AFFORDABLE CARE ACT AND PREMIUM VARIATION RULES: COULD CERTAIN CONSUMER SEGMENTS BE DISPROPORTIONATELY PROFITABLE TO INSURERS?
The Affordable Care Act (ACA) prohibits health insurance companies from using health status as a factor for pricing consumer premiums in the individual market starting in 2014. Insurers in the individual market will only be able to vary premiums based on age, smoking status, geography, family size and benefit level. Economists have questioned whether market distortions may still remain where certain consumer segments are more profitable than others. Specifically, young smokers could be disproportionately profitable to insurers. This paper tests this hypothesis using 2008 Medical Expenditure Panel Survey (MEPS) data and multivariate regression analysis to explore the relationship between smoking status and expected medical costs across different age cohorts. Two models were estimated using a survey response variable for smoking indicating whether the respondent was a current smoker or not. The first model only controlled for those factors that insurance companies may use to vary premiums. The second model controlled for a larger number of individual characteristics theoretically associated with medical spending.Results indicate that smokers in all age groups may be disproportionately profitable to insurances companies. This result was unexpected given past literature's findings that smoking results in higher medical expenditures for a population in a given year. One possible reason for this discrepancy is that former smokers are categorized as nonsmokers in this particular analysis. At a minimum, this research highlights the importance and nuances surrounding how tobacco use may be defined under future ACA regulations. These regulations need to consider such issues as whether former smokers should be classified as tobacco users and contemplate how long any look back period may be. In addition, regulations may want to consider whether there is a minimum threshold for defining a tobacco user.
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