How the New "Age Tax" Would Affect Older Americans

By Wendy Connick Markets Fool.com

The American Health Care Act (AHCA) has been passed by the House of Representatives, and before it goes any further, we will likely see a number of changes and compromises. However, there is one provision Americans should keep a close eye on, because it would have clear and significant effects on the senior population. Specifically, it would make it possible for health insurance companies to charge older clients much higher premiums relative to younger clients.

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The "age tax"

The Affordable Care Act requires health insurance companies to charge seniors aged 50 through 64 no more than three times what they charge younger enrollees. However, the AHCA introduces what it calls "age rating," which allows individual states to decide how much insurance companies can charge seniors relative to other clients. The Act suggests a default rate of five times the premiums for younger clients.

Image source: Getty images.

The cost to seniors

According to a study by AARP, this new legislation, if passed, would raise average annual insurance premiums for adults aged 60 and older to $17,900 -- an increase of $3,200. Since the median income for seniors who buy marketplace health coverage is about $20,000, an annual increase of over $3,000 in healthcare costs would be extremely burdensome for this group. Not surprisingly, AARP is strongly opposed to this bill and refers to it as an "age tax."

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Why the bill was introduced

Rep. Larry Bucshon (R-Ind.), a heart surgeon, proposed this age rating provision. He argued that because healthcare for older adults costs on average about 4.8 times more than it does for younger patients, it's only right to bring the insurance premiums for seniors in line with the costs. Limiting insurance companies to smaller premiums for senior enrollees forced them to raise premiums for younger enrollees to cover these extra costs, sometimes pricing these youngsters out of health insurance.

What the opposition says

Other groups say that young enrollees don't need the help because many of them are already receiving subsidies, are on their parents' insurance policies, or are covered by Medicaid. AARP representatives argue that seniors simply can't afford to buy health insurance at such inflated premiums. The organization points out that one section of the proposed American Health Care Act (AHCA) changes the current need-based system of premium tax credits to a flat credit, which would further increase low-income seniors' financial burden. Between the two changes, AARP says that healthcare premiums for a 64-year-old earning $15,000 a year would increase by $8,400.

What will happen next

The AHCA is now slogging through the Senate. If it becomes law in its current form, some states may choose to hold insurance companies to the current 3-to-1 ratio, while others may allow the difference in premiums to rise even higher than 5-to-1.This would make it more important than ever to shop around and compare prices on insurance policies. In this regard, the AHCA could help to broaden seniors' options by allowing consumers to purchase plans from other states.Seniors might also consider sticking with their jobs (and employer-provided health insurance) until they reach age 65 and are eligible for Medicare.

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