Thursday, October 22, 2009

NYT Economix blog: In Health Care Premiums, Who Gets a Subsidy?

The Economix blog on the New York Times site has a good article about who will subsidize whom in health insurance. One of the main purposes of health insurance is to pool risk and have the healthy cross-subsidize the sick. However, insurance companies have also charged more (in the individual market) to smokers, women, older folks, and people with families.

It true that all these groups have higher utilization than their counterparts. On the other hand, asking others to subsidize them excessively may be perceived as unfair. In the case of the old vs. the young, younger folks almost always earn less than older folks, so they are unable to subsidize them. For men vs. women, men still have higher lifetime earnings, so asking them to subsidize women is fair.

The only categories upon which health insurance companies will be able to price-discriminate are tobacco use, age and family composition. The requirements:

1) An insurance company would be allowed to charge tobacco users a health care premium that is one and a half times as high as the premium charged people who don’t use tobacco.
2) A plan’s oldest subscriber could be charged five times as much as a plan’s youngest subscriber.
3) A single adult with a child could be charged 1.8 times what a single adult alone could be charged; a “family” — which, from what I can tell from speaking with actuaries and insurance company representatives, generally refers to two adults plus at least one child — can be charged three times the premium a single adult is charged.
To help you visualize these price differences, here’s a chart showing the ratios:

Rampell asked if these ratios were actuarially fair - for example, are smokers' health care costs really 1.5x that of non-smokers? The answer is that's about right:

I was curious about whether these ratios were actuarially fair — that is, whether these ratios truly reflected the different annual costs to an insurance company of covering a smoker versus a nonsmoker, for example, or an older person versus a younger person. Representatives of both America’s Health Insurance Plans, an industry group, and the American Academy of Actuaries, a public policy organization, said that these ratios were pretty close to being actuarially fair.

Still, the 3:1 ratio for families versus a single person seems to be a big subsidy for families with lots of children. That is, a family with two parents and six children can apparently be charged a premium that is no more than three times the premium charged a single healthy person — even though the total cost of that family’s care is almost certainly more than three times the cost of the single person’s care. (Is this perhaps a pronatalist policy?)

The age ratios also may be a slight subsidy for older people, though Robert Zirkelbach, a spokesman at America’s Health Insurance Plans, said the permissible age ratio is not too far from reflecting the relative costs of covering the old and the young. He noted that previous health reform proposals had set a more elderly-subsidizing age ratio of 2:1 — meaning that young, healthy people would be paying much higher rates proportionate to their actual health costs in order to prevent older, less healthy people from paying rates that reflect the (actual) high cost of providing the latter medical care.

“Everybody would love for older people to not have to pay exorbitant premiums,” said Cori Uccello, a senior health fellow at the American Academy of Actuaries. “But keep in mind that the more you lower them beyond average cost, someone else will have to pick up the tab.”

If younger people have to pay rates that they think are unfairly high, she cautions, they may decide that buying health insurance isn’t worth it, even if the law requires that they purchase health insurance coverage. (The Baucus plan has such a mandate.) Perhaps young people will decide that it’s cheaper to pay a fine for forgoing health insurance than to pay for an expensive health insurance plan.

“The ratios are important, but the insurance mandate also has to be effective and enforceable,” Ms. Uccello said. “Otherwise the low-risk people who don’t think they’re getting a good deal will just say forget it.”

There are also lots of other risk factors that the premium-price ratio guidelines don’t allow insurance companies to consider.

For example, the Baucus proposal does not allow premiums in the individual market to be set based on gender. Gender, however, can be a pretty good predictor of risk.

Generally speaking, young women tend to incur higher medical costs than young men, even excluding the costs of maternity care. At some point around age 50, though, men start to cost more than women. So having unisex premium rates means that at some point in their lives members of each sex would be subsidized by, or subsidizing, the other sex.

In other words, if a demographic category is charged less than is actuarially fair, some other demographic category is subsidizing their costs. Under the Finance bill, there is little to no cross-subsidization between the demographic factors that are allowed (save for gender and family size). Many of the subsidies that are present can be justified. I've heard complaints especially about the age rating, but again, younger people generally have lower earning power and are less able to subsidize older people. Remember, many people on the exchange will get subsidies.

For family size, we are all subsidizing very large families. I imagine that insurers don't charge per child due to administrative reasons - large families are rare, and it would be a considerable paperwork burden to charge everybody per child.

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