C A L I FOR N I A H EALTH C ARE F OU NDATION Actuarial Value: A Method for Comparing Health Plan Benefits Prepared for California HealthCare Foundation by Roland McDevitt, Ph.D. Watson Wyatt Worldwide October 2008 About the Author Roland McDevitt, Ph.D., is Director of Health Research at Watson Wyatt Worldwide. He has developed simulation models to estimate the costs associated with changes in plan design, an aging population, and health care reform. He has also worked with various public and private organizations with an interest in Medicare and retiree health benefits. His current research is focused on consumer-directed health plans and their influence on consumer behavior. Watson Wyatt Worldwide is a human resources consulting firm that works primarily with large employers to plan and administer their benefits and compensation programs. About the Foundation The California HealthCare Foundation is an independent philanthropy committed to improving the way health care is delivered and financed in California. By promoting innovations in care and broader access to information, our goal is to ensure that all Californians can get the care they need, when they need it, at a price they can afford. For more information on CHCF, visit us online at www.chcf.org. ©2008 California HealthCare Foundation Contents 2 I. Introduction 4 II. Strengths and Limitations of the Actuarial Value Model 6 III. Key Findings 8 IV. Conclusion 9 Appendix I. Introduction California’s individual health insurance market offers plans with a wide and complex array of benefit levels and cost-sharing provisions. Some policymakers and stakeholders are concerned that this complexity makes it difficult for consumers to evaluate plans. A good summary measure of the protection afforded by these health insurance products might help consumers better assess which plans fit their needs. Numerous cost-sharing provisions interact to determine what a plan will pay and what the consumer will pay. But the interplay of these provisions can make it difficult for consumers to understand which plans are likely to make the greatest benefit payments. Actuarial value is a summary measure of likely payments by a plan. It measures the percentage of medical expenses paid by a health plan for a standard population, ranging from 0.00 for a plan that pays nothing to 1.00 for a plan that pays all medical expenses. In 2008, the California HealthCare Foundation commissioned the human resources consulting firm Watson Wyatt Worldwide to describe how actuarial value can be used to evaluate health plans. In previous research, Watson Wyatt had applied the measure to individual market plans available in California during 2006.1 This paper describes Watson Wyatt’s analytic approach, presents the strengths and limitations of actuarial value as a summary measure, and offers observations about the use of actuarial value to assess diverse health plans. 1 . Gabel, J., J. Pickreign, R. McDevitt, H. Whitmore, L. Gandolfo, R. Lore, and K. Wilson, “Trends In The Golden State: Small-Group Premiums Rise Sharply While Actuarial Values for Individual Coverage Plummet,” Health Affairs 26, No. 4 (2007): w488 – w499 (published online 14 June 2007; 10.1377/hlthaff.26.4.w488). See also: McDevitt, R., J. Gabel, L. Gandolfo, R. Lore, and J. Pickreign, “Financial Protection Afforded by Employer-Sponsored Health Insurance: Current Plan Designs and High-Deductible Health Plans,” Medical Care Research and Review (2007) 64: 212 – 228. 2  |  C alifornia H ealth C are F oundation Questions and Answers About “Actuarial Value” and the Individual Health Insurance Market Q: What does Actuarial Value (AV) measure? Q: How does AV relate to premium cost? A: AV is a measure of the relative percentages paid A: Premiums and actuarial value tend to be by a health benefits plan and its members. It is correlated. Products with more comprehensive calculated using the medical claims from a standard benefits, less cost-sharing at the time of service, population, along with a plan’s cost-sharing and higher actuarial value tend to have higher provisions, to simulate the payment of claims. premiums. However, there are exceptions— The percentage of charges paid by the plan is the premiums also can be influenced by such factors actuarial value. It is sometimes called the “benefit as administrative efficiency, provider practice rate.” In a recent CHCF project, “Check the Label: patterns, and level of negotiated discounts. Helping Consumers Shop for Individual Health Insurance” (www.chcf.org/topics/healthinsurance/ Q: Can AV be estimated for consumers in index.cfm?itemID=133667), AV was referred to as different circumstances — for example, for those “Percent Expense Paid by Insurance.” expected to be low or high users of health care services? Q: How is AV expressed? A: Yes. It can be useful to calculate actuarial value A: AV is expressed as a share of all medical and out-of-pocket estimates for high users (for expenses. For example, an AV of 0.75 would mean example, the top 1 percent); this can provide a that the health benefits plan would pay 75 percent sense of what the plan and member would pay in of covered medical expenses for a standard a worst-case scenario that involves a catastrophic population.  medical event. Actuarial values tend to be low when the focus is on low users, because a higher Q: Do any plans have an AV of 1.00? portion of their expense is likely to fall within A: An AV of 1.00 would mean that 100 percent of deductible and copayment categories. a standard population’s covered medical expenses were paid by the insurance carrier. Virtually all Q: Is bias introduced by using claims data insurance products incorporate some consumer generated by employment-based coverage to cost-sharing features, so even the most analyze individual market products? comprehensive plans provided through large A: Due to medical underwriting, enrollees in employers would have actuarial values less California’s individual market are healthier than than 1.00. A very comprehensive HMO plan, for those insured through employer-sponsored example, might have an AV near 0.95. coverage. Thus, they will typically use fewer services than the commercial population whose Q: Does AV consider premium cost? claims drive the model. This may result in some A: No. Actuarial value only measures benefit upward bias in all actuarial values calculated for payments. To fully assess whether a plan is a individual market products. However, differences good purchase, consumers would want to know in actuarial value among individual market products both the premium and the AV. They may also should still provide a valid measure of the relative want to consider other aspects of the plan, such generosity of plan provisions. as whether specific benefits like maternity are covered, whether the plan offers a broad choice of providers, and whether the plan has a good record of administrative performance. Actuarial Value: A Method for Comparing Health Plan Benefits  |  3 II. trengths and Limitations of the S Actuarial Value Model The Watson Wyatt claims-payment model estimates an actuarial value for each plan by using that plan’s cost-sharing provisions to simulate the payment of medical and prescription drug claims for a standard population. This population is a national sample of more than 2,000 people enrolled in employer- sponsored plans that have comprehensive medical and prescription drug benefits. This comprehensive coverage creates an opportunity to capture in a database a detailed account of the acute care medical services used by this population. This database allows the simulation of claims payments under plan designs that differ both in scope of covered services and in the cost-sharing required for these services. The model estimates plan payments and member out-of-pocket expenses by applying each plan’s deductibles, coinsurance, copays, out-of-pocket maximums, and benefit maximums to the claims experience of the model’s standard population. Expense categories include the full range of services that are commonly included in individual and group health insurance plans, enabling the tracking of plan expense and member out-of-pocket costs for outpatient visits and surgery, emergency room visits, hospital admissions, other medical care, and up to three tiers of prescription drugs. This process produces population-based actuarial values using a consistent methodology across plans. The actuarial value is not dependent on the health status of enrollees in the particular plan, or the local health care costs and practice patterns for that plan. Rather, the model calculates an actuarial value showing the percentage of expenses each plan would pay if identical populations were enrolled in all plans. The limitations of this approach include the following: K Actuarial value may not fully reflect consumers’ out-of- pocket costs. For example, the model does not identify which 4  |  C alifornia H ealth C are F oundation prescription drugs are on each plan’s formulary and which drugs are excluded from coverage. Nor does it consider long term care services or over-the-counter medications, which normally are not covered by individual or group health plans. K The model does not consider a plan’s administrative performance, the breadth or quality of the provider network, the premiums charged, or whether the plan offers optional features such as a Health Savings Account. K The claims database does not capture any applicant selection process in which individual insurance market plans engage. Similarly, it does not address coverage exclusions for preexisting conditions or waiting periods imposed by a plan. To the extent these mechanisms do operate, those enrolled in the individual market may carry lower risk than those in the model’s standard population derived from group plans. The purpose of the model is not to replicate the actual level of spending that occurs within each plan, but rather to provide a standard metric for comparing plan benefit payment ratios. Simulating each plan’s payments, using a fixed set of claims from a standard population, provides a reasonable way to compare the relative levels of insurance protection offered by each plan. Actuarial Value: A Method for Comparing Health Plan Benefits  |  5 III. Key Findings The following findings are drawn from actuarial valuations of individual market plans offered in California during calendar year 2006.2 Although the broader study included data from plans throughout California, the data presented in Figure 1 are from 32 plans offered in Los Angeles County. The first finding is that there was considerable variation in actuarial values among these plans, ranging from 0.32 on the low end to 0.85 on the high end. This wide range reflects major differences in deductibles, out-of-pocket maximums, and other cost-sharing provisions. A second finding is that no single plan provision is fully predictive of actuarial value. For example, Figure 1 illustrates how the 32 plans ranked on actuarial value, and how these same plans ranked Figure 1. lan Ranking by Actuarial Value and Out-of-Pocket P Maximum Actuarial Value Rank OOP Maximum Rank 35 30 25 20 15 10 5 0 1 5 10 15 20 25 30 P LAN N U M BE R Source: Plan provisions for the individual insurance products available in California during 2006 were abstracted from www.ehealthinsurance.com. 2. Gabel, J. et al., supra. 6  |  C alifornia H ealth C are F oundation on the basis of their out-of-pocket maximums. maximums, higher deductibles tend to occur with Although higher out-of-pocket maximums tend to lower actuarial values, but there are significant occur with lower actuarial values, Figure 1 shows deviations from this general tendency in actual plan that there are many exceptions where the rankings rankings.) diverge significantly. A final finding is that premium level and actuarial Plan number 13, for example, ranks toward the value are not highly correlated. Figure 2 shows how middle of the pack, with an actuarial value of 0.59, actuarial values related to the premiums charged but ranks first in terms of out-of-pocket maximum, by these plans in Los Angeles County during 2006 with a cap of $2,100. The reason the plan does for a 32-year-old individual. The left scale shows not rank higher in terms of actuarial value is that it actuarial value, the right scale shows monthly also has a $2,100 annual deductible that a member premiums, which ranged from a low of $56 to a must pay before the plan pays any benefits. (The high of $448. The chart shows that two plans might Appendix shows actuarial values for all 32 health have very similar actuarial values but very different plans, along with their annual out-of-pocket premiums. maximums and deductibles. As with out-of-pocket Figure 2. elationship Between Actuarial Value and Premiums in Los Angeles County, 2006 R Actuarial Value Monthly Premium 1.0 $500 $400 0.8 $300 0.6 $200 0.4 $100 0.2 $0 1 5 10 15 20 25 30 PLAN N U M BE R Source: Plan provisions for the individual insurance products available in California during 2006 were abstracted from www.ehealthinsurance.com. Actuarial Value: A Method for Comparing Health Plan Benefits  |  7 IV. Conclusion Many aspects of health plan value may interest consumers when selecting a plan. But a very important one — if they had access to it — could be the percentage of total health care expenses that the plan is likely to pay. Actuarial value provides an estimate of this plan payment percentage, which the consumer might consider along with other information about the plan. This brief analysis of plan data from the individual market in California illustrates the potential usefulness to consumers of a summary measure such as actuarial value. If the policy goal is to provide a single number that consumers can use to compare the relative value of different benefit packages, actuarial value presents a more robust measure than any single cost-sharing provision. 8  |  C alifornia H ealth C are F oundation Appendix: ctuarial Value, OOP Maximum, Annual Deductible and Premium A for 32-Year-Old: Individual Market Plans in Los Angeles County, 2006 R a n ki n g s V al u e s Plan Actuarial Actuarial M o n t h ly No. Va l u e OO P M Deductible Premium Va l u e OO P M Deductible Premium 1 1 3 1 19 0.86 $3,000 $ 0 $194 2 2 2 1 29 0.83 2,500 0 289 3 3 3 1 23 0.83 3,000 0 242 4 4 2 1 21 0.82 2,500 0 204 5 5 3 12 26 0.70 3,000 1,500 257 6 6 3 12 20 0.69 3,000 1,500 198 7 7 20 1 2 0.67 5,000 0 56 8 8 12 7 32 0.67 3,500 500 448 9 9 20 7 17 0.64 5,000 500 186 10 10 20 7 13 0.63 5,000 500 110 11 11 20 12 4 0.62 5,000 1,500 62 12 12 3 11 31 0.62 3,000 1,000 403 13 13 1 18 24 0.59 2,100 2,100 244 14 14 3 7 22 0.58 3,000 500 222 15 15 17 12 9 0.57 4,500 1,500 81 16 16 20 24 1 0.56 5,000 2,750 50 17 17 29 1 5 0.56 7,500 0 69 18 18 20 26 18 0.49 5,000 3,500 193 19 19 13 21 28 0.49 4,000 2,500 283 20 20 13 12 25 0.47 4,000 1,500 244 21 21 17 17 10 0.46 4,500 2,000 83 22 22 11 19 14 0.46 3,200 2,400 111 23 23 13 27 27 0.46 4,000 4,000 278 24 24 13 27 11 0.46 4,000 4,000 87 25 25 19 22 8 0.45 4,700 2,700 77 26 26 3 19 30 0.44 3,000 2,400 298 27 27 31 22 6 0.44 7,700 2,700 72 28 28 20 29 16 0.44 5,000 5,000 166 29 29 20 29 12 0.41 5,000 5,000 93 30 30 32 29 3 0.41 10,000 5,000 60 31 31 28 25 15 0.39 7,000 3,000 149 32 32 29 29 7 0.34 7,500 5,000 75 Source: Plan provisions for the individual insurance products available in California during 2006 were abstracted from www.ehealthinsurance.com. Actuarial Value: A Method for Comparing Health Plan Benefits  |  9 C A L I FOR N I A H EALTH C ARE F OU NDATION 1438 Webster Street, Suite 400 Oakland, CA 94612 tel: 510.238.1040 fax: 510.238.1388 www.chcf.org