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The Fuss about Individual Rates

Healthcare reform is a hot topic in the news almost every day, but most people don’t really know what everyone is talking about when it comes to Individual rates and how they will change with proposed healthcare reform.

We all generally understand the basic premise that the purpose of insurance is to protect against risk. Insurance by nature, is discriminatory – when you are in a high risk group, you pay more for insurance. For example, if you are a 16-year-old male you will pay more for automobile insurance than a 45-year-old male, and if you are 63-years-old you will pay more for life insurance than a 40-year-old. These formulas were developed by insurance actuaries with years of data to create these risk groups and tiers. The same applies for health insurance – if you are a 30-year-old woman you will pay less than if you are 60 years old.

Prior to the Affordable Care Act (ACA), insurance companies could charge different individual rates with ratios that were variable by state. For instance, in Louisiana prior to ACA, the ratio was 9:1, meaning insurance companies could charge a younger individual $100 per month for premiums, and an older person up to $900 per month for premiums. In Illinois it was as high as 27:1. The ACA changed the ratio to 3:1 and made it consistent for the entire country. There were problems with reducing the ratio to 3:1; the biggest being the dramatic increase of premiums for younger individuals.

Current proposed legislation has the ratio somewhere around 5:1 – it is higher than the ACA ratio, but still much lower than the pre-ACA ratios. Many lobbyists for AARP are upset with the proposal, as it adversely affects older individuals, but if we go back to pre-ACA ratios it would be even worse for most of the population above 55 years old.

Just as we pay for better roads, a better seat on an airplane, a lower deductible or a better network, the individual rates must also reflect the risk of the population of each state. We need to find a middle ground for each state based on that particular state’s demographics while offering flexibility and choice.