What Actuarial Value Means for Health Insurance

Actuarial value is a measure of the percentage of health care costs that are paid by a health insurance plan. It's become particularly important since the Affordable Care Act (ACA) was implemented because ACA compliance requires individual and small group health plans to fall within specific ranges in terms of their actuarial value.

The concept itself is simple enough: A health plan pays a certain percentage of health care costs, and plan members pay the rest. But it's essential to understand that actuarial value isn't calculated on a per-enrollee basis, instead, it's calculated across a standard population. For example, the 2016 actuarial value calculated by the Department of Health and Human Services (HHS) was based on standard population data across 54 million enrollees in both individual and group health insurance plans. In other words, if a certain plan has an actuarial value of 70%, it will pay 70% of average health care costs across the whole standard population. It will not, however, pay 70% of each enrollee's costs.

One Plan, One Actuarial Value, Very Different Results for Individual Members

As an example, let's consider two people with the same plan which has a $2,500 deductible and a $5,000 out-of-pocket maximum that only covers preventive services before the deductible is met. Let's say that Bob has coverage under this plan, and his only medical care during the year is a trip to urgent care for a few stitches when he cuts his hand. For simplicity's sake, we'll say that the urgent care bill was $1,500, after the health plan's network negotiated discount is applied. That's less than his deductible, so Bob will have to pay the entire $1,500. In other words, he has paid 100% of his health care costs for the year—and his insurer has paid 0% (assuming he didn't receive any preventive care).

Now let's consider Alan, who has coverage under the same plan. Alan is diagnosed with cancer in February and hits the plan's $5,000 out-of-pocket maximum the same month. By the end of the year, Alan's health insurance plan has paid $240,000 for his care, and Alan has paid $5,000 (his out-of-pocket maximum). In Alan's case, his insurance policy has paid 98% of his costs, and Alan has paid just 2% of the costs.

Remember, Alan and Bob both have the same plan, and for this example, we'll say it's a silver plan, which means it has an actuarial value of roughly 70%. Looking at it from this perspective, it's obvious that on an individual basis, there's wide variation in terms of the percentage of each enrollee's costs that are covered by the health plan, as it depends on how much health care each person needs during the year. But overall, across a standard population, the plan that Bob and Alan have will cover an average of about 70% of costs.

The ACA and Actuarial Value

Under ACA regulations and effective January 2014, all new individual and small group plans are required to fit into one of four metal levels, which are categorized based on actuarial value (note that catastrophic plans, which don't fit into the metal level categories and have an actuarial value below 60%, are also permitted in the individual market, but can only be purchased by people under the age of 30, or those who have a hardship exemption from the ACA's individual mandate).

The metal levels are designed as bronze, silver, gold, and platinum. Bronze plans have an actuarial value of roughly 60%, silver plans 70%, gold plans 80%, and platinum plans 90%. Because it's difficult for insurers to design plans that have a precise actuarial value, the ACA allows a de minimis range. It was initially +/-2, but it has expanded a bit over the years.

In December 2016, HHS finalized a rule that allows bronze plans (actuarial value roughly 60%) to have a de minimis range of -2/+5, starting in 2018 (in other words, between 58% and 65%).

Then in April 2017, HHS finalized market stabilization regulations that allowed the de minimis range to expand to -4/+2 for silver, gold, and platinum plans, and further expanded the new de minimis range for bronze plans to -4/+5.

Under the new rules, which became effective in 2018 and continue to apply to individual and small group plans:

  • Bronze plans can have actuarial values between 56% and 65%.
  • Silver plans can have actuarial values between 66% and 72%.
  • Gold plans can have actuarial values between 76% and 82%.
  • Platinum plans can have actuarial values between 86% and 92%.

Calculating Actuarial Value: Only In-Network EHBs Are Counted

The federal government created an actuarial value calculator—which is updated annually—that insurers use to determine the actuarial value of the plans they're proposing for the following year.

Only services that are considered essential health benefits (EHBs) are counted in the calculation. Insurers can cover additional services, but that doesn't count towards the actuarial value of the plan.

In addition, actuarial value calculations only apply to in-network coverage, so the out-of-network coverage that a plan provides—if any—is not part of the determination of a plan's actuarial value.

Large Group and Self-Insured Plans Have Different Rules

The actuarial value metal level requirements in the ACA apply to individual and small group plans. But large group plans (in most states, that means more than 50 employees, but in four states, it means more than 100 employees) and self-insured plans have different rules.

For large group and self-insured plans, the requirement is that the plan provides minimum value, which is defined as covering at least 60% of costs for a standard population (if an employer with 50+ employees offers a plan that doesn't provide minimum value, they risk a financial penalty under the employer mandate). There's a minimum value calculator that's similar to the actuarial value calculator used for individual and small group plans, but the calculators do have several key differences.

Large group and self-insured plans don't have to conform to the metal level categories that apply in the individual and small group market, so there can be more variation from one plan to another in the large group and self-insured market. Those plans have to cover at least 60% of the average costs of a standard population, but they can cover any percentage of costs above that level, without having to mold their benefits to fit within narrowly defined ranges.

Plans With the Same Actuarial Value Usually Have Different Plan Designs

The actuarial value calculator allows insurers to design unique plans that all end up within the same actuarial value range. This is why you can look at 10 different silver plans and see 10 very different plan designs, with a wide range of deductibles, copays, and coinsurance.

California's health insurance exchange requires all plans for individual and small groups to be standardized, which means that within a particular metal level, all of the available plans are virtually identical in terms of benefits from one plan to another, although they all have different provider networks. There are several other states that require some standardized plans but also permit non-standardized plans.

But plan standardization is not the same thing as actuarial value. If a state or exchange requires plans to be standardized, all available plans will have the same exact benefits across whatever metrics are used for standardization (deductibles, copays, coinsurance, out-of-pocket maximum, etc.). This is in contrast to actuarial value requirements, which allow for significant variation in terms of plan design and benefits, even for plans that have the same actuarial value.

The variation among plans at the same metal level can happen even when the plans have the exact same actuarial value (i.e., two plans with different benefit designs can both have an actuarial value of exactly 80%). But the de minimis range allowed at each metal level—and the expansion of the range as of 2018—further increases the variation allowed within a single metal level. A plan with an actuarial value of 56% is a bronze plan, and so is a plan with an actuarial value of 65%. Obviously, those two plans will have very different benefit designs, but they are both considered bronze plans.

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Article Sources
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