The Actuarial Value Calculator (AVC) – A Flawed Design

The Actuarial Value Calculator (AVC) and the accompanying Plan Design allocation Tiers (Platinum, Gold, Silver, Bronze) fundamentally undermine the entire National health insurance marketplace and the health care system, at the same time.  The AVC forces everyone to have to enroll in a High Deductible or HSA plan by ~2022 and pay significantly more than they pay today for their health insurance, even people in Employer plans!  If everyone is not in a High Deductible or HSA health plan, then the health plan will be subject to a 40% Federal Tax.  Yes, 40%; and if the tax had not been delayed, today, over 60% of employer and union health plans would already be paying the extra 40%, especially health plans that Government and Union employees have today.

The Fundamental Issue with the AVC

The AVC treats every person as an “average” consumer of health care services, which means each and every person spends ~$10,000 per year in health care services, as of 2016, and rising rapidly!   The problem is this…  Over 50% of people spend less than $1,000 per person per year on health care services, while 5% of people spend over 50% of all the health care spending in the USA.

Therefore, the AVC is fundamentally flawed…  The reality is that there is no way to create a “tool” that can adequately determine the “Value” of covered health care services of a health plan; because health care spending is so lopsided to the 5%.  The new/current system is broken and needs to be eliminated.  There is no need for a “Tool” to design health plans.

Whether people realize it or not, the design of “every single health plan in the Country” is controlled by the Government, at this time, through the Actuarial Value Calculator (AVC).  It may be okay to regulate and require a list of health insurance benefits (EHBs) to be covered by all health insurance plans; however, it is an entirely different issue when the government tells insurance companies what to charge people for copayments, coinsurance, and deductibles, even on Employer plans. 

Understanding the AVC 

The least understood issue of “affordability” of health insurance plans is the impact of the AVC and the fact that it sets ALL health insurance plan design and health plan costs using the “law of averages”.   The AVC compounds the impact of not having a High-Risk Pool; because the AVC uses the “national average cost” for determining the cost-sharing by people purchasing insurance.  The reality is that 1% of people spend over 30% of all dollars, while 5% of people spend over 50% of all dollars.    At the same time, 50% of all people spend less than $1,000 per person per year.  What actually happens behind the scenes within the AVC system is that “all” the utilization and costs of the top 5% are redirected to the 95%.

For example, a typical person, in the 95%, may only go to a doctor 2 or 3 times a year.  However, a high-risk individual with multiple chronic conditions may go 2-to-3 times per month.  Basically, 3 visits per year versus 30 visits.  The AVC looks at the math and says, the average of the two is 15 visits; therefore, both pay for 15 visits per year! This creates many issues that very few people understand; and is how the AVC actually undermines the entire health care system, as it destabilizes the health insurance marketplaces for Individual and Employer plans, including Government and Non-Government Employers.

Example: 70% Silver Plan “How your price is pre-set by the AVC”:

A Silver Tier 70% Plan divides up the $10,000 current average per-person per-year spending on health insurance between the person buying the insurance (30%) and the insurance plan (70%); plus up-to 20% more added for the health insurance company for administering the program.  Therefore: a 40-something (or the Employer) should expect to spend ~$8,400/year ($700/month) per-person for a Silver 70% Plan, not counting the up-to $3,000 in expected expenses the person would pay.  A 20-something would be half that, ~$350/month, and a 60-something would be 1.5 times that, ~$1,050/month.

Note: Catastrophic Plans are EXEMPT from the 3:1 Pricing Ratio under PPACA, hiding the fact the Ratio is actually ~6:1 

Under PPACA; Catastrophic Plans are priced at ~50% less than the Standard 20-something rate, making a Catastrophic Plan, available only to an under-30 person, cost ~$175/month, compared to an almost identical Bronze (60%) Plan at ~$350/month.

The real issue is that we should never have eliminated the High Risk Pools when PPACA was rolled out in 2014.  We should have left the High Risk Pools in place for the 5%; and then, we would probably have far more affordable health insurance plans today, without everyone being forced into a high deductible health plans and having to pay $1,000’s before the health plan starts paying for non-preventive care health care services.

Unlike Medicare, why did we combine Medical & Rx Expenses?

PPACA has also had the unintended consequence of destabilizing the health care cost inflation rate due to combining the Medical and Prescription Drug Benefits within one (1) single Maximum-Out-Of-Pocket (MOOP) cost limit for Individuals, accelerated by the strict use of the AVC tool in plan design.  While Medical benefits costs had been the primary focus, Prescription Drug costs exploded in the last five years; and since they must be ‘combined’ within the Medical MOOP, the result has been skyrocketing health plan premiums, driven by prescription drugs costs.  In fact, today, there are many drugs that can satisfy a person’s entire annual MOOP in one (1) single fill, resulting in a full coverage health plan for the year.  People are then motivated to get as much care as possible during the plan year, while being covered at 100% for all medical care and prescription drug costs.

Once the use of the AVC as the de-facto design tool is addressed, eliminated would be best, health plans should be allowed to more closely mimic the Medicare Program.  Medicare and Medicare Advantage Plans have “separate” Medical and Prescription Drug benefits today, which allows for better management of the health care costs and long-term cost containment of the medical care inflation rate. Therefore, consideration should be given to allow health plans to “separate” Medical and Prescription Drug MOOPs, meaning one (1) MOOP for Medical services and one (1) MOOP for Prescription Drugs, even if the plans are still required to maintain one (1) total MOOP for the combined benefits, allowing for better cost control methods.

High Risk Pools

High-Risk Pools are probably the simplest, most well understood and agreed upon method for addressing the “affordability” of health insurance plans.  PPACA attempted to replace them with an incredibility complicated multi-faceted system, which completely imploded and failed.  The original PPACA design of the merging of the high risk pools into the greater population was estimated to have a 2%-to-4% cost increase impact on Individual health plan costs.  However, the reality is their integration has really turned the cost impact into a 20%-to-40% increase to health insurance plan costs in the Individual marketplaces.

The most important and most immediately impactful thing that can be done to make Individual health insurance plans more affordable is to re-establish a behind-the-scenes National/Federal High-Risk Pool for all marketplaces that is based on a risk-share model, meaning no unlimited billing by healthcare providers.

The simplest way to address the risk-share model is to have High-Risk Pool members bills paid at the Medicare reimbursement rate.  It would reduce the funding required; and only be the equivalent of adding just one more year of Baby Boomers into the Medicare enrolled population.  In fact, many of the Baby Boomers are probably the High-Risk Individuals today; therefore, they would be moved to Medicare reimbursement rates slightly ahead of schedule.

Example: Over-simplifying how a High-Risk Pool works, using historical CT data…

Pre-PPACA, the CT high risk pool had loses of ~$40 million dollars on less than 2,000 people enrolled that were charged back the insurance companies based on the number of people insured in the entire State, ~ 2 million people.  Therefore, the annual cost per person was $20/year!  Very reasonable!  Fast forward to today (adding inflation), and that would be ~$40/year per person.

Under PPACA, today, that $40 million would be divided up among the 100,000 people in the Individual insured market, not 2 million people.  Therefore, each person would have to pay ~$400/year to support those losses for the 2,000 people that were in the high-risk pool, who were moved to the Individual insurance marketplace.

But wait…there’s more… Since the cost is included in the price of health plans today, that means we have to adjust that payment by age!  For a 20-something, it’d be ~$200/year; and for a 60-something, it’d be ~$600/year.   Fast forward to today…  The $400/year would have grown to at least $800/year; and that means a 40-something would be paying $800/year more, while a 20-something pays $400/year, and a 60-something pays $1,200/year more to cover those loses. (3:1 Ratio)

To fix this issue going forward, we need to bring back the High Risk Pools; and we should take a holistic and multi-faceted approach, even thinking outside the box…

Holistically speaking, we should consider the following:

  • State High Risk Pools for lower claim amounts, maybe $250,000/person/year maximum exposure at the State level.
  • National High Risk Pool to cover above the State level of claims, maybe up-to $1 million/person/year maximum.
  • Cost-sharing Program with Providers and Pharmaceutical Firms for claimants that exceed $1 million/person/year; and we can mimic how Medicare for “cost-sharing” as a starting point. Providers and Drug Manufacturers should be part of the cost-sharing and high risk pool strategy by accepting Medicare Reimbursement Rates for people in the High Risk Pools.
  • Allow Employer Groups to participate in the High Risk Pools for their Employees, contingent that they can show reduced costs for other Employees and their Families.  This should motivate Employers to hire older and potentially high risk individuals, such as those recovering from addiction.