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January 14, 2013 11:57 AM Age-rating and Selection

By Austin Frakt

The American Academy of Actuaries says premiums for young Americans will go way up because they will be cross-subsidizing older Americans. No surprise.

A consequence is more of them are likely to pay the smaller penalty and take up insurance only when sick. (Let’s call this “gaming,” for short.) But this mechanism is also what keeps premiums sufficiently affordable for the older cohort so fewer of them game it in this way.

Consider the counterfactual of more risk-rating by age. In that case, you’d get less gaming among the young but more for the older cohort.

Which scenario is to be preferred from points of view of selection and welfare?

I’m ignoring the other counterfactual of more redistribution by income. I think that would be better, but I am not optimistic about the political prospects of increasing the progressivity of the tax system. The more likely question to be put on the table is, should the age rating bands be modified? If so, how much cross-subsidization by age is tolerable? How many gaming 60-year-olds would we trade for one less gaming 25-year-old?

[Cross-posted at The Incidental Economist]

Austin Frakt is a health economist and an assistant professor at Boston University's School of Medicine and School of Public Health. He blogs at The Incidental Economist.