Variable pricing and effective actuarial value

WARNING —  I’m likely chasing my tail in this post

Actuarial value (AV) is a measure of group level benefit generosity.  At a group level, a plan that says it has a 70% AV should see the insurer, mostly using premium revenue, to pay about 70% of the allowed amount of qualified claims while the covered individuals pay about 30%.  The 30% will be made up of some combination of deductibles, co-pays and co-insurance payments.  At the individual level, most people will never see their personal actuarial value match up with the group actuarial value.  Many people will have no claims and a few people will have incredibly high claims.  This is a group measure.

The ACA plans are segmented into metal bands — bronze, silver, gold, platinum — which are markers for actuarial value.  Here, silver is supposed to be about 70% of AV while gold is about 80% AV.  AV is calculated for ACA purposes from a single national calculator that blends national rates and benefit structures to average utilization of a wide variety of services.  It assumes uniform national pricing.  But we don’t have uniform national pricing.

The experience of AV at the individual level is even more divergent due to insurer pricing variance.

I needed to work out an example.

I took a single fairly complex Evaluation and Management office visit code (99215) and found the current Medicare fee for service fee schedule (100% Medicare).  I then multiplied 100% Medicare by 1.6 (160% Medicare is a plausible public option rate) and 2.0 (200% Medicare is a very plausible standard commercial market rate).  From there, I created a bunch of deductible only plans at various levels of deductible and then divided the deductible by the price of a visit to estimate how many visits of this particular code at a particular price would be needed to meet the deductible.

As you can see, there is a wide variance in the number of visits needed to meet deductible.  The simplest version ($1,000 deductible) someone would need 3, 4, or 6 visits (200%, 160%, 100% Medicare respectively) to meet their deductible.  All three payment levels all have the “same” notional actuarial value (about 90% or Platinum coverage) but the actuarial value as experienced by an individual with 5 visits is very different. The low cost insurer pays nothing.  The high cost insurer pays for a 2.27 visits, so the last two visits had no cost sharing and the middle cost insurer pays for 1.39 visits including a no cost sharing last visit.  The experienced AV in these cases are 0, 28% and 45%.  The value proposition of insurance changes at the individual level as a function of the prices an insurer pays to providers when we use national average prices to calculate actuarial value.

Low cost insurers have more opportunities for their cost sharing structure to act as a deterrent to utilization.  Someone who is flipping a coin between a fourth and fifth visit has a large marginal cost ($183.19) if they are on a $1,000 deductible only Platinum plan with an insurer paying Medicare rates while they face no cash marginal costs on either the middle cost or high cost plan.

I think that given how we calculate AV, the effective group AV for low cost, narrow network plans is notably below the stated, nominal group AV while the AV for plans that are connected to high cost and broad networks may be well over the stated AV.  Some of this may be equalized in risk adjustment but I have an inkling that there are notable residuals that might show up in MLR data first and then strategic decision-making on entry and exit as well.