Obamacare: What if not enough young, healthy people enroll?

Young adults were there for Barack Obama both times he ran for president. Now he needs them more than ever – to buy health insurance.

But it’s not clear they’ll deliver. A poll released this week by Harvard’s Institute of Politics on American “Millennials” – those aged 18 to 29 – bore the bad news: A majority (56 percent) of Millennials disapprove of the Affordable Care Act (ACA), and only 29 percent of uninsured people in that age group plan to buy coverage via HealthCare.gov or a state-run exchange.

If the individual insurance market is to work, a significant percentage of young, healthy people need to pay into the system. The reason is that they are effectively subsidizing the older enrollees – those in the 50-to-64 age band, who on average are less healthy than the younger group.

“So for every old person you get, you want to get some young people in as well to help cover your costs, on average,” says Larry Levitt, a senior vice president at the Kaiser Family Foundation.

The worst-case scenario for Obamacare would be a “death spiral” in which not enough healthy people sign up, meaning insurance companies have mostly high-cost customers on their plans. The result would be drastically higher premiums that threaten the long-term viability of the program.

How many young enrollees does Obamacare need?

It has long been reported that the Obama administration aimed to enroll 7 million people in the new online exchanges for 2014, including 2.7 million people between the ages of 18 and 34, or 38.5 percent of the total. When asked, an administration official involved in health policy would only say that there needs to be a “mix” of people of all ages in the insurance pool. No numbers or percentages.

For 18- to 34-year-olds, the rule of thumb is to enroll them at roughly the proportion represented in the enrollee population as a whole. They represent about one-third of the population that is between 18 and 64. At 65, people can enroll in Medicare.

Health insurance premiums vary by age, but the variation is limited under the ACA to a ratio of 3 to 1. So someone who’s 64 can be charged only three times someone who’s 21. That’s less than the variation that exists in the individual market today, which is typically more in the range of 5 to 1.

What happens if not enough young people sign up?

That’s the gazillion-dollar question. First, it depends on the size of the shortfall of young enrollees.

David Axene, a fellow at the Society of Actuaries, says he would start to worry if the 18- to 34-year-old age group was underrepresented by 15 to 20 percent.

“That’s when I would start to say that it’s serious,” he says.

If the final percentage of young people was in the 20 percent range, for example, “that would result in a rather significant increase in premium rates above and beyond inflation to make up for that loss.”

And add to that concerns about “health status selection” – that is, where healthy people opt out of insurance.

What do the numbers look like so far?

The Obama administration has not released demographic information on enrollees yet, but is expected to in mid-December, in its monthly report on enrollment.

Early indications are that enrollment is skewing toward older people. Two weeks ago, the California exchange reported that in October, only 23 percent of enrollees were age 18 to 34, while 56 percent were in the 45-to-64 category.

The information is “too sporadic to draw conclusions, but it appears it’s an older population than what some [insurers] had assumed,” says Mr. Axene of the Society of Actuaries.

Mr. Levitt read the California numbers positively.

“What really matters is who’s enrolled as of March 31,” the last day of open enrollment for 2014, Levitt says. “So I took the California numbers as encouraging, because they were further along among young people than I would have expected.”

When we do have numbers, how should we interpret them?

First, one must consider each state separately, because insurance is pooled at the state level.

“Enrolling a young person in California isn’t going to help you in Texas,” says Levitt. “You could end up in a situation where some states have very balanced risk pools and other states don’t, depending on how effective the outreach.”

Also, Levitt notes, one must look at everyone in the individual market in each state, not just those enrolling through the exchanges. People can buy insurance outside the exchanges, but if they do, they are not eligible for a federal subsidy.

What about adult children under the age of 26?

Under the ACA, people under the age of 26 are allowed to stay on their parents’ health plan. For many young adults, it’s the cheapest way to get covered. As of June 2013, 3.1 million people had taken up this option. But it also takes them out of the individual market, so they’re not helping to offset the costs of older enrollees.

If the market ends up imbalanced, how does Obamacare address that?

The ACA provides for what are called the “three R’s” – reinsurance, risk corridors, and risk adjustment. Reinsurance is a pot of money, funded by a tax on every health plan, that helps insurers cover the costs of expensive claims. Under a recent rule change, reinsurance would pay 80 percent of the cost of claims over $45,000, down from $60,000. The ceiling is $250,000.

The program called risk corridors, available only to insurers on the new exchanges, exists to even out premiums. If an insurer takes in more than it ends up needing, it gives some of the excess to the government. If its premiums end up being too low, the government will cover some of the losses.

The risk adjustment program takes money from insurers that had healthier-than-average customers and gives it to insurers with more-expensive customers. That removes the incentive by insurers to recruit only healthy customers.

The first two risk mitigation programs are in effect for three years, 2014 to 2016. Risk adjustment is permanent.