The Affordable Care Act (ACA) has not only brought with it sweeping reforms in health insurance but also in the lingo we use to talk about health plans. Among these new terms is “Actuarial Value” also known simply as “AV.” So what is AV and how does it fit into healthcare reform? Well, don’t worry, HealthMarkets reviews and interprets the ‘geek speak’ of health insurance for you.
To put it simply, actuarial value refers to a health plan’s level of generosity in terms of its benefits. In other words, how much value can people using a given health plan expect to get out of it? Plan providers calculate this by determining the overall expected health costs for a given area. Then, they apply a plan’s benefits to those costs to come up with a ratio of how much of those costs are paid by the plan and how much are paid by the insured.
Health plans that meet ACA standards (AKA Qualified Health Plans or QHP’s) are categorized into four metallic levels—Bronze, Silver, Gold, and Platinum. These aren’t arbitrary designations. As these names imply, the different metallic levels give a clue as to the cost of any given health plan. More importantly, they tell us about actuarial value.
The ACA defines very specific guidelines around these classifications. For example, plans categorized as Bronze must have an actuarial value around 60%. Silver has an AV of about 70%. Gold has about 80% AV. Platinum has an AV around 90%. (See the table above.)
So, what does this tell us? We see that a Silver plan has 70% AV. These plans are designed to pay for about 70% of covered medical expenses for a general population. This does not necessarily mean the plan has 70/30 coinsurance.
Coinsurance and actuarial value are two completely different aspects of a health plan. As a matter of fact, a large number of Bronze plans have 100/0 coinsurance but still have only 60% AV. Coinsurance is the fixed percentage the plan pays for covered expenses after the deductible has been met. Actuarial value is a mathematical calculation to determine the overall level of coverage after all plan benefits are applied—deductible, coinsurance, copayments, and out-of-pocket maximum.
HealthMarkets Reviews a Common Scenario
To illustrate, imagine that an individual (we’ll call her Susan) has a short hospital stay totaling $25,000 in medical expenses. Let’s assume her plan has a $1,500 deductible, after which she must pay 30% of the remaining charges until she reaches a total out-of-pocket cost of $5,000. In other words, Susan has a 70/30 coinsurance plan with a maximum out-of-pocket of $5,000. Assuming the $25,000 bill represents charges that are covered by her plan, let’s take a look at how much value she will get out of her plan after all is said and done.
|$25,000 Hospital Bill||Susan pays…||Her plan pays…|
After Susan’s health plan applies her benefits, it will pay $20,000 of the $25,000 bill. This comes out to 80% of the total cost (20,000 ÷ 25,000 x 100). Even though her plan’s coinsurance is 70/30, the total split of paid expenses after all benefits are applied comes to 80/20. If this were the true actuarial value of Susan’s plan, it would be classified as Gold according to ACA standards since it pays 80% of the total cost.
Of course, this example greatly oversimplifies how actuarial value is truly calculated. Nonetheless, it still illustrates the essence behind it. For a true AV calculation, we need more than Susan’s hospital stay. As a matter of fact, we need to consider the entire population of people as well as the entire sum of medical costs a plan expects to cover based on statistical data.
In the health insurance world, the people who study these kinds of statistics are called actuaries, hence the term actuarial value. As a result, actuarial value does not tell us how much value Susan gets out of her plan. Instead, it tells us how much value a general population can statistically expect to get out of a given plan based on anticipated medical costs.
Fortunately, you don’t have to be an actuary to figure this out since we provide assistance free of charge. As you might suspect, HealthMarkets reviews your individual health insurance options with you. Just give us a ring at (800) 304-3414 and we’ll help you find an affordable health insurance plan.