Some smokers trying to get coverage next year under President Barack Obama’s health-care law may get a break from tobacco-use penalties that could have made their premiums unaffordable.
The Obama administration—in yet another health care overhaul delay—has quietly notified insurers that a computer system glitch will limit penalties that the law says the companies may charge smokers. A fix will take at least a year to put in place.
Older smokers are more likely to benefit from the glitch, experts say. But depending on how insurers respond to it, it’s also possible that younger smokers could wind up facing higher penalties than they otherwise would have.
Some see an emerging pattern of last-minute switches and delays as the administration scrambles to prepare the Oct. 1 launch of new health insurance markets. People who don’t have coverage on the job will be able to shop for private insurance, with tax credits to help pay premiums. Small businesses will have their own insurance markets.
Last week, the White House unexpectedly announced a one-year postponement of a major provision in the law that requires larger employers to offer coverage or face fines. Officials cited the complexity of the requirement as well as a desire to address complaints from employers.
“This was an administration that was telling us everything was under control,” health care industry consultant Robert Laszewski said. “Everything was going to be fine. Suddenly this kind of stuff is cropping up every few days.”
A June 28 Health and Human Services Department document couched the smokers’ glitch in technical language:
“Because of a system limitation … the system currently cannot process a premium for a 65-year-old smoker that is … more than three times the premium of a 21-year-old smoker,” the industry guidance said.
If an insurer tries to charge more, “the submission of the (insurer) will be rejected by the system,” it added.
Starting in 2014, the law requires insurance companies to accept all applicants regardless of pre-existing medical problems. But it also allows them to charge smokers up to 50 percent higher premiums —a way for insurers to ward off bad risks.
For an older smoker, the cost of the full penalty could be prohibitive.
Premiums for a standard “silver” insurance plan would be about $9,000 a year for a 64-year-old non-smoker, according to the online Kaiser Health Reform Subsidy Calculator. That’s before any tax credits, available on a sliding scale based on income.
For a smoker of the same age, the full 50 percent penalty would add more than $4,500 to the cost of the policy, bringing it to nearly $13,600. And tax credits can’t be used to offset the penalty.
The underlying reason for the glitch is another provision in the health care law that says insurers can’t charge older customers more than three times what they charge the youngest adults in the pool. The government’s computer system has been unable to accommodate the two. So younger smokers and older smokers must be charged the same penalty, or the system will kick it out.
That’s not what insurers had expected. Before the glitch popped up, experts said the companies would probably charge lower penalties for younger smokers, and higher penalties for older ones.
“Generally a 20-year-old who smokes probably doesn’t have much higher health costs than someone who doesn’t smoke in any given year,” said Larry Levitt, an insurance market expert with the nonpartisan Kaiser Family Foundation. “A 60-year-old is another story.”
The administration is suggesting that insurers limit the penalties across all age groups. The HHS guidance document used the example of a 20 percent penalty.
In that case the premium for a 64-year-old would be about $10,900, a significant cut from the $13,600 if insurers charged the full penalty.
It’s unclear what insurance companies will do. A spokesman for America’s Health Insurance Plans, the main industry trade group, said insurers were aware of the issue and expected the administration would fix it eventually.
Another workaround for the companies would be to charge the full penalty to both younger and older smokers. In that case, there wouldn’t be any savings for older smokers, and younger ones would see a big price shock.
Levitt said he suspects insurers would keep the penalties low to sign up more young people. Laszweski said he thought they would do the opposite.
“It’s going to throw cold water on efforts to get younger people to sign up,” he said.
Workers covered through job-based health plans would be able to avoid tobacco penalties by joining smoking cessation programs because employer plans operate under different rules. But experts say that option is not guaranteed to smokers trying to purchase coverage individually.