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Affordable Care Act plans provide risk protection, but use of ratings can be misleading

Most relatively healthy Affordable Care Act plan consumers pay more out-of-pocket than they may have thought based on the rating level — from bronze to platinum — of coverage purchased, according to a new study led by Stanford health policy researchers.

In the marketplace of health insurance established under the Affordable Care Act, each plan is given a metal to represent its level of coverage. These levels are intended to provide standardized information on coverage generosity to help consumers choose among plans.

For example, for bronze level plans, with a rating of 60 percent, enrollees in these plans as a group pay 40 percent of covered costs out-of-pocket. Many consumers may believe that a rating of 70 percent, for a silver plan, may mean they only need to pay 30 percent, personally, of covered health costs out-of-pocket.

Yet these population level ratings are very different than the actual out-of-pocket costs paid by individual health consumers, a group of Stanford health policy researchers found in a new Health Affairs study.

By simulating out-of-pocket spending for bronze, silver and gold marketplace plans — those having values of 60 percent, 70 percent and 80 percent, respectively — they found that while marketplace plans significantly reduce exposure to the financial risk of a catastrophic illness, the use of these percentage-based "actuarial" values can be misleading. For the vast majority of consumers, the proportion of covered spending is likely to be far less than their actuarial values.

“Many Americans may find themselves not using their health insurance plan in a given year, because they didn't get sick,” said Maria Polyakova, PhD, an assistant professor of health research and policy and lead author of the paper.

In fact, only when annual total health care spending (reflecting use of health services) exceeds $16,500 for bronze plans, $19,500 for silver plans, and $21,500 for gold plans, do plans in these metal tiers cover the proportion of costs matching their actuarial values.

Marketplace plans provide relatively comprehensive coverage for the small proportion of people who experience extremely high health care spending, the authors wrote. But the vast majority of enrollees experience relatively little direct benefit from their coverage in any given year because they must pay most of their services out of pocket because their expenses fall below the deductible limits.

But Polyakova, who is also a faculty research fellow at the National Bureau of Economic Research, told me that it’s important not to conclude that purchasing health insurance is a waste of money for the young and healthy.

“Indeed, most working age adults do not use much health care,” she said. “The idea of health insurance, however, is to protect household finances in those cases when someone does get sick and needs expensive care. In this paper, we find that for many consumers, marketplace plans are likely to provide valuable risk protection.”

The mismatch between expected and experienced coverage for the majority of people who have low health care expenditures is one factor that may have inhibited enrollment in marketplace plans among relatively healthy people, the authors wrote, a phenomenon that could have contributed to marketplace instability.

“More generally, a weakness of using actuarial value is that doing so distracts consumers from the key purpose of insurance, which is financial risk protection,” said Polyakova and co-author Kate Bundorf, PhD, an associate professor of health research and policy and chief of the Division of Health Services Research.

“Policymakers should consider alternative ways of communicating plan generosity that more accurately convey to consumers their likely out-of-pocket spending in a plan and how much risk protection plans provide,” they wrote. “Moreover, it may be important and valuable to emphasize the risk protection value of plans in the public debate.”

One fairly easy fix, Polyakova said, would be for healthcare.gov to show consumers their expected spending under different “sick” and “healthy” scenarios. Currently, the health site asks consumers whether they expect to be sick or healthy and then shows which out-of-pocket costs would result. But it doesn't show people who expect to be healthy what would happen to their spending if they did get sick, she said.

Previously: Health care fixes possible, Stanford scholars write and The future of Medicaid and Medicare: A Q&A with Stanford Health Policy scholars
Photo by kschneider2991

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