Creating A Usable Measure of Actuarial Value

Gary ClaxtonVice PresidentKaiser Family Foundation10/17/2011

Roles for Actuarial Value in the ACA

• Tiers of coverage for individuals and small businesses (and some others)• 60% AV = Bronze• 70% AV = Silver• 80% AV = Gold• 90% AV = Platinum

– Concept: Different levels of cost sharing applied to defined benefit package (EHB)– But: Benefit package may not be well defined, so other elements, like benefit limits,

could affect AV

• Premium tax credits tied to silver tier• Reductions in cost sharing for lower-income individuals

– Reduced deductibles and other cost sharing raise AV of silver plans to different levels for people at different incomes

• Minimum value for ESI: Plan’s share of the total allowed costs of benefits provided under the plan must be at least 60% of such costs

Estimating Cost Sharing Under the ACA

• Study asked three different consulting firms to estimate cost sharing for nongroup coverage

• Common Assumptions– Assumed typical employer plan as PPO covering broad range of services, with 82%

actuarial value– Benchmarked to same average premium; assumed 10% for administration– Prevention covered without cost sharing

• Simplifying assumptions included deductibles and coinsurance that applied to all services (other than prevention)

• Firms estimated cost sharing combinations for some of the AVs relevant to the ACA– Focus on bronze and silver level plans, with upward adjustment for cost-sharing

subsidies

Estimates of Plan Designs Meeting Selected ACA Actuarial Value Thresholds, 2014

Actuarial ResearchCorporation Aon Hewitt Towers Watson

ActuarialValue

Out-Of-Pocket

Maximum Deductible Coinsurance Deductible Coinsurance Deductible Coinsurance

60% $6,350 $6,350* 0% $4,350 20% $2,750 30%

70% $6,350 $4,200 20% $2,050 20% $1,850 20%

70% $4,200 $4,200* 0% $2,650 20% $1,550 30%

70% $3,200 $3,200* 0% $3,200* 0% $2,050 30%

73% $3,200 $3,200* 0% $3,200 0% $1,750 25%

87% $2,100 $1,050 20% $250 20% $150 20%

94% $2,100 $60 10% $200 5% $0 8%

Note: Amounts shown for the out-of-pocket maximum and deductibles are per person; figures for families would be double these amounts. Where an asterisk appears, the firm was unable to construct a plan design within the constraints of the actuarial value and out-of-pocket maximum. The deductible shown in these cases is equal to the out-of-pocket maximum, which is the highest it can be. The out-of-pocket maximum amounts are based on those for high-deductible plans that qualify to be paired with a Health Savings Account, inflated forward to 2014.

Why the Differences?

• There are pretty big differences in the estimates• Firms assumed same average premium/cost, but

– Different data with different distributions of spending– Different estimates of the impact of cost-sharing provisions on service use– Different estimates of the impact of first-dollar coverage for prevention

• Using common data/service risk distribution would reduce differences• Over time, differences would shrink as vendors become familiar with new

market structure and covered population

Minimum Value for ESI Offers

• Generally people offered coverage through a job cannot claim a tax credit for choosing coverage in an exchange unless the coverage offered– Is not affordable– Does not have a minimum value

• Minimum value is an actuarial value test– Plan’s share of the total allowed costs of benefits provided under the plan must be at

least 60% of such costs

• Unlike exchange coverage, plans offered by large employers and self-funded plans are not required to offer essential health benefits– So 60% of what (how limited can the package be and still be health coverage)?– Potential for an objective benchmark (a benchmark package or a dollar amount) that

could be used in determining whether 60% is met

Much More to Come

• We are awaiting regulations to describe how actuarial value will be determined for the different purposes of the ACA

• An important open issue is how actuarial value will be determined if there is flexibility in definition of essential health benefits

• There are a number of other important issues, for example– What is the standard population for each of the benefit tiers (risk adjustment probably

cannot fully offset selection against lower cost-sharing tiers)?– Will actuarial value calculations be audited or mostly rely on certifications from plan

actuaries?– How will higher use from subsidized cost sharing be incorporated in the actuarial value

calculations for plans?