When my best friend from childhood graduated from college and started taking a series of actuarial exams en route to becoming an actuarial “fellow,” I thought our professional lives would certainly never cross paths. (Actuarial exams are some of the toughest tests in the world according to Milton Friedman, the Noble prize-winning economist, who decided to pursue another career path after failing some of the actuarial exams.) Now, more than twenty years later, the term “actuarial values” is in vogue as Congress debates health insurance reform legislation and I wish I had paid closer attention to the career of my friend the actuary.
So, let’s start with the basics. The actuarial value of a health plan is the share of health care costs that a plan would cover if an average population were enrolled in it. For example, a plan with an actuarial value of 70%, would cover 70% of the health care expenses of an average population, and 30% would be picked up by individuals. If you are enrolled in a health plan with an actuarial value of 70%, it does not mean that you, personally, only will have to pay for 30% of your health care costs. If you happen to use lots of medical care, you could end up having to pick up a much higher share of your costs, and if you are lucky, you could end up paying for a much smaller share.
Here’s my view on how actuarial value is being used in the health care debate and why it matters: It is a way to compare apples to apples when evaluating different health plans for large groups of people. My actuary friend cautions me that “actuarial values are based on averages and useful in estimating overall funding levels, however, they have less relevance for particular individuals evaluating a plan for their needs.” In other words, it is more like comparing apple orchards to apple orchards.
In the health reform debate, actuarial value is being used as an objective way to put a value on how good the coverage is that will be offered through “Exchange” plans. For those of use who follow health coverage for children and families, it will be critical to keep our eye on the minimum actuarial value established by various proposals because it will help determine whether the coverage offered as a result of reform is affordable and works for families.
The current House bill states that health plans must have an actuarial value of at least 70%, which means the insurance covers an estimated 70% of health-care expenses for an average population. The higher the actuarial value, the more generous the benefit package and less onerous the cost-sharing while a lower actuarial value, would indicate a less generous benefit package and higher cost-sharing. It isn’t clear yet where the Senate will set the minimum, but estimates range from 65% to 76%. These are both less generous than the typical employer-sponsored preferred-provider plan that the Congressional Research Service estimates to be about 80% to 84%. It is also less robust than the standard PPO plan offered to federal employees according to CRS. (It is important to note that traditional Medicaid for children has an actuarial value of 100% and close to half of states use the Medicaid benefit package in their CHIP programs as well.)
Why should we care about what appears to be such an obscure number? The actuarial value provides a quantitative way to make sure plans meet a minimum value. It takes into account elements of a health plan such as deductibles, coinsurance, copayments, out-of-pocket limits, and benefit limits. If policymakers lower the minimum actuarial value, we know families will either receive reduced benefits or face higher costs.
As policymakers face pressure to reduce cost estimates for health reform, they very well may look to lowering that number, making plans skimpier and requiring more cost sharing from families. CCF will be keeping a close eye on minimum actuarial values and their impact on access and affordability to health coverage for children and families.