Actuarial value and cost-sharing update

What will differentiate a Bronze level plan from a Silver, Gold or Platinum one when the Health Insurance Exchanges open?

On February 24, 2012, The Department of Health and Human Services released a bulletin describing how this will work for health plans in the individual and small group market. This guidance, which applies to health insurance plans offered both on and off the Exchange, clarifies:

• How the actuarial value of the plans will be calculated
• How employer contributions to health savings accounts will be factored into calculating actuarial value
• How requirements for out-of-pocket limits and cost-sharing subsidies will be handled

The importance of actuarial value
To make sense of this new information, it’s important to understand how the actuarial values will help consumers and small businesses compare the level of coverage included in the four tiers of the Health Insurance Exchanges.

The actuarial value measures the percentage of expected medical costs that a health plan will cover for employees or other individuals. For example, any bronze level plan would have a 60% actuarial value. It would be expected to cover, on average, 60% of the insured individual’s actual medical expenses, with the individual responsible for paying the remaining 40%.

Plans at any level must clearly state the deductibles, copayments, coinsurance and other factors that contribute to the actuarial value. This will make it easier for individuals to compare health plans “apples to apples.”

How will actuarial values be calculated?
The HHS bulletin proposes the use of a standard data set for actuarial calculations — with some flexibility to address state needs.

Under this approach, actuarial value would be based on claims for a standard population that would reflect average medical service prices and average utilization of medical services. The guidelines also propose permitting states to develop state standard populations based on state-specific claims data.

The goal of this approach is to ensure that two plans with the same cost-sharing designs would have the same actuarial values.

HHS intends to develop a publicly available calculator that plans would use to determine actuarial value, with the ability to reflect state-specific standard population information.

How are employer contributions to Health Savings Accounts and Health Reimbursement Arrangements calculated?
According to the HHS proposal, employer annual contributions to health savings accounts would be considered part of the benefit design of the health plan for purposes of calculating the plan’s actuarial value. This calculation would not include any accumulated balances in these health savings accounts.

Without this measure, an employer’s contributions to a Health Savings Account (HSA) or Health Reimbursement Arrangement (HRA) wouldn’t show up with the correct actuarial value when the calculations are made. This adjustment will raise the overall actuarial value of the plan.

Any money that is contributed to an HSA by an employee or covered individual would not be reflected in the actuarial value estimate. (HRA accounts do not allow individual contributions so this would not apply.)

How will out-of-pocket limits be handled and cost-sharing subsidies be handled?
According to the law as passed, out-of-pocket limits for higher income households will be capped starting in 2014 at the level required for HSA qualified high deductible plans. As of 2012, that level is $6,050 for individuals and $12,100 for families.

All cost-sharing subsidies will be offered on Silver tier plans. Individuals and households with income less than 250% of the Federal Poverty Level are eligible for reductions in the maximum out-of-pocket limits and increases in the actuarial value requirement normally associated with plans at the 70% benchmark standard.

In the latest bulletin, HHS proposed publishing an annual notice on this subject, providing guidance on the out-of-pocket levels that would be consistent with the required actuarial value targets for this group. When insurance carriers improve their Silver plans to hit these more generous actuarial value targets, HHS requires that these variations use only lower cost-sharing to achieve the targeted value. This keeps plans from raising some cost-sharing elements while significantly lowering others to hit the targets, providing a form of consumer protection.

The government recognized that it could be difficult for a health plan to hit the required actuarial value targets and also follow the law’s requirement to provide lower out-of-pocket limits for eligible low income families.

As a result, the HHS guidelines propose a rule that would apply any time an out-of-pocket maximum would interfere with the actuarial value of a plan. It would give health insurers the flexibility to raise out-of-pocket limits, as needed. If higher out-of-pocket maximums are permitted, health plans will be able to offer lower deductibles while still hitting the actuarial cost-sharing target for a certain tier (Gold, Silver, etc.)

In the bulletin, HHS proposes not to reduce the maximum out-of-pocket limits for individuals with household income between 250% and 400% of the Federal Poverty level. This is because a reduction in the maximum out-of-pocket limit for the standard Silver plan could require increases in other forms of cost sharing, such as deductibles and co-pays, for that plan to maintain the required 70% actuarial value.

Because many consumers will not hit the out-of-pocket maximum for their plan, HHS has determined that these changes would actually benefit a great number of consumers by keeping actuarial value of their plans on target.

For full details, see the government’s Actuarial Values bulletin.

Impact on employers, employees and individuals — Actuarial value will help employers and their employees understand and compare the relative value of various health policies with different plan designs.

Impact on brokers — Brokers will need to become versed in the actuarial value calculation methodology so that they can help employers or small businesses understand and compare various plan options.