Health Insurance Surcharges for Tobacco Users: State and Federal Rules

A person's tobacco use can play a role in how much they pay for health insurance coverage even though the Affordable Care Act brought dramatic changes to the way individual and small group health insurance premiums are determined.

Insurance companies can no longer base premium on an applicant's medical history (or a small group's overall medical history), and cannot reject an applicant based on their pre-existing conditions or overall health history.

But ACA allows individual and small group health insurers to adjust premiums based on just four factors—geographic location, age, family size, and tobacco use.

• Health insurance premiums vary from one zip code to another.
• Older people are charged more than younger people, with a cap of three times the rates that apply to a 21-year-old, and smaller premiums for people under the age of 21. (Massachusetts caps age rating at a 2-to-1 ratio, while New York and Vermont do not allow premiums to vary based on age.)
• Family size: Each person has their own premiums. A family of five will pay more than a family of three since the additional children will have premiums. But premiums are only added for up to three children under the age of 21, so a family with five children under the age of 21 will have the same premiums as a similar family with three children.
• Tobacco users can be charged up to 50% more than people who don't use tobacco.

This article will explain the federal rules that apply to tobacco surcharges, and how some states have modified those rules.

Although lawmakers who wrote the ACA felt strongly that a person's health status should not be taken into consideration when setting health insurance premiums, they agreed to allow insurers to charge tobacco users higher premiums.

This decision was controversial: Some believe that it's only fair for tobacco users to pay more for their health coverage, given the toll that tobacco use takes on a person's health and the added costs to treat tobacco-related health conditions.

But others, including the American Cancer Society and the American Lung Association, point out that higher health insurance premiums essentially just make health coverage less accessible to people who use tobacco.

If people remain uninsured because they can't afford health insurance, they're not able to access the free tobacco cessation coverage that's included with ACA-compliant health plans, and they're less likely to receive timely medical treatment when they need it.

What Constitutes Tobacco Use?

Although the text of the ACA includes a provision to allow higher premiums for tobacco users, it does not clarify exactly what constitutes tobacco use.

But a subsequent rule issued by the Centers for Medicare and Medicaid Services defines tobacco use as the use of any tobacco product within the past six months with a frequency of at least four times per week.

Since any tobacco product is counted, this includes e-cigarettes and vaping, as well as traditional cigarettes, cigars, chewing tobacco, and pipe smoking. But the rule excludes tobacco use for religious or ceremonial purposes.

How Much Higher Are Premiums?

The ACA specifically includes an allowable 1.5-to-1 ratio for tobacco use, meaning that individual and small group health insurers can charge tobacco users up to 50% more than non-tobacco users.

Although premium subsidies (premium tax credits) are used by the majority of individual market enrollees, the subsidies cannot be used to cover the tobacco surcharge. Lower-income Americans are more likely than higher-income Americans to use tobacco products.

People with low and modest incomes who buy their own health insurance can qualify for premium subsidies that cover the vast majority—or even all—of their health insurance premiums if they don't use tobacco. But if they do use tobacco, the surcharge can result in unaffordable health insurance premiums for these applicants.

If we look at the nationwide average pre-subsidy premium in 2020, it's about $576 per month for health plans sold in the exchange. Across all exchange enrollees, 86% qualify for premium subsidies that amount to an average of nearly $492 per month.

But if a person with an average premium is subject to a 50% tobacco surcharge, their premium would increase to $864 per month, while their premium subsidy would not change at all.

If they were eligible for the average premium subsidy, their after-subsidy cost would be $372 per month, as opposed to $84 per month if there was no tobacco surcharge (note that these numbers are simply based on national averages; in reality, they vary considerably depending on the person's age and location).

Some states have taken action to prohibit or modify the tobacco surcharge, reducing its impact within those states. Colorado limits the tobacco surcharge to 15%. Arkansas limits it to 20%, and Kentucky limits it to 40%.

And in California, the District of Columbia, Massachusetts, New Jersey, New York, Rhode Island, and Vermont, insurers are not allowed to charge tobacco users higher premiums. Connecticut also prohibits tobacco surcharges, but only for health plans sold in the state's health insurance exchange (Access Health CT).

Although the majority of states do allow insurers to impose tobacco surcharges of up to 50%, many insurers choose to use smaller surcharges or skip them altogether. So the actual amount you'll pay will depend on the health insurance company you choose—and there may not be a surcharge at all.

If you're paying a tobacco surcharge and you've kicked the habit at least six months ago, you can update your information when your health plan renews for the coming year (either through the exchange, directly through your health insurer, or through your employer, depending on how you get your health coverage).

Your rates will then be adjusted for the coming year to reflect the removal of the tobacco surcharge.

Employer-Sponsored Coverage

Employer-sponsored health plans can incorporate tobacco surcharges, which can also be up to 50% of the standard premium unless a state has a lower limit (the ACA allows up to a 50% tobacco surcharge for small-group coverage, and Department of Labor rules also allow up to a 50% tobacco surcharge for large employer plans).

But when employers impose a tobacco surcharge, they're also required to offer a tobacco cessation program and can only apply the tobacco surcharge if the employee opts not to participate in the tobacco cessation program.

Most employers do not use tobacco surcharges. According to a recent survey by the Kaiser Family Foundation, 9% of employers that offer health coverage impose a surcharge for tobacco use (this is across employers of all sizes).

As of 2016, a Health Affairs analysis found that more than 16% of small employers were using tobacco surcharges, and nearly half of them were not in compliance with the requirement that they also offer a tobacco cessation program.

By 2017, the prevalence of tobacco surcharges among small employers' health plans had grown to nearly 18%. But it dropped to just 4% as of 2018.

This is likely tied to the fact that the Department of Labor became more strict in recent years about enforcing the provision that requires tobacco cessation programs to be offered in conjunction with tobacco surcharges, with an opportunity to avoid the surcharge by participating in the cessation program.

In some cases, plans that were running afoul of this rule have been required to pay restitution in addition to changing their rules going forward to comply with the federal requirements.

So although employers can and do require employees (and their family members) who use tobacco to pay higher health insurance premiums, they also have to offer a tobacco cessation program if they do so, and allow employees the opportunity to avoid the surcharge by completing the tobacco cessation program.