The Age Ratio Thing

(cc photo by Randy son of Robert)

(cc photo by Randy son of Robert)

One difference between the House and Baucus versions of health reform that hasn’t gotten much play is the way they treat age differently. In both cases, Exchange insurers will be able to charge different premiums according to how old you are. But in the House this will be restricted to a 2:1 ratio whereas Baucus would leave a larger 5:1 ratio. Baucus’ approach is better for young people and the House approach, which would basically force young people to offer a larger subsidy to our elders, is better for older people. Since this should balance out over the lifecycle, I don’t think there’s a huge fairness question either way. But I’m not very clear on what policy objective doing it the House’s way achieves.

You might say that the problem with Baucus’ bill is that it may cause financial hardship for some people aged 50-64. And, indeed, it might. But the issue here is the relatively stingy subsidies. Taking the Baucus framework and adding the House’s age provisions just pushes the financial hardship off the fiftysomethings and onto twentysomethings. Conversely, if you took the House framework and added Baucus’ treatment of age you’d just wind up with fewer young people needing subsidies and more subsidies going to older people. The net distributive impact is all going to be located among non-subsidized people in the top 60 percent or so of the income distribution, so I don’t see what problem shifting funds from young prosperous people to old prosperous people is supposed to solve.

I do think, however, that it might create a new problem, namely that having such a flat premium schedule is going to create weird incentives for insurers. The way the House is doing it, if for some reason lots of old people want to buy your firm’s insurance policy you’re going to lose a ton of money. Conversely, if lots of young people want to buy your firm’s insurance policy you’re going to earn a fortune. That means it would be in your interests to cultivate a reputation as offering poor services to older people; something that can probably be most easily achieved by actually offering poor services to older people. Allowing insurers to have a steeper price gradient reduces their incentive to try to actively manage the age compensation of their risk pool. I think the House leadership may think they’ve solved this problem by including a public option that won’t have the same profit incentives as for-profit insurers. But in reality this might lead for-profit insurers to just market very heavily to the young and hope to dump all the older unprofitable clients onto the public option, which would then go broke (it’s not eligible for taxpayer subsidies) leading to some kind of crisis.