Q. Why would Congress let insurers charge a 60-year-old three times as much has a 25-year-old?
A: It’s true that the ACA allows insurance companies to charge older applicants three times a much as younger applicants.
But it’s worth noting that prior to 2014, there was no federal standard in terms of how rates could vary based on age. It was common for health insurance companies to charge older applicants five or six times a much as they charged younger applicants. So the 3:1 ratio is an attempt to keep premiums reasonable for older Americans, while also mitigating the more dramatic rate hikes that would have been imposed on younger enrollees if lawmakers had opted for pure community rating (charging everyone the same price, regardless of age).
From a fairness perspective, the 3:1 ratio does make sense. Older enrollees do tend to use more healthcare services; their higher health insurance premiums are analogous to younger men being charged higher automobile insurance premiums. But while the pre-ACA landscape—in most states—allowed health insurers to set premiums very precisely based on each applicant’s expected healthcare needs, the ACA smoothed out many of the variations. Insurers can no longer increase premiums—or reject applications—based on enrollees’ medical history. And while premiums are still based on age, the 3:1 ratio keeps rates more even across the population than they would be without the ACA.
And for people who are eligible based on income, the ACA’s premium subsidies essentially eliminate the differences in premiums due to age. For enrollees who are subsidy-eligible and have equal incomes, their subsidies will result in premiums that are equal, despite the fact that pre-subsidy, the older enrollee’s premium is likely significantly higher than the younger enrollee’s premium (this description of the subsidy cliff illustrates how this works).
Incidentally, the 3:1 ratio applies even if the applicant is over 65 years old; people who are not eligible for Medicare can enroll in Obamacare plans even if they’re well past 64, yet their rates can’t be any higher than a 64-year-old’s rate, since that rate is already the maximum allowed under the 3:1 ratio rule.
New York and Vermont both use pure community rating, under reforms that were implemented many years prior to the ACA. They also have among the highest average health insurance premiums in the country. Massachusetts does allow for some variation in premiums based on age, but only with a 2:1 ratio, rather than the 3:1 ratio allowed under federal law (so older enrollees in Massachusetts don’t pay more than twice as much as younger enrollees).
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