The Patient Protection and Affordable Care Act (PPACA) introduces new restrictions on insurers’ ability to use demographic variables to price policies in the individual and small group markets. Gender, age, and other community variables have long been used for premium price differentiation. However, beginning on January 1, 2014, rates may not differ based on gender, and must adhere to a maximum 3:1 ratio when comparing the premium for the most expensive adult age group and the least expensive adult age group.
These new regulations will increase the difference between healthcare costs and what insurers are allowed to charge in premiums, raising the potential for adverse selection as traditionally less expensive demographics, such as young males, seek other health insurance alternatives. Plans will also be allowed to vary rates by area, tobacco use, and family size, but those factors are unlikely to offset this effect. Although much of the recent focus on the implications of this change is on the age limitations, in reality much of the restriction’s impact is caused by moving to unisex rates.
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Milliman’s Mike Sturm is featured as part of a recent article in Health Plan Week (HPW) about gender as a rating factor and whether men and women should be charged the same premiums:
Gender is “like any other rating variable,” Mike Sturm, a consulting actuary with Milliman, Inc., tells HPW. “You want to establish people’s rates as accurately as possible, and obviously men and women have different health care spending patterns.”
Sturm calculates that women, including maternity costs, are about 30% to 40% more expensive than men, using Milliman research data on the weighted average of all commercially insured women and men throughout their lifetimes. Even factoring maternity into the calculation, women remain higher cost than men by 20% to 30% over their lifetimes, he notes.
Without gender rating, if a man costs $100 and a woman costs $200, the insurer would charge them $150 apiece, Sturm explains. The situation works if the man and the woman stay in the pool, he says. But if the man leaves the pool, the insurer has $200 worth of cost and only $150 of premium. Yet Sturm says this result is not necessarily clear cut because age and health status seem to be more significant rating characteristics than gender.
If an insurer rates appropriately by age, Sturm asserts that there likely won’t be much adverse selection from gender because men pay more for women’s maternity costs in the younger years, but women pay more for men’s health conditions in the later years, evening it out in the long run.