Actuarial Value (AV) is a pretty basic concept, but you need to think about it in terms of insurance. What is insurance? It is a group of people paying money into a pot (premium) where some of the people will receive more money than they put in and some will receive less, and the insurance company keeps the difference but no more than the Minimum Loss Ratio (MLR, to be defined on a future Monday) allows. In the case of health insurance, most will receive less than they put in, some will receive more and a select few will receive a lot more.
So, Actuarial Value is the percentage of overall medical expenses that an insurance plan covers for the average individual. In terms of PPACA, the silver plan has a 70% AV. This means, for the average person, a silver plan will cover 70% of all of their medical costs. The key point here is that it is an average. Some people will cover greater than 30% of their medical expenses on a silver plan and some will cover less.
So, how can we be sure that one silver plan is calculated the same as another plan from company to company? The government has created an Actuarial Value calculator to equalize the measurements. The government has created leeway of 2% each way so a silver plan can be from 68% to 72% Actuarial Value according the government calculator.
How do insurance plans change their AV? They have the ability to change the deductible, co-insurance, out of pocket maximum and copays.
More to come…