Another ACA Paradox: Lowering the Average Age Increases Consumer Premiums

There is a little secret (not anymore) among health actuaries that pricing age slopes are self-fulfilling. If the true cost of the oldest eligible age group in a population is five times the youngest eligible age group, we say that there is a “5 to 1 age slope”; we usually abbreviate 5:1. Regulations sometimes define or limit the pricing age slope that insurers can utilize. The Affordable Care Act (ACA) has a fixed 3:1 age slope which is known to be narrower than the true cost of the actual population. The effect of this regulation is higher premiums for younger enrollees and lower premiums for older enrollees.

As younger individuals are asked to pay higher premiums, some of them (predominantly healthy) decide not to obtain coverage. The younger enrolled population is now less healthy. On the flip side, older individuals have lower premiums. Some older individuals who had previously declined coverage may enroll now that premiums are lower. We would expect this group of new older enrollees to be healthier than their peers. Voila, the younger people are less healthy and the older people are healthier; the age slope for enrollees is now 3:1. OK, it doesn’t always work out that cleanly, but you get the drift. We end up with robust enrollment of older individuals and a larger mix of young, healthy people without insurance. (Remember this when ACA solutions are targeted toward providing coverage for older people.)

Would you believe that the resulting cost slope is less than 3:1? A study released today by RAND Corporation, “Opening Medicare to Americans Aged 50 to 64 Would Cut Their Insurance Costs, but Drive Up Insurance Prices for Younger People”, states this: “While older exchange enrollees currently pay higher premiums, the analysis finds that, as a group, their care is less expensive relative to their high premiums. Younger people in the exchange tend to be less healthy and their care is more expensive than the premiums they pay.” This suggests that older individuals are subsidizing the cost for younger individuals in a 3:1 marketplace.

It is very important (and usually overlooked) to note that the actual premiums consumers pay don’t fit along a 3:1 curve. Most enrollees receive premium subsidies, and net premiums are 1:1 for the benchmark plan for enrollees at the same income level. For plans priced below the benchmark, older enrollees actually pay less (not a typo) than younger enrollees. The effect of this is a market that is relatively more attractive to older enrollees; RAND states that “a wide variety of adults, including both healthy and unhealthy people tend to enroll in the individual market. Younger adults who enroll in the individual market, in contrast, tend to be unhealthy and expensive.”

This study reminded me of an incident at the Society of Actuaries Health Meeting this summer. I attended a session titled “Where are we Headed: Disruptions for the Health Actuary”. During the Question & Answer period, I referenced audience polling results regarding the future possibility of a buy-in option similar to what RAND has studied. Here are the polling question and the results.

Which scenario do you think best describes the future 10 years from now?

Almost half of the polled audience believed a ‘Medicaid/Medicare Buy-In Option or Government Option on the Exchanges’ was the most likely scenario. One of the speakers said that “the concept is to try and get the higher cost members out of the ACA to make it cheaper, to incentivize more people to purchase it.” I asked about the rationale of a Medicaid/Medicare Buy-In, as putting a lower cost Government Option on an individual market exchange is problematic for other reasons.

I acknowledged agreement with the Buy-In being the most likely scenario, but challenged the thinking behind it:

“I want to ask a question about the wisdom of it, and if we have really thought through that. Ten years ago, if we had gaps, we had 50 million people uninsured and the most vulnerable were our low-income, our elderly, and filling those gaps with programs like Medicare and Medicaid would have been the most likely already ready-made solution for that…but it seems we likely we have forgotten about the ACA, which itself was specifically designed to help lower-income people, to help elderly, sick people who had trouble getting insurance, and the ACA has flipped things around, so now the disadvantaged people are more your younger, higher-income people. It seems ironic that the solution for problems for younger, high-income people are programs that traditionally help lower-income, older people. It seems like a strange solution to the problems that we have today. It seems like we’re targeting the wrong groups with that sort of step, so I’d be interested in your thoughts on that.“

It was met by a long silence, then audience laughter, and then “that was a good question.” It was a reminder that many policymakers are still trying to solve the same problems that the ACA addressed, perhaps not realizing that the ACA has created solutions for its targeted population but created challenges for other groups in the process. Shouldn’t our focus now be on populations challenged by the ACA rather than those with newfound ACA solutions?

RAND states that “a Medicare buy-in could offer significantly more-affordable coverage to older adults while potentially leading to higher premiums for the pool of people in the individual market”. In other words, it would provide a lower cost off-ramp to people already advantaged by the ACA, and by doing so, it would raise premiums even higher for those who have been challenged by the ACA’s regulations. Historically, some advocacy groups have looked to expand government programs by targeting populations with private market challenges; this may be the first time that a population with adequate private coverage was specifically targeted while a challenged group (and policy impact to it) was ignored.

The ACA has provided a more attractive market for older enrollees while attracting a limited population of younger adults, who are primarily in poor health. Allowing older adults to buy-in to Medicare would solve a problem that doesn’t exist; it would increase premiums in ACA individual markets and relegate those markets to covering primarily low income (eligible for premium subsidies) adults age 26 to 49 (and possibly their children), as younger adults would scatter back to their parents’ plan if they aren’t there already. The collateral damage of a Medicare buy-in would be a shrunk, last resort, limited individual market resembling a small remnant of the robust marketplaces that ACA architects once envisioned. This may inevitably be the goal of its proponents, but let’s be forthcoming about the challenges and the impact of policy proposals on subpopulations in ACA markets.

Greg Fann, FSA, FCA, MAAA, is a Consulting Actuary with Axene Health Partners, LLC and is based in AHP’s Temecula, CA office.