Age-rating bands mark significant change in health plan operations

NATIONAL REPORTS-When major provisions of the Patient Protection and Affordable Care Act (PPACA) take effect in 2014, MCOs will face new limits on premium rates in the individual and small-group markets. Premiums may only vary by a ratio of 3-to-1 for differences in age, and by a ratio of 1.5-to-1 for tobacco use.

"Premiums for young, healthy people may be higher due to the more restrictive rating bands, while premiums for older individuals would be somewhat lower," says American Academy of Actuaries Senior Health Fellow Cori Uccello. "This may discourage younger people from purchasing coverage."

At present, several states set limits on allowable premium variation related to age. In the small-group market, Alabama and North Dakota set a limit of 4-to-1, South Dakota sets a limit of 3-to-1, and New Hampshire sets a limit of 3.5-to-1. In the non-group market, New York has pure community rating, with no variation for age.

"This change isn't phased in," he says. "The legislation says that in 2014, overnight, age-related variation will be limited to 3-to-1. This will mean a significant premium increase for young, healthy people, as much as 50% to 60% by many estimates. Insurers are concerned that this could lead to significant disruption and higher costs."

There is broad agreement that for market reforms such as guaranteed issue to work, there must be widespread participation in the system, including young, healthy people as well as older and sicker people.

POST-REFORM EFFECTS

Whether premiums for the young end up higher post-reform than they are today actually depends on several factors, notes Alissa Meade, an expert at the McKinsey Center for U.S. Health System Reform.

"The legislation includes many benefit minimums, so post-reform, we may see a richer product," she says. "We might end up with a price increase but also increased value. Then again, many younger individuals will qualify for a subsidy. Even if the set premium is higher, what they end up actually paying may be lower."

Will insurers maintain profitability in rapidly changing and unpredictable circumstances? There isn't anything inherent in the modified community rating levels set in PPACA that would limit overall profitability. Post-reform, insurers are still able to set their price, Meade says.

But several closely related factors could have significant effects.

"Profitability will be maintained if insurers set prices at the right level," she says. "However for some insurers, setting premiums within a narrow band would be a new capability. Developing that skill may be challenging for some."

The effects of the new premium limits will vary since state laws vary so much. States may set limits that are narrower than the federal limits but not broader. For example, New York has the option of continuing its current community rating system.

"States that already have rate banding in place face less of a challenge," Meade says. "Payers in entirely unregulated states will need to master a new way of approaching prices."