Creating A Usable Measure of Actuarial Value

1. Creating A Usable Measure of Actuarial Value Gary ClaxtonVice PresidentKaiser Family Foundation 10/17/2011

2. 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

3. 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

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

5. 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

6. 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

7. 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?