Age Rating Under Comprehensive Health Care Reform:

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Abstract

Congressional health care reform proposals have differed in the premium rating rules that would be applied to non-elderly adults. Some have proposed allowing premiums for the older adults to be as much as 5 times as high as those for younger adults (5:1 rating), while others would limit the highest premiums to be twice that of the lowest (2:1 rating). This analysis uses the Health Insurance Policy Simulation Model (HIPSM) to compare the financial implications of the premium rating choice (5:1, 2:1, and 1:1) for households of different ages, incomes, and sizes.

Introduction

One of the central goals of comprehensive health care reform is to eliminate discrimination by health status in the sales and pricing of health insurance and reduce the financial burdens associated with poor health. Consequently, current proposals being considered by Congress would prohibit health insurers from setting premiums based explicitly on the health experience of enrollees. These proposals would promote sharing of health care risk by limiting, but not eliminating, the differences in premiums charged to individuals of different ages. The age rating limits are quite different across the proposals under consideration. The Baucus proposal (as of September 16, 2009), for example, would allow age rating bands of 5:1 (i.e., the premiums charged the oldest adults could be no more than 5 times those charged younger adults), while the House Tri-Committee proposal and the Senate Health, Education, Labor, and Pension (HELP) Committee proposal would limit age rating bands to 2:1. The larger the variation permitted in premiums based upon age, the less broadly risk is shared, as health care expenditures tend to increase with age.2 The smaller the variation permitted, the greater is the extent to which younger individuals who purchase coverage will tend to cross-subsidize the health care expenses of older individuals.

Such differences in age rating bands will lead to significant differences in the distribution of health care burdens across individuals and families of different ages, particularly those enrolling in coverage independently through the proposed National Health Insurance Exchange (referred to here as “the exchange”). This analysis highlights these differences, providing insight into the trade-offs inherent in this policy choice. We compare the distributional consequences across individuals and families under a health care reform approach similar to that delineated in the House Tri-Committee proposal (H.R. 3200) using age rating of 5:1, 2:1, and 1:1 (i.e., pure community rating where all ages are charged the same premium). This analysis takes into account the financial protections that would be provided through premium and out-of-pocket subsidies in the exchange for the modest income population under the House Tri-Committee bill. While our primary focus is on household financial burdens for different age and income groups under health care reform, we also summarize the implications of the different rating rules for health insurance coverage and the costs associated with health care reform. The analysis concentrates largely on the population enrolling in non-group health insurance coverage through the exchange.

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