Young people under Obamacare: Cash cow for older workers

It's official: the health care law will unduly stick it to young Americans by making them pay far higher premiums starting January 1, 2014.[1] New rules announced this month are even worse than expected when it comes to shoveling an unfair burden onto our nation's youth. Moreover, they also perversely increase the incentives of young people to remain uninsured.

The newly announced rules limit insurers to charge their oldest customers no more than three times as much as younger ones. As shown in the following chart based on estimates by international management consulting firm Oliver Wyman, the rule will force insurers to hike rates for 18- to 24-year-olds by 45 percent even as rates for those 60 and older drop by 13 percent in most states.[2] That means a 22-year-old waitress paying $2,068 for her health insurance will have to fork over $3,000 when Obamacare takes effect.[3] And these figures even underestimate the actual impact.

Analysts based these estimates on average premiums for 5-year age groups (i.e. 55-59, 60-64, etc.). However, the new rules say that the restriction must apply to 1-year age groups (i.e. 25, 26, 27, etc.). Since health spending rises steadily by age-about 3.5 percent per year between 25 to 64-expected spending for 64 year-olds is higher than for the 60-64 year-old age group as a whole. That means insurance companies will have to charge 18-year-olds at least 10 percent more using the 1-year age groups to ensure their premiums fall within the mandated range of those of 64 year-olds.

The real-world consequence of this regulatory misjudgment is that young people will have an even greater economic incentive to simply pay the $695 annual penalty for not having coverage and wait until they are sick before they purchase it. [4] In short, it is now even more likely that Obamacare will amplify the perverse incentives for "free-riding" that it was intended to counter.

Clearly, until we observe actual behavior next January, we won't know precisely how large an adverse selection problem has been unnecessarily created by these new rules. But what we can say for certain is that for young adults who elect to have health coverage, it will be way more expensive next year than it is today.

Is this fair? Ask the typical 20-24 year-old-whose median weekly earnings are $461-whether it's fair to be asked to pay 50 percent higher premiums so that workers age 55-64-whose median weekly earnings are $887-can pay lower premiums. Think about that. The median earnings for older workers are $420 a week more than those of younger workers, or roughly $20,000 more a year. How is mandating a price break on health insurance for this far higher income group at the expense of the lower income group possibly fair?

The difference in mean health spending for those age 45-64 and those age 18-24 is a mere $4,100-less than $350 a month.[3]  In short, the group benefiting from this transfer earns enough extra in a single week to cover the expense of their high health insurance premiums. I'm in the age category that would benefit from this type of transfer, yet even I can see how grossly unfair it is to the typical young worker.

As well, this unnecessary and undesirable feature of Obamacare is complicating discussions about how to reform Medicare. One very logical tweak to the program is to raise the age of eligibility to age 67 (so that it matches the eligibility age used for Social Security). After all, life expectancy at age 65 has risen by 4.5 years since Medicare's inception. But because of the restrictions placed on premiums under Obamacare, such a simple change would require the premiums of young adults obtaining coverage through the exchanges to increase by at least eight percent, according to a Kaiser Family Foundation study.

This is what comes of "taxation by regulation." If older people truly are deserving of help in paying for their premiums, then we should be relying on honest and open subsidies to assist them. This would permit the burden to be borne by society in general in a fashion that we can agree is distributionally fair. In contrast, loading all of these generational cross-subsidies onto young people is manifestly unfair. When we see "Occupy Obamacare" protests, we'll know that young people have finally figured this out.

Footnotes

[1] Even enthusiastic proponents of the law such as Washington and Lee University professor Timothy Jost, have acknowledged that age rating compression "is going to force younger people to pay more in the individual market as older individuals pay less."

[2] Many states already place restrictions on age rating in the individual insurance market (as codified in the Oliver Wyman report), but use a much more generous 5:1 ratio, which does not distort pricing nearly as much given that there is a 6:1 ratio of spending for older compared to younger individuals. In an unregulated market, we would expect premiums to mirror the 6:1 ratio of expected spending for these two groups so that each age cohort effectively self-financed its own spending, just as we observe in markets for life insurance, long term care insurance and auto insurance. The chart shown shows the increase in rates required for each age category to move from a 5:1 maximum ratio to a far more restrictive 3:1 ratio.

[3] These are illustrative figures. The CBO projects that in 2016, the average premium in the individual market under Obamacare will be $5,800 ($300 more than without Obamacare). The age rating rules will allow this premium to be lower for the youngest subscribers so long as their premium is no less than one third the amount charged to the oldest subscribers. Thus, one can imagine a plan that charges $3,000 for its youngest subscribers and $9,000 for its oldest, averaging $5,800. But the Wyman figures imply that without Obamacare, a $3,000 policy would have cost a young subscriber only $2,068 in the current market.

[4] The penalty starts at only $95 in 2014, growing to $325 in 2015 and $695 in 2016, after which the penalty will be adjusted for cost-of-living increases (just as Social Security payments are). Obviously, the incentives to simply pay the penalty rather than spend thousands of dollars are coverage are even greater in 2014 and 2015, when the dollar penalty is relatively smaller.

[5] These are based on 2010 data from the Medical Expenditure Panel Survey, which are the latest available. Mean spending for age 18-24 was $1642, compared to $5737 for those age 45-64. Unfortunately, there is no more fine-grained age breakdown reported. However, average spending for those 65-90 is only $9,896, so the difference in spending between the oldest and youngest workers cannot possibly exceed $7,300.

 

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Christopher J.
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