Actuarial Value: For Those Buying Health Insurance

Whether we like it or not, the trend in our for-profit health insurance system is to pass more of the cost of health care onto the consumer rather than to reduce costs from the top down. Therefore, shopping for the best deal in health insurance coverage, requires that we know what actuarial value (AV) means. Actuarial value is a convenient short-cut for consumers to get an idea of how “generous” a health insurance plan and therefore makes comparison shopping between plans a bit easier. Actuarial value combines the various cost-sharing provisions (like deductibles, copays, and coinsurance) into a single number. It is defined in the figure below.

actuarial value equation

Minimum Consumers need to know about Actuarial Value

The minimum consumers need to know about actuarial value includes:

  1. Actuarial value is a measure of a particular health insurance plans cost-sharing only.
  2. Actuarial value does not tell us anything about the quality or quantity (choice) of healthcare providers or the quality of the insurance company (e.g., responsiveness of insurance reimbursement, communication and satisfactory resolution of any disputes, how often reimbursements are rejected, and insurance paperwork demanded).
  3. Actuarial value only applies to health services offered by in-network provider and most plans provide no coverage out-of-network.
  4. In general, the more the insurer has to pay and the less the patient has to pay in health costs (i.e., the more “generous” the plan), the higher the actuarial value . Actuarial value varies from 100% (means the insurance company pays 100% of all health costs) to 0% (the patient pays 100% (i.e., no insurance)). Because of the unpredictability of health, people who buy plans with lower actuarial value are taking a risk that if they get very sick and require costly health care, out-of-pocket costs could escalate beyond one’s ability to pay.
  5. In general, the higher the actuarial value, the higher the premium and the lower the patient cost-share.
  6. While everyone would want a health insurance plan with an actuarial value of 100%, the premium cost for such a plan is too high for most people to afford (for which you can thank our overpriced, for-profit healthcare system).
  7. Because the calculation for actuarial value takes into account the health spending by a “standard” population, actuarial value will NOT tell you EXACTLY how much you will personally spend. The health care needs (and spending) of any particular individual varies from person to person and from year to year. One patient may find that a plan pays very little of his health costs while another will have the plan cover much more.
  8. There is no absolute method for calculating the actuarial value of an insurance plan so our government has provided an official Actuarial Value Calculator that all insurers selling on the Health Insurance Marketplace must use.
  9. For any given health insurance plan, insurers have many parameters they are free to “play” with to arrive at a specific actuarial value. These parameters include (1) deductible amounts and when they are applied, (2) copays/coinsurance amounts and when they are applied and (3) maximum out-of-pocket. Therefore plans offered with the same actuarial value may have very different cost-sharing structures (mixes of deductibles, co-pays, and coinsurance).

Obamacare (PPACA) and Actuarial Value

Most Americans would never have heard of actuarial value if it hadn’t been for Obamacare (PPACA) healthcare reforms. Before Obamacare (PPACA), insurance companies were free to exclude all kinds of basic (but costly) health services from their plans. Today, all major medical plans (with some exceptions, of course) must cover Essential Health Benefits (EHBs) and they must deliver a minimum actuarial value of 60%. This was not a problem for large employers, who already provided such plans and more.

Before Obamacare (PPACA), individuals buying health insurance in the non-group marketplace had no idea if a particular insurance plan was a good deal or just a product that gave insurers excessive profits.  In the Health Insurance Marketplace, where individuals (and small groups) who are not covered by employer-sponsored or government health insurance can buy coverage, plans are grouped into categories with similar actuarial values and given names (bronze, silver, gold and platinum) for easier comparison shopping. The actuarial values in each category can be ±2% . A plan with an actuarial value of 66% would still fall into the Bronze category, but it is unlikely for an insurer intent on maximizing profits would sell such a plan unless the insurer was trying to increase market share.

For high health spenders (e.g., people with costly pre-existing conditions, and older Americans with chronic conditions) the plans with higher actuarial values (gold and platinum plans) are better deals. This of course assumes the consumer can afford the premiums. Platinum plans usually have the highest monthly premiums and the lowest out-of-pocket costs. For low health spenders (e.g., the young and healthy), plans with lower actuarial values (bronze or silver) are better deals. Bronze plans usually have the lowest premiums and the highest out-of-pocket costs. This information is shown in the table below.

metal tiers and actuarial valueObamacare (PPACA) also allows people under 30 or those who qualify for a financial “hardship exemption” to buy health insurance that has an actuarial value of less than 60%. This insurance is called Catastrophic.  Compared to the Bronze plan above, the Catastrophic plan has a lower premium cost and a higher cost-share.  While catastrophic health plans cover the same benefits as found in the plans above, the patient must pay for all health costs until a high annual deductible is met (exceptions include preventive screenings and 3 primary care visits per year).

Final Notes On Actuarial Value

Before Obamacare (PPACA) reforms, individual’s buying health insurance from  insurance brokers had to rely on the commission-paid brokers’ assurances that he or she was getting a good value.  Actuarial value makes a plan’s value a bit more transparent. Unfortunately, much more information about health insurance products needs to be made available to the public before the consumer can truly comparison shop for the best deal.

If I were shopping for a health insurance plan on the Health Insurance Marketplace, I would buy the most “generous” health plan I could afford.  There is nothing worse than being very sick and having to also worry about how to pay the medical bills.  Furthermore, I would not want to be put in a position where high cost-sharing delays or stops me from seeking necessary medical care (e.g., I find a lump on my breast).

While only insurers providing plans on the non-group and small group Health Insurance Marketplaces are required to provide actuarial value numbers, the actuarial value numbers for all health insurance plans can be determined. In the table below, I have included a few other health insurance plans for comparison.

actuarial value of several insurance plansAll of the health insurance plans in the table are taxpayer-subsidized and you can see that plan “generosity” varies by what group you happen to fall under.

 

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