Guest Article

(From the April 23, 2012 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

HHS Releases Approach to Be Taken in Determining Actuarial Value

The Patient Protection and Affordable Care Act (Act) requires the Department of Health and Human Services to determine how the actuarial value of qualified health plans (QHPs) and other nongrandfathered coverage in the individual and small group markets will be calculated. A recently released Bulletin describes the Department's proposed approach, and requests comments on the proposal.

Actuarial Value of Health Plans under the Affordable Care Act

The Act requires issuers of non-grandfathered health plans (inside and outside of the Exchange) in the individual and small group markets to assure that any plan offered includes the essential health benefits (EHB) package and, with only limited exception, meets a distinct level of coverage (i.e., described as the bronze, silver, gold or platinum level). The EHB package must be equal in scope to the benefits provided under a typical employer plan and must include ten specifically identified benefits/services (e.g., emergency services, hospitalization, prescription drug, preventive services, pediatric services, etc.). Each State will be allowed to select a benchmark plan that reflects the benefits provided under a typical employer plan in their State. A plan's actuarial value (AV) is based on its coverage of the EHB for a standard population. As explained in the Bulletin:

The Bulletin emphasizes that the calculation is based on the provision of EHB to a standard population, not the population covered by the plan, since the AV is expected to be used by consumers in comparing the relative value of plans with different cost sharing designs. A bronze level plan requires an AV of 60 percent, a silver level plan requires an AV of 70 percent, a gold level plan requires an AV of 80 percent, and a platinum level plan requires an AV of 90 percent.

Hand-in-glove with the calculation of AV is the requirement for issuers to reduce cost sharing on EHB for individuals with household income below 400 percent of the Federal Poverty Level (FPL) who are enrolled in a QHP in the individual market through an Exchange. These cost-sharing reductions are designed to have the effect of achieving certain AVs and, as a result, the same definitions and calculations will apply, the Bulletin explains.

Proposal for Calculating Actuarial Value

The Bulletin lays out the basic framework for regulations it expects to propose on defining AV and how the cost sharing reductions will achieve certain prescribed AVs. Key features of the proposal are:

Proposal for Reduction of Cost Sharing

The Act also requires issuers to reduce cost sharing on EHB for individuals with household income up to of 400 percent of the FPL who enroll in a silver-level QHP in the individual market through an Exchange. The reduction is made first by reducing the maximum out-of-pocket limit, then by reducing cost sharing in the form of deductibles, coinsurance, or copayments. The Federal government is required to make payments to the issuer equal to the value of the reductions. Under the Department's proposal, eligible individuals will offered variations of the silver plan QHPs with the cost-sharing structures modified to reflect the AV for which the individual is eligible. The individual would pay only the amount of cost sharing in the modified silver plan in which the individual is enrolled, while the Federal government would make monthly payments in advance to the issuer, with a reconciliation against the actual cost-sharing reduction amounts at year end (similar to the Medicare Part D low-income subsidy program).

The reduction in cost-sharing will increase the AV of the plan, but the Act limits the maximum permissible AV level. Due to that limitation, the Bulletin explains that no reduction will be made for individuals with income between 250 and 400 percent of FPL. It proposes an annual process for determining the reduction at lower income levels (which will be based on benefit and payment parameters issued annually by the Department).

The Bulletin explains that issuers of QHPs will be required to submit, along with each standard silver plan they propose to offer through the Exchange, three variations of that standard silver plan to match the Act's three levels of cost-sharing reductions (i.e., reductions for individuals with household income between 100 and 150 percent of FPL, 150 and 200 percent of FPL, and 200 and 250 percent of FPL).

Further, for the silver plan variations, cost sharing across a particular benefit or provider would need to remain the same or decrease as the variations increase in AV. For example, if the co-payment on an emergency room visit at a particular university hospital is $30 in the 73 percent AV silver plan (for those with household income between 200 and 250 percent of FPL), it would need to be $30 or less in the 87 percent AV silver plan (for those with household income between 150 and 200 percent of FPL). Similarly, if the co-payment was reduced to $20 in the 87 percent AV silver plan, it could be no more than $20 in the 94 percent AV silver plan (for those with household income between 100 and 150 percent of FPL). Issuers would be permitted to vary only the cost sharing structures—not the benefits or provider network—of each variation of the standard silver plan. An enrollee in any silver plan variation, therefore, will have access to the same benefits and providers as under the standard silver plan, the Bulletin explains.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.220.2692, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955. Copyright 2012, Deloitte.