Subsidy formula makes some policies costlier for the young

Young adults are paying as much or more in premiums for the cheapest bronze plans purchased on the Affordable Care Act marketplace as people ages 54 to 64, according to a University of Tennessee Health Science Center study.

The study, published online last week in the Annals of Internal Medicine, found that the reverse premium age curve - premiums should be cheaper for younger people, who use less health care - is the result of how tax credit subsidies are calculated under the law. It could mean that paying the penalty for not buying insurance as required by the individual mandate would be less than the monthly premiums for those low-premium policies.

"The reason you have the mandate is so you can get the right balance of healthy and sick people," said lead author Ilana Graetz, assistant professor at the University of Tennessee Health Science Center in Memphis. "I think this creates some concerns about whether or not that can happen."

The penalty for not buying insurance this first year is $95 per adult, $47.50 per child (up to $285 for a family), or 1 percent of taxable income, whichever is greater.

Persuading healthy young people to sign up for health insurance has been vital to the success of Obamacare. Without them to balance out the older, sicker people who buy insurance in higher numbers, coverage would cost more. The promise of low premiums was the carrot used to persuade younger people to plunge into the insurance pool. The stick was the penalty.

Graetz's team wanted to find out if the carrot and stick idea was working by focusing on the least expensive bronze plans. Those plans were chosen by 31 percent of the 18-to-34-year-olds who bought ACA insurance in Pennsylvania, and by 24 percent in New Jersey.

Obamacare plans are categorized into tiers - bronze, silver, gold, and platinum. Bronze (the only level included in the study) has the lowest monthly premiums but the highest out-of-pocket costs. The average deductible (the amount you must pay before insurance takes over) for a bronze plan, for example, is more than $5,000 a year. Copays (a fixed amount you pay for an office visit or for covered prescription drugs) and in some cases coinsurance (where you pay a percentage rather than a fixed amount) also are high.

For their study, the researchers collected premium data for every plan offered on state and federal marketplaces nationwide. Using the after-subsidy premium price, the team came up with variations in premium affordability by age, income, and geographic area.

To their surprise, they found that people between 21 and 53 with incomes at 200 percent of the federal poverty level ($22,980 for an individual in 2013) who purchased the cheapest bronze plans paid a higher monthly premium than people 54 to 64 with the same income.

"Normally you expect older people to pay more in terms of premiums because they have a higher demand for health insurance," Graetz said. "But when you look at people receiving subsidies the reverse seems true. So this is a reversal of the premium age curve."

So what's the thinking behind the premium age curve? In the simplest terms, the higher your premium, the more you save after factoring in age and subsidy. Graetz explained the complicated formula using a fictitious Emily, 21, and Bob, 64, at 400 percent of the poverty level, which is the highest income eligible for a subsidy and was used by the government as the starting point for calculating subsidies at all levels.

Based on an average of policies across the country, the premium for the cheapest bronze plan turns out to be $240 a month for Emily and $720 for Bob.

To arrive at their monthly premium, you have to subtract the benchmark premium - defined as the second-lowest-cost silver plan - from the premium cap, which is the amount of subsidy given to purchase the benchmark plan based on an individual's income, regardless of what plan is actually purchased.

The benchmark premium for Emily is $290; for Bob, $870. That makes the premium cap (9.5 percent of their income) $270. So Emily receives a $20-a-month subsidy while Bob gets $600 a month. That means that, for the same policy, young Emily will pay $220 monthly premiums, while older Bob pays $120.

Graetz is concerned that the higher premium payments will keep younger people out of the market if they think coverage is unaffordable or unfair. Her study, she hopes, will bring attention to kinks in the law.

"The main message is not that the ACA isn't working," she said. "There are some gaps that I think we can address to make it better."

The good news for Obamacare is that most people are purchasing the more generous and comprehensive silver-tier plans.

This article was written in partnership with Kaiser Health News, an editorially independent program of the Kaiser Family Foundation.