Marketplace Plans Provide Risk Protection, But Actuarial Values Overstate Realized Coverage For Most Enrollees

By Maria Polyakova, Lynn Mei Hua, and M. Kate Boundary
Health Affairs, December 2017


The Affordable Care Act (ACA) has increased the number of Americans with health insurance. Yet many policy makers and consumers have questioned the value of Marketplace plan coverage because of the generally high levels of cost sharing. We simulated out-of-pocket spending for bronze, silver, or gold Marketplace plans (those having actuarial values of 60 percent, 70 percent, and 80 percent, respectively). We found that for the vast majority of consumers, the proportion of covered spending paid by the plans is likely to be far less than their actuarial values, the metric commonly used to convey plan generosity. Indeed, only when annual health care spending exceeds $16,500 for bronze plans, $19,500 for silver plans, and $21,500 for gold plans do plans in these metal tiers cover the proportion of costs matching their actuarial values. While Marketplace plans substantially reduce consumers’ exposure to financial risk relative to being uninsured, the use of actuarial values to communicate plan generosity is likely to be misleading to consumers.

From the Introduction

While the Affordable Care Act (ACA) has increased the number of Americans with health insurance, policy makers and consumers have questioned the value of Marketplace coverage because cost sharing in many plans is generally high. In a recent survey, 22 percent of people who purchased health insurance on their own reported having problems paying medical bills; copayments, deductibles, and coinsurance were the most frequently reported sources of problems.

The standard metric for measuring the generosity of a plan’s coverage is the plan’s actuarial value—that is, the ratio of a plan’s covered spending that is paid for by the plan, divided by the plan’s total covered spending for a standardized population. For example, an actuarial value of 70 percent indicates that for a standardized population, enrollees as a group pay 30 percent of total covered expenditures out of pocket, and the plan pays 70 percent. For Marketplace plans, actuarial values are used to define product tiers. Bronze plans must have an actuarial value of 60 percent, while silver, gold, and platinum plans must have actuarial values of 70 percent, 80 percent, and 90 percent, respectively—although as of 2018 some variation (from 4 percent below to 5 percent above the value, depending on the metal tier) is permitted.

Metal levels and their corresponding actuarial values are intended to provide standardized information on coverage generosity to help consumers choose among plans. The actuarial value simplifies cross-plan comparisons by aggregating complex cost-sharing features—including deductibles, copays, and coinsurance (which can vary across types of health care services)—into a single metric based on out-of-pocket spending. Using a standardized population for the calculation ensures that differences in actuarial values across plans are not driven by differences in the types of people enrolled.

In practice, however, the effect of cost sharing on out-of-pocket spending can vary substantially across people based on the number and types of services they use. As a result, the actuarial value, which is calculated at the population level, might not accurately represent the proportion of covered expenditures paid by a plan for any given enrollee. The distinction between population- and individual-level measurement, however, is often overlooked in the popular media and even in some of the information that insurers provide to consumers. For example, the Blue Cross Blue Shield Blue Care Network of Michigan’s website states, “If you choose a bronze plan, overall you’ll pay about 40 percent of your health care costs, and your insurance company will pay about 60 percent. If you choose a gold plan, overall you’ll pay about 20 percent and your insurance company will pay about 80 percent.”

From the Study Results

We found that although the actuarial value accurately describes the experience of the standardized population as a whole, it does not reflect what most people experienced in their plan. For each of the three metal tiers, plans covered the fraction of the costs corresponding to their actuarial value only for enrollees who had substantial annual health care spending. For example, in the average gold plan, an enrollee would have to spend approximately $21,500 before the plan covered 80 percent of spending, its actuarial value. For the silver and bronze tiers, the spending levels required for plans to reach their actuarial value were $19,500 and $16,500, respectively. Because more than 90 percent of people had annual spending of less than $15,000, for the vast majority of enrollees, the proportion of expenditures covered by a plan would have been much lower than its actuarial value. For the enrollees with the highest spending, assumed to be those using the most services because of illness, plans in all three metal tiers covered more than 85 percent of their spending. However, very few people used that much care.

From the Discussion

While Marketplace plans provide significant financial risk protection, communicating plans’ generosity based on actuarial value may create a mismatch between coverage people expect and coverage they experience. Health care expenditures are highly skewed: As noted above, only a small percentage of people have very high spending in a given year. In other words, an adverse health event that causes very high spending is rare, but it represents a substantial financial risk. Marketplace plans provide relatively comprehensive coverage, as measured by the proportion of total expenditures they cover, for the small proportion of people who experience very high spending. The remainder of the covered population (the vast majority of enrollees) get protection from the risk of catastrophic health care expenditures but experience relatively little direct benefit from their coverage in any given year. They pay premiums but ultimately pay for most of their services out of pocket because their expenses fall below the deductible limits.

More generally, a weakness of using actuarial value is that doing so distracts consumers from the key purpose of insurance, which is financial risk protection. Actuarial value is driven by the average across the population and provides no information on the likelihood of different levels of spending or how specific consumers would fare financially under different scenarios.…

The actuarial value of a health plan is the percentage of covered health care costs paid by the insurer, but for the entire population covered, not necessarily for the insured individual. As this study shows, the overwhelming majority of individuals with plans in the ACA exchanges pay a much higher percentage of their covered costs than they might expect to based on the actuarial values of their plans.

The insurers depend heavily on the amount of the deductible to adjust the actuarial values of their plans. Those with low or modest expenses will have a much smaller percentage of costs covered because of their deductibles, whereas those with high medical costs who have already exceeded the deductible will have their additional costs covered at a percentage greater than the actuarial value. Although about 80 percent of spending occurs amongst the 20 percent of individuals with high costs, the other 80 percent of us will find that a much higher percentage of our costs will be out-of-pocket because of the deductible that must be paid.

If it seems like health insurance doesn’t work very well for the 80 percent of individuals who have modest expenses, that’s because it doesn’t. Other studies have shown that modest expenses can create a financial hardship for many individuals and families. And those with higher expenses? They may have a higher percentage of the charges beyond the deductible covered, but they still have the up front out-of-pocket expenses which may constitute a hardship for many of them as well.

Why do we continue to leave in charge the private insurers who have figured out a way to pay less than the actuarial value for the care that most of us receive? It wouldn’t be an issue if we all had first dollar coverage – simply get the care we need when we need it without having to worry about deductibles and other cost sharing.

We should all have prepaid health care through a well designed single payer system instead of being victims of a numbers racket.

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