Young Adults – Boon for Savvy Marketers, Thanks to Healthcare Reform

Young adults have just become a very appealing segment of the population for three reasons. First, they represent a significant portion of the US population at 40 million. Indeed, 1 person out of 9 is between 19 and 26. Second, they have the highest rate of uninsured. A 2009 poll conducted by the Commonwealth Fund Survey of Young Adults reveals that a whopping 45% of the 19-29 population had no health insurance for some time during the year. Third, the healthcare reform is boosting their healthcare “purchasing” power, causing a shift in the way marketers assess, target, and reach them.

The healthcare reform calls out four groups of young adults. The first group is entitled to better treatment as early as Sep 23, 2010 while the other groups will have to wait until 2014 to enjoy the privilege.  The four groups are:

1. High School and College Graduates
2. Young Adults Too Old for Medicaid
3. Young Adults Just Getting By
4. Financially Fine Youngsters

Group 1: High School and College Graduates

This is the only group that sees the change enforced right away. It comprises children that graduate from high school and elect not to go to college; and, also young adults that graduate from college. Until now, they were automatically dropped from their parents’ insurance. Thanks to the healthcare reform, they can stay on their parents’ insurance until 26.

Our calculation indicates there are about 3.5 million people that may get coverage through this route. Including both insured and uninsured, this segment counts a very sizable 26 million people.

Group 2: Young Adults To Old for Medicaid

This group will have to wait until 2014 to enjoy the benefit.  Currently, children covered by Medicaid lose coverage as soon as they turn 19 since they are no longer children. Under the reform, age is no longer a determining factor in establishing eligibility for Medicaid coverage. Indeed, anyone, regardless of age, is entitled to Medicaid coverage so long as their income is below 133% of the Federal Poverty Level (FPL), which amounts to about $13K for singles.  As a result, 19-26 adults, just like their older counterparts, will benefit from this expansion in Medicaid coverage.

Our calculation indicates about 2 million 19-26 young adults may get coverage through this route. Including both insured and uninsured, this segment counts about 7.5 million people.

Group 3: Young Adults Just Getting By

Just like the Medicaid folks, this group will have to wait until 2014. Young adults that do not make much – between 133 and 400 percent of FPL, which translates to about $13K – $40K for singles – may benefit from subsidies toward health insurance premiums. The amount of the subsidy, as one would expect, follows a sliding scale and decreases as the income gets more significant.  Exchanges that offer health insurance at competitive premiums will have been set up for those young adults to purchase insurance from.

We expect less than 2 million young people will benefit from such a windfall. Including both insured and uninsured, this segment counts just over 4 million people.

Group 4: Financially Fine Youngsters

This group will also have to wait until 2014 to enjoy their new rights and comprises young adults that make more than 400% of FPL – which amounts to more than $40K for singles – and that cannot be dependents on their parents’ insurance because their parents do not have insurance. They fall in two categories.

The first category works for employers that have more than 50 full-time employees and those employers do not offer insurance coverage. The penalty the reform brandishes, around $2,000 per employee (starting from the 31st employee – no penalty on the first 30 employees), although not gigantic may be menacing enough to convince some employers to offer health insurance to their employees.

The second category includes young adults that elect to go without health coverage probably because of their excellent health record. Just like employers, those young adults may reverse their decision and buy coverage to avert penalties especially if they feel the premium is reasonable. In 2014, the penalty will be $95 or 1% of income, whichever is higher. By 2016, the penalty will have grown to $695 or 2.5% of income, whichever is higher.

Our calculation indicates only a small number fall in this group, about a quarter of a million. Including both insured and uninsured, this segment counts less than one million people.

Implications for Marketers

Of the 32 million that will gain insurance, we estimate just over 7.5 million will be coming from the 19-26 segment (see below).

How large of a market do those young individuals represent, say, for the pharmaceutical industry?  We took a stab at the question from two angles.

First, the tab of the health care reform has been estimated at $940 billion over 10 years, a gross underestimate according to many. This amounts to about $3,000 of health care costs per newly insured per annum ($940 billion ÷ 10 years ÷ 32 million newly insured). According to a recent Kaiser study, we spent $2.3 trillion on healthcare in 2008, which puts the share of prescription drugs at 13% (indeed, Rx drugs in the US topped $300 billion in 2009 according to IMS).  This in turn suggests $390 of drug consumption per capita, which we recognize is on the low side.

Second, the $300 billion of prescription drug in 2009 points to a per capita consumption of $1,000 of prescription drugs assuming we were 300 million in the US last year. Given the pent-up demand of the uninsured, odds are the per capita consumption of the newly insured will easily exceed the $1,000 mark. On the other hand, the 19-26 being a healthier crowd, one would expect a lower healthcare expense, probably half that amount.

If we assume the drug cost to be $500 to take a round number(that’s less than $50 a month), this suggests the market of the 7.5 million 19-26 young adults that will gain coverage stands at just under $4 billion, no small sum by any means.

Those that will reap the most from this windfall are drug companies that serve the younger crowd such as manufacturers of ADHD and Asthma drugs to mention just those two. At the end of the day, companies that will come ahead are those that will have figured out a way to effectively reach those young people. The channels they’ll deploy will probably encompass Facebook, text messaging on the mobile phone, tweets, and technologically creative venues that have not yet seen the light of day.

Notes on Size Estimates

Below is a step-by-step walk-through that explains how each of the four groups of young adults was sized up and split between insured and uninsured, as well as the information sources that were tapped to accomplish this task.

Sources:

1. [Census] "Annual Social and Economic (ASEC) Supplement." U.S. Census Bureau  2009: http://www.census.gov/hhes/www/cpstables/032009/perinc/new02_003.htm
   
2. [Federal Register] Department of the Treasury. “Federal Register.” Vol. 75,(92) (2010): 27127-27129
   
3. [Rite of Passage] Collins, S., & Nicholson, S. “Rite of Passage: Young Adults and the Affordable Care Act of 2010.” The Commonwealth Fund, May (2010): 5-10.
   
4. Adjust for 19-26 instead of 19-25.
   
5. Adjust for double counting by allocating 5% of 3 toward 1 and 5% of 3 toward 2.

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