RESEARCH Premium Increases for “Young Invincibles” Under the ACA and the Impending Premium Spiral Sam Cappellanti October 2, 2013 Crucial to the success of the Affordable Care Act's (ACA) health insurance exchanges is the participation of 2.7 million uninsured 18-35 year olds, sometimes referred to as the “young invincibles.” With lower than average incomes and generally good health, “young invincibles” are more likely to forego health coverage than others, or be attracted to plans offering basic coverage at minimal prices. Due to the ACA’s sweeping market reforms, rates for low-premium plans have increased exponentially between 2013 and 2014. In fact, on average, a healthy 30 year old male nonsmoker will see his lowest cost insurance option increase 260 percent. 18-35 year olds typically utilize fewer health care services then other populations, and as such, their premiums are needed to subsidize the costs of caring for more expensive enrollees. The administration admits that without these “young invincibles” the exchanges may well fail. However, unreasonable premium increases and an ineffectual subsidy-penalty system appear likely to discourage young people from signing up, threatening the stability of the insurance market. As can be seen in the following map, premiums for a healthy 30 year old will increase in all fifty states and the District of Columbia – from a low of 9 percent in Massachusetts to a high of 600 percent in Vermont. Premium subsidies will do little to defray increased rates for young people, while penalties for noncompliance appear paltry when compared to the costs associated with AmericanActionForum.org RESEARCH coverage. A cost-benefit analysis reveals that the cost of purchasing subsidized insurance is up to 10 times greater for this population than the cost of the mandate penalty. Premium spiral may be eminent, as many will find it financially advantageous to forego coverage, potentially limiting the actual number of “young invincibles” entering the exchange system to well below the administration’s goal of 2.7 million. Introduction The Obama Administration estimates they need the participation of nearly 2.7 million 18- 35 year olds in order for state-level health insurance exchanges set up by the Affordable Care Act (ACA) to work as intended.1 The enrollment of these low cost young adults, a group commonly referred to as “young invincibles,” is essential, as they are required to subsidize the costs of insuring the elderly and chronically ill. The term “young invincible” is a health policy buzzword used to describe young, generally healthy individuals who remain uninsured due to optimism bias: the perception that insurance is not a sensible investment since they are unlikely to need expensive medical treatment.2 Studies have also shown that a portion of this young, uninsured population cannot afford insurance at pre-Affordable Care Act rates.3 Whatever the cause, convincing this previously uninsured group of individuals to enroll in insurance plans is critical to the success and stability of the exchanges. Given their youth, health status, and average income, this demographic is most likely to be attracted to plans offering basic coverage with affordable premiums that, under the exchange regulations, will require greater cost-sharing and perhaps cover more limited networks and services.4 Under the Affordable Care Act, the plans offering the lowest acceptable coverage (with an actuarial value of 60-70 percent) are categorized as bronze plans. However, a comparison of the monthly premium for the least expensive bronze plan offered in each state-level exchange to the least expensive plan offered in 2013 reveals that premium rates are set to increase exponentially in 2014 under the exchange system, with a 30 year old single person expecting an average premium increase of 260 percent. 1 Julie Pace and Jim Kuhnhenn, Obama declared health care law ‘is here to stay’, Associated Press (May 10, 2013), available at http://www.boston.com/news/politics/2012/president/candidates/obama/2013/05/10/obama- declared-health-care-law-here-stay/aH3Iy2nHcV7l3859kzd62N/story.html. 2 See e.g. Katherine Baicker, William J. Congdon, and Sendhil Mullainathan, Health Insurance Coverage and Take-Up: Lessons from Behavioral Economics, 90 The Milbank Quarterly 107, 117 (March 2012); Kirsten Bibbins-Domingo, PhD, MD and Melissa Burroughs Pena, MD, Caring for the “Young Invincibles”, 25 J. Gen. Intern. Med. 642 (2010); Peter Diamond, Organizing the Health Insurance Market, 60 Econometrica 1233, 1236 (1992); Neil D. Weinstein, Unrealistic Optimism About Future Life Events, 39 J. Personality & Soc. Psych. 806, 806 (1980). 3 See e.g. S. R. Collins, R. Robertson, T. Garber, and M. M. Doty, Young, Uninsured, and in Debt: Why Young Adults Lack Health Insurance and How the Affordable Care Act Is Helping, The Commonwealth Fund, June 2012. 4 Letter from Nat’l Ass’n of Ins. Comm’rs, to John J. O’Brien, Dir., Healthcare and Ins., U.S. Office of Pers. Mgmt. (Oct. 24, 2012), available at http://www.naic.org/documents/index_health_reform_section_commentletter.pdf. AmericanActionForum.org RESEARCH The catalysts for these excessively large increases include guaranteed issue and community rating, amongst other ACA provisions. Prior state-level experiences reveal that guaranteed issue and community rating policies can result in a market-destabilizing phenomenon known as premium spiral.5 Premium spiral begins when guaranteed issue and community rating policies raise premiums, particularly for the young, who cross-subsidize high-risk beneficiaries. In response to rising costs, young healthy enrollees opt out of coverage, seeing the investment as financially disadvantageous given their low medical costs. The insurance risk pool becomes disproportionately older and sicker, further increasing prices and driving insurers out until the system becomes unsustainable. In order to avoid this “death spiral,” the Obama Administration put the individual mandate in place. The financial mechanisms meant to encourage enrollment, low-income subsidies and noncompliance penalties, however, seem unlikely to entice “young invincibles” into the exchange system. Utilizing a cost-benefit analysis to compare the costs of the increased bronze level premiums net any subsidies to the costs of the penalties, it becomes clear that in the majority of instances, the cost of bronze level insurance far exceed the costs of the penalties, except for those with incomes 133% of the federal poverty level. Despite cost- defraying subsidies, the combination of costly premiums and ineffective penalties for noncompliance will likely keep many “young invincibles” from enrolling in the exchanges, and could result in a form of premium spiral. Methodology This paper focuses on the health insurance premiums for a 30 year old single male nonsmoker. As someone categorized as a “young invincible,” this individual would most likely be interested in purchasing a bronze-tier plan, offering compliant coverage, but at the lowest price possible within the exchanges. The 2014 publically released premium data6 differ in their age ratings, and therefore must be standardized so that each reflects the premium cost for a bronze-tier plan being purchased by a 30 year old single male. Using the Centers for Medicare and Medicaid Service’s (CMS) default federal standard age curve, base premium rates and rates not fitting into this paper’s parameters were converted into a uniform set of data. For the purposes of this paper, the following 5 See e.g. Thomas Buchmueller and John DiNardo, Did Community Rating Induce an Adverse Selection Death Spiral? Evidence from New York, Pennsylvania, and Connecticut, 92 Am. Econ. Rev. 280 (2002); David Cutler and Richard Zeckhauser, Adverse Selection in Health Insurance, Frontiers in Health Policy Research 1, 8 (January 1998). 6 2014 premium rate data was derived from the Kaiser Health News compilation State Premium Watch: Pricing in the New Insurance Marketplaces, which contains website links and PDFs of the rates for the state-run exchanges, state-federal partnership exchanges, and federally-run exchanges. All rates used in this paper were released prior to the October 1, 2013 launch of the exchange system (available at http://www.kaiserhealthnews.org/stories/2013/august/04/state-premium-watch- exchanges-marketplaces.aspx). AmericanActionForum.org RESEARCH conversion equation is used: ARP = BR(PR).7 The premium ratio factor used to compute the cost of a premium for a 30 year old man was 1.135. The January 2013 rates used in this study are derived from a July 2013 report developed by the U.S. Government Accountability Office (GAO).8 The report compiles annual base premium rates for each state, presenting the minimum, median, and maximum premium rates for individuals, families, and couples of varying ages. The GAO compiled the rates using information from the Center for Consumer Information and Insurance Oversight (CCIIO). As the base rates for single men aged 30 are available in this report, there was no need to use the CMS age curve formula to create a demographically constant set of data. To compare the two sets of base premium data, the 2014 post-ACA rates were compared with the actual 2013 rates. These numbers are displayed below both as a difference in actual dollars and as a ratio to one another. Results Of the 51 states studied, all experienced health insurance rate increases, with 44 of those states experiencing triple digit percentage increases in premiums for the lowest-priced coverage. Pre-ACA premiums average $62.00 monthly, while post-ACA premiums average $187.08 per month, a $125.08, or 202 percent, increase. The average percent change between 2013 and 2014 minimum level plan monthly premiums is 260 percent, reflecting a nearly 3 to 1 ratio between the two sets of premiums. 7 Adjusted rate price (APR) = Base rate (BR) x Premium ratio (PR). 8 U.S. Government Accountability Office, Private Health Insurance: The Range of Base Premiums in the Individual Market by State in January 2013, GAO-13-712R (Jul 23, 2013).