With major provisions of the Affordable Care Act ("ACA" and otherwise known as "Obamacare") set to go into effect on January 1, 2014 many observers are focused on whether young people will purchase health coverage or instead pay a relatively modest penalty in year one.1 To improve its understanding of expected consumer behavior during Obamacare's first open enrollment period, HealthPocket leveraged consumer analysis work from Deft Research, a market research firm providing expert services to the health insurance industry. Deft's survey of the target market for Obamacare points to an interesting conclusion not often discussed: the harder sell is likely to be older consumers who are not yet eligible for Medicare and not the younger consumers as is widely assumed.
Increased scrutiny regarding how much insurers could raise rates as an enrollee ages came with the enactment of the ACA. The law limited the rate difference due to age to 3 times – an older person can only be charged 3 times more than a younger person.2 From an actuarial perspective having a rate differential makes sense – compared to younger people, older people use more health care.3 Deft's research, rather than focusing on actuarial justification, looks at the same issue from the consumer choice perspective, and it shows some older buyers are likely to balk at the rates they are offered.
Deft's research shows that the least likely buyer is older and wealthier than the most likely buyer. By being wealthier, their health insurance subsidies will be smaller. Because they are older, they will see higher cost health insurance. The following chart shows the age comparison between most likely and least likely health insurance buyers from among the current population of uninsured.
The study found that the most likely buyer benefits from being both young and low income. For example, according to the subsidy calculator of the Kaiser Family Foundation4 a single 28 year-old earning $20,000 per year will pay $3,281 for a silver plan, but will receive $2,259 in premium subsidy. They would be responsible for the remainder, $1,021 or about $85 per month. As their income grows, this consumer would continue to receive a subsidy until his or her insurance premium equaled 9.5% of income ($34,500 of income.)
In contrast, a single 60 year-old with income of $45,000 would be eligible for insurance coverage at a total silver plan cost of $8,191 for 2014 and a subsidy of $3,916. Therefore that person would end up paying $4,275 for their annual coverage (about $356 per month).
Deft's study found that many older uninsured persons will find even their subsidized premiums to be too expensive. They will take a tax penalty rather than purchase health insurance – at least in the first year of reform.
Deft's research was conducted prior to when people will experience the primary benefits of the ACA, including guaranteed issued coverage and no price discrimination for health status (other than smoking.) However, taking hypothetical situations in which only the age factor is varied begins to show what motivates the concerns of older consumers.
The lower-income, frequently younger, consumer can earn more income and still receive subsidies that are adjusted with earnings. However, if the 60 year-old described above making $45,000 earns an additional $1,000, his or her income reaches 400% of poverty and the subsidy goes to zero. In this situation the 60 year-old would pay a full silver plan premium of $8,191, nearly $4,000 more than would be the case with $45,000 in income. By contrast, a 28 year-old would pay $3,281 per year regardless of whether he or she earned $45,000 or $46,000 in that year.
The cost increase for a 60 year-old couple is even more dramatic. At $62,000 of income the couple would receive a subsidy of $10,492 for coverage that cost $16,382. However, that subsidy goes to zero if the couple earned an extra $1,000, so at $63,000 of income the couple would pay the full premium amount of $16,382.
The dramatically different outcome between the 28 year-old and the 60 year-old is caused by the age band ratings that have been restricted, but not prohibited, in the ACA. Deft's research is an early indication that people who are not yet eligible for Medicare and hover near 400% of poverty are going to approach the individual market with trepidation. While the public policy arguments are heavily focused on keeping prices low enough to attract younger, healthier applicants, the effect of the solutions will be to introduce a so-called ‘rate shock' to many consumers in their late 50's and early 60's.
Price sensitive consumers will also take a close look at the less expensive premiums of the bronze plans. These plans will cover on average 60% of someone's healthcare costs as compared to 70% for silver plans, so the lower premium comes with a higher out-of-pocket cost tradeoff. Consumers under 250% of poverty will more likely stay with the silver plan because the ACA provides them reductions in out-of-pocket costs as part of their silver plans. For the older consumer hovering at or above 400% of poverty, the bronze plan premium cost difference will make a material difference in their premium expenses.5
Those at the highest end of the age rating band and close to the 400 percent of poverty level will have a particularly difficult time sorting through subsidy issues. As the examples above show, incorrect estimates of annual income can mean significant differences with respect to the amount of subsidy provided. The resulting requirement to pay back subsidies has to be understood by consumers and especially those at the higher age rate bands as part of their planning for the ACA.6
Results are based on 5,084 responses collected nationally in April 2013. Respondents were uninsured and subsidy eligible consumers between the ages of 18-64 years old.
In the Most Likely Buyer study, Deft Research categorized consumers using attitudes about health insurance and consumers' stated intent to buy a silver plan when shown a premium that was age-rated and subsidized for them. Deft's analysis produced four types of buyers: "Most Likely Buyers," "Discouraged Buyers," "Convincible Buyers," and "Least Likely Buyers" that were further described based on: market size, relative health risk, ethnicity, sex, channel preference, enrollment preference, age, income and other demographics.
The research led to predictive models that use standard demographics to estimate the likelihood of a consumer being either a Most Likely Buyer or a Discouraged Buyer. When estimates are made for every record in a consumer database, health plan marketers have a targeting rationale that will improve the return on investment of marketing expenditures.
Any questions regarding the 2013 Most Likely Buyers study can be directed to Deft Research's VP of Client Services, George Dippel at email@example.com or by phone at (262) 697-1370.
Information regarding subsidy and premium cost was obtained through the Kaiser Family Foundation subsidy calculator.
Deft Research furnishes the healthcare industry with reliable, timely and actionable consumer insights. Their detailed reports, guided discussions and ongoing assistance help clients identify how to best reach, engage, and motivate consumers to act. Deft Research focuses on providing information and insight to drive measurable results. Since 2005, Deft has helped the nation's leading healthcare enterprises gain critical knowledge to confidently navigate the ever-evolving marketplace.
Steve Zaleznick, Executive Director for Consumer Strategy and Development at HealthPocket.com, co-authored this survey analysis. Correspondence regarding this study can be directed to Mr. Zaleznick at firstname.lastname@example.org. Feedback and questions are welcome but, given the volume of email, personal responses may not be feasible.
Richard Hamer, Principal at Deft Research co-authored this survey analysis and conducted the underlying market research survey.
1 The penalty will be the greater of $95 or 1% of modified adjusted gross income.
2 In prior research HealthPocket found this ratio to be exceeded in only 14 states.
3 See: http://ahip.org/News/Press-Room/2013/AHIP-Statement-on-Age-Rating.aspx.
5 An indication of early bronze plan rates for 60 year olds can be found in this article: http://money.usnews.com/money/blogs/the-best-life/2013/08/08/how-obamacare-will-affect-health-insurance-rates-by-age-group
6 See this IRS subsidy information in Kaiser Health News: http://www.kaiserhealthnews.org/Stories/2013/July/24/interview-with-cathy-livingston-on-how-to-apply-for-tax-credit-subsidies-for-premiums.aspx
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