While many people are happy about health insurance exchanges and the opportunities they offer individuals for health insurance coverage, the reality for many young adults as a demographic is that their premiums are virtually guaranteed to rise because of Health Care Reform.
The reason why premiums will increase for young adults isn’t because of one factor, but instead a number of reasons. First, reform guarantees insurance coverage to everyone regardless of their health status or pre-existing conditions. This certainly forces insurance companies to raise the premiums of everyone, even the traditionally healthy young adult demographic. Second, rate bands will likely become a more widely used regulation, especially in exchanges (more on rate bands later). Finally, while health insurance companies can factor in age when pricing premiums, they can only do it on a 3:1 multiple.
How Insurance Companies Can Rate Premiums
The new Health Care Reform law no longer allows insurance companies to rate premiums based on health status or gender. In the past something like a pre-existing might not have been covered, or at the very least would have pushed premiums sky-high. Insurance companies can no longer look at health status as a factor for premium rates.
The factors that can be used are the following:
- Individual or Family Enrollment
- Geographic Area
- Age
- Tobacco Use
There are still limits within these factors. For example, the age factor only allows for a maximum 3:1 variation in premiums for adults, thereby capping it’s effectiveness at 3x the lowest rate. While the fact that age is factored in may be good news for young adults, who traditionally as a demographic use less health insurance than the elderly, the 3:1 variation limit puts some upward pressure on premiums for those in their 20s and 30s.
Three Different Rating Reforms
There are a few reforms that already have been implements in a number of states that adversely affect young adults when it comes to pricing premiums. They include:
1) Rating Bands
Rating bands essentially set a ceiling as to how much premiums can vary in a given state. If the rating band was 5, the highest premium could only be 5 times that of the lowest premium. This puts upward pressure on the lower premiums, which likely are made up of the young adult demographic (remember, health status can not be a factor starting in 2014 so it’s irrelevant whether we are talking about healthy or unhealthy young adults).
2) Community Rating
Community rating means that everyone in the same “community” on the same plan must be charged the same rate. This spreads cost evenly throughout the demographics that make up the community.
3) Adjusted Community Rating
A variation of the community rating, adjusted community rating states allow for some variation in the rate charged to individuals on the same plan in the same community. Young adults fare better under this regulation, since age is a factor that allows for fluctuation in pricing and therefore distributes the premiums in their favor.
In an unregulated market there is much more leeway to price premiums according to health status and age. The more reform there is, the more it favors those who have chronic/pre-existing conditions as well as those who are older. Rating bands, community rating, and adjusted community rating all work against healthy young adults, or in the post-reform world where health status and claim experience is not factored in, it works against those who are in the younger demographic.
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Health Care Reform is still being implemented little-by-little. We should start seeing many of the regulations being implemented in 2014, though we won’t see the full effects of Health Care Reform until well past 2014.
One thing that we will see (and to a degree have already started to see) is less variance in premium costs between those in their 20s, 50s, and 70s; costs will be spread out more evenly between demographics. Since young adults generally use less health care than those in their 50s and beyond, their premiums are definitely going to rise as we see reform being fully implemented.
Do you think age should be factored in to a higher degree? Should the multiple for age be higher than 3-to-1? What are your thoughts on Health Care Reform and what do you think could be done differently/better?
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Photo by John Benson
Full Disclosure: I do work for a diversified health and well-being company, but this post is my own opinion and is no way representative of my employer.
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I am probably about to offend everyone here.
#1 I am an advocate of Canadian ir European style universal healthcare. So obviously it makes me crazy that we Americans complain about our healthcae costs going up, yet are willing to pay a 20 percent premium to insurance companies to manage our care
#2 Don’t reply to this saying that you don’t think it’ fair that you have to “pay for other people’ care.” We are all going to pay or each other anyway. When poorpeople are uninsued it would be unethical to refuse treatment. They will go to the emergency and the general public gets stuck holding the bill. We might as well just accept the fact that healthcare costs will be paid for and absorbed by everyone and we might as well make it as cheap as possible.
It’s obviously a sensitive subject to me. I have a pre-exiting condition because I had back surgery many years ago.
@Holly at ClubThrifty Notice that I didn’t really give an opinion in this piece, as I know it’s a sensitive topic. It is important to keep in mind for personal finances, that’s all : )
@DC @ Young Adult MoneyOh, I know. The whole topic just makes me crazy because the answer seems completely obvious to me =)
@Holly at ClubThrifty I understand your perspective. At this point we know that for at least the next four years nothing is going to change from the current path so it’s more about implementation and people understanding the changes vs. debating whether we are doing the “right thing” or not.
Lots of people have no idea what changes are actually going to take place, but I don’t blame them for not knowing. If I didn’t work in the health care industry I probably wouldn’t know either, though, which is why I write about it from time-to-time.
@DC @ Young Adult Money @Holly at ClubThrifty
I think the biggest negative is that limits/regulations are being put in the wrong places! The whole point of insurance is to spread risk amongst community. When I studied for my life insurance license you learn that it came front the ways communities monitored themselves in the past. A village would collect a little bit of food or money from every family. Then if the husband (breadwinner) died, his family would receive some of the stores of food or money.
I believe this country needed reform, bc some of the system is way out of hand, and many communities are underserved but I don’t think what they came up with works. Insurance uses actuary tables to determine the risk they are taking and then charge according to that risk. So yes, the elderly should pay more. Yes, women generally need more care, so they should pay more, people that have chronic illnesses should pay more. It should not be crippling, but commensurate to the risk the insurance company is taking on. These factors come into play for life insurance and auto insurance and home/renters insurance…why not health insurance. Keep in mind I believe this knowing that I AM a woman and I have chronic illnesses (asthma and anemia) that would cause me to pay more under that thought…but I’m also a bad driver so I have to pay more auto insurance! In my family, though, my husband gets virtually no care and the kids really only get their preventive care. So their prices should be lower.
@MomofTwoPreciousGirls @DC @Holly Women generally have higher healthcare costs because we carry and deliver the children. It’s completely wrong for women to have to shoulder the entire burden. Think about it. Every baby born is a man’s child as well. Furthermore, age isn’t everything. What about an obese 20 year old who smokes? Why should a 60 year old who has taken great care of their health pay more than them? There are so many other variables that I could mention.
Even if you take away childbirth, women typically require other medical care. Men only need to have physicals each year women need to have a physical and a gyn appt, and as we age you need to add in mammograms, colonoscopies etc etc. when you fill out an application for life insurance you have to do a complete history and you are charged accordingly. I think the same should be true of health insurance. The company insuring you for either of these cases has a higher risk and cost to cover you. Insurance is based on risk factors, so why should that not be considered?
And older healthy person still probably needs to see more doctors in a year to remain that way, just as an obese 20 year old would. Just as a smoker would. These companies come up with premiums using statistical algorithms.
That does not mean that costs are driven through the roof by other nonstatiscal factors of course!
What we probably both agree on is that there is a lot of waste that drives up these costs as well. And THOSE are the things that should have been addressed in healthcare reform. (Bloated administration costs on the part of the insurance companies, bloated torte costs for medical practitioners, people costing the system more bc they never did any maintenance and waited until the body broke down.
@MomofTwoPreciousGirls I should say that health insurance companies “bloated” administration costs are completely seperate from medical cost trend in general. In fact, if health insurance companies do not spend at least 80-85% on medical costs, they have to pay a rebate. The remainder is what they have for all operating expenses and whatever is left after that is profit.
Here’s the post: https://www.youngadultmoney.com/2012/07/30/understanding-the-medical-loss-ratio-mlr-and-health-insurance-rebates/
Very good post DC! We got to experience buying our own healthcare coverage last year and let me tell you…it was eye opening o say the least. We’re also relatively healthy to boot. I don’t know what the answer is, but it has to be better than what we have.
@FrugalRules The exchanges should benefit you starting in 2014. They will still be “pricey” but will be so regulated that you should benefit if you are purchasing it on your own.
I’m curious why premiums will flatten for people more. Because older people have a higher usage of health services, wouldn’t their premiums remain higher?
@AverageJoeMoney Premiums for the elderly currently can be as much as 9x higher. The rate bands have (and will continue to) push up premiums for young adults. We’ll see this more once the exchanges are up and running, since they will have very strict guidelines, I’m sure.
our insurance premiums definitely went up by about $100 a month. It really blows, and the only thing that kept us having more money in our pocket this year was because our FSA contribution went down to $1,000 this year from $5,000 last year. I hope the premiums don’t go up again next year…
@NewlywedsBudget They most likely will go up next year, especially since you are young adults. It may go up a lot or a little, it really depends on the policy, what you are paying now, etc. It’s not a fun thing to think or talk about, but it’s a reality.
We’ve definitely noticed an increase in our premiums, and I really appreciate this post. It’s difficult to muddle through all the health care changes to understand how it will affect us, and this makes it much clearer. You should totally keep posting about this as you learn new things!
@BudgetBlonde Thanks! I like writing about health care so I will probably keep it up : )
I’m just curious on what your thoughts are about having more young people in the health insurance pool. At the moment there is a large number of uninsured young people who cannot afford health insurance and thus go without. Once these people are factored in wouldn’t that decrease premiums overall? Or is it not enough to counter the number of older Americans.
@JustinatTheFrugalPath No it would not decrease premiums overall. It will decrease premiums for the older population, not young adults. Young adults will pay more because of the upward pressure of rate bands.
The main point is they cannot offer these young adults super cheap premiums, because they can only vary rates by a certain factor (i.e. 3x for age, etc.) therefore the “floor” has to be relatively high for premiums. The only reason young adults will join is because it is 1) subsidized so they can afford it or 2) they feel forced to because they will have to pay a fine if they don’t purchase it.
@DC @ Young Adult Money That makes sense. Instead of lowering the floor for insurance rates it would instead just lower the ceiling.
Thanks for bringing this point to light DC. I do believe that everyone should have affordable health insurance, I’m just not sure how they should go about it.
@JustinatTheFrugalPath Yep that’s exactly what will happen.
No problem, I like writing about health care. Basically the health care reform didn’t tackle costs, instead it tackled the coverage issue. Everyone will have coverage regardless of their health status/history/pre-existing conditions, so the overall medical spend will increase and the increased costs will be spread out among everyone. Maybe next time around they will tackle cost of care??
That was one of my big beefs with healthcare reform when it was being negotiated – that insurance premiums for young people would climb dramatically.
Oops, posted before finished. But I’d also be curious what your thoughts are on the lack of need differentiation for young families that seems to be present now due to HC reform. By that I mean, a young parent can’t buy separate levels of coverage for herself and her child as she used to be able to, which seems insane since their needs are completely different.
Mom could do with a HDHP, but baby needs regular checkups and probably needs a more “standard policy”.
As someone in the industry, I’d be very interested in your thoughts on that.
@Plantingourpennies Well, from everything I’ve read/heard/looked into (and the rules do change as HHS and the states determine definitions and whatnot) there will be less variations in coverage. Most plans are going to cover just about everything, and they are going to cover people regardless of sex. The premiums can vary for age, but like I said it’s going to have much less variation than in the past.
I see lots of people taking the fine to avoid the insurance. I’m sure it will be less than paying premiums, and I bet you can deduct it from your tax returns that most people in this category likely get every year.
@Eyesonthedollar Well, for those young adults that DO pay for insurance, their premiums will go up ;)
@Eyesonthedollar The penalty is non-deductible. Bottom line: Obamacare HOSES young people, who voted for the guy in overwhelming numbers. Elections have consequences.
@senatorseven I didn’t mean the penalty was deductible just that lower to middle income workers let Uncle Sam withhold too much of their pay and tend to get a refund, so they would use that to offset the penalty. I don’t agree with everything in health care reform. It has been a pain as a health care provider, but I do know many young adults without decent jobs who are able to stay on their parents’ insurance until age 26. I don’t think they feel hosed at all. Young people who choose to pay for premiums will pay more, but when you get old you might be grateful that things are spread out a bit more. There are always positives and negatives.
@Eyesonthedollar I’m actually in the age group that those under 30 will subsidize with their increased premiums, as my premium under the law can’t be more than 3x the lowest premium. As for staying on parents’ coverage ’til 26, if Obamacare, the failed stimulus, cash-for-clunkers, Dodd-Frank and other horrible economic policies had been replaced by sensible tax and spending policies, perhaps all those 23-26 year olds would be able to find a JOB and wouldn’t need to be on Mom & Dad’s coverage. I’ve been in the health insurance industry for over 25 years, and nobody I know in the industry is a true fan of this bad law. It has done and will do NOTHING to control cost, and meanwhile forces all to purchase coverage with inflated premiums due to the underlying cost increases associated with care delivery.
@Eyesonthedollar Hit “send” too soon … Note that this law will result in my business securing more clients than ever, because of the coverage mandates, so as a professional it’s very good for me; as an American who loves his country, it’s a disaster.
I absolutely believe that everyone should have access to affordable health care. Key word there being affordable. If you make insurance coverage mandatory and then impose fees for not having insurance, I’m not sure where that will put most young people. When I was between college and grad school there was a period of time I was uninsured. I wanted insurance of course, but couldn’t afford to buy it on my own. I don’t think they people who chose not to have insurance (most of them at least) don’t buy the insurance because they don’t want it, they don’t buy it because they can’t afford it. So now we’re going to charge them a fine for being unable to afford health insurance, I’m not sure how that will work out?