• The actuarial value of many insurance plans today stinks

    New paper in Health Affairs: “More Than Half Of Individual Health Plans Offer Coverage That Falls Short Of What Can Be Sold Through Exchanges As Of 2014“:

    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.

    There are two figures in the paper, and both are worth looking at. Here’s the first, describing the actuarial values of individual plans:

    Percentage Of Individual Policies, By Actuarial Value And Plan Type, 2010

    As you can see, a ton of them fall below what would be considered “bronze” under the ACA’s exchanges. This means that all of those plans would have to be significantly improved if they want to be offered in the future. This is what I mean when I say that many people in the US are “underinsured”. It also means that the majority of people with individual policies are going to see a nice improvement come 2014.

    On the flip side, here are the actuarial values of group policies, or those likely to be offered by employers:

    Percentage Of Group Policies, By Actuarial Value And Plan Type, 2010

    About two-thirds of employees have policies that would qualify as gold or platinum. That’s great for them now. But if employers decide in the future to go to the exchanges for their employees’ plans, many will likely choose to go with cheaper options, such as silver or bronze. Should that happen, many employees will find their out of pocket health care costs rising in 2014.

    It’s likely that these two messages will allow for differing interpretations of the results of this study. Those who support the ACA will likely cite the first figure, pointing out how bad things are and showing how much things will be improved for those in the individual market. Those who oppose the ACA will likely cite the second figure, contending that those who already have insurance through their jobs may see a drop in the quality of their insurance coverage. Both may be right.

    But let’s not forget how bad things are right now. This is from the Discussion of the manuscript:

    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.

    The health care system is supposed to be for sick people. It’s currently failing them. If you’re lucky enough to have the best insurance in the country, getting really sick can cost thousands of dollars a year. If, however, you have crappy insurance, then getting sick can bankrupt you. If you’re among the tens of millions of Americans who are completely uninsured, you’re likely completely screwed.

    Whether you love or hate the ACA, the status quo is terrible.


    • Where does Medicare fall on the scale of actuarial value?

      • I think it is in the 75-80% range. That is, at least, an upper bound. Slightly lower, I could believe. Higher, I could not.

        • But keep in mind that because AV ignores network choice, a plan that had low cost-sharing coupled with a limited network would have higher AV.

          So, for example, an Advantage plan that had low copays (but limited your network) would have a significantly higher AV than a PPO/FFS structure with higher coinsurance to take into account less control of network costs.

        • The Congressional Research Service has estimated (I think they contracted with Watson Wyatt, a benefits consultant) that Medicare A+B+D (without Medigap) has an actuarial value of 76 percent. This definition of AV is percent of average medical expenses covered for a standard population of working-age adults. In contrast, typical employer insurance is around 93 percent. This is why a lot of seniors buy Medigap or get their employers to pick the cost sharing up.

          Medicare’s AV for seniors and the disabled might be somewhat different. Not sure if that means higher or lower. Working age folks tend to use fewer inpatient hospital services. They had to use a standard population to compare it to other plans.

    • Have there been any studies since the Rand Study that looked at the impact of being underinsured (as opposed to being uninsured) on health services utilization our health?

    • “About two-thirds of employees have policies that would qualify as gold or platinum. That’s great for them now. But if employers decide in the future to go to the exchanges for their employees’ plans, many will likely choose to go with cheaper options, such as silver or bronze. Should that happen, many employees will find their out of pocket health care costs rising in 2014.”

      Well, yes and no – you make a good point (some employees may face worse plans under the Exchange), but are overreaching a tad.

      This study included both large and small groups, but only small employers can participate in the Exchange come 2014. As you probably know, small employers, on the whole, offer less generous benefits than large groups.

      So saying that 2/3 of employees in *all group plans* have gold or platinum plans ignores that a majority are likely large group, and so likely to retain those plans in 2014.

      (Though states have the option of allowing large groups come 2017, that is not to say it *will* happen, and is likely to vary greatly.)

      • I didn’t say that all large groups would abandon their gold or platinum status. I said that this is what could happen to some. I also said it’s likely what those who oppose the ACA will highlight and see as most significant.

    • I had individual insurance once and it sucked. I had an $8,000 deductible (albeit with no cost sharing after that). Luckily I never had to go in to see the doctor. I’d guess a 35 percent actuarial value or so. It was cheap and I was not earning much.

      One Republican policy analyst has said that Obamacare will “prevent many Americans from keeping the plans they have and like.” Well, I didn’t like my ~35 percent actuarial value plan and I would gladly switched had I had some sort of subsidy.


      I would be really, really interested to see how well people with insurance under a 50 percent actuarial value really like their plans. I didn’t like mine. I bet I’d be in the majority. Being forced to give up my junk coverage would have been a blessing. Is that what Mr. Jacobs, the analyst above, is complaining about?

      And he says a lot of HSAs would be forced out thanks to Obamacare. I’d reply that the worst HSAs would be forced out, and we should all be happy. It’s quite interesting that of employer-sponsored HSAs, over half of them are silver or better. I’m not that opposed to HSAs, but I am opposed to giving poor people skimpy HSA coverage and calling it health reform. Which is essentially what this guy is arguing.

      • I wonder what amount they used for consumption of health services in these calculations? It may have been an “average” of health expenditures for the US. However, there is a problem with this average in that most people don’t have average expenditures. I would think that the average consumption is made up of a bimodal distribution consisting of “healthy people” and “sick people”. Healthy people don’t have many medical expenses and sick people have a lot of medical expenses. There are probably very few people who have the average of these two groups.
        In your case with an $8000 deductible and zero copay after the deductible, it might have an actuarial value for “average” benefits of 35% but the real AV if you were healthy would be close to 0% but the AV if you were unhealthy could be more than 90%.
        In either case, the high deductible policy is probably a good choice since most people won’t go bankrupt with $8000 in medical expenses.
        How about a measure of insurance cost in terms of your real income? If you earned $50,000 with expenses of $5000, your “real insurance cost” would be 10%.

      • What are you willing to give up to move from a 35% AV plan to an 80% AV plan? As you said you choose the plan because of price. You were not willing to spend your money for additional AV. But if someone else foots the bill you would love that additional AV.

        We know how that plays out, Medicare has 30-40 Trillion in red ink delivering that model.

        As to the poor AV value of individual plans how much of that is self selection? I.e. if a women has no intent to have kids and buys a policy that does not cover pregnancy this AV test argues she has a bad policy. Common financial sense says its a great policy, why spend $100+ per month for a benefit you don’t want or need? If they live responsibly and don’t need the coveraqe it was a good decision. If everyone praticed such prudence we would save billions and not be having these discussions.

        What purpose does measuring AV even serve seperated from cost? If a plan has an AV of 100% but the premium is 200% why would anyone buy the policy? Unless of course they were spending someone else’s money. Not having done the math but haveing done the math for 20 years I would wager any policy with an AV over 50% is wasting money. Insurance has cost, thus insuring AV which has no associated risk, I.e. annual exams, is just throwing money away.

        • My wife and I would both have qualified for subsidies. I think we earned just over the future Medicaid threshold for about a year. Under those circumstances, I’d make the trade even if I had to pay more out of pocket.

          Btw, my wife was paying $400+ a month for COBRA as she had pre-existing conditions. Under the ACA, I assume the subsidies would have made it so that we’d have to pay less for her.

          Under the ACA, the whole idea is that you can’t buy really low AV plans, but we’ll subsidize you so you don’t have to. Most of you, anyway.

          And yes, I’m aware that AV is only one dimension on which we can compare insurance.

    • Whatever happened to the type of insurance we hoped never to collect on?
      Oh, yeah, that was when insurance was relatively inexpensive.
      Now, we want to make sure we got good value for our premiums, so that the premiums can go even higher.
      By the way, if a policy is paid-up, how do you determine its actuarial value?
      Don Levit

    • A smart health policy blogger once said “sometimes good things cost money”. Rich insurance plans cost money, if that’s what people want they ought to pay for it. Looks like many people are choosing to buy plans with more limited benefits and spending their money on other things

      • I doubt they are all “choosing”. That’s likely what they can afford, cause that’s all that’s offered. Community ratings will change that.

        Moreover, if employers chose to reduce plans in the exchanges and returned the difference in costs to their employees, I think that’s fine, too. I bet that won’t happen across the board.

        • “Afford” is not a word with a strictly objective meaning. If you choose a lower benefit plan because it’s what you can afford, but you have cable satelite TV, multiple cars in your household, multiple cellphones in your household, etc, is it truly the best you could afford? (This is not to suggest that everyone with lower quality coverage is living high on the hog, but at the margin many people are making those decisions and choosing to spend less on insurance in favor of other things)

          re: employer coverage, it remains to be seen what will happen to wages when and if employers start dropping coverage. But Austin has beat the drum pretty hard that employees bear the cost of employer insurance, which implies that that cost should accrue to salaries as ESI goes away

          • What savings would normally go to salaries is going to be eaten up by;

            rapidly increasing worker comp cost

            increased unemployement premiums

            higher taxes(if it cost employers $1 to provide a benefit it is safe to assume it is going to take at least $2 in taxes to provide a lessor benefit)

            Increased complainace cost

    • To be complete, we should remember that the proposed Ryan plan results in an AV of about 30% by, IIRC, 2030.


    • The underlying premise of the ACA exchange is that yes, the new policies will cost more than the “dreck” which now characterizes the individual market………….

      howwever, those Americans who get no help from their employer will now get subsidies from the federal government.

      A new bronze policy might cost $6,000 a year, but if your annual income is $50,000 you might only have to pay about $3,000 of that yourself.

      This is not a bad solution mathematically.

      But there will be a lot of problems before it is finally works.

      The subsidies are not that easy to administer — people’s incomes are volatile, they get divorced, etc.

      The plans in the exchange could be dominated by sick people, meaning higher premiums even after the subsidies.

      And as Holtz-Eakin has pointed out, many employers could dump their health plans and push 30-40 million new people onto the exchanges. This will drive up the cost of the subsidies into the range of $200 billion a year, with peanuts in new tax revenue from various penalties to offset this.

      Bob Hertz, The Health Care Crusade

      • Does the Holtz-Eakin analysis account for how that change might impact wages and salaries and profits, and the possibility of revenue increases from those sources?

    • As I remember, Holtz-Eakin showed that many employers would find it cheaper to pay $2000 per employee in penalties and then terminate their health plan.

      An emplloyee making less than about $55K a year would be better off in the exchanges than they had been under the employer plan.(unless the employer paid 100% of the old premium)

      The designers of the ACA did have some assumptions that if an a large employer saved $1 million in premiums by dropping their health plan, then the $1 million would flow out as taxable wages instead, which would help the feds pay for the subsidies.

      I find that a very weak connection. Over 90% of private firms are nonunion these days, and it is wild guesswork as to where the $1 million in corporate savings will wind up. It may go to paying down debt, to dividiends for key shareholders, or to building a factory in India.

      The idea of separating health insurance from employment was and is a good goal. The challenge is to keep the $800 billion or so of employer money in the system. Single payer advocates have the same challenge. The $800 billion which is now paid voluntarily (albeit not cheerfully) must be captured as taxes, or any public plan will be underfunded.

    • Comment to Nate on low AV plans…………..

      I can’t get behind you all the way on your critique here, but let me say why and you usually have a solution……..

      If I want to buy the cheapest car insurance policy, then in MN I will only cover medical costs and any liability to another driver. I will not buy coverage for body repairs on my own car.

      OK, now assume I have an accident and my own car sustains $5000 of body damage. I have no insurance coverage for this. I do not want to spend $5000 out of pocket.

      So I junk the car.

      This happens every single day in the US, and there is no public discussion or legislation or sad stories in the media. And it does help hold down the cost of car insurance.

      Health insurance does not fit this casualty-insurance model all the time. Out of every 100 people who buy a low-AV policy to save money, about 3 of them will get a very bad disease and there will be some drug or treatment that their insurance does not cover. (and which they cannot afford out of pocket either, unless they mortgage their house or raid their retirement.)

      They cannot junk themselves, which sounds kind of sarcastic but it is really the core issue.

      What happens most often is some combination of charity, bake sales, and bankruptcy. The doctors who treat cancer etc are aware of this and often they will help out in some way. Hospitals do forgive bills also.

      Now from the viewpoint of a single payer advocate, or just a good Democratic planner, this is pretty repulsive for a very rich nation.
      If everyone had a high-AV policy this problem would nearly vanish.
      I have never seen a state employee holding a bake sale to pay for a transplant.

      Nate, you are totally correct to resist the enormous cost of giving everyone cadillac coverage.

      Yet the current consequences for a minority of citizens are pretty awful.

      Now one solution that no one but me ever brings up would be price controls on expensive drugs and treatments. Some of the things that cost $20,000 and drive patients into bankruptcy should probably cost about $4000.

      But not in all cases.

      Is there a less expensive solution?

      Bob Hertz, The Health Care Crusade

      • Liability Insurance in regards to Auto covers one’s liability to another driver up to a minimum limit. I could have an EMTLA policy with a $500,000 limit on the street tomorrow which would cost a fraction of what PPACA plans do. If we are going to require Hospitals treat people then let’s require they have an EMTLA Liability policy as the minimum. If they don’t I am ok with denying treatment, the more bleeding heart t type might want to withhold tax refunds or treat it as some sort of government collectable debt.

        Couple key points, notice the limit, there is no reason to spend more than this. The only reason we blow through this limit now is because we tell hospital they have an unlimited amount to spend. Once someone gets close to this point we need to start having other discussions about quality of life and value of additional weeks or months.

        The number of people that would hit this situation a year is so small you could barely measure it. If we need to hold some bake sales or charity events for them so be it, no solution will solve everything.

        If someone doesn’t want to pay for insurance to cover overpriced Rx they should not be required to.
        There are very few illnesses and conditions you can’t treat for $4 or less. You might need to take the pill 2 times a day instead of one or take two pills instead of a combo pill but your not going to die or suffer for lack of treatment if you only take generics. Imagine the pressure on Pharma if people just stopped buying their over priced one offs.

        Lab, X-ray, diagnostic if you call around and avoid the hospitals you don’t need to insure these services. These test usually have high capital cost and a lifespan, the owners don’t cover that cost when they are closed or not using the machines. There is plenty of affordable capacity is the majority of the country, again no one solution covers everything but it fixes most.

        Physicians are another service that if you pay cash and are flexible you don’t need to insure.

        This would be geared towards those that choose not to buy insurance due to cost, about 95% of the uninsured. If we as society are going to protect them with some guarantees of care then lets require they carry minimum coverage. PPACA mandates everyone buy an overpriced policy full of crap we neither need or want. Which is fine as long as people are spending their own money.
        “If everyone had a high-AV policy this problem would nearly vanish.”

        And we would have a debt crisis like the PIIGS. Medicare is already short 30-40 Trillion, how much more do you think good Democrats can add to that before it collapses? For all the mockery of Bush and his tax cuts they pale in comparison to the SS and Medicare boondoggles.

        “Yet the current consequences for a minority of citizens are pretty awful.”

        What about the future consequences? Would you argue everyone being without great coverage and being trillion in debt they could never pay back is better than a few people suffering now? This is where the bleeding heart always causes more problems than it solves. A few people where homeless so the left created housing projects and destroyed entire generations and millions. Some mothers struggled so the left created welfare and now the number of single mom households no better off than the original moms has exploded. 13% of seniors had problems paying for catastrophic health expenses in 1964 so the left created Medicare and now 19% can’t pay for the healthcare and we have 40 trillion in debt. Time after time the left has taken a pretty awful experience for a very small minority and inflicted it on millions more. The left has never once achieved eliminating awful, but they have multiplied it countless times.

        Let’s doing a little forward thinking, something Liberal policy makers never do. What are the potential unintended consequences of PPACA and how do they compare to the current situation. One that jumps to mind right away from your earlier comment;

        o A new bronze policy might cost $6,000 a year, but if your annual income is $50,000 you might only have to pay about $3,000 of that yourself.
        This is not a bad solution mathematically.
        But there will be a lot of problems before it is finally works.
        The subsidies are not that easy to administer — people’s incomes are volatile, they get divorced, etc.

        Why would anyone get married? If you’re married both parties could potentially not qualify for any subsidy or only a reduced subsidy. If the lower paid party stays single and claims the kids; the public is now supporting the live in, long term girlfriend and kids of millionaires. Remember 25%+ of the uninsured make over 75K, people of means have no problem gaming the system. Our billions annually in uncollected taxes prove this. Greece shows the end game of that problem.

        Hasn’t the left already done enough to destroy the two parent family home without adding this?

        Fraud is another one that is rampant in Medicare and now can expand into private insurance. People sell their Medicare ID so crooked providers can bill for services never rendered. The member doesn’t care because the services don’t cost them anything and the providers give them some sort of remuneration. If you’re not going to use your $500+ in annual preventive care, covered at 100%, but someone offers you $100 for your member ID how many millions would take that?

        PPACA is the grandest Rube Goldberg Machine ever imagined. It wasn’t enough designing Medicare that manages to deliver $4000 in care for $7000 in cost, Obama had a dream, he was going to deliver $3000 in care for $14,000 in cost.

    • Good for you. This is an excellent blog but it tends toward academic comments rather than bluntnessl. I wonder what the responses will be.

      I think that you and I agree that if a person carries no insurance at all, then their ER costs will be paid up front by government and then they will owe the government money.

      This is not a small item. It is far superior to hospitals hiring collection agencies.

      But it will cost some public money until the debts are repaid through payroll deduction, not getting refunds, etc. Are you OK with that?

      Next, You are totallly correct that raising policy limits was a foolish part of PPACA But what if a hospital does send a bill for $300,000? Someone somewhere must have the muscle to make them back off.

      In other words, I believe we must set liability limits right into consumer law. This is not easy.

      Next, I simply am not sure if almost all conditions can be treated by generics as you impliy. Parkinsons and MS come to mind. I am not an expert in this. My hunch is that the number of people who need expensive drugs just to get through the day is larger than you imply.

      Finally, your comments about the marriage penalty in the PPACA are right on. For a related article, see Mary Eberstadt in the 4-2-12 National Review.

      Bob Hertz

    • falls into one of those I don’t like the idea but its better then nothing catagories. What I worry about is some politician looking to buy votes just whiping it out. As long as the government takes it seriously. What I would really like to see is programs that supposedly have trust funds, Medicare, SS, workers comp, etc have those funds used to fund other loan programs like student loans or SBA. Maybe that would keep government serious about collecting.

      Something needs done, EMTLA should never have been passed without a compensation companet to pay for the care they were required to give away. When they passed the bill they should have known they were inviting people to drop insurance and take advantage of the requirement. EMTLA was a road map to abuse not a solution.

      Your hospital bill comment opens up a whole new issue with PPACA. I’ll try to keep it short. Fully insured carriers and government have never been the drivers of innovation. Cost effective and creative health plans come from self funding. Employers, the one’s footing the bill, have the muscle, desire, and ability to take the hospitals on. A pissed off employer and good state consumer protection laws is all we need to defeat the hospitals and restore some pricing sanity. Unfortunently PPACA and now the States could set self funded plans back or even kill it if CA has their way. If SF employers don’t fix the problem it will never be fixed.

      Very very few new treatmeants have come out that offer any theraputic improvement, The vast majority of drugs are time release or just change dosage. Speaking of MS copanone is a great example of an overpriced drug but they will be losing their cash cow very shortly.


      “When I started copaxone 9 yrs. age, it cost $1250/mo. this was the cost of producing/distributing it and research and developement. Today the cost is a rediculous $3600/mo.- triple in just 9 yrs.”

      Pharma can’t pay their CEOs or anyone else if they have zero revenue. If we refuse to pay $4000 for copaxone they wont have a choice but to sell it at a reasonable price. If not they will go BK then the MS society can buy the patents at BK sale and give it away.

      This is the same problem employers allowed themselves to get into. Instead of standing up to the hospitals when they threatened to balance bill members rediclous amounts they rolled over and started paying. Once the hospitals saw all they had to do was threaten the employee who would then cry to HR who would then demand the bill be paid they took it and ran. Now employers are calling their bluff and telling them to balance bill the employee and justify the $20,000 for a colonospy.

    • How long till Medicare and Medicaid are at this point? Medicaid in CA or IL will be first, followed quickly by others states and then Medicare.


      “Valencia is 765 days late on bills, mostly to pharmaceutical companies and healthcare services.”

    • Nate I am in basic agreement. I have one minor quibble and one more major question.

      Minor — EMTALA was passed I think in the mid-1980’s. I do not thnk that those who passed it even thought about what it would do to insurance markets.

      I think the thought was that hospitals were pretty much rolling in money, and so they could offer stabilizing care to the uninsured without any real disruption.

      There were some well-publicized cases of people being turned away from ER’s due to lack of money (also race). As you noted in an earlier post, sometimes the law that intends to correct an outrage
      can become damaging in its own way.

      Major — you suggest that we just stop buying the most over-priced drugs.

      Who does the stopping? In some cases, the patient will slip into horrible pain without the medication. What you suggest would seem to use the patient as a kamikaze in the cause of cost control.

      Can you expand on that aspect? Thank you.

      • Off the top of my head I can’t think of any drug, except some orphan ones, that are the only treatment for a condition. I’m sure there are some out there but the number of people affected is so small we can’t justify over paying tens of billions every year. I’m certain there will be people who will suffer, their suffering is not worth billions. There are people alive today suffering who have no treatment, is it fair we don’t spend billions helping them?

        It’s in this comendable american pursuit to do everything for everyone that we lose track of exactly how expensive everything is. Saying we should spend $3 million to keep a kid alive doesn’t sound like much until you step back and realize there are 1000 kids like that….every year. Then on top of that those efforts will be bastardized to help 10,000 more kids that don’t need help but if it is available people will take advantage of it.

        This is what is killing Europe, death by 30 million “charitable” acts. Let them retire at 50, pay for healthcare with little cost. All these small inexpensive vote purchases add up. Now an entire continent is going to suffer for generations.

        Just like you said, EMTLA was an overly broad and excessive responce to a small problem. Like recision in insurance, if you believed the papers and politicians you would think millions were being murdered every year when in fact a few dozen people were wronged, a problem easily solved by our court system. Now we have no underwriting and carte blanch permission to lie to insurance companies that is going to cause millions more to be uninsured.

    • I am going to hold on for one more shot on the issue of how to combat price gouging by drug companies.

      You implied that a rather small number of people could somehow just say no to the most expensive drugs.

      I realize full well that this is a statistically treacherous area, but let me take my shot.

      Studies in Canada in the last decade asserted that about 5 persons per one thousand needed drugs that cost over $10,000 a year.

      I am not sure if this just referred to those under age 65……but if it did,
      then out of 120 million american adults under age 65, (not in prison or the army or on Medicaid), then we have 600,000 who depend on expensive drugs for MS, rhematoid arthritis, HIV, cancer survival, etc.

      I think that is too many to just say no. That is why I favor some kind of price control on drugs which have no substitutes……rather than charging what the market will bear, which seems grotesque when the market consists of such frail and desperate people. Germany has had price review boards for years and their lives go on.

      If this yields fewer funds for research, I am OK with that. We have had wonderful new drugs in the last 50 years, we can take a break. Besides the greatest life saver of the late 20th century was the polio vaccine, and Dr Salk never made an extra nickel above his academic salary.