Why health insurance subsidizes the elderly

Over at the Speaking of Actuaries blog, SOA President Brad Miller puzzles over why Obamacare has younger buyers subsidizing older ones:

I discussed this with someone who works on Capitol Hill. I told him I understood the criteria for the first three but was struggling to understand the reason for the young to old age subsidy. Was Congress and the president trying to emulate the group insurance market? Were they making a statement about the appropriateness of age-based pricing? The person just looked at me and smiled. He said, “Brad, you are such an actuary. You try to impute logic where there is none. There is one reason and one reason alone for the 3 to 1 limit that subsidizes the old at the expense of the young.” I said, “OK, what is the reason?” He said, “It is the price that AARP (American Association of Retired Persons) extracted for their support of the bill.”

“It is the price AARP extracted to support the bill.” Totally non-actuarial. Totally political. Old people vote, young people don’t. If you are under age 35 this should make you pay particular attention.

I think Brad and the aide have set up AARP as a straw man here. There are political considerations to any bill (er, that’s politics), but there are sound public policy reasons for the subsidy. Health insurance is unbelievably expensive if you are over 50. $10,000 a year for a healthy couple is not out of the question.

For many people, that makes it unaffordable in the same way it would be unaffordable for a young, poor person. If you require someone to buy insurance, but they can’t afford to, you haven’t solved a problem. You’ve just created a new class of criminal.

Also, they may be focusing on the current concept of health insurance as a one-year policy. However, the individual mandate – assuming it remains in the law – turns health insurance into a lifelong purchase for every consumer. This makes a bit of sense, since health insurance is a lifelong need.

In that circumstance, it’s not inappropriate to charge a customer more in the early years of coverage and less in later years. I’m pretty sure you can buy a term-life policy that works this way.

Another way to look at it: The young person will probably become old, so they will move from subsidizing to receiving the subsidy

Brad’s larger point is on target, though: Actuaries tend to see actuarial considerations when addressing problems. But there are other ways, and they are equally valid.

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2 thoughts on “Why health insurance subsidizes the elderly

  1. Geof Hileman says:

    He also seems to be making the broad assumption that older = affluent. While this is true for some people, I’m fairly certain it’s not always the case.

  2. Jim Wickwire says:

    How about $18,000 a year? Although I suppose they don’t consider me healthy.

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