Medical Cost Trend: Behind the Numbers 2013

PwC (PricewaterhouseCoopers)
Health Research Institute, May 2012
Healthcare spending growth in the United States has slowed considerably over the past three years. And despite expectations that the trend would bounce back up in 2012, it did not. In fact, we see no major change on the horizon for 2013.
Medical cost trend measures spending growth on health services and products—a critical factor in calculating insurance premiums for employers and consumers. For 2013 PwC’s Health Research Institute projects a medical cost trend of 7.5%. Perhaps most notably, the historically large gap between healthcare growth and overall inflation has closed slightly.
As a result, the United States finds itself at a crossroads with respect to medical inflation. History suggests that the current slowdown is merely a dip mirroring broader economic trends and that medical cost growth will return to “normal” when the rest of the economy recovers fully. Looking even further out, if the Affordable Care Act is fully implemented, tens of millions of newly-insured Americans receiving care for the first time in years could cause a spike in spending in 2014 and beyond.
But across the healthcare landscape behaviors are beginning to change. Employers are pushing wellness programs with real enforcement muscle. Healthcare providers and drug makers are embracing the quest for value. And patients are becoming more cost-conscious medical consumers.
It is always dangerous to predict that medical cost trend could be approaching a more sustainable level. Yet if the structural forces in the industry take hold, the U.S. health system may be entering a “new normal.”
Executive summary
The focus on medical cost containment strategies is continuing, aided by the sluggish economy, reforms in the healthcare industry, and efforts by employers to hold down costs.
More than half of the employers surveyed by HRI are considering increasing employees’ share of health benefit cost and expanding health and wellness programs in 2013.
In estimating the medical cost trend growth for 2013, HRI relied on multiple sources including interviews with health plan actuaries and industry leaders, a review of available surveys and analyst reports, and PwC’s own 2012 Health and Well-Being Touchstone Survey of 1,400 employers from more than 30 industries. In this year’s report, we identified:
Four factors that will deflate medical cost trend in 2013:
* Medical supply and equipment costs abate under market pressure. Supplies can account for more than 40% of the cost of certain procedures. Recent hospital consolidation and physician employment are enabling administrators to move away from “physician preference” purchasing and negotiate for significant savings. In addition, insurers are pressuring hospitals to hold down these expenses.
* New methods to deliver primary care gain popularity. One of the slowest areas of cost growth has been in physician services, and this trend is expected to continue in 2013 as consumers choose alternatives to the traditional doctor’s office visit. Lower-cost options such as workplace and retail health clinics, telemedicine, and mobile health tools continue to gain market share because employers and consumers view them as cost effective and convenient.
* Price transparency exerts pressure. As comparative cost information becomes more readily available, purchasers such as employers and individual patients can shop for non-emergency services such as tests and elective procedures. Providers meanwhile are under pressure to justify prices. More than 30 states require some reporting of hospital charges and reimbursement rates. Congress is considering legislation that would prohibit cost confidentiality clauses in insurance and hospital contracting.
* The pharmaceutical patent cliff continues to foster the use of cost-saving generics. Many blockbuster drugs have recently gone off patent, which will have a major effect on lowering drug spending in 2013.
Two factors that will inflate medical cost trend in 2013:
* Uptick in utilization trend is expected in 2013. The recession of 2007–2009 contributed to a significant slowing in healthcare consumption, as many people who lost jobs or were afraid of losing employment delayed care. As the economy continues to strengthen, utilization is expected to rebound.
* Medical and technological advances accelerate growth of higher-cost care. Remarkable new discoveries and technological advances let many in society live much longer—but often at a significantly higher cost. New technologies, such as robotic surgery and positron emission tomography services, have grown rapidly, with 36% of hospitals performing robotic surgery in 2010. Several health plans reported an uptick in high-cost cases, many surpassing the million-dollar mark.
What this means for your business
Employers and insurers will want to capitalize on the recent slowdown, while doctors, hospitals, and pharmaceutical companies will need to retool their business models to succeed in the new environment.
http://www.pwc.com/us/en/health-industries/behind-the-numbers/key-findings.jhtml

This annual PwC projection of medical cost trends with employer-sponsored health programs seems to celebrate the slowing of cost trends at the 7.5 percent level for 2013. Yet that is well in excess of the rate of inflation. Our nation’s employers and their private insurer partners have remained ineffective in controlling health care cost escalation.
PwC discusses four factors that they say should deflate the medical cost trend, but when you look closer at them, they would barely tweak costs.
* Hospital consolidation may place administrators in a better negotiating position for purchasing supplies and equipment, but since these are not services but rather products with relatively fixed production costs, negotiable margins will be quite narrow. Very little savings will be reflected in the bottom line of total costs.
* Retail health clinics might charge lower fees than primary care practices, but not much lower. Also, most health care still needs to be delivered within the traditional system of primary care professionals, specialists, and hospital and outpatient services. A discount on flu shots and exams for common colds in a convenience clinic will not make much of a dent in spending on the 80 percent who are relatively healthy, yet still receive most of their care through traditional health care professionals and facilities. It won’t have any impact at all on the 80 percent of health care that is consumed by those with more significant health care problems.
* There is much discussion of price transparency, as if patient/consumers are going to drive down prices through health care shopping. Most prices paid are determined not by price checks but by administered rates of government programs or negotiated rates through third party payers, including private insurers and employers with self-insured programs. Ubiquitous price shopping is merely a dream of ideologues.
* It is true that many blockbuster drugs are coming off of patent and will be much less expensive as generics. But when you look at some of the newer agents and the research that is down the line, the quest of the pharmaceutical and biotech industry is for drugs and biologicals with five and six digit prices, or maybe four digits for products with low production costs and higher utilization. The PwC report mentions $300,000 and $400,000 drugs that are already on the market. The industry has no interest in producing new $20 drugs.
The report also mentions factors that will inflate health care costs, including increased utilization as the economy recovers, and increased spending on newer expensive technology. Also spending increases will occur if the states are successful in enrolling significant numbers of previously uninsured individuals in their insurance exchanges, and if employers increase coverage to avoid penalties should the Affordable Care Act survive its challenges.
Until we are ready to change to a much more efficient single payer national health program, we can anticipate that intolerable health care inflation rates will stay with us. As more of us suffer from the results – impaired access and financial hardship – we may finally reach a threshold wherein we are ready to act. Until then, don’t get sick.

Estimating the Tradeoff Between Risk Protection and Moral Hazard with a Nonlinear Budget Set Model of Health Insurance

By Amanda E. Kowalski
The National Bureau of Economic Research, May 2012
Abstract
Insurance induces a well-known tradeoff between the welfare gains from risk protection and the welfare losses from moral hazard. Empirical work traditionally estimates each side of the tradeoff separately, potentially yielding mutually inconsistent results. I develop a nonlinear budget set model of health insurance that allows for the calculation of both sides of the tradeoff simultaneously, allowing for a relationship between moral hazard and risk protection. An important feature of this model is that it considers nonlinearities in the consumer budget set that arise from deductibles, coinsurance rates, and stoplosses that alter moral hazard as well as risk protection relative to no insurance. I illustrate the properties of my model by estimating it using data on employer sponsored health insurance from a large firm. Within my empirical context, the average deadweight losses from moral hazard substantially outweigh the average welfare gains from risk protection. However, the welfare impact of moral hazard and risk protection are both small relative to transfers from the government through the tax preference for employer sponsored health insurance and transfers from some agents to other agents through a common premium.
4.3 The Estimated Tradeoff Between Moral Hazard and Risk Protection
The third panel of Table 10 gives the tradeoff between the welfare gain from risk protection and the deadweight loss from moral hazard. The distribution of the tradeoff at any quantile generally is not equal to the difference between DWL (deadweight loss) and RPP (risk protection premium) at those quantiles. However, as shown in the penultimate column, the mean tradeoff is equal to the mean DWL minus the mean RPP. For all offered and hypothetical plans considered, the results show that the average deadweight loss exceeds the gain from risk protection. The average net welfare loss in each of the offered plans is around $5, or 0.25% of money at stake.
We see that the welfare gains that we estimate from insurance in Table 11 are very similar to predicted insurer spending reported in Table 8; demographic groups with higher predicted insurer spending derive a larger welfare gain from insurance than demographic groups with lower predicted insurer spending. As we see in Table 12, demographic groups with larger predicted insurer spending also have larger deadweight losses. Risk protection does not appear to vary with predicted insurer spending because the magnitudes of the risk protection premium are so small, but there is also some variation in the risk protection premium across demographic groups.
NBER:
http://papers.nber.org/papers/w18108
Full paper (highly technical):
http://www.econ.yale.edu/~ak669/kowalski05_17_12submit.pdf

The mainstream policy community likely will take from this study the fact that it supports the prevailing notion that losses from insured patients using more health care than they otherwise would have (moral hazard) are greater than the gains in protecting personal finances in the face of medical need (risk protection). Such an interpretation would be unfortunate simply because it is inadequate and therefore misleading.
Most importantly, the net welfare loss of using more care when there is risk protection is so small that it is almost negligible. In fact, the population studied (employees of a large retail trade firm) did not have high health expenditures and therefore would be the most likely to respond to direct costs incurred below their deductibles. Yet the data show that mean value of the extra care obtained above the value of the risk protection premium was almost negligible.
Most of health care spending is incurred by those with greater health care needs, a group that was not represented in this study of healthier individuals. People with greater health care needs exceed their deductibles and consequently do not experience consumer sensitivity to most of their health care prices.
Another important issue is that the extra health care accessed as a result of moral hazard should not be automatically dismissed as excess care. Half of it is not since it includes beneficial services, even though these services risk being dismissed merely because they are not reflected in improved mortality data. Even the care that might not seem to be beneficial still provides reassurance to concerned patients that their presenting complaints do not warrant further diagnostic or therapeutic intervention. Reassurance provided by health care professionals should not be considered to be a moral hazard.
The lesson to take home from this study is that the cost of trading up for more risk protection is almost negligible when the price paid is a very small increment in additional spending on largely beneficial health care that might otherwise have been foregone.
This is crucial in the continued debate over health care reform. There is considerable political pressure to shift price sensitivity to health care consumer/patients through consumer-directed high-deductible plans, health savings accounts, vouchers for Medicare plans, lower-tier plans in insurance exchanges, and other devious innovations that insurers will no doubt introduce in the future. These concepts are to deter the false bogeyman of moral hazard, but at the profound cost of threatening financial security for those of us with health care needs.
Regular readers already know how we can circumvent this nonsense – simply enact a single payer national health program that eliminates cost sharing. Countries that spend on average only half of what we do have shown that it can be done. The moral hazard is in not doing it.

By Neale Mahoney
The National Bureau of Economic Research, May 2012

Abstract

This paper examines the implicit health insurance households receive from the ability to declare bankruptcy. Exploiting cross-state and within-state variation in asset exemption law, I show that uninsured households with greater seizable assets make higher out-of-pocket medical payments, conditional on the amount of care received. In turn, I find that households with greater wealth-at-risk are more likely to hold health insurance. The implicit insurance from bankruptcy distorts the insurance coverage decision. Using a microsimulation model, I calculate that the optimal Pigovian* penalties are similar on average to the penalties under the Affordable Care Act (ACA).

5.2 Effect on Costs

To summarize, I find a strong positive relationship between seizable assets and out-of-pocket payments for households with higher utilization, a slightly downwardly sloping relationship for households with lower utilization, and zero effect on the extensive margin. Thus the impact of bankruptcy on financial risk is exactly what you would expect from a high-deductible health plan.

Conclusion

Understanding why households are uninsured is fundamental to positive and normative analysis of health insurance policy—yet the insurance-coverage decision is not well understood. The objective of this paper is to examine how the implicit insurance from bankruptcy bears on this decision.

In the first part of the paper, I argue that the fact that most medical care is provided on credit coupled with the fact that this debt can be discharged for seizable assets in bankruptcy provides households with implicit high-deducible health insurance.

I next evaluated the quantitative importance of this mechanism. Exploiting cross-state and within-state variation in asset exemption law, I show that uninsured households with greater seizable assets make higher out-of-pocket medical payments, conditional on the amount of care received. In turn, I find that households with greater wealth-at-risk are more likely to hold health insurance coverage. Health insurance is wealth insurance, to a certain degree, and is less valuable to those with fewer assets.

The final part of the paper examined ways in which the implicit insurance from bankruptcy might inform the design of health insurance policy. Because households do not pay for bankruptcy insurance, too many households choose to be uninsured on the margin. Using a utility-based, microsimulation model of insurance choice, I estimate that the optimal Pigovian* penalties are similar on average to the penalties under the ACA.

* A Pigovian tax is a tax levied on a market activity that generates negative externalities. The tax is intended to correct the market outcome. In the presence of negative externalities, the social cost of a market activity is not covered by the private cost of the activity. In such a case, the market outcome is not efficient and may lead to over-consumption of the product. A Pigovian tax equal to the negative externality is thought to correct the market outcome back to efficiency. In the presence of positive externalities, i.e., public benefits from a market activity, those who receive the benefit do not pay for it and the market may under-supply the product. Similar logic suggests the creation of Pigovian subsidies to make the users pay for the extra benefit and spur more production. (Wikipedia, accessed 5/29/12)

NBER:
http://papers.nber.org/papers/w18105?utm_campaign=ntw&utm_medium=email&utm_source=ntw

Full paper (highly technical):
http://www.stanford.edu/~nmahoney/Research/Mahoney_Bankruptcy.pdf

Comment: 

By Don McCanne, MD

At the risk of oversimplification, this paper demonstrates that personal bankruptcy can serve as a form of health insurance in individuals who are otherwise uninsured and have negligible wealth that is at risk and negligible assets that can be seized in a bankruptcy proceeding.

What a terrible thesis this is to study – suggesting that bankruptcy can suffice for health insurance in people with no wealth and no seizable assets. Maybe that is acceptable if impaired health care access due to lack of funds is not important, or if we accept that the costs of uninsured care should be shifted to insured individuals, or, above all, if we assume that the indignity of personal bankruptcy is small price to pay for this perverse form of “insurance.”

Perhaps one of the most alarming sentences in this paper is the following: “Thus the impact of bankruptcy on financial risk is exactly what you would expect from a high-deductible health plan.”

Wow! On financial risk, bankruptcy works as well as a high-deductible plan!

Instead of trying to figure out whether or not Pigovian penalties are similar to penalties under the Affordable Care Act, why don’t we instead move forward with a health care financing system that doesn’t ever involve bankruptcy, or Pigovian penalties for that matter – a single payer national health program. Not only would that be much simpler, we would all get the health care that we need.

Bankruptcy as Implicit Health Insurance

By Neale Mahoney
The National Bureau of Economic Research, May 2012
Abstract
This paper examines the implicit health insurance households receive from the ability to declare bankruptcy. Exploiting cross-state and within-state variation in asset exemption law, I show that uninsured households with greater seizable assets make higher out-of-pocket medical payments, conditional on the amount of care received. In turn, I find that households with greater wealth-at-risk are more likely to hold health insurance. The implicit insurance from bankruptcy distorts the insurance coverage decision. Using a microsimulation model, I calculate that the optimal Pigovian* penalties are similar on average to the penalties under the Affordable Care Act (ACA).
5.2 Effect on Costs
To summarize, I find a strong positive relationship between seizable assets and out-of-pocket payments for households with higher utilization, a slightly downwardly sloping relationship for households with lower utilization, and zero effect on the extensive margin. Thus the impact of bankruptcy on financial risk is exactly what you would expect from a high-deductible health plan.
Conclusion
Understanding why households are uninsured is fundamental to positive and normative analysis of health insurance policy—yet the insurance-coverage decision is not well understood. The objective of this paper is to examine how the implicit insurance from bankruptcy bears on this decision.
In the first part of the paper, I argue that the fact that most medical care is provided on credit coupled with the fact that this debt can be discharged for seizable assets in bankruptcy provides households with implicit high-deducible health insurance.
I next evaluated the quantitative importance of this mechanism. Exploiting cross-state and within-state variation in asset exemption law, I show that uninsured households with greater seizable assets make higher out-of-pocket medical payments, conditional on the amount of care received. In turn, I find that households with greater wealth-at-risk are more likely to hold health insurance coverage. Health insurance is wealth insurance, to a certain degree, and is less valuable to those with fewer assets.
The final part of the paper examined ways in which the implicit insurance from bankruptcy might inform the design of health insurance policy. Because households do not pay for bankruptcy insurance, too many households choose to be uninsured on the margin. Using a utility-based, microsimulation model of insurance choice, I estimate that the optimal Pigovian* penalties are similar on average to the penalties under the ACA.
* A Pigovian tax is a tax levied on a market activity that generates negative externalities. The tax is intended to correct the market outcome. In the presence of negative externalities, the social cost of a market activity is not covered by the private cost of the activity. In such a case, the market outcome is not efficient and may lead to over-consumption of the product. A Pigovian tax equal to the negative externality is thought to correct the market outcome back to efficiency. In the presence of positive externalities, i.e., public benefits from a market activity, those who receive the benefit do not pay for it and the market may under-supply the product. Similar logic suggests the creation of Pigovian subsidies to make the users pay for the extra benefit and spur more production. (Wikipedia, accessed 5/29/12)
NBER:
http://papers.nber.org/papers/w18105?utm_campaign=ntw&utm_medium=email&utm_source=ntw
Full paper (highly technical):
http://www.stanford.edu/~nmahoney/Research/Mahoney_Bankruptcy.pdf

At the risk of oversimplification, this paper demonstrates that personal bankruptcy can serve as a form of health insurance in individuals who are otherwise uninsured and have negligible wealth that is at risk and negligible assets that can be seized in a bankruptcy proceeding.
What a terrible thesis this is to study – suggesting that bankruptcy can suffice for health insurance in people with no wealth and no seizable assets. Maybe that is acceptable if impaired health care access due to lack of funds is not important, or if we accept that the costs of uninsured care should be shifted to insured individuals, or, above all, if we assume that the indignity of personal bankruptcy is small price to pay for this perverse form of “insurance.”
Perhaps one of the most alarming sentences in this paper is the following: “Thus the impact of bankruptcy on financial risk is exactly what you would expect from a high-deductible health plan.”
Wow! On financial risk, bankruptcy works as well as a high-deductible plan!
Instead of trying to figure out whether or not Pigovian penalties are similar to penalties under the Affordable Care Act, why don’t we instead move forward with a health care financing system that doesn’t ever involve bankruptcy, or Pigovian penalties for that matter – a single payer national health program. Not only would that be much simpler, we would all get the health care that we need.

By Jon R. Gabel, Ryan Lore, Roland D. McDevitt, Jeremy D. Pickreign, Heidi Whitmore, Michael Slover and Ethan Levy-Forsythe
Health Affairs, May 23, 2012

Abstract

The Affordable Care Act creates state-based health exchanges that will begin acting as a market place for health insurance plans and consumers in 2014. This paper compares the financial protection offered by today’s group and individual plans with the standards that will apply to insurance sold in state-based exchanges. Some states may apply these standards to all health insurance sold within the state. More than half of Americans who had individual insurance in 2010 were enrolled in plans that would not qualify as providing essential coverage under the rules of the exchanges in 2014. These people were enrolled in plans with an actuarial value below 60 percent, which means that the plans covered less than that proportion of the enrollees’ health expenses. Many of today’s individual health plans are below the “bronze” level, the lowest level of plan that can be sold through exchanges. In contrast, most group plans in 2010 had an actuarial benefit of 80–89 percent and would qualify as highly rated “gold” plans in the exchanges. To sell to ten million new buyers on the exchanges, insurers will need to redesign benefit packages. Combined with a ban on medical underwriting, the individual insurance market in a post–health reform world will sharply contrast with the market of past decades.

From the Discussion

Using simulated claim payments, we found that the average actuarial value of group plans in 2010 was 83 percent, and the average for individual plans was 60 percent. For an average family, annual out-of-pocket expenses were $1,765 with group coverage, compared to $4,127 with individual coverage. For people in poor health who incurred high medical expenses, the differences between the group and individual markets were even more dramatic.

Our findings have notable policy implications. First, the majority of Americans with individual insurance coverage today are enrolled in a plan whose actuarial value is too low to qualify for a state-based exchange. Insurance reforms that went into effect September 23, 2010, raised the financial protection offered by exchange plans. For example, lifetime maximum benefits were eliminated, effective preventive services must now be offered without cost sharing, and annual limits on insurance coverage were removed. But to qualify for exchanges, insurers will need to lower the average deductible level for individual tin plans, which today average nearly $3,900 for a single person.

Second, about two-thirds of today’s employees are enrolled in a gold or platinum plan. Families with coverage through the exchanges are likely to have less financial protection than employees with employer-based coverage enjoy today. Employers choosing to buy insurance coverage for their employees through the small-employer exchange, which could eventually include employers with more than a hundred workers, will probably obtain less extensive coverage if they opt to buy a plan in the silver tier than if they now offer a plan typical of those provided in the employer-based market today.

Third, very sick patients—those in the top 1 percent of medical spending—incur sizable out-of-pocket expenses regardless of coverage. For example, these top spenders face out-of-pocket expenses of nearly $3,800 in a group platinum plan. But there are substantial differences in out-of-pocket spending between plans with high actuarial value and plans with low value. A family in the top 1 percent of medical spenders with tin coverage in the individual market incurs annual out-of-pocket expenses of more than $27,000. (“Tin coverage” is a fifth tier created exclusively for this study. It is a level below the bronze tier – below 60 percent actuarial value – a level that will not be permitted in the state insurance exchanges.)

http://content.healthaffairs.org/content/early/2012/05/22/hlthaff.2011.1082.full

Comment: 

By Don McCanne, MD

Reports of this study likely will celebrate the fact that very low actuarial value plans which are commonplace in the individual market today – those below 60 percent value (plan pays less than 60 percent of covered health costs) – will have to reduce their deductibles and perhaps make other changes to qualify under the Affordable Care Act. But is this enough?

The study compared group plans with individual plans. Group plans have an average actuarial value of 83 percent, whereas the average actuarial value for individual plans is 60 percent, with 51 percent of them falling below that threshold. Only 14 percent were silver (70% AV) and 2 percent gold (80% AV), and there were no platinum (90% AV) plans in the individual market.

The lower half of all individual plans will have to either bring their value up to 60 percent or drop out of the exchange market. This means that average actuarial values of plans in the individual market – those available through the exchanges – will still be in the low 60s – far below group plans with their average actuarial value of 83.

Further, it is likely that smaller employers will rely on the exchanges to provide coverage for their employees – again with lower actuarial value plans than is typical of employer-sponsored group plans. The impact on patients will be significant.

Repeating a quote from above, “… very sick patients—those in the top 1 percent of medical spending—incur sizable out-of-pocket expenses regardless of coverage. For example, these top spenders face out-of-pocket expenses of nearly $3,800 in a group platinum plan (the very best coverage available). But there are substantial differences in out-of-pocket spending between plans with high actuarial value and plans with low value. A family in the top 1 percent of medical spenders with tin coverage in the individual market incurs annual out-of-pocket expenses of more than $27,000.”

Although “tin coverage” (plans under 60% AV) will be prohibited in the exchanges, the financial burden on patients who need significant amounts of health care will still be great, even with the subsidies and the elimination of maximum lifetime benefits. Instead of adding to the burden of illness, we should be attempting to preserve the financial security of patients, as we would be if we had a single payer national health program – an improved Medicare for all.

More Than Half Of Individual Health Plans Offer Coverage That Falls Short Of What Can Be Sold Through Exchanges As Of 2014

By Jon R. Gabel, Ryan Lore, Roland D. McDevitt, Jeremy D. Pickreign, Heidi Whitmore, Michael Slover and Ethan Levy-Forsythe
Health Affairs, May 23, 2012
Abstract
The Affordable Care Act creates state-based health exchanges that will begin acting as a market place for health insurance plans and consumers in 2014. This paper compares the financial protection offered by today’s group and individual plans with the standards that will apply to insurance sold in state-based exchanges. Some states may apply these standards to all health insurance sold within the state. More than half of Americans who had individual insurance in 2010 were enrolled in plans that would not qualify as providing essential coverage under the rules of the exchanges in 2014. These people were enrolled in plans with an actuarial value below 60 percent, which means that the plans covered less than that proportion of the enrollees’ health expenses. Many of today’s individual health plans are below the “bronze” level, the lowest level of plan that can be sold through exchanges. In contrast, most group plans in 2010 had an actuarial benefit of 80–89 percent and would qualify as highly rated “gold” plans in the exchanges. To sell to ten million new buyers on the exchanges, insurers will need to redesign benefit packages. Combined with a ban on medical underwriting, the individual insurance market in a post–health reform world will sharply contrast with the market of past decades.
From the Discussion
Using simulated claim payments, we found that the average actuarial value of group plans in 2010 was 83 percent, and the average for individual plans was 60 percent. For an average family, annual out-of-pocket expenses were $1,765 with group coverage, compared to $4,127 with individual coverage. For people in poor health who incurred high medical expenses, the differences between the group and individual markets were even more dramatic.
Our findings have notable policy implications. First, the majority of Americans with individual insurance coverage today are enrolled in a plan whose actuarial value is too low to qualify for a state-based exchange. Insurance reforms that went into effect September 23, 2010, raised the financial protection offered by exchange plans. For example, lifetime maximum benefits were eliminated, effective preventive services must now be offered without cost sharing, and annual limits on insurance coverage were removed. But to qualify for exchanges, insurers will need to lower the average deductible level for individual tin plans, which today average nearly $3,900 for a single person.
Second, about two-thirds of today’s employees are enrolled in a gold or platinum plan. Families with coverage through the exchanges are likely to have less financial protection than employees with employer-based coverage enjoy today. Employers choosing to buy insurance coverage for their employees through the small-employer exchange, which could eventually include employers with more than a hundred workers, will probably obtain less extensive coverage if they opt to buy a plan in the silver tier than if they now offer a plan typical of those provided in the employer-based market today.
Third, very sick patients—those in the top 1 percent of medical spending—incur sizable out-of-pocket expenses regardless of coverage. For example, these top spenders face out-of-pocket expenses of nearly $3,800 in a group platinum plan. But there are substantial differences in out-of-pocket spending between plans with high actuarial value and plans with low value. A family in the top 1 percent of medical spenders with tin coverage in the individual market incurs annual out-of-pocket expenses of more than $27,000. (“Tin coverage” is a fifth tier created exclusively for this study. It is a level below the bronze tier – below 60 percent actuarial value – a level that will not be permitted in the state insurance exchanges.)
http://content.healthaffairs.org/content/early/2012/05/22/hlthaff.2011.1082.full

Reports of this study likely will celebrate the fact that very low actuarial value plans which are commonplace in the individual market today – those below 60 percent value (plan pays less than 60 percent of covered health costs) – will have to reduce their deductibles and perhaps make other changes to qualify under the Affordable Care Act. But is this enough?
The study compared group plans with individual plans. Group plans have an average actuarial value of 83 percent, whereas the average actuarial value for individual plans is 60 percent, with 51 percent of them falling below that threshold. Only 14 percent were silver (70% AV) and 2 percent gold (80% AV), and there were no platinum (90% AV) plans in the individual market.
The lower half of all individual plans will have to either bring their value up to 60 percent or drop out of the exchange market. This means that average actuarial values of plans in the individual market – those available through the exchanges – will still be in the low 60s – far below group plans with their average actuarial value of 83.
Further, it is likely that smaller employers will rely on the exchanges to provide coverage for their employees – again with lower actuarial value plans than is typical of employer-sponsored group plans. The impact on patients will be significant.
Repeating a quote from above, “… very sick patients—those in the top 1 percent of medical spending—incur sizable out-of-pocket expenses regardless of coverage. For example, these top spenders face out-of-pocket expenses of nearly $3,800 in a group platinum plan (the very best coverage available). But there are substantial differences in out-of-pocket spending between plans with high actuarial value and plans with low value. A family in the top 1 percent of medical spenders with tin coverage in the individual market incurs annual out-of-pocket expenses of more than $27,000.”
Although “tin coverage” (plans under 60% AV) will be prohibited in the exchanges, the financial burden on patients who need significant amounts of health care will still be great, even with the subsidies and the elimination of maximum lifetime benefits. Instead of adding to the burden of illness, we should be attempting to preserve the financial security of patients, as we would be if we had a single payer national health program – an improved Medicare for all.