Health Affairs has an interesting article on actuarial value of insurance in the ACA.** I am not sure what I am taking from it as my reactions are muddled.
We simulated out-of-pocket spending for bronze, silver, or gold Marketplace plans (those having actuarial values of 60 percent, 70 percent, and 80 percent, respectively). We found that for the vast majority of consumers, the proportion of covered spending paid by the plans is likely to be far less than their actuarial values, the metric commonly used to convey plan generosity….
the average gold plan, an enrollee would have to spend approximately $21,500 before the plan covered 80 percent of spending, its actuarial value (Exhibit 1). For the silver and bronze tiers, the spending levels required for plans to reach their actuarial value were $19,500 and $16,500, respectively. Because more than 90 percent of people had annual spending of less than $15,000, for the vast majority of enrollees, the proportion of expenditures covered by a plan would have been much lower than its actuarial value.
My first reaction to the study is “Of Course!” Most people in most years don’t touch the healthcare system. The Agency for Healthcare Research and Quality (AHRQ) has 2015 data on per capita spending by percentile:
70% of people don’t spend $15,000 a year. 50% of the population can buy a used 1983 stick shift Volkswagon Rabbit whose reverse does not work for the same cost as their annual healthcare expenditure.^^^ The concentration of costs means most people are going to be a whole lot cheaper than average. This is further exacerbated as the fixed cap on out of pocket expenses means low utilizers need to pay a higher percentage of their total costs. Cost sharing choices have significant distributional implications:
Deductible plans favor the sickest people as the low utilizers pay for almost all of their care via deductible cash. That means the proportion of the pool’s individual responsibility amount is borne by healthy people.
Co-pay only plans favor people who use highly concentrated cost services. A co-pay does not differentiate between a specialist visit with a contract expense of $200 and a specialist visit with a contract expense of $600. It is the same fee. So people who use very costly services but only rarely are best off. People who use a lot of fairly low costs services on a regular basis pay more proportionally.
Co-insurance only plans favor low cost utilizers. They are not paying full price via their deductible, and unlike co-pays, the individual cost per unit matters.
At the same time, the paper makes a very good point:
the actuarial value, which is calculated at the population level, might not accurately represent the proportion of covered expenditures paid by a plan for any given enrollee. The distinction between population- and individual-level measurement, however, is often overlooked in the popular media and even in some of the information that insurers provide to consumers.
The aggregate story breaks down at the individual level. In order for an insurance pool to pay a half million dollar claim for an individual with a Silver plan that has a $5,000 cost sharing cap (99% individual actuarial value), a lot of people will see the insurer pay out a lot less than 70% of their actual claims. This is one hell of a confusing communication and choice problem that I don’t have any good answers for besides the simple fact that I need to think about this a lot.
** Polyakova, M., Hua, L. M., & Bundorf, M. K. (2017). Marketplace Plans Provide Risk Protection, But Actuarial Values Overstate Realized Coverage For Most Enrollees. Health Affairs, 36(12), 2078-2084. doi:10.1377/hlthaff.2017.0660
^^^ Why yes, I drove a rusted red VW Rabbit that I had to Fred Flintstone for 3 point turns during in high school. Shockingly few people ever wanted to enter the car.
zhena gogolia
I had a rusted red VW Rabbit with a hole in the floor!
Sab
This coming year has been weird with insurance. My dad is quite elderly , rather wealthy , with dementia. Most of my siblings have agreed that it’s majorly immoral for us to have nurses aides we depend on and can afford to have insurance to not have it. The nurses aides disagreed They know the market rate for their services and think anything else is charity. After banging my head against the wall I explain that replacing them after a medical catastrophe would be expensive, they relented and brought in their insurance invoices for next year. Even they think it would be immoral for them to have insurance to keep on doing what they are doing (actual hard and frustrating work) while it would be okay to pay them minimally for 15 plus years to preserve the inheritance my siblings cannot be bothered to wander into town to claim. Our nurses aide-housekeeper has been here for fifteen years six days a week. My siblings have turned up maybe two days every five years or so. How are they more entitled than she to some benefit when she is actually working hard every day to care for my dad.
Weird world full of weird people, some of them amazing, others not so much.
Mandarama
@Sab: You are a good person, to recognize and do right by the people who care for your dad. I feel like most people see that kind of labor as a commodity to get at the cheapest price possible. A terrible kind of objectification.
WereBear
@Mandarama: I agree. And many people are trained to expect bad treatment.
Sab
@Mandarama: More selfishly, you get what you pay for. If my nurses aides know I respect them and their work I get much better nurses aides. This isn’t charity. It’s the market at work. I pay to get people I trust and respect and weirdly I get people I can trust and respect.
Sab
On the other hand, Mayhew Anderson told me the rates would go up. They have, by about twenty percent. Yikes. Still glad that me and mine have insurance. We are why the rates have gone up. Fake insurance is way cheaper than actual insurance.
Ocotillo
Ugh, I just got off a conference call (was supposed to be Go to Meeting which crapped the bed so I could not see what was being discussed) and the Insurance broker that is switching us from group Blue Cross to group Aetna was presenting. Blue Cross was going up very dramatically so it compelled my employer to seek potential alternatives. Individual deductible will now be $ 6,500. My spouse who has a condition that requires ongoing maintenance has this frugal gene that keeps her from doing certain things if they will cost too much.
We can afford what we are confronted with now and the company has an HSA which the broker just went on and on about how wonderful it is. He also blamed healthcare reform for the increased premiums. (I am old enough to remember premiums increased quite a bit prior to healthcare reform as well)
I hate insurance and am just venting because it is very complicated to me. I only go to the doctor for an annual physical and since my wife has had more issues, she is the one who understands how insurance and co-pays and deductibles work so she keeps up with it.
I wonder if we would have been better off buying in the individual market rather than using the company group plan? My company is out of Nebraska and I live in Texas so I don’t get to take advantage of a narrow network plan that costs less. The company does throw in $ 120 per month for the HSA.
David Anderson
@Ocotillo: You would not qualify for subsidies on the individual market. I would talk with a broker before you did anything else besides angrily shake your fist at the universe.
J R in WV
Dave,
We bought our very first new car from the local VW dealer, it was a white Rabbit diesel. They were very good to their customers, our starter went out about 400 miles past the warranty, and they made it good because I had asked them to look at it a couple of months earlier. Diesels take much more power to spin, so the part was a major push for us to buy, if they hadn’t helped us out.
We drove that car until the unibody frame was no longer really able to hold things together, and sold it for $100 to a neighbor, who used that diesel motor to run a sawmill. The motor may still be running, somewhere on a farm around here.
Bob Hertz
thanks for posting. Is there any way I can read the article without paying $15?
bob hertz
Betsy
Hi David, thank you for this. I’m trying to figure out what plan might be best for me for next year if I leave my job and go out for insurance on my own. Can you explain that third item in the quote? I don’t quite understand coinsurance-only plans and how they do or don’t benefit someone at those various “styles” of utilization. I see docs kind of a lot for low-level chronic stuff (think migraines, reflux) and once every year or two seem to have a need for an ER visit, hospitalization maybe once in five years.
Betsy
Heres what I don’t understand: “Co-insurance only plans favor low cost utilizers. They are not paying full price via their deductible, and unlike co-pays, the individual cost per unit matters.” What are low cost utilizers? Who is not paying full price and why are they “not paying it via their deductible?” Finally what does “the cost per unit matters” mean — what are the units we’re talking about? And to whom does the per-unit cost matter?
Bob Hertz
The asymmetry of costs appears in many forms of insurance. Most people go without a housefire their entire lives, but there is no great protest against paying fire insurance premiums.
Why?
Because the insurance is generally cheap and relatively progressive. If you have a small house or no house, then insurance is not a hardship.
What is driving people crazy about ACA health insurance is the need to pay $1000 a month or more for insurance that as you point out does not cover most medical care.
One way to relieve this is to do what California does – namely, office visits are always covered regardless of deductibles. We could also mandate that Emergency room visits have no deductible. in France, diabetic medications have no deductibles…..etc etc