Another delay has been quietly announced by the Obama administration–the fifth in a week. This delay could come to the delight of some older smokers, but could hurt younger smokers more. The notice was sent out by Health and Human Services notifying insurance companies of a system limitation that is not expected to be fixed until 2015.
Currently, insurance companies are not allowed to charge extra for preexisting conditions (hhs.org). However, they are allowed to charge up to a 50% increase in premiums for smokers. (acscan.org) The reason for the delay is a glitch in the computer system that is programmed to reject any rates that don’t meet the age band limits set by the ACA. A provision in the ACA law states insurance companies are not allowed to charge older customers more than 3 times the amount they charge younger customers. Under a separate provision, insurance companies are allowed to charge varying penalties to smokers up to an additional 50% of their premium. The computer system, however, does not separate the base premium charge and the smoker penalty. Instead it reads the premium and penalty as one rate. Therefore, if a higher tobacco-use penalty is applied that results in a total premium that exceeds the 3:1 ratio, the rate is rejected.
The Original Plan: Varying premiums for smokers
Insurance companies were expected to charge smokers varying penalties based on age. The theory behind this is a 21-year-old smoker will not have the same health issues as a 64-year-old smoker who has been smoking for many years. It was believed that insurance companies would charge a smaller penalty for a 21-year-old smoker and a full 50% increase for a 64-year-old smoker. If a young smoker is charged $2000 annually with a 20% penalty ($2400) and a older smoker is charged $6000 annually with a 50% penalty ($9000), the difference between the two premiums is greater than 300%. The ACA law does not prevent this from occurring, but the computer system does.
Option 1: Charge all ages 50%.
The theory behind this is charging the maximum penalty will increase premium revenues that are required to cover the cost of older smokers. The problem with this is adding a 50% premium hike to an otherwise healthy young smoker could persuade the smoker to pay the significantly lower individual mandate penalty rather than acquire insurance for several thousand dollars a year. A 21-year-old smoker is healthy enough to be profitable and placing him or her on the exchange creates profitable premium revenue that offsets the expenses of insuring an older smoker whose premiums may not cover what it costs to insure him or her.
Option 2: Charge all ages a much lower, across-the-board rate.
The problem with this is a 64-year-old smoker can be far more expensive to insure than a 64-year-old non-smoker in relatively good health. The result is insurance companies may not be able to charge the highest-risk individuals enough to recover their losses, but they might be able to attract younger smokers onto their plan. Insurance agencies might prefer to have younger individuals on their plan. Beyond the obvious financial implications of the smoking provision, the penalty was designed to help deter people from smoking. Reducing the penalty for smokers could reduce the likelihood of them changing their lifestyle.
According to the Obama administration, this glitch will be fixed by 2015. Until then, insurance companies will have to deal with the fact that the computer system runs as though the 300% cap provision supersedes the 50% penalty provision. Read about other ACA delays here:
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