What is actuarial value?
By Alex Gramling
Employer sponsored health insurance can take on a spectrum of designs which often leave HR professionals and benefits sponsors with a nebulous notion regarding the attractiveness (or “richness”) of the benefits offered. Luckily, there is a standardized mathematical calculation, known as “actuarial value” (AV), which can provide a general barometer of a health plan’s value relative to the expenses incurred. AV is a simple concept from a high-level perspective, but more granular understanding can provide better insight into how this number can play into benefit attractiveness, plan financials, and annual renewal planning.
Healthcare.gov defines actuarial value as “the percentage of total average costs for covered benefits that a plan will cover.” For example, a plan with an 80% actuarial value is expected to pay for 80% of the total cost of covered benefits, and the remaining 20% would be the responsibility of the member through cost sharing in the form of deductibles, copayments, or coinsurance, as applicable.
This definition is simple enough, but it doesn’t explicitly state that this calculation is for the average cost using a standard population. In other words, individual members of the health plan may see wildly different values using their own incurred expenses. A member who did not meet their deductible would pay 100% of their expenses, while a high cost claimant might pay <1% of all expenses they incur. The value provided in the calculation simply does not explain what will happen on a claimant by claimant basis.
Small employers and individuals – AV in the spotlight
In attempts to standardize health insurance offerings, the Affordable Care Act (ACA) created “metallic” tiers used in small group (definition depends on state) and individual plan rating. These metallic plans used actuarial value as the determination for the classification, thrusting AV into the everyday vernacular of benefits and HR professionals.
From inception, metallic tiers used a ±2% de minimis variation for classification. In other words, 58-62% actuarial value yielded a bronze plan, 68-72% silver, 78-82% gold, and 88-92% platinum. There is also a catastrophic tier (<60%) in the individual market, but it has stringent requirements and has been omitted from this group-focused perspective on AV.
The regulated metallic ranges were relaxed in 2018, yielding the following ranges, by tier: 56-65% bronze, 66-72% silver, 76-82% gold, 86-92% platinum. These new guidelines allow more variation within each metallic tier so that consumers and small groups have more options at the expense of less standardization.
Large employer and self-funded plans: AV as a key consideration
Fortunately for large employers (>100 employees) and self-funded plans, the metallic design requirements are not applicable. Plans in this size range are free to design a health benefits package in a manner of their choosing, so long as it meets minimum value (>60% AV) and stays within the other ACA-mandated requirements such as the caps on out-of-pocket limits.
This is where actuarial value becomes a paramount figure in benefits planning. Knowing the actuarial value of a health plan can allow decision makers to benchmark offerings against competitor or general market plan designs, understand the cost impact of plan design changes, or simply understand the expected cost burden on employees (premium/contributions + cost sharing). Considering these various uses can transition this calculation from a singular data point to one which can help inform decisions as a key metric.
Are all valuations created equal?
No, calculations can differ slightly from source to source since the underlying continuance tables may differ. However, Benefits and HR professionals usually have access to only a few actuarial value calculations which limits the potential for confounding calculations:
- The Centers for Medicare and Medicaid Services (CMS) releases both an actuarial value calculator and minimum value calculator meant to be used across the entire country. These calculators are different in nature, but at their core both produce a plan valuation which only considers services which are essential health benefits, and only at the in-network benefit levels. This calculator will only give the AV of a single plan, and isn’t detailed enough to produce relative values leaving the end-user to approximate the value difference using simple comparisons.
- TPAs and insured carriers rarely distribute the actuarial value of a plan, but consultants can typically give a general approximation of a plans valuation using in-depth calculators available to them through large data aggregators or internal actuarial resources. These calculators have various complexities, and may yield only a relativity from the existing plan design. Either way, the additional sophistication of these calculators should help to better approximate the value of a plan versus the CMS calculator.
These calculators do not generally include any assessment of network composition, ACOs, drug formularies, or other cost containment initiatives. These other parameters may need to be analyzed separately to adequately position the calculation in the context of all available data.
Depending on the size of your health plan, utilizing an actuarial value calculation may provide a good measuring stick for where your plan sits in the grand scheme of available benefit designs. It is advisable to take the time to have an actuarial value or relative value calculation performed so that both short and long term planning can be advised through a quantifiable data point. Whether decision makers are looking to stay in a competitive hiring position, manage plan expenses, or simply stay compliant, actuarial value or benefit relativities should be a prominent feature of strategic planning.
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