Monday, March 15, 2010

qotd: Do premiums correlate with actuarial values?

California HealthCare Foundation
October 2008
Actuarial Value: A Method for Comparing Health Plan Benefits
By Roland McDevitt, Ph.D., Director of Health Research, Watson Wyatt

Actuarial value is a summary measure of likely payments by a plan. It
measures the percentage of medical expenses paid by a health plan for a
standard population, ranging from 0.00 for a plan that pays nothing to
1.00 for a plan that pays all medical expenses.

Actuarial value only measures benefit payments. To fully assess whether
a plan is a good purchase, consumers would want to know both the premium
and the actuarial value. They may also want to consider other aspects of
the plan, such as whether specific benefits like maternity are covered,
whether the plan offers a broad choice of providers, and whether the
plan has a good record of administrative performance.

Individual market plans in Los Angeles County, 2006
32 plans listed at <>
Actuarial value and premium for a 32-year-old

0.86 - $194
0.83 - $289
0.83 - $242
0.82 - $204
0.70 - $257
0.69 - $198
0.67 - $56
0.67 - $448
0.64 - $186
0.63 - $110
0.62 - $62
0.62 - $403
0.59 - $244
0.58 - $222
0.57 - $81
0.56 - $50
0.56 - $69
0.49 - $193
0.49 - $283
0.47 - $244
0.46 - $83
0.46 - $111
0.46 - $278
0.46 - $87
0.45 - $77
0.44 - $298
0.44 - $72
0.44 - $166
0.41 - $93
0.41 - $60
0.39 - $149
0.34 - $75

If the policy goal is to provide a single number that consumers can use
to compare the relative value of different benefit packages, actuarial
value presents a more robust measure than any single cost-sharing provision.


House of Representatives
March --, 2010
H.R. ____
To provide for reconciliation...

Table of premium percentage limits and actuarial value percentages based
on income tier

Family income of 350% through 400% of federal poverty level (FPL)
Final premium percentage - 11%
Actuarial value percentage - 70%

Reference premium amount - average premium for the 3 basic plans in the
area for the plan year with the lowest premium levels

Comment: An important finding in this Watson Wyatt report is that the
premium paid for a private insurance plan has a very poor correlation
with the percentage of medical expenses that are paid by that plan on
average, as represented by the actuarial value. In this list from 2006,
a plan that paid 86% of the medical expenses had a premium of $194,
whereas another plan that paid 44% of expenses had a premium of $298.

Another important observation is that most of these plans in the
individual market have a comparatively low actuarial value. Almost half
of them don't even pay one-half of the medical expenses on average.
Think of the burden on the typical family of a year's worth of premiums
plus one-half of all medical expenses.

Although following the numbers reminds you of a shell game, it is
instructive to look at the reconciliation bill released by the House
Budget Committee last night (link above). With a family income of 350%
to 400% of the federal poverty level, the family would be required to
purchase a plan with an actuarial value of 70%, and they would be
required to pay up to 11% of their income for the premium. Thus the
family would be responsible for 11% of their income plus, on average,
30% of the medical expenses covered by the plan, plus all other costs
not covered by the plan.

That family also would be limited to providers selected by the private
insurer. In addition, that 11% of income cap on premiums applies only to
the average of the three cheapest plans with a 70% actuarial value.
Seeing the poor correlation with actuarial value, the family may feel
compelled to purchase a much more expensive plan with the same 70%
actuarial value if the cheapest plans do not include their personal
health care professionals with whom they have an established relationship.

Furthermore, most would prefer to have a plan that has benefits closer
to typical employer-sponsored plans which until now have had an
actuarial value of about 80%, and sometimes more. The family would be
responsible for the full additional costs of any such plan if they
should upgrade. (Upgrade really isn't the best choice of terms since all
trends today actually constitute a downgrade from the traditional standard.)

The bottom line is that a family at 400% FPL is being priced out of
health care, and a major factor contributing to this is that we are
relying on an incompetent private insurance industry that can't even
price its products properly. And Congress is... yes... cramming that
down our throats!

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