The Affordable Care Act: How Smoking (and Quitting) Will Affect Rates

On October 1, 2013, Health Insurance Marketplaces (often referred to as “exchanges”) opened across the country.  To date, the opening of the exchanges has been the most talked about, and for that matter, argued about, aspect of the Affordable Care Act (“Act”).  As citizens consider their future options for insurance coverage they need to be aware that a limited number of factors will affect the rates they receive: age, location, family size, and smoking.  As smoking will play an important role in determining an individual’s rate, this article will help explain how smokers (and quitters) will be treated under the Act.

Generally speaking, the Act prohibits insurance providers from considering many traditional factors used to determine an individual’s insurance rate; for example, gender and pre-existing medical conditions.  However, smoking (and other tobacco use) is fair game.  In fact, the Act specifically permits insurers to charge smokers up to 50% more for insurance than non-smokers.  Couple this smoking surcharge with the fact that insurers are also authorized to charge older individuals up to three times as much as younger people, and you reach the conclusion that smokers could be facing steep premium prices.

Here’s a scenario provided by the Associated Press:

Take a hypothetical 60 year-old making $35,000 a year.  Estimated premiums in the new private health insurance markets under the act would be around $10,000.  However, that person would be eligible for a tax credit that brings the cost down to around $3,000.

Now take a hypothetical 60 year-old smoker.  The smoking penalty would add $5,000 to the cost.  Further, since the federal tax credits can’t be used to offset the penalty, the smoker’s total cost for health insurance would be $8,000, nearly 23% of income.

The above example is, in reality, a worst case scenario.  The real-world results likely will not be this extreme.  For one, many insurance companies will not charge the maximum 50% surtax for competitive reasons, and will probably limit the surcharge to around 15%.  Second, some states operating their own exchanges will provide better protections for smokers in their states by either limiting or doing away with the surcharge.

The latest guidance provided by the federal government also limits the definition of tobacco use.  In order to be considered a tobacco user, an individual must have used tobacco products more than three times per week within the last six months.  This means that if you quit for a six month period, you will no longer be subject to the 50% surtax, which is a pretty nice incentive to quit.  Finally, smokers who obtain coverage through their employers can avoid the penalty by joining smoking cessation programs. That option is not guaranteed to smokers purchasing individual coverage.

The last thing to point out is that a computer system glitch will limit the surtaxes insurers can assess on older smokers for at least a year.  The current computer program, due to an ineffective design, is unable to account for the interaction between the age surtax limit (three times that of a younger person) and the smoking surtax (50%).  So for now, both young and old smokers will be charged the same lower penalty.  The Obama administration has promised that this glitch will be fixed within a year.

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