Shrink Obamacare's Costs By Removing Rule Driving Up Young People's PremiumsCommentary by John R. Graham
June 22, 2015
The Supreme Court will soon decide King v. Burwell, the case that will determine whether tax credits being paid in at least 34 states without their own exchanges are legal. If the Supreme Court makes the administration follow the letter of the law, billions of dollars of federal tax credits will continue to flow to 16 states, but not the rest. This will result in a political crisis giving Congress and President Obama the opportunity to fix the worst aspects of Obamacare.
Here is one suggestion: Remove Obamacare’s rule forbidding accurate premiums by age. The difference in rates between young adults and older ones can be no greater than three to one. The actuarial consensus is that average health spending for 63-year-olds is five times that of 22-year-olds. However, instead of reducing premiums for older applicants, the rule dramatically increases premiums for younger ones.
Last October, HealthPocket, an online insurance broker, measured the increase in premiums for every age group in 2014 versus the pre-Obamacare individual market and concluded they increased by double digits for every age group. The increase in rates for 63-year-olds was 37.5 percent for women and 22.7 percent for men. For 23-year-olds, the increase was 44.9 percent for women and 78.2 percent for men. There are other mandates driving up the cost of health insurance. Nevertheless, scholars at the Heritage Foundation conclude that Obamacare’s age rating restrictions increase premiums for younger adults by about one-third.
Obamacare disguises these true premiums by offering health insurers tax credits to reduce the net premium people pay, thus fooling many into thinking premiums have gone down.
Although removing all Obamacare’s mandates could reduce the price of health insurance significantly, it is unlikely that a King v. Burwell victory would lead to such an opportunity, because the president could easily grandstand by accusing Congress of wanting to take away benefits. Given the limited opportunity, Obamacare’s age bands would be the best target to engage. This could have the added benefit of significantly reducing the amount of taxpayers’ dollars required for Obamacare tax credits.
Although we do not know the correlation between age and income in the exchanges themselves, we know younger households earn less than older ones. For example, in 2011, the median income for households with a head of household between 15 and 24 was about $25,000, according to my calculations in a forthcoming study on a responsible response to King v. Burwell. People ages 18 through 24 comprise 11 percent of 2015 Obamacare exchange enrollees. These people are surely almost entirely subsidized by Obamacare’s tax credits.
Take an example from the administration itself:
“For example, the amount that a 27-year-old woman with an income of $25,000 (218 percent of the FPL) would pay for the second-lowest cost silver plan is capped at $145 per month. If she lived in Jackson, Mississippi, the premiums for the second-lowest cost silver plan available would cost her $336 per month before tax credits. Therefore, the amount of the premium tax credit would be $191 per month — the difference between specified contribution to the benchmark plan and the actual cost of the benchmark plan. Her use of the tax credit would not be restricted to the second-lowest cost silver plan. She could apply the $191 per month tax credit toward any plan of her choosing in any metal level. By applying her tax credit to the lowest-cost bronze plan in Jackson, which is priced at $199 per month, she could obtain Marketplace coverage for just $8 per month after tax credits.”
If the age rating restrictions were lifted, the premium for the second-lowest cost silver plan could easily be expected to drop to $270, a reduction of $66. The tax credit would drop by the same amount. $66, which amounts to a drop of over one-third from $191. Aggregated over the entire Obamacare population, this would dramatically reduce Obamacare’s claim on taxpayers.
Investors’ Note: UnitedHealth Group UNH +0.64% (NYSE: UNH), Anthem (NYSE: ANTM), Cigna CI +6.49% (NYSE: CI), Aetna AET +4.01% (NYSE: AET), and Humana HUM +0.96% (NYSE: HUM) are health insurers for which a finding for the plaintiffs in King v. Burwell would be a material event.
John R. Graham is a Senior Fellow at the National Center for Policy Analysis and Co-Organizer of the Health Technology Forum: DC.