We’ve looked at how Obamacare could affect individuals, and we’ve looked at how it might affect the companies offering (or not offering) insurance to their employees. But what about the health plans themselves? What’s changing about the actual product the public’s getting a shot at?
One thing to remember is that the primary source of most health insurance plans, the large group market, is not experiencing a dramatic shift. Many of the new requirements being placed on plans don’t apply to large group offerings. This is, in part, due to the fact that the large group market has worked relatively well. The insurance that people tend to get through large employers has, historically, been generally pretty solid. And, as such, politicians wanted to make sure that they didn’t do anything to screw that market up.
However, insurance companies are going to see major differences in the types of plans they can offer on the individual and small group markets, as well as new requirements about how they spend their money and new taxes.
What do the Metal Tiers Mean?
One of the biggest changes to individual and small group health plans is the new metal tier system employed in the exchanges. On the surface, it’s a pretty simple method for categorization that should help consumers shop. Bronze plans are cheaper and have less coverage, platinum plans are pricey but offer more coverage. But what do those metal tiers really mean?
In order to understand the metal tiers, we’ll have to take a quick look at actuarial science. The actuarial sciences are, in essence, how insurance companies figure out what to charge people. Let’s use a hypothetical. Two identical twins, Lou and Harry, are both 30-years-old and the picture of good health. They both walk into a nearby insurance office looking to purchase life insurance. The only real difference between Lou and Harry is that Harry’s favorite hobby is shark fighting, a rare sport wherein people jump into the ocean, put on blindfolds, and do battle with Great White sharks using naught but a steak knife. Dangerous, sure, but it’s Harry’s passion, so who are we to criticize?
If you’re an insurer, you’re clearly going to charge Harry higher premiums for his life insurance. Both brothers appear set to live into their 80's based on their health alone, but Harry’s penchant for fighting sharks with a blindfold on is an extreme risk. He’s more likely to die suddenly, so you’re going to need to charge more to make offering him life insurance a transaction that’s most likely going to be profitable for you.
And the way you determine just how much to charge Harry is through actuarial science. Basically, actuaries know how to tally up all of the different risk factors involved (using some fairly complicated math) and use that to determine how long they expect Harry to live. And, based on that number, an insurer can figure out what to charge in premiums that will allow them to turn a profit before Harry bites it (or gets bitten, as it were). Of course, Harry might die sooner than you’re expecting and cost you money, but he might also prove astonishingly adept with that steak knife and live much longer, in which case you’ll profit more than expected. In the end, provided you have a large enough customer base, things should even out and your margins will work out.
The same principal applies to health care. Insurance companies employ actuaries who consider all sorts of different factors and try to figure out how many covered medical costs a person or family will rack up over the course of the year. Then, the premiums for the plan are based on those costs.
Of course, anyone who’s ever shopped around for a plan knows that the premiums are connected to other things. If you’re looking to keep your monthly payments down, you used to be able to just get a cut-rate plan with a sky-high deductible and massive copays. That’s because another way health insurance companies adjust their risks is through cost-sharing. By getting policy holders to pay part of their costs, they can further limit their risk. As such, each plan has an “actuarial value.” This is what portion of expected medical costs the plan would cover assuming the policy holder’s medical costs were consistent with what the actuaries predicted. So, a plan with a 75 percent actuarial value would cover ¾ of medical costs, with the policy holder covering the last ¼ through copays, deductibles, and coinsurance. Note that this is separate from premiums, that’s just what you pay to get the plan.
Right, But About Those Metal Tiers…
So, behind the metal tiers is a very simple set of actuarial values. A Bronze Plan has an actuarial value of 60 percent, a Silver Plan 70 percent, a Gold Plan 80 percent, and a Platinum Plan 90 percent. So, if you get a bronze plan, you should, hypothetically, end up paying 40 percent of your total covered medical costs on top of your premiums, through whatever cost-sharing devices the plan has in place. It’s important to remember, though, that these are all projections. If you have a bronze plan but you only go to see the doctor once, when you have a cold, and get some antibiotics, odds are good that you’re gonna end up paying even more than 40 percent. You'll be under your deductible, pay a copay, you might end up paying 90-100 percent of your medical costs that year. However, if you get hit by a bus and need $2.5 million of life-saving surgery, you’ll hit your out-of-pocket maximum pretty quick and end up paying WAY less than 40 percent of your costs. Different plans may structure themselves different to hit these standards, with bigger or smaller copays or deductibles, and companies were allowed to fall within plus or minus two percent on the values, but the essential use of the metal tiers was to standardize insurance offerings in a way people could understand.
The new law also includes a number of other new requirements for insurance plans, and some other de facto changes will come as a result. One major policy element that should have a major effect is that the individual mandate doesn’t just require that someone has coverage. In order to avoid paying the tax penalty, you’ll need a plan with at least a 60 percent actuarial value (with a few specific exceptions for certain people). As such, it’s unlikely that any health insurance plans offered on the exchanges are going to fall below that as no one’s likely to want to pay for an insurance plan and then still owe the government a tax penalty for being effectively uninsured. This could even spill over into the large group market as well. Even though those plans are specifically tailored to individual companies and aren’t subject to any specific requirements, it’s hard to imagine an employer offering a plan that would fall short of what their employees would need to avoid tax penalties. And, more importantly, if your employer-sponsored plan has an actuarial value under 60 percent, you’ll still be eligible for subsidies through the exchange. And if you use those subsidies, your employer would take their own tax hit if they have more than 50 full-time employees.
Another major change is that new government rules standardize the calculation of actuarial values. In the past, actuarial values would be calculated on a per-case basis. For a large business, they would be based on the people working there. For an individual plan, it was based on just you. Now, with the individual and small group markets getting thrown together into one large risk pool, any individual, family, or small business in the same region is going to have the same levels used to calculate actuarial values. And it’s not going to include an individual’s health status, marking a major change from past industry practice.
There’s also a new set of standards for what health plans on the individual and small group market have to cover. There are new essential health benefits, including basics like emergency room care and basic preventive care, which are required in every plan by the federal government. And there’s also a second set of benefits specific to each and every state that will include other types of care not listed with the federally required essential health benefits.
What’s This All Mean?
In the end, many of these changes are what’s driving the predicted premium spikes in many states. Basically, the plans that insurance companies were offering had to meet certain minimum standards, and people wouldn’t have the option to pay less for the old, cut-rate plans with almost no coverage they used to be able to get. For the nation’s young, who are relatively healthy and unlikely to utilize much of their coverage, they’re gonna pay a lot more. However, the nation’s hospital that may have been eating the costs of young invincibles who assumed they didn’t need much coverage, it could work out fairly well.
Either way, the metal tiers should standardize the basics of shopping for health plans in a new way.
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