Will Higher Premiums and Low Penalties Keep Young Adults Out of the Insurance Marketplace?

On October 28, 2013, an HHS news release indicated that five out of 10 young adults eligible for insurance coverage from the Affordable Care Act’s (ACA) Health Insurance Marketplace could receive coverage for $50 or less per month in 2014. According to a research study by the American Action Forum (AAF), entitled “Premium Increases for ‘Young Invincibles’ Under the ACA and the Impending Premium Spiral,” this HHS release paints a misleading picture of the actual premium costs to young adults.

Led by Douglas Holtz-Eakin, former Director of the Congressional Budget Office, the  AAF is a center-right policy institute providing actionable research and analysis to solve America’s most pressing policy challenges. According to AAF, a comparison of the monthly premium for the least expensive bronze plan offered in each state-level exchange in 2014 to the least expensive plan offered in 2013 indicates, on average, that a healthy 30-year-old male nonsmoker will see his lowest cost insurance option increase 260 percent. In fact, AAF predicts that premiums for healthy 30-year-olds will increase in all 50 states and the District of Columbia.

Effect of Subsidies

The AAF also contends that the premium subsidies offered under the ACA will do little encourage young adults to enroll, because the penalties for noncompliance with the individual mandate are small in comparison to the costs of enrollment. In fact, cost-benefit analyses by AAF indicates that: (1) the cost of subsidized insurance is up to 10 times greater for young adults than the penalty for noncompliance with the individual mandate; and (2) in the majority of instances, the cost of bronze level insurance premiums far exceeds the penalties, except for those with incomes 133 percent of the federal poverty level.

State Premium Increases

All 50 states and the District of Columbia have experienced health insurance rate increases since ACA enactment, according to the AAF study, with 44 states experiencing triple digit percentage increases in premiums for the lowest-priced coverage. The average premium rose from $62 per month prior to the ACA to $187.08 per month after the ACA, 202 percent increase. The average percent change between 2013 and 2014 minimum level plan monthly premiums is 260 percent.

Rationale for Premium Spike

The AAF study offers several reasons for the premium spike for young adults.

First, the ACA imposes a Health Insurance Tax (HIT) on insurance plans, which, according to the Joint Committee on Taxation, is projected to exceed $100 billion by 2024. AAF quotes global consulting firm Oliver Wyman, which projected in an October 31, 2011 study, entitled “Estimated Premium Impacts of Annual Fees Assessed on Health Insurance Plans,” that these increases will result in premium increases of at least 2.3 percent within the first year of the HIT’s implementation. AAF also reports that Oliver Wyman estimated in an November 2012 study, entitled “Annual Tax on Insurers Allocated by State,” that the HIT will cost the average individual $2,171 and family $5,140 in additional premiums over the next 10 years.

Second, exchange usage and administration fees, which can be charged by state and federal exchanges to insurance companies, are likely to be passed along to the customers. These fees were estimated by Trustmark Companies, in their July 18, 2013 study entitled “Patient Protection and Affordable Care Act In Focus: Overview of Four New Fees,” to cause federal exchange premiums to increase by up to 3.5 percent.

Third, premium increases associated with coverage of the essential health benefits (i.e., ambulatory services, behavioral health care, outpatient prescription drugs, maternity and newborn care, and preventative and wellness services, etc.) have ranged from 0.13 percent in Rhode Island to 33 percent in Maine, with most states expecting single digit increases.

Fourth, minimum actuarial values drive premium increases. Plans are grouped based upon their actuarial values: bronze (60 percent), silver (70 percent), gold (80 percent), and platinum (90 percent). Because the bronze tier’s actuarial value is a higher value than many of the health insurance plans being offered in the individual market today, this will tend to drive premiums upward as these plans are required to cover more services.

Fifth, the ACA’s reduction of the age-band compression to a ratio of 3:1, which means that an older enrollee’s premium cannot be more than three times that of a younger enrollee, will result in premium increases for young adults. Currently, all 50 states have age-band systems with at least a 5:1 ratio. The AAF quotes an Oliver Wyman study which determined that the implementation of the 3:1 ratio will increase premiums 45 percent for young adults 18-24 years of age and 35 percent for those 25-29.

Finally, community rating and guaranteed issue will result in premium increases. The AAF states  that  the Council of Economic Advisors found that: (1) community rating raises the prices for individual policies by over 20 percent and for family policies by over 27 percent; and (2) guaranteed issue raises the price of individual health insurance policies by 114 percent and family policies by 94 percent. Without an effective individual mandate, the AAF states, premiums will spiral upward.