Defining health benefits
I don't want to spend a lot of time talking about actuarial values and you don't want to spend a lot of time talking about actuarial values, but they're pretty much at the center of the Senate health-care reform bill, so we both better get used to it.
The minimum benefit package (the "bronze plan") in the Senate proposal has an actuarial value of 60 percent. That means that it expects to cover 60 percent of a population's expected health-care costs. Silver is 70 percent, gold 80 percent, and I won't insult your intelligence by listing the value of a platinum plan, but suffice to say it follows the trend.
The fact that these plans have similar values, however, doesn't mean they work the same way. Consider this example from the excellent Congressional Research Service report (pdf) on valuing benefits:
Consider two actuarially equivalent plans. Plan A has a $400 deductible, after which 20% coinsurance is charged, with an out-of-pocket maximum of $5,000. Plan B has a deductible of $2,500, after which the plan pays 100% (out-of-pocket maximum of $2,500). Both have an actuarial value of 80%; that is, if a standardized population of adults enrolled in job-based coverage had this benefit package, both plans would be expected to pay 80% of the medical expenses incurred for that population.
Now consider the experience of two individuals -- one who has total medical expenses of $2,500 for a broken leg, compared to one who has $25,000 for outpatient cancer treatments. For the person with the broken leg, Plan A would pay a higher percentage than Plan B -- 67% rather than 0%. For the cancer patient, however, Plan A would pay a lower percentage than Plan B -- 80% rather than 90%.
Want a bit more confusion? People tend to prefer PPOs to HMOs. PPOs tend to be more expensive than HMOs. But HMOs tend to have a higher actuarial value. The average PPO is in the low 80s, while the average HMO is 93 percent.
The reason is that PPOs make up for their easy access to specialists by building in more copayments and cost-sharing. HMOs offer more first-dollar coverage, and though specialists are more irksome to access, there's less cost-sharing. But people prefer ease of access to coverage, so the HMO's actuarial advantage doesn't translate into a market preference. In other words, actuarial value isn't everything.
But it is a lot of things, particularly for poorer folks who can't afford much cost-sharing. In the Senate plan, the subsidies are tied to the silver plans, with the poorest folks paying about two percent of their income and people between 300 and 400 percent paying 9.8 percent of their income. There are also cost-sharing protections that kick in to ensure that people between 100 percent and 150 percent of the poverty line get 90 percent of costs covered, and people between 150 percent and 200 percent 80 percent of costs covered. People between 200 and 400 percent of poverty are also protected on the cost sharing front, but their formula is tied to HSAs, and it gets a bit more complicated.
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