Why Are Children's Health Insurance Premiums Going Up in 2018?

Doctor examining child
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If you buy your health insurance in the individual market, you've likely seen headlines about the rate increases that will be coming in 2018. The small group market, which is regulated under the same Affordable Care Act (ACA) rules as the individual market, will also see rate increases, although the overall increases won't be as significant.

But the headlines tend to focus on average rate increases, either across an entire state, or across a particular insurer's entire population of insureds. For people with coverage in either the small group or individual insurance market, the actual rate increase for each specific plan and member could vary considerably from the average for the state or the insurer.

That's always the case, but there's a new change for 2018 in terms of how rates are calculated for children—particularly teenagers—and it could result in fairly significant rate increases for some families. So let's take a look at what's happening with children's rates, and what you can expect for the new year.

Children Will Have Varying Rates

The ACA imposed some new rules on premiums for individual and small group health insurance plans (individual plans are the kind that people buy for themselves; small group plans are generally offered by employers that have up to 50 employees, but there are a few states where groups of up to 100 employees are considered small groups).

Under the law, the premium for older adults cannot be more than three times the premium for a 21-year-old. Children are assigned a lower rate, which has thus far been set at 63.5 percent of the rate for a 21-year-old. This applied to all children, from newborn to age 20, since 2014.

Prior to 2014 (i.e., before the ACA's rating rules were implemented), premiums were generally set for various age groups based on the expected claims for each age group. Children tend to have higher claims when they're infants and toddlers, lower claims when they're in the elementary and middle school years, and then claims tend to climb as kids enter their later teen years. Prior to 2014, insurers could incorporate that into their rate-setting—some had much higher premiums for newborns, for example.

But under ACA rules from 2014 through 2017, all kids up to age 20 were charged 63.5 percent of the premium that applied to a 21-year-old. That's changing for 2018, due to new rules that were finalized by HHS in December 2016 (specific rating methodology is detailed in Appendix 1 of this HHS memo):

  • The rate for a 21-year-old will continued to be the base rate against which other rates are set.
  • Children from age 0 to 14 will be charged 76.5 percent of the base rate.
  • Children age 15 will be charged 83.3 percent of the base rate.
  • Children age 16 will be charged 85.9 percent of the base rate.
  • Children age 17 will be charged 88.5 percent of the base rate.
  • Children age 18 will be charged 91.3 percent of the base rate.
  • Children age 19 will be charged 94.1 percent of the base rate.
  • Children age 20 will be charged 97 percent of the base rate.
  • Adults will continued to be charged rates based on their age, with a maximum rate (for people age 64 and older) of three times the base premium.

HHS noted that although claims expenses do tend to be higher for kids under age 4 and lower for kids aged 4 to 14, the single rate band for kids from birth to age 14 is intended to spread out the cost across a larger population, and limit the sudden rate increase that would apply to a family with a newborn if rates were set based entirely on the expected claims for each age group.

This change in the methodology used to calculate rates does not include the normal rate increases that apply each year due to the increasing cost of medical care and the other factors that drive overall rate increases. Those changes will increase the base rate, so the new rating rules for children will be using larger percentages of a larger base rate, further exacerbating the rate hikes that will apply to children's coverage.

The District of Columbia and seven states—Alabama, Massachusetts, Minnesota, Mississippi, New Jersey, Oregon, and Utah—use their own rate-setting methodology, so the new numbers for children's premiums don't apply in those states. In addition, New York and Vermont don't allow age-based rating at all, so there is no variation in premiums based on age in those two states.

Large Groups Use Different Rating Methodology

Note that large group premiums are typically based on composite rates, and only vary based on whether the employee is enrolling as self-only, employee plus spouse, employee plus kids, or employee plus spouse and kids. The ages of the children—and even the number of children—do not typically affect the premiums that are charged. The new rules described above for setting premiums for children are specific to the individual and small group market.

Rate Change Will No Longer Be as Sharp When People Turn 21

Rates for children are going to be higher in 2018 than they have been in the past, with the most dramatic increase applying to older teens. But when those kids eventually turn 21, they won't experience the sharp rate increase that used to apply. Prior to 2018, a person turning 21 would go from paying 63.5 percent of the base rate to paying the base rate, all in one jump; the jump will now be smoothed out across ages 15 to 21.

Rates Will Be Slightly Lower for Adults Than They Would Have Been

It's also important to keep in mind that the age rating bands are intended as a means of spreading the total costs out across the full population of insureds. Of the total amount of premiums needed to cover the cost of care for a plan's total membership, the percentage of that total will now apply a bit more to children, which means it will apply a little bit less to adults. The total amount that must be collected isn't impacted by the new rating methodology.

Of course, that applies across a plan's entire membership; the impact on each particular household will vary, and a household full of teenagers will face higher pre-subsidy premiums in 2018 than they would have faced without the new child age bands, even after accounting for the parents' premiums. But overall, the new age bands for kids don't change the total amount of money that insurers will collect from all of their members combined (keeping in mind that the total amount that needs to be collected will be higher in 2018 than it was in 2017, due to the normal factors that drive rate changes).

Premium Subsidies Will Adjust to Keep Pace With New Rates

For people who purchase individual market coverage in the exchange (and only in the exchange) in each state, premium subsidies (premium tax credits) are designed to keep the cost of coverage to an affordable level. The amount of the subsidy is determined by capping the cost of the second-lowest-cost silver plan at a specific percentage of the household's income, with percentages that are lower for lower-income enrollees, and higher for higher-income enrollees.

As the cost of coverage for a given household increases, so does the amount of their subsidy. Unfortunately, subsidies aren't available to households that earn more than four times the poverty level, so a family of five would be ineligible for premium subsidies if their income exceeds $115,120 in 2018. But for households with income that doesn't exceed four times the poverty level, the subsidies grow to keep pace with the overall cost of coverage, and the subsidy is specific to each household's actual cost of coverage (note that subsidies aren't available if you're in the Medicaid coverage gap or if the family glitch applies to your situation).

It's also important to understand that the ACA caps charges for children under age 21 at a maximum of three per family, in both the individual and small group market. So a family with six kids under 21 will only have to pay premium for three of them (note that while parents can keep their kids on their plan until the kids turn 26, premiums are charged for all kids age 21 and older, regardless of how many other dependents are on the plan).

The takeaway here is that while rates will increase more than usual for families with teenagers, premium subsidies will also grow for those families if they're eligible for subsidies. For households that are subsidy-eligible, the subsidies will keep the net premium of the second-lowest-cost silver plan at an affordable level. If the family's income remains unchanged from 2017, the net cost of the second-lowest-cost silver plan will actually be slightly lower in 2018 than it was in 2017, despite the overall rate increases for 2018 and the new age bands for kids.

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