Will Obamacare make insurance cheaper?

This post comes from Elizabeth O'Brien at partner site MarketWatch.

There's little doubt that, come next January, the Affordable Care Act will make it easier for many baby boomers to find individual health insurance coverage. Those with low or moderate incomes will also find comparable coverage for less than what they pay today, thanks to government subsidies.

But a big question remains: What will individual policies -- and their premiums -- look like for higher-paid professionals and others whose incomes exceed the subsidy threshold? Will they be more or less affordable than today's policies?

The answer is of particular interest to the self-employed and those considering early retirement -- in other words, those without employer-provided group insurance who are under 65 and thus not yet eligible for Medicare.

In most states today, older people are routinely denied individual coverage, or charged a lot for mediocre policies, due to their pre-existing conditions. It's not uncommon for self-employed people in their late 50s to pay $7,000 a year or more -- in some cases, much more -- for health insurance.

Starting on Jan. 1, 2014, insurers will no longer be able to use people's health status as a basis for denying them coverage or charging them more. "It really changes the ballgame for people who want to retire early," said Sara Collins, vice president for affordable health insurance at the Commonwealth Fund, a private foundation working toward a high-performance health system.

So older people across all states will soon enjoy guaranteed coverage -- good news, for sure. But at what price? Insurance companies will still be able to set prices based on age, so in practice a 64-year-old could pay up to three times as much as a recent college grad for comparable coverage.

Regardless of age, premiums will fall for those whose gross income is up to 400% of the federal poverty level -- in 2012, $44,680 for an individual, $60,520 for a family of two, and $92,200 for a family of four -- because they'll qualify for government subsidies.

It's too early to say definitively what premiums will look like for everyone else, since insurers have not yet filed their rate plans with the states for the policies they'll offer on the state-level health insurance exchanges. One insurance company CEO's prediction late last year of "rate shock" for 2014, estimating that some individual policies could as much as double in some markets, has caused alarm.

Cutting ties to 'health status'

Yet the bottom line is this: Older, sicker people are the most likely of all consumers to see individual premiums hold steady or even decline for comparable coverage under health care reform, experts say.

That's not to say they'll see across-the-board decreases. It's just that, if it works as intended, the Affordable Care Act will make the insurance system fairer for everyone. And the consumers who typically get the shortest end of the stick today are older, sicker people on the non-group market who haven't yet reached the Medicare eligibility age of 65.

Why is this? Each state regulates health insurance differently. Currently, most allow insurers to charge people based on their health status. Older, sicker people pay more than younger people for individual insurance policies. Much more, in fact: Premium differences for the same coverage between a 21-year-old male and a 64-year-old male can easily reach 5-to-1, according to the Kaiser Family Foundation, a nonprofit that studies health issues. (The difference is a little less pronounced for women.)

Starting in January, no one can be denied a policy or charged more due to pre-existing conditions. The only factors that an insurer will be allowed to use to price individual policies are age, tobacco use, geography and family size. What's more, starting next January, insurers will be required to charge 64-year-olds no more than three times, or 300% of, the price that a 21-year-old pays for health insurance.

These new, 3-to-1 rating bands -- as these ratios are called -- will shift costs from older people to younger people, most experts agree. America's Health Insurance Plans, a trade group representing insurers, did a hypothetical illustration showing how this will affect a 24-year-old and a 60-year-old with the same individual policy in the same area: Starting on Jan. 1, the 24-year-old will pay 50% more for coverage than he or she would have in 2013, and the 60-year-old will pay 10% less.

Penalties for dropping out

Of course, if too many young people decide not to pay these increases and drop their coverage, then the overall pool becomes older and presumably sicker, and rates will rise across the board. To keep that from happening, the law imposes penalties on nonparticipants.

In 2014, the penalties for those of any age who don't have a basic policy will be the greater of $95 or 1% of income in excess of the tax filing threshold ($9,750 for single people under 65 in 2012). In 2015, the penalties will be $325 or 2% of applicable income; in 2016, they'll be $695 or 2.5% of applicable income, up to a maximum of three times that amount per family, or $2,085.

To be sure, experts caution against comparing pre- and post-reform coverage on price alone. That's because many people will get more comprehensive coverage starting next year. Many individual policies today exclude maternity and mental health benefits, for example; starting Jan. 1, the law requires all policies to cover a package of "essential health benefits."

What's more, most states currently allow insurers to write policies that specifically exclude coverage for a patient's pre-existing condition -- say, diabetes or heart disease -- but this will soon be prohibited.

People who don't qualify for subsidies can buy individual policies on their state exchange starting this October, for coverage beginning Jan. 1, or in the outside market. The law's provisions changing the ways insurers can charge consumers apply to the insurance market as a whole. Indeed, the Affordable Care Act includes many provisions intended to keep the state-level exchanges and the outside market in parity, both in terms of their risk pools and their plan offerings. This is to prevent "adverse selection" on the exchanges, so they don't wind up serving only the oldest and sickest.

This vulnerable population can also look forward to increased geographic mobility next year, according to Gary Claxton, vice president of the Kaiser Family Foundation.

Let's say you're an early retiree in California with an individual policy. If you develop a health problem when you're on that policy, then you'll probably have trouble moving, because if you relocate to another state, your insurer could use that as a reason for dropping your coverage. You'd also be likely to have trouble passing medical underwriting in your new state to get a policy to replace your old one (other than in the handful of states, including New York, that currently guarantee coverage for all).

"You're stuck until Medicare," Claxton said. But starting Jan. 1, this will no longer be the case.

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