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Chart of the day: Subsidies change everything

  • Thursday, 11 April 2013
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There has been an expression of concern among some analysts about the three-to-one age-based community rating of premiums in the ACA exchanges. This is the provision that premiums for older consumers can be set only up to three times those of younger ones. This effectively caps the premium of older consumers and forces younger ones to cross-subsidize. So unfair (perhaps)!

Except you can basically throw all that out the window for most subsidized consumers, those with incomes below 400% of the federal poverty level. Examine this chart from The Commonwealth Fund that shows total premium plus out-of-pocket costs as a percent of income for individuals with various incomes and health care spending:

    • Premium Plus Out-of-Pocket Costs as a Percent of Income for Older and Younger Consumers
    • Premium Plus Out-of-Pocket Costs as a Percent of Income for Older and Younger Consumers

The left side is for a young consumer, age 22, the right for an older one, age 62. The colored bars are for different points in the distribution of health care spending. Notice that for individuals with incomes of 400% FPL, the older consumer's premium + out-of-pocket costs are about two to three times those of younger individuals with the same income. That's about what you'd expect given the constraints on age rating of premiums. (Out-of-pocket cost sharing is not similarly constrained.)

But, for individuals with incomes of 300% FPL and below, the premium subsidies do a lot of work. Yes, total premium of the older cohort can't be more than three times that of the younger one, but that ratio isn't evident in the chart. Total individual costs are about the same across ages for these, subsidized, cohorts. Put another way, most of the cross subsidization is not flowing from younger to older individuals. It's flowing from the treasury to everyone with low enough incomes.

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