For consumers in most parts of the country, 2015 is the second year in which they can shop for an individual health insurance policy without being charged a higher price because of their health status. Under the Affordable Care Act (ACA), insurers offering plans for individuals and small businesses are now prohibited from varying a consumer’s premium rate, except to account for 1) the number of people covered under the policy, 2) their age, 3) where they live, and 4) whether they use tobacco.

As we explain in a recent Commonwealth Fund issue brief, one of the most significant choices facing states concerns tobacco rating. Before health reform, nearly all states allowed insurers to charge people who use tobacco a higher price for coverage. The ACA curtails but does not eliminate this practice, and most, but not all, states followed the federal approach (Exhibit 1). We found that, in order to make coverage more affordable for a greater number of Americans, policymakers in 10 states and the District of Columbia chose to further limit the power of insurance companies to raise prices on tobacco users.

Exhibit 1. Federal Framework for Tobacco Rating in the Individual Market
Key concept Implementation approaches
Definition of tobacco use “Tobacco use” is the use of any tobacco product on average four or more times per week within the past six months.
Tobacco use surcharge Insurers in the individual and small-group markets may charge a person who uses tobacco a premium that is up to 50% higher than the rate paid by a nonsmoker. This surcharge may vary by age.
Federal premium assistance and the tobacco surcharge Consumers who are assessed a higher premium rate because they smoke must bear the full cost of that surcharge.

The amount of a consumer’s premium tax credit is calculated after the insurer adjusts the premium to reflect the consumer’s age and geographic region, but before “rating up” for tobacco use. In this way, the tax credit defrays the costs of age and location but does not mitigate the surcharge associated with tobacco use.

What's the issue? The justification for tobacco rating is straightforward and, at first blush, commonsensical. Its effect, however, may be to jeopardize access to affordable insurance for many consumers, especially those with lower incomes. These consequences have led groups like the American Cancer Society and American Lung Association to oppose the practice.

Reasons for tobacco rating . . . The basic rationale for tobacco rating is that tobacco use is a voluntary behavior that increases health costs and can lead to higher-priced coverage. If insurers aren’t allowed to adjust a person’s rates based on tobacco use, they will spread the costs connected with tobacco-related illness and disease across the wider population, thereby raising premiums for nonsmokers. Additionally, some point out that a tobacco surcharge creates a financial incentive for smokers to quit—and a disincentive to start—and therefore suggest that its use may lead to healthier behaviors.

. . . and against. Insurers’ flexibility to charge higher rates for tobacco use raises the risk that smokers will be unable to afford coverage and, therefore, will go without it. This danger is acute for lower-income Americans because of the way the health law’s premium tax credits are calculated. In short, they don’t ease the impact of the surcharge. For a nonsmoker who earns around $17,000 a year and receives federal premium assistance, for example, annual premiums equal 4 percent of income (about $700); for a similarly situated smoker, the tax credit stays the same, but the price tag for coverage nearly quadruples. Given this calculus, those who might be especially well-served by coverage—and the access to cessation services it provides—may be unable to afford it. Anecdotal reports presented at a recent national meeting of state insurance regulators indicate that, in some areas, the tobacco surcharge poses as big an obstacle to coverage access as the states that have not yet expanded eligibility for Medicaid.

Tobacco rating is also problematic because insurers may treat tobacco use as a proxy for poor health, raising premiums to account for an enrollee’s (presumed) medical needs in a way that skirts the ACA’s prohibition on health status rating. Finally, though there are public policies and medical and behavioral interventions with track records of promoting cessation, there is little evidence to suggest that hiking a consumer’s insurance premium is an effective way to end tobacco addiction.

What options do states have? The ACA’s premium rating rules represent a minimum standard of consumer protection: a floor, not a ceiling. Policymakers that wish to customize their state’s tobacco rating policy have a number of options they may pursue, separately or in combination.

The simplest approach is to reduce or eliminate the premium surcharge associated with tobacco use. Every state that diverged from the federal tobacco rating standard in the individual market in 2014 followed this path (Exhibit 2).

Exhibit 2. State Standards for Tobacco Rating in the Individual Market in 2014
State standard States
Tobacco rating is permitted, but the maximum surcharge an insurer may impose is capped at a level less than the federal default of 50%. Arkansas (20%), Colorado (15%), Kentucky (40%)
Tobacco rating is prohibited throughout the individual market. California, District of Columbia, Massachusetts, New Jersey, New York, Rhode Island, Vermont
Tobacco rating is prohibited for plans sold in the state’s marketplace only. Connecticut

Alternatively, a state may require that the tobacco use surcharge be calculated as a share of the consumer’s subsidized premium (instead of from the unsubsidized price, as under the default rules). This option wouldn’t change the amount of the federal premium tax credit, a move foreclosed by federal law. But, it would make the resulting surcharge smaller for lower- and middle-income Americans who qualify for premium assistance.

Additionally, states may provide an alternative definition of tobacco use. For example, a state could increase the threshold for how frequently tobacco must be used to trigger a surcharge, or shorten the time frame for last regular use of tobacco.

In preparation for 2014, states found themselves with a long list of implementation issues to address and a short time to do so. And yet nearly a quarter of states still chose to customize their approach to tobacco rating. As initial implementation pressures ease and more evidence about the impact of the tobacco surcharge comes to light, it seems likely more states will consider charting their own course on this thorny issue.