July 12, 2010 

Office of Consumer Information and Insurance Oversight 

Department of Health and Human Services 

Attention: OCIIO-4150-IFC 

P.O. Box 8016 

Baltimore, MD 21244 

Re: Dependent coverage to age 26—comments regarding interim final rule 

To Whom It May Concern – 

On behalf of the American Academy of Actuaries’1 Benefits and Eligibility Work Group, I 

appreciate this opportunity to provide comments to the Departments of Health and Human 

Services, the Treasury, and Labor on the recently released interim final rule on Sec. 2714 of the 

Public Health Service Act (PHSA). These regulations clarify issues related to the requirements 

for a plan or issuer offering dependent coverage of children to make such coverage available for 

children until they reach the age of 26. 

Our comments are focused on three areas within the regulations that may cause some disruption 

in the individual and group markets and/or have a significant financial impact on insured costs. 

In addition, based on our reading of the regulations, it is unclear whether the financial impact of 

the issues discussed in this letter is reflected in the economic impact study performed by the 

departments. The three areas of concerns are: premium surcharges due to age, limiting coverage 

to dependents not eligible for employer-sponsored insurance (ESI), and the definition of 

“dependent.” These issues are described below. 

Premium Surcharges Due to Age 

Section II. A. of the interim final rule states that “the terms of the plan or policy for dependent 

coverage cannot vary based on the age of a child, except for children age 26 or older. 

Examples illustrate that surcharges for coverage of children under age 26 are not allowed

except where the surcharges apply regardless of the age of the child...” [emphasis added] Below 

we cite Sec.147.120 (e) Example 1. 

Example 1. (i) Facts. A group health plan offers a choice of self-only or family health 

coverage. Dependent coverage is provided under family health coverage for children of 

participants who have not attained age 26. The plan imposes an additional premium 

surcharge for children who are older than age 18. 

 

1

 The American Academy of Actuaries is a 16,000-member professional association whose mission is to serve the 

public on behalf of the U.S. actuarial profession. The Academy assists public policymakers on all levels by 

providing leadership, objective expertise, and actuarial advice on risk and financial security issues. The Academy 

also sets qualification, practice, and professionalism standards for actuaries in the United States. 
Page 2 of 4 

(ii) Conclusion. In this Example 1, the plan violates the requirement of paragraph (d) of 

this section because the plan varies the terms for dependent coverage of children 

based on age. [emphasis added] 

 

We believe the requirement, as well as Example 1, creates some unintended ambiguity. In 

particular, the conclusion under Example 1 does not reference “surcharge,” thus leading to an 

alternative interpretation that age rating for dependents is no longer allowed. These regulations 

apply to both group and individual health insurance coverage. If age rating for dependents is not 

allowed, it would create rate disruption in the market. Age rating for dependents needs to be 

maintained so that the rates are reasonable in relation to the benefits provided. In the next 

paragraph, we describe current rating practice in the individual market and the effect of not 

allowing age rating for dependents. 

In the individual market today, many carriers consider the age of the dependent when setting the 

family premium for policies. While the practice is predominant in the individual market, this 

practice also occurs in the group market. Standard risk premium rates typically vary by each age 

or age grouping. A carrier does this to be consistent with how it rates all other ages (i.e., to match 

premium rates with the expected medical expenses for the risk class of age). Expected medical 

expenses, at very young ages in particular, vary significantly from other ages of dependents; in 

practice, carriers have reflected this in higher standard premium rates for the youngest of 

dependents than for others. For example, claims costs for younger children (ages 0 to 2) are 

much higher than for children who are age 2 and older. Reflecting the age of dependents, when 

establishing premium rates for a family policy, more accurately reflects the true costs for each 

family. Eliminating this ability will require insurers to charge the same dependent rate to each 

family regardless of age. Since this varies from current practice, families with older children will 

likely see an increase in their premium, and families with very young children will likely see a 

decrease in their premium. 

We request clarification on whether the intent of the regulations is to limit a plan’s ability to use 

age-based surcharges for these newly insured dependents (to age 26) as a means of discouraging 

them from electing to continue coverage under their parent’s plan. Since the regulations 

specifically prohibit a premium “surcharge” for dependent coverage, one interpretation is that the 

regulations allow the continuation of the practice of varying premiums for dependent coverage 

by age. In other words, as long as no extra surcharges are levied above and beyond current rating 

practices, age rating for dependents would be allowed. We suggest a revision of the regulations 

and relevant examples to remove any unintended ambiguity. 

In the event the intent was to disallow age rating on dependents, other alternatives should be 

considered. One alternative would be to allow a carrier to continue the practice of charging 

premium rates by age; however, once the dependent reaches a particular age, the rates would 

remain constant. For example, the expected claim costs for individuals in their 20s do not vary 

significantly by age, which is consistent with current pricing practices for this age group. Thus, 

disruption in the market would be minimal. 
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Limiting Coverage to Dependents Not Eligible for Employer-Sponsored Insurance (ESI) 

The interim final rule states that a grandfathered health plan may exclude from coverage an adult 

child who has not attained age 26 only if the child is eligible to enroll in an employer-sponsored 

health plan other than his or her parent’s group health plan. 

Enabling currently insured young adults to shift coverage from their own policy to that of their 

parent’s policy could create unintended adverse dynamics or uncertainty in the group market. We 

provide an example to demonstrate an unintended consequence of allowing young adults to make 

this shift. 

Example: A group health plan offers a choice of self-only or family health coverage. 

Dependent coverage is provided under family health coverage for children of participants 

who have not attained age 26. Under this dependent tier structure, family premiums do 

not vary by the number of dependents. Therefore, a working adult child can be added to 

an existing family contract with no increase in premiums rates. 

The magnitude of the loss in premium due to the addition of adult children will vary by the 

dependent rating structure offered. 

What if the adult child is working full time at an employer that currently offers insurance but 

requires the employees to pay a portion of the premium? This adult child is currently enrolled in 

his or her employer’s plan and paying a portion of the premium. However, the adult child will 

now be able to opt out of this plan and enroll under his or her parent’s plan for free. It would be a 

wise economic decision for the young adult to elect to enroll under the parent’s plan. What is the 

impact on the premium for his employer’s plan? 

Generally, most groups employ what is commonly called a “composite rating.” In other words, 

there is a common rate for each dependent option for the group (i.e., a common single rate for all 

those who elect employee-only coverage, a common family rate for all those who elect 

employee-plus-dependents coverage.) In states in which age rating is allowed, the composite 

rates reflect the average age distribution of all employees. Therefore, the younger employers are 

subsidizing the older employers. 

In this example, if the adult child were to withdraw from his or her employer’s insurance 

program, the group’s average age would increase, resulting in a higher premium rate for the rest 

of the group. Small employers are most susceptible to material increases due to young adults 

migrating to their parents’ plans, because they have fewer employees over whom to spread the 

lost subsidy. However, even large employers could experience increases, depending on the 

distribution by age of their currently insured employees. 

We have illustrated one scenario, but there are other scenarios depending on the structure of the 

dependent tier options under the parent’s contract, as well as the individual circumstances of the 

family (i.e., if there are other siblings currently insured under the parent’s policy). The 

opportunities for selection will vary by each of these scenarios. However, the situation cited in 

the above example is applicable for many groups. 
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One way to address these concerns is to allow both grandfathered and non-grandfathered plans to 

exclude an adult child who is eligible to participate in their employer’s insurance plan. 

Definition of Dependent 

The interim final regulations clarify that financial dependency, residency with 

participant/subscriber, student status, employment, and eligibility for other coverage may not be 

used to define a dependent. These are practices that carriers currently use to assist them in 

identifying dependents for insurance coverage. Since the definition of dependents is much 

broader in the regulations, we believe there is potential for significant anti-selection, especially 

prior to the implementation of the individual mandate requirement. There are strong incentives 

for individuals who need medical services to enroll in an insured plan by any means, setting up a 

system prone to misuse. Adoption of a definition for dependent that is difficult to verify could 

increase administrative costs and increase the likelihood for misuse. We believe this antiselection issue will have a significant financial impact, especially in the first few years of 

implementation of the regulations. 

Economic Impact 

The interim final rules included an economic impact of this portion of the law. However, there 

were insufficient disclosures of assumptions and methodologies for us to provide an independent 

review. It is unclear whether certain scenarios were taken into account in the economic impact 

calculation. Examples include, but are not limited to, the impact of the items discussed in this 

letter—namely, the upward pressure on rates and market disruption as a result of (1) age rating 

no longer being allowed; (2) the anti-selection effect of young adults currently enrolled or 

eligible for ESI moving to their parent’s plans and paying a lower dependent rate; (3) the antiselection effect of carriers’ reduced ability to verify dependent eligibility. Furthermore, we 

believe it should be noted that the economic impact calculated in the interim final rule is an 

average, and the actual impact on individual carriers, employer groups, and/or individual 

insureds could vary significantly from this average and from one another. Therefore, without 

understanding the assumptions and methodologies used in the economic impact calculation, we 

are unable to comment on this analysis. 

***** 

We would appreciate the opportunity to discuss any of these items, including the assumptions 

and methodologies behind the economic impact section, with you at your convenience. If you 

have any questions or would like to discuss these items further, please contact Heather Jerbi, the 

Academy’s senior health policy analyst (202.785.7869; Jerbi@actuary.org). 

Sincerely, 

Bela Gorman, MAAA, FSA 

Chairperson, Benefit and Eligibility Changes Work Group 

American Academy of Actuaries