Actuarial Value and Employer-Sponsored Insurance. Methods for Calculating Actuarial Values of Employer-Sponsored Insurance


In this draft white paper, we report on the distribution of AVs of ESI plans. This preliminary analysis was conducted by Actuarial Research Corporation (ARC), in collaboration with John Bertko, the senior health actuary at the Center for Consumer Information and Insurance Oversight/Centers for Medicare and Medicaid Services.

AV is calculated as the share of expenses for covered services paid by a plan for a given population, where the numerator is the expenses paid by the plan and the denominator is the total cost of covered services.  The total cost of covered services (i.e., the denominator) depends on at least two parameters — first, the services covered, and second, the cost-sharing structure of the plan.  The effect of the services covered on the denominator should be clear — if a plan covers a broad set of services the denominator will be larger than if a plan covers a narrow set of services.  The effect of cost-sharing on the denominator is through the relationship between cost-sharing and utilization.  A plan with larger amounts of patient cost-sharing will have lower levels of expected total spending than a plan with lower amounts of patient cost-sharing, because patient cost-sharing levels affect utilization.

Given these parameters, consider the following approaches to determining the total cost of covered services for AV calculations: 1) an internal benchmark for covered services and cost-sharing and 2) an external benchmark for covered services and an internal benchmark for cost-sharing — a hybrid approach (Figure 1).

Figure 1.
Summary of approaches to estimating the total cost of covered services for AV calculations

Approach Benchmark
Covered services Cost-sharing structure
Internal Internal Internal
Hybrid External Internal

For the purposes of this analysis, we primarily estimated the total cost of covered services utilizing a hybrid approach because this method could be used to establish a reference point for the breadth and generosity of ESI plans.  We also conducted the analyses using the internal approach.  These results are reported below.

Two external benchmarks for services were selected as illustrative examples.  The first uses the services covered by the Federal Employees Health Benefits Program Blue Cross/Blue Shield Preferred Provider Organization plan (FEHBP-PPO).1  The FEHBP-PPO plan, the “broader benchmark,” was chosen for this exercise because ARC had previously conducted analyses using that plan, and had detailed information on the services covered by the plan.  For the purposes of this analysis, we also consider a second benchmark, the “narrower benchmark,” which covers a more limited set of health services — physician and mid-level practitioner care, hospital and emergency room services, pharmacy benefits, and laboratory and imaging services.  Very few plans in the market today do not cover all of these services.2

Rehabilitative services, durable medical equipment, acupuncture and chiropractic services, and home health services are among the excluded services of the narrower benchmark.  While many employer plans currently cover most or all of the services excluded from the narrower benchmark, we excluded these services from the narrower benchmark in this hypothetical example to assess the impact the choice of services included in the benchmark had on the estimated fraction of enrollees in ESI plans with AVs below 60 percent.  The services excluded in the narrower benchmark account for 5 percent of the total cost of the services in the broader benchmark (Figure 2).

Figure 2.
Percentage of total cost for covered medical services by service category

Figure 2. Percentage of total cost for covered medical services by service category

Source:  ARC analysis of Medical Expenditure Panel Survey (2005).

The AVs for plans representative of those covering persons under age 65 with ESI through active employment were calculated by evaluating the cost-sharing parameters of the plans, for services covered under the external benchmark, against the expenditures and utilization of a standard population.  This was done by means of a claims repayment program, which evaluated the plan’s cost sharing parameters (copayments, deductible, coinsurance, out-of-pocket maximum and benefit maximums) against the covered services as defined by the benchmark (see Appendix A for a technical description of methodology).

1  Services in the FEHBP-PPO plan include physician and mid-level practitioner services, hospital and emergency room services, pharmacy benefits, equipment/supplies, laboratory and imaging services, midwife services, complementary and alternative medicine (chiropractic and acupuncture services), physical and occupational therapy, mental health, and podiatric services.  Benefits in this example do not include dental or vision services.

2  Based on data from the Bureau of Labor Statistics’ National Compensation Survey, 2009.

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