Premiums up in smoke

Reader Piquoiseau asks a good question on underwriting:

The word “non-smoker” appears in the chart you posted. In five years of reading about the ACA, this is the first time I’ve seen a reference to individuals being treated differently on the basis of their smoking or not smoking. While it was understandable that premiums would be higher for smokers in the days of underwriting, I had assumed that Guaranteed Issue and Community Rating meant that smoking — like other risk factors — would no longer affect individuals’ insurance options. I hope that you will post at some point about how insurance options differ for the large minority of people given to this particular vice.

The short answer is that smokers will pay more.  The long answer is below:

Guaranteed Issue and Community Rating are different things. Guaranteed Issue means that anyone who can double click on a button or sign their name to a form can get insurance. This does not mean that there is a single rating band and thus a single price for everyone. Under a guarantee issue universe, it is possible for a pair of 40 year olds to have policies with the same actuarial value and network with a $300 a month difference in premiums.

Community Rating means the rating band is the entire community or covered group. That means everyone who qualifies for the insurance gets the same premium price. It is a subsidy from the healthy/cheap to the sick/expensive.

Policies with complete Guaranteed Issue and Community Rating are the most common coverage element in the United States.  That is most if not all policies offered by employers.  Once an employee qualifies to be part of the medical insurance group set up by the employer, they are guaranteed a policy if they elect to be covered and they’ll pay the same rate.  Qualification to be part of the group can vary; for Mayhew Insurance, an employee is eligible on the first day of orientation, at my old job it was the first of the month after the hire date, my wife’s job offered insurance at the first of the month after sixty days from the hire date etc.  But once qualified everyone in a tier of coverage (self, self and adult partner, self and kid, self and kids, family etc) pays the same rate.

True Community Rating on the employer side is fading a little bit as more variables are allowed to be introduced.  Smoking is a frequent premium upper while participation in a wellness incentive program will often reduce premiums or deductibles.

PPACA is has guaranteed issue and partial community rating. Insurance companies are allowed to take three things into account when they issue differential rates on the individual market.  The first is age.  On average younger people are way cheaper than older people.  Insurers can have a 3:1 premium spread between their age 64 rates and their age 21 rates.  Secondly, insurers can price discriminate based on geography.  States define the geographic sub-units where differential pricing can occur.  Some states like Vermont consider the entire state a single rating area, so geography is irrelevant.  Other states, like California cluster their counties into zones.  Zone 1 can have different rates than Zone 2 for the same person.  This is because the expected cost of services can differ between counties (see cost of services in Aspen, Colorado versus Denver, Colorado for instance on the importance of zoning)  and the general health status of people vary by region.  People  in Applachian North Carolina are sicker on average than people in the Research Triangle area.

Finally, insurers are allowed to charge up to a 50% surcharge  for smokers.  They are not required to charge 50%.  I just looked at my market’s Second Silver, and the smoking surcharge for my personal age band is 3% for that particular policy.  It will vary.  Using the same values,  another company’s smoking surcharge for their lowest Silver is 20%.  The actuaries disagree on how much smoking will cost the insurers incrementally for the current policy year.

The short answer is that smokers will pay more.