A significant disparity in health insurance costs between young and old tied to risk-based ratings has crippled the individual and small group markets with generally fewer than 50 lives. It also is one of the least discussed issues of health care reform.

Average medical spending per person among 18- to 44-year-olds is about $2,079, whereas it’s 2.3 times higher for 45- to 64-year-olds at $4,866, according to the latest data available from the federal government. These numbers are based on the Medical Expenditure Panel Survey administered by the Agency for Healthcare Research and Quality (AHRQ), which is part of the U.S. Department of Health and Human Services.

Age, of course, is just one of many factors used to underwrite premiums alongside health status, geography and the type of insurance coverage being sought. There’s widespread agreement, even among insurers, that ratings based on health status should be abolished, along with pre-existing condition exclusions, as long as the reform effort is reasonable enough that it doesn’t produce any unintended consequences. The concepts of guaranteed issue and community rating also are being promoted as part of this thinking.

Critics of the health care reform process have suggested that policymakers should focus on more important issues such as limiting the extent to which healthy people subsidize the care of unhealthy people who aren’t taking enough responsibility for their well being.

In search of a sweet spot

Either way, key House and Senate committees have agreed to cap premiums for older Americans who participate in proposed regional or national insurance exchanges so they’re no more than double what younger people pay.

The move would mirror efforts in nine states where more tightly regulated age-based restrictions are in place, though the ratio may be as wide as 30:1 in other states. The insurance industry has agreed to address the issue on a national level in hopes of creating some uniformity across the nation.

But there’s a raging debate about the most appropriate generational ratio that would achieve the best overall balance, with insurers saying a much wider spread of 5:1 is needed. Their argument is that it’s a matter of fairness so that the young don’t over-subsidize the old, who file more medical claims.

Karen Pollitz, project director of Georgetown University’s Health Policy Institute in Washington, D.C., recently described the proposal as “obscene” and a “tax on getting old.” Her colleague, Judy Feder, would like to see the proposed age band tighter than 4:1.

“We’re looking for a balance of rating fairness and subsidy protection and decent benefits to make policies affordable to everyone,” she says. “Young people need the protection as do older people, and when we spread risks we look for subsidies to offset some of that risk spreading.”

The trouble with moving from 5:1 to 4:1 is that it will increase health care costs for 95% of policyholders, cautions Robert Zirkelbach, a spokesman for America’s Health Insurance Plans in Washington, D.C.

“Actuaries say that health care costs between the oldest and youngest workers under 65 are typically six and a half to seven times, and that’s a variation that we see in practice today,” he adds.

James Gelfand, senior manager for health policy for the U.S. Chamber of Commerce in Washington, D.C., notes that House committee legislation is in the 2:1 range, while the Senate Finance Committee started with 5:1 before notching it down to 4:1. He says young employee could expect to pay about $200 under the 5:1 scenario, but as much as $1,000 if it’s 2:1.

Even playing field

Small businesses are keeping a watchful eye on proposed age bands in hopes that any final legislation will level the playing field on underwriting restrictions so that they can better manage insurance risks relative to large companies. Big business is able to self-insure hefty claims and more easily spread underwriting risks in fully insured plans.

Gelfand says it’s extremely challenging for the smallest organizations to obtain and afford insurance policies if, say, an employee is on kidney dialysis, receiving chemotherapy or is approaching retirement age and considered more prone to illness or injury.

The problem apparently is being exacerbated by demographic pressures. “We’re increasingly hearing from employers that the newest crop of workers is not ready to step up to the plate, and they desperately want to keep their experienced workers,” he reports.

There seems to be a growing consensus among the public that allowing people to continue falling through the cracks because they’re sick or old is unacceptable, Gelfand says. “Are they willing to pay the price that that comes with? I don’t know,” he adds. “You can only go to the richest 1% so many times, and health reform is a good example of a time when everybody is going to have to chip in if we want to make that change.”

Done right, health care reform that eliminates pre-existing conditions and adopts reasonable ratings based on age and health status “would be a huge boon to small business,” he believes. “Good rating reform is priceless because big business will no longer have a huge advantage when it comes to pooling risk.”

But if the pain thresholds of young and healthy Americans are overestimated as part of a misguided reform effort that includes a 2:1 age band, then he believes the small group market could be devastated even further, while large employers remain immune to any collateral damage. Gelfand says small employers would reach a point where it becomes impractical for them to offer health insurance.

The combination of adverse selection and so-called death spirals could wreak havoc in the small group market.

“If there is community rating, small firms with healthier workers may chose to drop health insurance offers, thus leading to only small firms with unhealthy workers taking up insurance,” cautions Didem Bernard, Ph.D., an economist with AHRQ, who says this is now happening in New Jersey. “This could lead to higher premiums since younger or healthier workers are no longer in the insurance pool to subsidize the older or unhealthy workers.”

Guest blogger Bruce Shutan is a former managing editor of Employee Benefit News and a freelance writer based in Los Angeles.