Monday, October 12, 2009

Addendum to my last post on the health insurance industry's complaints

Ezra Klein, blogging for the Washington Post has a link to the actual PwC study and offers some more analysis.

One of the other cost factors I neglected to mention is actuarial value. Briefly speaking, actuaries can make some assumptions about which health services a standard population would use, calculate how much those services would cost and run those costs through an insurance plan. That would produce an average percentage of how much of the costs would be covered by the insurance.

For example, Medicaid will cover all medically necessary care with zero cost sharing. Its actuarial value is 100%. A good employer sponsored plan will probably cover 80%-95% (going off my memory here) of incurred expenses. In other words, of your total medical bill, the insurance will pick up 80-95% of the tab. Of course, that will vary from person to person depending on what illness you incur and the terms of the contract. Almost all plans will sell you generic drugs cheaper than branded drugs, but if you have a rare disease, you will pay more. Some plans limit mental health care, so if you need that, you'll pay more. Some plans will have limited reimbursement for hospitalizations (e.g. a separate deductible you must meet, perhaps a maximum number of hospitalizations). Some plans have a lifetime limit on benefits, and if you have a very serious illness, you can quite easily meet a $2 million lifetime benefit, even though it sounds like a lot.

Insurance bought on the individual market has a far lower actuarial value. For the insurance plan I have, I would be surprised if the actuarial value were over 35%. Massachusetts mandates that bronze level plans (the cheapest you can buy if you're not a young adult) have an actuarial value of 56%, according to the PwC report. Actually, I thought it was more like 65%, and Massachusetts has young adult plans which I thought had an actuarial value of more like 50% or so, but PwC would probably know better.

Higher actuarial values cost more but protect you more. So, you will pay more, but you will get a lot more - and you won't have the illusion that your plan is protecting you when it doesn't. A lot of the exclusions I mentioned above will be curtailed

The Finance bill specifies a minimum actuarial value of 65%. That is actually quite low. It will have to do for now, but in the long run we want plans with an actuarial value of 75% and up to be available to everyone, with subsidies if need be.

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