Topic: Miller College of Business

May 6, 2014

Under the Affordable Care Act (ACA), healthy Hoosiers who buy health insurance from the exchange might pay significantly more in premiums because of the poor health of their neighbors, says a new policy brief from Ball State University.

The university’s Center for Business and Economic Research (CBER) recently released “Individual Market Premium Variations Under the Patient Protection and Affordable Care Act: Evidence from Indiana” to analyze the impact on Hoosiers who do not get their health insurance through an employer.

“Basically, there are two questions Hoosiers want answered,” said Michael Hicks, CBER director and the policy brief’s lead author. “These are ‘Am I paying for my neighbor’s bad health?’ and ‘Am I paying more because I live in a rural community?’”

In addition to Hicks, the CBER research team included Morgan Lewis, an undergraduate research assistant and Srikant Devaraj, senior research associate and project manager.

Researchers examined the ACA’s impact by studying actuarial estimates that are used to calculate regional rates for health insurance under a number of plans, including bronze, silver and silver plus. Ball State’s research team then developed three models that estimate regional variation in health insurance rates at the county level.

“The answer to the first question is yes, as households pay for the ill health of residents within their county,” Lewis said. “These costs are not trivial. All things being equal, the additional health care expenses of living in the highest diabetes incidence rate county in the state costs a household an additional $230.40 per year over what it would spend in the county for median diabetes incidence.

“The cost increases by more than $474 per year for a household living in the county with the highest percentage of health care issues, versus the county with the median percentage” she said. “These are not unexpected results, and point directly to some of the Affordable Care Act’s justification for community ratings.”

Hicks points out that before the implementation of the Affordable Care Act, Indiana had no restrictions on insurance rating systems for setting premiums. In addition to being able to refuse coverage for pre-existing health conditions, insurance companies could base their rates on health status, age, gender and tobacco use in the individual health insurance market.

Companies were also free to vary rates by geography due to changes in health care costs. Insurance companies weighted these factors as they saw fit to determine the premiums for individuals.

“This meant that, due to lower perceived costs, a young and healthy man who did not smoke could be paying substantially less than an older female with a tobacco habit,” Hicks said. “The state set no restrictions on the variability between these two premiums. Health insurance was regulated primarily by the free market.”

However, the incident of chronic diseases such as diabetes had more impact on a county’s rates than whether it was rural or urban. Location had little to no impact on rates.

“The Affordable Care Act, or Obamacare, is an enormously complex piece of legislation impacting almost one-fifth of the U.S. economy,” Hicks said. “Though the results of its implementation are not yet clear, it is certain that it will change the way health insurance is bought and sold in the United States.”