One of the key components of Health Reform (a.k.a. Obamacare, a.k.a. the Affordable Care Act) is the creation of Health Insurance Exchanges. Not any plan can participate in the exchanges however. First, these plans must cover certain Essential Health Benefits (EHB). Second, the plans must meet certain actuarial value (AV) thresholds. Health Plans are grouped into four tiers based on their AV: plans in the bronze tier must have an AV of 60%; silver plans an AV of 70%; gold plans an AV of 80%; and platinum plans an AV of 90%.
What does an Actuarial Value Mean?
The AVC methodology document explains as follows”
AV is calculated as the percentage of total expenditures covered by the plan. Under our proposed rule, the denominator of this calculation is simply the average allowed cost of all services for the standard population in the year for a specified metal tier; the numerator is calculated as the share of average allowed cost covered by the plan, using the cost-sharing parameters specified.
To provide information on utilization and cost sharing for a standard population of enrollees, HHS used 2010 claims data from the Health Intelligence Company, LLC (HIC) database. This commercial database includes detailed enrollment and claims information for individuals who are members of several regional insurers and covers over 54 million individuals enrolled in individual and group health plans.
A plan’s actuarial value is calculated based on a standard population. Defining the standard population, however, is not a trivial task. If the population is composed of mostly elderly individuals with poor health status, then the AV will differ from the case where the AV is based a population of young, healthy individuals. HHS defines the standard population as including the following types of individuals:
- Newly insured individuals.
- Individuals in the status quo individual market
- Individuals in the small group market
- Individuals moving out of employer coverage
- Individuals with Medicaid eligibility for part of the year
- High risk individuals
So what is the point of an AVC?
Plan design structures are characterized by cost-sharing features that determine the division of expenses between the plan and the insured. The ratio of the share of total costs paid by the plan relative to the total costs of covered services is the AV of the plan. No summary calculator could capture every single potential plan variation. However, empirically, the vast majority of the variation between the AVs of health plans is captured by a finite number of variables, and the calculator focuses on accurately determining plan actuarial values based on this set of key plan characteristics. Therefore, the calculator includes only these key characteristics that have a significant effect on actuarial value.
Users must follow four steps to use the AVC:
- Set their metal tier
- Calculate average expenses across all enrollees
- Calculate Expenses Covered by Employer Contributions to HSA and HRA (if Applicable)
- Calculate Plan-Covered Expenses for Spending Below Deductible Amount
- Determine Applicable Spending Level for Maximum Out-of-Pocket (MOOP)
- Calculate Plan-Covered Expenses for Spending Between the Deductible and the MOOP
- Calculate Plan-Covered Expenses for Spending Above the MOOP
- Apply Network Blending, if Applicable
- Calculate AV and Corresponding Metal Tier
For additional Information on Implementing Health Reform, see the Health Affairs Blog.