What Is Actuarial Value?
Let’s start by saying, when people buy healthcare insurance policy, they’re looking to make a series of payments to an insurance company. In return, the insurance policy pays in full or in part for medical costs. Now, when many, many people buy a given insurance policy, you can add up all of the charges made by everyone using the policy and come up with an average. Let’s call that the Average Cost.
The actuarial value(AV), in health insurance, is what percentage of the Average Cost your health insurance policy will cover. So, for example, if a plan has an AV of 60%, then it’s estimated you would be responsible for 40% of the costs for your medical care.
Example Of Actuarial Value
In reality, the percentage you can pay can be quite different. The amount of medical attention any one person receives can vary greatly. So, if you only use your policy for check-ups, tests, prescription drugs, or any other routine purpose, then your policy’s percentage of medical costs are going to be much lower than the estimated 60% because most of those costs will come out of deductibles and copays. On the other hand, if you have a major medical expense covered by the policy in a given year, then your plan would cover much more than the estimated 60% AV.
What’s The Actuarial Present Value?
The actuarial present value is the expected present value of a series of payments made to pay for the policy. Now, with an understanding of the actuarial present value, you can use the actuarial value formula.
The Formula For How Actuarial Value Is Calculated
There is no exact actuarial value formula for finding a “standard across multiple plans. But, the Department of Health and Human Services(HHS) has developed an “Actuarial Value Calculator," which is updated regularly. Luckily, there is a simple actuarial value formula used to calculate the actuarial value. Remember, when you took all of the costs of all of the people under a given policy and found the average, we called that the Average Cost. So, the actuarial value formula is:
- [Actuarial Present Value] / [Average Cost]
This actuarial value formula is a good estimate but no replacement for HHS's calculator.
Breakdown Of Actuarial Value Metal Levels
Why do actuarial metal levels matter to you? The Affordable Care Act (ACA) in the United States required health insurance providers to calculate and publicize the AV of each plan, using actuarial metal levels. The health care reform requires tiers to health insurance plans in the individual and small group markets to meet certain actuarial metal levels:
- Bronze (60% AV)
- Silver (70% AV)
- Gold (80% AV)
- Platinum (90% AV)
These are intended to allow consumers to compare different plans of coverage. Yet, health insurance plans can vary greatly even within the same actuarial metal levels.
For example, Bronze Plan A might offer a $6,000 deductible and a 0% coinsurance with a monthly premium of $250. Now, Bronze Plan B offers a $2,000 deductible and a 50% coinsurance with a monthly premium of $350. So, the people with Bronze Plan A will pay more before they reach their deductible but doesn’t pay anything beyond that for covered medical expenses because of the 0% coinsurance. On the other hand, the people with Bronze Plan B won’t pay as much to reach their deductible. But, once they do, the coinsurance starts, and they’ll have to pay for half of all covered medical expenses going forward because of the 50% coinsurance.
Also, to give the insurance policies some help in meeting the requirements, the HHS has stated an insurance policy can be within 2 percentage points of the standard. So, a silver plan can have an AV between 68% and 72%. And, this flexibility in small group markets allows issuers to exceed annual deductible limits in order to meet a given metal level.