Here's What Older Americans Need to Know About the Age Tax

By Maurie Backman Markets Fool.com

Utter the word "Obamacare" in a crowded room, and you'll get a host of mixed reactions (and perhaps some choice words). But the proposed Republican version -- the American Health Care Act -- is certainly not without controversy itself. One major provision of the plan, dubbed the age tax, is particularly troublesome for older Americans who aren't yet eligible for Medicare and get their insurance through the open marketplace.

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What is the age tax?

Under Obamacare, workers earning less than $48,000 a year received subsidies to help offset their insurance costs. Those subsidies were directly tied to income and the price of insurance by geographic region. (Premiums are considerably more expensive in some parts of the country than others.)

IMAGE SOURCE: GETTY IMAGES.

Under the proposed American Health Care Act (AHCA), subsidies will still exist, but will phase out at incomes of $75,000 per year. Furthermore, subsidy amounts will not be determined by income, but by age, as follows:

Age Range

Proposed Subsidy

20-29

$2,000

30-39

$2,500

40-49

$3,000

50-59

$3,500

60 and over

$4,000

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DATA SOURCE: LATIMES.COM.

Note that these subsidies will not be geographically based, either. In areas where health insurance costs the most, participants will have no choice but to absorb the added expense.

Now, based on the above, you'd think the AHCA would be reasonably friendly to seniors, given the more generous subsidies for which they'd be eligible. But another provision of the plan, known among critics as the age tax, not only virtually negates the above benefit, but makes it far more expensive overall for seniors to stay insured.

Because seniors are typically more expensive to insure than younger Americans, providers want the option to pass those costs onto plan participants. Under the current system, the amount that older Americans can be charged relative to younger Americans is capped at a ratio of 3:1. The AHCA, however, is seeking to change that ratio to 5:1, which means insurers will be allowed to charge seniors up to five times as much as younger enrollees for coverage.

According to AARP, as a result of the age tax, seniors 60 and over will see their health insurance costs go up by $3,200 a year, on average, leaving the typical older American on the hook for $17,900 in annual premiums. Or to look at it another way, a 64-year-old earning $26,500 would pay an average of $12,900 more each year in premium costs under the new proposal.

Since it's estimated that seniors already spend one out of every six dollars on healthcare, it goes without saying that most can't afford to pay any more. If the AHCA passes, lower-earning seniors who live in areas with the highest insurance costs will be hurt the most.

Is there a silver lining?

There is, but you really need to look for it. The AHCA does uphold certain Obamacare provisions that, if eliminated, would leave seniors with even fewer options. First, under the new system, insurers will not be allowed to deny participants with pre-existing conditions. Given that older Americans are the most likely to have prevailing health issues, this is a small way of throwing them a bone.

Additionally, insurers won't have the option to impose annual or lifetime limits on coverage, and they'll be obligated to offer the same basic coverage under the current system. But since many seniors require more than just basic benefits, that's not particularly encouraging news.

Another interesting aspect of the AHCA is that the requirement to purchase insurance is gone. Instead, insurers will be allowed to charge participants 30% more for premiums for one year if their coverage lapses. All told, these changes will likely leave an estimated 24 million people who currently have coverage uninsured by 2026.

If you're an older American in need of health insurance, hold on tight. You could, unfortunately, be in for a rather rocky, expensive ride.

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