Featured Health Business Daily Story, Oct. 28, 2016

How Switching to 5:1 Age-Rating Band May Impact Rates, Enrollment, CMS Spending (with Table: Subsidies, Age Ratings Slash Coverage Costs for Older Enrollees)

Reprinted from INSIDE HEALTH INSURANCE EXCHANGES, a hard-hitting newsletter with news and strategic insights on the development and operation of public and private exchanges. Sign up for a $62 two-month trial subscription today.

October 2016Volume 6Issue 10

During a September meeting at the White House to discuss possible improvements to the Affordable Care Act (ACA), some health plan executives advocated loosening the age-rating band ratio from 3:1 to 5:1 (eNews Alert 9/14/16). But actuaries and economists contacted by HEX say that although such a move would likely boost enrollment among young adults, there would be consequences.

The 3:1 age rating requirement — a provision of the ACA — was heralded as a way to shield older, sicker Americans from paying vastly higher premiums than younger, healthier enrollees. Prior to the enactment of the law, actuaries and health plans warned the age-rating bands would have a disproportionate impact on younger people, who would get less value from their premiums. In some cases — due to the way federal premium subsidies are calculated — older individuals wind up with larger federal premium subsidies and lower premiums than younger enrollees (see table, p. 3).

Based on actuarial models, the 3:1 rating band increased premiums by between 5% and 10% for people between the ages of 25 and 40. But premiums were reduced 15% to 25% for people aged 55 to 64, says Dave Dillon, a fellow of the Society of Actuaries.

Under the existing 3:1 rating band, a 24-year-old earning 250% of the Federal Poverty Level (FPL) pays about $600 a year more for coverage than they really should, Kurt Giesa, a partner in Oliver Wyman’s actuarial consulting practice, tells HEX. “If you think about the actuarial value of the premium, then that 24-year-old is getting 73 cents in value for every dollar paid out of pocket. By contrast, a 64-year-old at 250% of FPL receives about $3 in value for every dollar paid. Giesa explained the impact rating bands and premium subsidies have on coverage costs at a Sept. 14 hearing before the House Committee on Oversight and Government Reform.

Inside Health Insurance Exchanges

The existing bands, combined with the ACA’s formula for calculating federal premium subsidies, have kept many uninsured young adults out of the risk pool. Federal subsidies essentially disappear for young adults who earn more than 250% of FPL. “That means that young people are getting a much lower percent subsidy than are older people,” says Alissa Fox, senior vice president in the Blue Cross and Blue Shield Association’s office of policy and representation. Fox advocates eliminating the 3:1 band and allowing states to set their own rules.

While moving to 5:1 would relieve some pressure, it’s seen as just one factor needed to drive more young adults to the public insurance exchanges. And such a change would push premiums up substantially for older adults, says Dillon. “It wouldn’t be a silver bullet, but it would be one factor to bring rates down for younger people,” he tells HEX.

Mac McCarthy, president of McCarthy Actuarial Consulting, LLC, agrees that while moving to a 5:1 ratio is a step in the right direction, it probably is not enough to entice substantial numbers of young adults to enroll at this stage of the game. “The tepid individual mandate and enforcement, confusing and constantly changing plans, and difficult enrollment websites all work against enrolling folks that would rather not be bothered in the first place,” he says.

Consider this: A 27-year-old single healthy male earning $15,000 a year qualifies for a federal subsidy of about $220, McCarthy explains. Due to the 3:1 age curve, the premium is $245, for a silver plan with a deductible of several thousand dollars. “His cost would only be $25 a month, but his expectation is that he will get nothing out of it. Do you think he will opt to use his $25 for that, or to take his girlfriend to a movie?” he asks. Under a 5:1 band, that person’s subsidy would completely cover the premium. “Now, all you have to do is to convince him to spend the time to research plans and deal with the exchange website,” McCarthy quips.

5:1 Would Cost $9.3 Billion

Loosening age restrictions would reduce premium costs for younger adults relative to where they are now, and that could lift enrollment among young adults. But it also would increase premiums for older adults, says Cori Uccello, a senior health fellow of the American Academy of Actuaries. “While you might attract more young enrollees, you risk losing healthy older individuals. And it’s the healthy older people who do a lot to subsidize the costs of the high utilizers because they pay higher premiums.…You don’t want to lose that group.”

In 2016, people between the ages of 45 and 64 made up nearly half of the nation’s exchange enrollment.

“From an actuarial perspective, any time that you restrict premium rates with regard to a characteristic that is predictive of costs, it can raise concern about selection effects,” adds Hans Leida, an actuary in Milliman’s Minneapolis office. “People who are getting a better deal will disproportionately sign up for coverage.”

A study by RAND Corp. concludes that switching to a 5:1 band would reduce premiums for young adults by much less than it would boost premiums for older enrollees. For a 64-year-old, the annual premium for a typical silver plan would grow from about $8,500 to $10,600, according to RAND. A 24-year-old enrollee would see premiums fall from $2,800 to $2,100. The higher premiums for older, low-income enrollees would cost the federal government an additional $9.3 billion a year in federal premium subsidies. Moreover, RAND estimates about 400,000 older adults who don’t qualify for subsidies would drop coverage.

Furthermore, an Urban Institute analysis suggests that switching to a 5:1 band would tend to undercharge young adults for health care and overcharge older adults relative to their actual spending, notes Sara Collins, Ph.D., an economist and vice president at The Commonwealth Fund. Another complication is that any change to age-rating factors would flow into the risk-adjustment program. Risk-adjustment transfers take into account the risk scores that are assigned to each member, but also account for the rating factors that insurers are allowed to use to set their premiums for these members, Leida explains.

Carriers Warned of Age-Rating Risks

A 2009 study by the Blue Cross and Blue Shield Association concluded that a mandatory 3:1 rating band — vs. a 5:1 band — would prompt 500,000 people to leave the individual market. “And we knew it would also make it more difficult to enroll people,” says Fox.

After the enactment of the ACA, America’s Health Insurance Plans (AHIP), the National Association of Insurance Commissioners and other stakeholders urged a gradual phase-in of the age-rating band (HEX 4/12, p. 8). In its final rule in February 2013, the agency confirmed that the rate band couldn’t be phased in.

But the rule didn’t explain how carriers should set premiums using the rating bands. A carrier that wanted to attract young members might have priced its products as low as possible. While those low premiums wouldn’t have adequately covered the cost of older and sicker members, health plans incorrectly assumed the risk adjustment and risk corridors programs would offset those losses. Other carriers might have priced their products higher to make sure that premiums covered the costs of their older members, but that strategy typically leads to young members subsidizing older ones, explains Dillon.

At this point, it’s difficult to know how moving to a 5-to-1 band would impact carriers and enrollment, says Dillon, adding that some carriers likely have claim costs for older members that are significantly higher than 5:1.

Prior to the ACA there were no federal rules on rating bands, but they did vary by state. Some states, such as New Hampshire, had a 4:1 band. Minnesota had a 3:1 band, and New York was community rated and didn’t allow carriers to base premiums on age.

Subsidies, Age Ratings Slash Coverage Costs for Older Enrollees

In the table below, the top portion of the table represents 2015 premiums if not restricted by the 3:1 age-rating band. The second row indicates costs after the 3:1 rating band is applied. The middle of the table indicates an individual’s out-of-pocket costs for coverage after Advanced Premiums Tax Credits are applied. After 250% of FPL, the 24-year-old isn’t helped by the subsidies and must pay the full premium, while the 64-year-old with the same income level is responsible for only one third of the premium due to the subsidy. The bottom part of the table shows the ratio of the actuarial value of the coverage to the out-of-pocket cost of coverage, essentially a measure of the “value” the individual receives for every $1 in out-of-pocket spending for the coverage.

Actuarial Premiums Relative to Out-of-Pocket Costs by Age and Income

Age 24

Age 44

Age 64

Actuarial Premium

$ 133.87

$ 263.51

$ 593.70

Premium With 3:1 Age Slope

$ 183.51

$ 256.37

$ 550.53

Out of Pocket Cost of Coverage After Tax Credits, by Federal Poverty Level (FPL)

150% FPL

$ 58.64

$ 58.64

$ 58.64

250% FPL




350% FPL




400%+ FPL




Actuarial Premium Relative to Out-of-Pocket Cost by Age and FPL

150% FPL




250% FPL




350% FPL




400%+ FPL




Note: To simplify this analysis, neither the value of cost-sharing reduction subsidies nor the penalties for not maintaining coverage were factored into this analysis.

SOURCE: Oliver Wyman, testimony before the House Committee on Oversight and Government Reform. Sept. 14, 2016.

© 2016 by Atlantic Information Services, Inc. All Rights Reserved.

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