Obamacare Rate Shock Isn’t What You Think
The Patient Protection and Affordable Care Act has been tarred by critics as an illegitimate engine of intergenerational redistribution, forcing the young to subsidize insurance costs for the old. The higher premiums for young and healthy consumers’ exchange plans, relative to what is available in today’s dysfunctional individual market, are cited as proof, with the alarming tag line “rate shock.”
Rate shock has raised concerns from the law’s supporters and opponents alike. It has largely been pinned on a provision that restricts insurers’ ability to discriminate based on age; under that rule, premiums charged to a plan’s oldest beneficiaries cannot exceed three times the premiums of younger individuals.
The specter of saddling young Americans with higher costs provides a convenient political target. It has sparked efforts to discourage young adults from enrolling in the exchanges. The latest is a campaign to “burn your Obamacare draft card,” with conservative activist group FreedomWorks encouraging young people to torch copies of Vietnam draft cards with the word “Obamacare” superimposed on top.
“The whole scheme is enlisting young adults to overpay, so other people can have subsidies,” said Dean Clancy, vice president of public policy for FreedomWorks. The group’s goal is to “make it socially acceptable to skip the exchange and pay the fine.”
We find this campaign odd. If premiums are indeed shockingly high, that ought to be discouragement enough to opt out of coverage, with no help needed from FreedomWorks.
So why the sleight of hand? Maybe because FreedomWorks’ premise is wrong. Recent evidence suggests that the law won’t actually raise premiums for young adults for the reason its opponents claim. That’s because income-based tax credits will disproportionately help young Americans afford coverage.
In fact, more than 90 percent of individuals ages 21 to 27 eligible for exchange plans are slated to receive these subsidies. So the vast majority of these young adults will face out-of-pocket costs that are equal to or less than per-capita health-care spending for all 21- to 27-year-olds who are covered through the exchanges -- the precise actuarial fairness that Obamacare’s opponents endorse. In other words, as a group, they won’t be paying more than the value of the services they receive.
If the law’s age-rating provisions aren’t to blame for rate shock, what is? The truth is that premium increases for young adults will be driven by guaranteed-issue and community-rating protections -- in plain English, preventing insurers from denying coverage or basing premiums on health history.
Thus, the health-care law’s “rate shock” isn’t a result of the young subsidizing the old. It’s the result of reforming the system so it serves the needs of the sickest and most vulnerable -- something the current individual market fails to do. Guaranteed issue and community rating, as well as minimum benefits and caps on out-of-pocket spending, are not designed to benefit the healthy at any age. They are designed to protect the ill and injured at every age.
Owing to their popularity, railing against these provisions would be politically challenging. Guaranteed issue is supported by two-thirds of Americans, including a majority of both Democrats and Republicans. If you’re opposed to the health-care law, it’s far easier to suggest the young should not subsidize the old, even if that’s not the source of rate shock. That it is based on a faulty assumption about what drives rate shock makes that view all the more unfortunate.
Rate shock isn’t a myth, but the notion that Obamacare transfers significant wealth from the young to the old is. Of course, the more that young and healthy consumers believe it’s real, the more likely they’ll be to opt out, pushing premiums higher for everyone else. It’s a cynical way to perpetuate the market dysfunction that Obamacare is intended to address.
(Adrianna McIntyre is a graduate student in public policy at the University of Michigan. Austin Frakt is a health economist with the U.S. Department of Veterans Affairs.)
To contact the writers of this article: Adrianna McIntyre at firstname.lastname@example.org; Austin Frakt at email@example.com.
To contact the editor responsible for this article: Christopher Flavelle at firstname.lastname@example.org.