Copyright © 2010 by the American Academy of Actuaries What Is Actuarial Value? Cori E. Uccello, FSA, MAAA, MPP Senior Health Fellow American Academy of Actuaries From Vision to Reality: State Strategies for Health Reform Implementation Washington, DC November 12, 2010

Copyright © 2010 by the American Academy of Actuaries 2 What Is Actuarial Value? A health insurance plans actuarial value indicates the average share of medical spending that is paid for by the plan, as opposed to being paid out of pocket by the consumer. The calculation takes into account various plan features: –Cost-sharing elements such as deductibles, coinsurance, copayments, and out-of-pocket limits, and –The range of services covered by the plan. For example, an actuarial value of 70% means that, on average, the plan pays for 70% of medical spending. Consumers pay the remaining 30% out of pocket.

Copyright © 2010 by the American Academy of Actuaries 3 What Is Actuarial Equivalence? When two or more plans have the same actuarial value, they are said to be actuarially equivalent. Actuarial equivalence comparisons answer the question: On average, does one plan cover at least as much as another?

Copyright © 2010 by the American Academy of Actuaries 4 The Affordable Care Act Specifies Four Benefit Tiers Additional Catastrophic Plan available for individuals up to age 30 and to those exempt from mandate. (Coverage level set at current HSA level.) Regardless of benefit tier, maximum out-of-pocket limits are based on those for HSA-qualified health plans ($5,950 for individual coverage and $11,900 for family coverage in 2010). Benefit TiersActuarial Value Platinum90% Gold80% Silver70% Bronze60%

Copyright © 2010 by the American Academy of Actuaries 5 Estimated Actuarial Values of Current Plan Designs Prototypical Plan DesignSelect Plan Design FeaturesEstimated Actuarial Value HMO-Style Plan $15 office visit copay $250 inpatient hospital copay Deductible: N/A; OOP Max: N/A 91% Most Popular FEHBP Plan Deductible: $300 Coinsurance: 15% OOP Max: $5,000 83% PPO Deductible: $500 Coinsurance: 15% OOP Max: $3,500 80% Alternate PPO Deductible: $1,500 Coinsurance: 25% OOP Max: $7,500 65% High Deductible Health Plan Deductible: $5,000 Coinsurance: 30% OOP Max: $10,000 48% Source: Snook, Dobson, Harris, Understanding Healthcare Plan Costs and Complexities, Milliman Healthcare Reform Briefing Paper (June 2009). Note: Actuarial value estimates reflect the U.S. labor force population (and spouses/dependent children). Values for a standard U.S. population could differ.

Copyright © 2010 by the American Academy of Actuaries 6 How Benefit Tiers Can Help Consumers Choose Between Plans Plans within the same benefit tier are roughly actuarially equivalent. Benefit tiers provide a gauge of the relative generosity of different plans. For instance, platinum level plans provide more coverage, on average, than bronze level plans.

Copyright © 2010 by the American Academy of Actuaries 7 Limitations of Using Actuarial Value When Choosing a Health Insurance Plan Because actuarial value calculations are done on an average basis for a given population, different plans may be more or less valuable to any particular individual, even among plans in the same benefit tier. Plans within the same benefit tier will have different premiums. Actuarial values do not incorporate information about provider networks.

Copyright © 2010 by the American Academy of Actuaries 8 Illustrative Example Total Spending Plan 1 Deductible: $500 Coinsurance: 20% OOP Max: $2,000 Plan 2 Deductible: $250 Coinsurance: 30% OOP Max: $2,500 Person 1$25,000Plan Share: $23,000 (92%) Individual Share: $2,000 (8%) Plan Share: $22,500 (90%) Individual Share: $2,500 (10%) Person 2$1,500Plan Share: $800 (53%) Individual Share: $700 (47%) Plan Share: $875 (58%) Individual Share: $625 (42%) Person 3$800Plan Share: $240 (30%) Individual Share: $560 (70%) Plan Share: $385 (48%) Individual Share: $415 (52%) Person 4$500Plan Share: $0 (0%) Individual Share: $500 (100%) Plan Share: $175 (35%) Individual Share: $325 (65%) Person 5$400Plan Share: $0 (0%) Individual Share: $400 (100%) Plan Share: $105 (26%) Individual Share: $295 (74%) Total$28,200Plan Share: $24,040 (85%) Individual Share: $4,160 (15%) Plan Share: $24,040 (85%) Individual Share: $4,160 (15%) Source: American Academy of Actuaries, Critical Issues in Health Reform: Actuarial Equivalence.

Copyright © 2010 by the American Academy of Actuaries 9 Issues to Consider When Choosing a Health Insurance Plan Benefit tier (actuarial value) Premium Cost-sharing features (e.g., deductibles, coinsurance, maximum out-of-pocket limits) Range of medical services covered Provider network and quality Customer service

Copyright © 2010 by the American Academy of Actuaries 10 Cost-sharing Assistance for Low- and Moderate-Income Families To be eligible, must enroll in a plan in the silver level of coverage. Cost sharing assistance includes: –Reductions in out-of-pocket limits, and –Increases in actuarial value.

Copyright © 2010 by the American Academy of Actuaries 11 Reductions in Out-of-Pocket (OOP) Limits Standard OOP maximum limits ($5,950 for individuals; $11,900 for families) are reduced for people with incomes less than 400% FPL. Income Level Reduction in OOP Max Limit % FPL2/3 reduction % FPL1/2 reduction % FPL1/3 reduction

Copyright © 2010 by the American Academy of Actuaries 12 Increases in Actuarial Value Cost-sharing subsidies are available to people with incomes less than 250% FPL. Aside from specified reductions in maximum out-of-pocket limits, plans have flexibility in how to achieve increased actuarial value through combination of deductibles, copayments, and coinsurance. Income LevelActuarial Value % FPL94% % FPL87% % FPL73%

Copyright © 2010 by the American Academy of Actuaries 13 Interplay Between OOP Limit Reductions and Increases in Actuarial Value People with incomes 250%-400% FPL have reduced OOP limits, but actuarial value for silver plan must not exceed 70%. Therefore, other cost-sharing provisions may need to be increased to offset decrease in OOP limits. –Secretary directed to adjust the OOP limits if necessary to ensure they do not cause actuarial values to exceed specified levels.

Copyright © 2010 by the American Academy of Actuaries 14 Silver Tier Plan Requirements, by Income Income Level Actuarial ValueMaximum OOP Limit* % FPL94%2/3 reduction % FPL87%2/3 reduction % FPL73%1/2 reduction % FPL70%1/2 reduction % FPL70%1/3 reduction 400%+ FPL70%standard limit * Standard maximum out-of-pocket limits are based on those for HSA-qualified health plans ($5,950 for individual coverage and $11,900 for family coverage in 2010).

Copyright © 2010 by the American Academy of Actuaries 15 Final Thoughts Details of actuarial value calculation methods and assumptions are yet to be determined. Using actuarial values to categorize plans by benefit tiers can provide a gauge of the relative generosity of different plans. Because actuarial value calculations are done on an average basis for a given population, different plans may be more or less valuable to any particular individual, even among plans in the same benefit tier.