearly old to the young, as the nearly old will pay up to three times the premiums for health insurance as the young. Of course, that discrimination significantly reduces the cost of the subsidies. Age discrimination (as opposed to other types of discrimination) in setting premiums is often justified because the nearly old will soon qualify for Medicare, the lucky duckies, and they can wait for expensive care after they qualify. Good grief! There were several explicit policy goals for health care reform, universal coverage being one and non-discrimination in setting premiums being another. As for universal coverage, universal insurance coverage eventually became the substitute (for universal coverage). Obama’s priority has always been universal insurance coverage, the tell being his opposition to the mandate – while the mandate is essential for non-discriminatory community rating, the latter actually increases the cost of universal insurance coverage; hence, the “compromise” for aged based (i.e., discriminatory) community rating. The implementation phase of ACA has reflected Obama’s priority for universal insurance coverage, as he punted on essential health benefits, dumped Medicaid expansion on the insurance exchanges, and postponed the small employer exchanges. Universal coverage alone would have been a tremendous accomplishment; universal insurance coverage not so much. What we are getting is universal insurance coverage, which is how ACA, Obama, and the Democrats will be judged in 2014 and 2016. Good luck with that.

    • The ACA allows for community rating narrower than 3:1.
      Doing so would “penalize” younger and healthier workers. but there is a positive side effect:: additional premiums are flowing to the insurer from the younger and healthier cohort.
      This increases the profit of the insurer.
      In our plan which is designed to provide a portion of the insurer’s reserves to provide paid-up benefits for those with low or no claims, these increased reserves through higher premiums translate into more paid-up benefits for low and no claimants: a true partnership between insurer and insured.
      The bottom line is twofold; The younger and healthier pay more in the beginning to accumulate acelerated paid-up benefits (much faster than an HSA), lowering their premiums, potentially, by 60-80%.
      The older and sicker are getting a significant discount on premiums, if the rating is 1:1, instead of 3:1.
      So both the low claimants and the high claimants and the insurer wins – a win, win, win.
      To accomplish this worthy goal, people have to start looking at being with an insurer as a long-term relationship.
      This is very different from today’s market, inwhich the insurer’s clientele may have close to 100% turnover in 3-5 years, for the person is typically looking ahead only for the next year.
      Don Levit