High actuarial value is better, right?
Well it depends.
It really depends on what you assess your prospective personal health risk to be and how much of a hit you can absorb. And from there, it is a matter of interrogating the benefit design of plans.
Let’s look at two Gold plans I designed using the 2019 actuarial value calculator to tease this out a bit.
|Plan A||Plan B|
|Coinsurance after deductible (you pay)||30%||0%|
|Maximum Out of Pocket||$6,000||$2,000|
|PCP Sick Visit||No cost sharing||Deductible applies|
|Generic Drugs||No cost sharing||Deductible applies|
What plan is more attractive if we assume same insurer with the same network?
What plan has the higher actuarial value?
Which plan is better?
Well that depends on your situation.
Since July 1, 2017, my personal healthcare utilization has been one $126 Primary Care Provider (PCP) visit and one $7.42 generic prescription. The combination of those two things cleared up an upper respiratory infection that felt like I was breathing through Styrofoam. And this is the type of utilization that I expect going forward for myself. If I had Plan A for the past year, I would just be paying my premiums with no cost-sharing for my utilization.
My mother, as I have mentioned before, is a medical zebra. She has had a series of 1 in a million conditions over the past decade. Last winter, she had a significant surgery for one of her zebra conditions. With pre-op treatments, prep, surgery, and post-op rehab, she is probably in the top 1% of medical spend for the past twelve months. Plan B is better for her as she would have met her out of pocket maximum under both plans A and B. Plan B has a lower maximum out of pocket amount that she would have to pay. It saves her $4,000.
Plan B has a slightly (<0.5%) higher actuarial value than Plan A.
Actuarial value is a decent approximation at a population level of how much an insurance company will pay for the group. It is a weak tool at the individual level.
Plan A will be attractive to people who self-identify as being likely to be low risk. The bet in Plan A is that the most common utilization that this population will use is low cost. A “free” PCP visit is in the realm of imagination for this population. For someone with a high probability of expensive medical conditions, a no-cost sharing PCP visit is irrelevant as they are going to be using enough other services that they will hit their out of pocket maximum. The challenge for these folks is if they get hit by a surprise, they’ll pay more in out of pocket expenses.
Plan B is attractive to people who either can not take a significant cash hit in case they got hit by a medical meteor or people who know that they will run up significant claims. The $2,000 deductible is also the out of pocket limit so it is a maximum ceiling on spending that is very predictable. Common utilization like a PCP visit for to address an illness will cost more as deductible applies but the total exposure is limited.
If both plans are offered in the same market, this is not a big deal. There may be risk adjustment transfers between Plan A and Plan B while premiums will be roughly the same. However if only one plan is offered, the low deductible, common services excluded from cost-sharing plan will produce a very different set of winners than a higher deductible with no other cost-sharing plan design.
The core insight is that if we hold actuarial value and medical pricing constant, lowering deductibles and excluding common, low cost services means the healthy benefit over the sick. The group has to pay the same (on first approximation) amount of cost-sharing but the burden is more heavily borne by the few high cost group members instead of being broadly spread among the mostly (and currently) healthy.