What is Actuarial Value?

Actuarial value is average total of costs for covered benefits covered by a health plan. Let’s look at how ObamaCare’s metal plan actuarial values work and how actuarial value applies to all plans in general.

FACT: Actuarial Value (AV) in regards to health insurance was created by the Affordable Care Act to rank ObamaCare’s “metal plans” by the average amount of out-of-pocket costs they cover for everyone (a standard population) on the plan and ensure minimum value of plans sold starting in 2014.

What is Minimum Value?

In terms of the Affordable Care Act, minimum value means that a plan has an actuarial value of 60% for essential benefits. All major medical plans must provide minimum value from 2014 and beyond. In other words, actuarial value is used to determine if a plan provides minimum value under the Affordable Care Act.

Why is Actuarial Value Important?

Actuarial value is an important concept to understand as it is commonly confused as meaning the exact amount your plan will pay for your medical services (the total of copays and coinsurance your plan pays in a year based on services you use), or the amount your plan will pay have you reach your deductible (coinsurance before you reach your out-of-pocket maximum). It’s not any of those things, it’s simply a benchmark for how good a plan is and is based on average cost sharing amounts for all participants in the plan. It relates to cost sharing, but it is not an exact cost sharing amount.

Actuarial Value is Used to Rank Metal Plans

Actuarial value is used to rank metal plans, these rankings have some important implications.  Plans that have an actuarial value of at least 70% are considered Silver plans and are eligible for all types of cost assistance. Silver plans are the “benchmark” plan for determining the maximum amount you can pay if your income is below 400% of the Federal Poverty Level after Tax Credits.  Plans that are 60% are considered Bronze plans and represent the minimum cost sharing value of private major medical plans sold after 2014.

Cost Sharing Reduction subsidies which reduce out-of-pocket costs also use actuarial value. Cost Sharing Reduction subsidies work by raising the actuarial value of a Silver plan to 73% AV, 87% AV, or 94%AV based on income.

Better Actuarial Value Means Better Cost Sharing

As a rule of thumb health plans with better actuarial value will have better cost sharing in exchange for higher premiums, however the exact cost sharing amounts and what services are covered by what amounts differs from plan to plan even within the same metal tier.

Actuarial value is based on kind of complex calculations and is meant to rank plans to give you an idea of what plans will cover, to determine cost assistance eligibility of plans, and to ensure that insurance providers sell plans that provide a minimum value. Go to CMS.gov to read exact rules for actuarial values under the Affordable Care Act or download the AV calculator for some mind-melting actuarial value goodness.

What Actuarial Value Isn’t

Actuarial value isn’t the amount of out-of-pocket expenses for covered benefits your plan will pay you vs. what you will pay for out-of-pocket amount you will pay.  It is an average amount the plan will pay for everyone who uses the plan vs. what everyone will pay out-of-pocket.

One person may find the plan pays very little, while a select few will balance this by having the plan cover much more.  The projected average value is derived from this concept.

Actuarial value is an average, not an exact number… The assumption that a Silver plan with 70% Actuarial value plan will pay 70% of your actual out-of-pocket costs is sort of like assuming you will have 2.4 children or that the slot machine will pay you back 95 cents for every dollar you bet.  We are talking theoretical large numbers, not expected real life experiences.

All marketplace plans have a maximum out-of-pocket cost no more than $6,600 for an individual and $13,200 for a family in 2015 and must provide at least ten essential benefits as part of their covered benefits. More than 50% of all medical costs are incurred by a very few unfortunate people.  Since your deductible will be high and all plans have the same maximum limits on the amount you can pay in a year, most of the costs you pay for a Bronze plan will go to the unfortunate people who get cancer or have a bad accident and reach their cost sharing limit.

How Actuarial Value Works

Actuarial value is the theoretical projected range of the total average amount a plan will pay for covered essential benefits, for a standard population. It’s calculated by a AV calculator found on CMS.gov.  It is usually represented as a whole number percentage 60%, 70%, 80%, or 90% under the ACA and has a leeway of 2%.  This means 60% can be anywhere from 58%-62%.

On average a plan with an actuarial value of 60% will pay 60% of covered benefit costs before and after a deductible for all participants in that plan.

ObamaCare’s Metal Plans and Actuarial Value

Actuarial value is used to rank the ObamaCare’s metal plans and to determine minimum value of employer plans.  A plan can’t have less than “60%” actuarial value, but it can have more.  In general bronze plans have at least 60%, Sliver 70%, Gold 80%, Platinum 90%. Employer plans must have at least the value of a bronze plan to be considered minimum essential coverage.

Since the rule is “at least” a % and not “exactly” a % we can expect, for example, Bronze plans to have between 58%-69% actuarial value. Bronze plans that cover more out-of-pocket costs like coinsurance and copays, cover more benefits, and have lower deductibles will have a higher actuarial value.

Some important things to note are:

  • Actuarial Value is calculated before subsidies.
  • The ACA caps how much of your household income a plan can cost on the marketplace.  That cap is based on the second lowest cost Silver plan.  The cap is a result of Advanced Premium Tax Credit subsidies.
  • Only Silver plans are eligible for out-of-pocket assistance (Cost Sharing Reduction subsidies CSR).
  • Actuarial value only takes into account covered benefits (see ten essential benefits for common covered benefits).
  • If a benefit isn’t covered then that isn’t factored into actuarial value.  So PLEASE make sure the drugs, docs, and services you need are covered in-network by your plan!

As a general rule of thumb aim for a Silver HMO if you want to save money. Remember not all Sliver plans are created equal.  If you have access to CSR subsides there isn’t much of a chance any other plan will provide better value.

See more on metal plans for details on choosing a plan and actuarial value of those plans.

How is Actuarial Value Calculated

The short answer is there is a standard calculation method set forth by HHS and the law.  This method averages common out-of-pocket costs to determine cost sharing amounts. It does not include premiums and due to calculation methods and can ommit more subtle features of a plan, such as service specific deductions or exceptions to the out-of-pocket limit.

Now that you have an understanding of how actuarial value works it’s time to sign up for a health plan!