California health insurance - Health Reform for California - 3 to 1 Rate Compression

3 to 1 Health Insurance Rate Compression

Okay..in fairness, we tried to make the title sound technocratic but it's only because we're reading health reform rules these days and those pages upon pages might as well be written in Klingon.

The 3 to 1 rule is very important since it's a big part of why many people California health insurance rates will go up.

That we can all understand unfortunately after a decade of getting hit by higher rates.

Let's understand what the 3 to 1 compression is for the California health insurance market.

Age matters (less)

One of the critical marketplace tenets of the health reform bill dealt with age bands.

Health insurance rates have always been based on a person's age and for good reason.

On average, a person's claims doubles with each decade of their life outside or a blip that occurs in the first year of life and around the prime years for maternity.

This means that the average claims for a large enough number of age 55 years old will double the claims of a similar group of 45 year olds.

Prior to health reform, rates were based on the claims of a given area and given age band which usually fell in 5 year "bands".

For example, if you were age 42, you would be group with all the other people enrolled age 40-44 in your general area.

When you turned 45, you would jump into the new age band and your rate would go up in your birth month.

It was always a bit of sticker shock and never good news to give a person who just turned 40!

That was then.

Let's fast forward to post health reform in California.

Cost shifting down the ages

One of the rules in the bill stipulated (always in trouble when you have to use the word "stipulate") that the oldest (or most expensive) age band cannot be more than three times the cost of the cheapest age band (generally 18-29).

For example, if the least expensive health insurance rate for a person age 19 in a given geographic area is $33/monthly, the same plan cannot be more than $100/monthly in that same area for a person age 64.

Medicare takes over at 65 for most Californians so age 60-64 is traditionally the most expensive age band. To contrast this with the prior setup, the typical compression was generally thought to be about 5 to 1.

So what does this all mean?

The price of being young just went up!

The net net is this...if you are younger, let's say below age 45, you will see your rates go up immediately on Jan 1st, 2014 by a large amount.

This leads to the variability we're seeing in the "Rate Shock" warnings coming from the industry for Jan 1st.

They expect rates to go up 30-50%. You can expect the younger age bands to take the 50% hit while the older age bands will likely see the 30% increases for comparable coverage.

The Rate Shock is a result of other factors but the 3-1 compression is definitely part of the equation.

This is an interesting twist in the health reform bill as it essentially forces the younger people to subsidize the older people and you wonder whose lobbying brought this about.

We have our suspicions but ultimately, we need to look at how to address this increase and get the best possible rate. We need a strategy going forward regardless of age.

For now, you can impress your friends with 3-1 compression. Very wonky!

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