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REPORT: Early Consumer Testing of Actuarial Value Concepts (September 2011)
Download the full report (PDF).
Executive Summary
This study finds that consumers are very interested in knowing the value of their health plan choices; in other words, whether their options are a good value for their premium dollars. However, determining value is very difficult for consumers. The typical health plan has too many cost-sharing features for consumers to figure out how much coverage the plan is offering. Difficulties stem from the fact that many of the terms are unfamiliar to consumers, and the fact that it is difficult for consumers to weigh the myriad features so they can be compared across plans.
Actuarial value is a concept that could help consumers with this value equation. Actuarial value is a measure widely used by insurers but unfamiliar to consumers. It measures the share of claims costs a health plan would cover if a standard population of both healthy and sick people were enrolled in it. Remaining costs are covered by the enrollees through the cost-sharing provisions. Another way to think about actuarial value is that it is a measure of the health plan’s generosity or overall financial protection. As an example, a typical large employer health plan has an actuarial value of about 85%. This means that the health plan covers about 85% of claims, across a standard population, with the enrollees paying the rest.
The 2010 Affordable Care Act (ACA) calls for actuarial value to be used with consumers for the first time in 2014. The Act requires plans sold in the individual and small group markets to conform to one of four “metal” tiers (platinum, gold, silver, bronze) representing four levels of actuarial value (90%, 80%, 70%, and 60%), plus a catastrophic plan design. The ACA also requires a new disclosure indicating whether or not a plan covers at least 60% of total allowed costs. This study examines consumer reactions to these actuarial value concepts.
We found that consumers readily understood, used, and favored the “metal tier” designations called for by the ACA. The tiers provided an important “pathway” for participants to think about their plan choices. The use of these tiers doesn’t require a technical understanding of the term actuarial value, just a general understanding of the relative ranking indicated by each tier. The appeal of the designations rested, in part, on the fact that the relative value of the “metals” was already familiar to them, from either credit cards or the Olympics.
Consumers struggled, however, when actuarial value was displayed as percentage on a side-by-side plan comparison. Consumers didn’t understand (and mostly ignored) a new required federal disclosure, designed to convey whether or not a plan covers at least 60% of the total allowed cost. The purpose of this disclosure was not clear, and the text used jargon that wasn’t familiar to consumers. While not explicitly required by the ACA, we also tested a “conventional” actuarial value measure alongside the disclosure. This measure used explanatory text similar to the disclosure. Not surprisingly, consumers were confused for similar reasons. In addition, some had difficulty understanding the difference between the actuarial value measure and other percentages in the comparison, such as coinsurance.
However, even though consumers didn’t find the conventional actuarial value measure easy to use, their statements and responses actually reinforced the need for an overall number like actuarial value as a means of comparing across plans. Despite participants’ clear preference for being able to weigh costs (or often “value”) across health plans, the bottom line is that they don’t understand the typical cost-sharing provisions very well. If consumers cannot effectively weigh or measure those costs, they cannot make meaningful comparisons across plans.
Their ready use of the metal tier designations—a related concept that was intuitive and easy to use—indicates the potential of this measure. The use of the metal tiers to guide health insurance shopping could be attributed to the fact that the tiers provided a usable mental model for making decisions. Conversely, conventional actuarial value was too unfamiliar. The explanatory text could not overcome consumers’ lack of experience with the concept, and the measure did not become a useable point of comparison.
This study should be considered an initial foray into eliciting consumers’ reactions to the actuarial value measures in use today. Consumer shopping has been successfully guided by benchmark measures in other realms (think EnergyGuide ratings or estimated Miles per Gallon stickers) and actuarial value shows promise as comparative tool that fulfills a real consumer need. However, it is critical that follow-up studies are conducted to explore the word choice, education, and graphic design elements needed to make this measure more accessible to consumers. Furthermore, steps must be taken to ensure that it is trusted by consumers, including having the measure calculated in a standardized way.