Actuarial Standard of Practice No. 50

Determining Minimum Value and Actuarial Value under the Affordable Care Act

STANDARD OF PRACTICE

TRANSMITTAL MEMORANDUM

September 2015

TO:  Members of Actuarial Organizations Governed by the Standards of Practice of the Actuarial Standards Board and Other Persons Interested in Determining Minimum Value and Actuarial Value under the Affordable Care Act

FROM:  Actuarial Standards Board (ASB)

SUBJ:  Actuarial Standard of Practice No. 50

This document is the final version of ASOP No. 50, Determining Minimum Value and Actuarial Value under the Affordable Care Act.

Background

Section 1302 of the Affordable Care Act (ACA) establishes the use of an actuarial value to categorize health insurance plans into bronze, silver, gold, and platinum tiers, specify a minimum level of coverage, and help consumers compare different plan designs and costsharing provisions. Similarly, Section 1401 of the ACA added Section 36B to the Internal Revenue Code of 1986, which creates a minimum value requirement for employer-sponsored plans (defined in terms of the health insurance plan’s share of total costs). Although a practice note provides information on the subject of determining minimum value and actuarial value under the ACA, no guidance for actuaries on the subject exists other than the regulation. Therefore, the ASB requested that the ASB Health Committee explore a potential ASOP to provide guidance to actuaries performing these tasks. As a result, the ASB Health Committee issued a discussion draft in April 2014 to gather feedback on such a potential ASOP.

A question regarding whether an ASOP was necessary for this subject was posed in the discussion draft. This question generated comments on both sides of the issue. Following discussions among the reviewers—which included the task force, Health Committee, and ASB—the decision was made to issue an exposure draft.

Exposure Draft

The exposure draft of this ASOP was approved in December 2014 with a comment deadline of May 1, 2015. Fourteen comment letters were received and considered in making clarifications that were reflected in this final ASOP. For a summary of the issues contained in the comment letters, please see appendix 2. In general, the suggestions helped improve the clarity of the standard but did not result in substantive changes to the standard.

The ASB thanks everyone who took the time to contribute comments and suggestions on both the discussion draft and the exposure draft of this ASOP.

The ASB voted in September 2015 to adopt this standard.

Task Force on Actuarial Value/Minimum Value under the Affordable Care Act

Timothy J. Wilder, Chairperson

                     David V. Axene                                                   Donna C. Novak

                     Elaine T. Corrough                                             Ngoc Trang

                     Gregory G. Fann                                                John M. Stenson

                     Nancy F. Nelson

Health Committee of the ASB

Nancy F. Nelson, Chairperson

                      Robert M. Damler                                               Annette James

                      Shannon C. Keller                                              Donna C. Novak

                      Richard A. Lassow                                              Timothy J. Wilder

Actuarial Standards Board

Patricia E. Matson, Chairperson

                     Christopher S. Carlson                                        Thomas D. Levy

                     Maryellen J. Coggins                                           Barbara L. Snyder

                     Beth E. Fitzgerald                                                Frank Todisco

                     Darrell D. Knapp                                                  Ross A. Winkelman

The ASB establishes and improves standards of actuarial practice. These ASOPs identify what
the actuary should consider, document, and disclose when performing an actuarial assignment.
The ASB’s goal is to set standards for appropriate practice for the U.S.

Section 1. Purpose, Scope, Cross References, and Effective Date

1.1 Purpose

This actuarial standard of practice (ASOP) provides guidance to actuaries performing professional services with respect to determining the actuarial value (AV) of a health insurance plan and testing whether the minimum value (MV) requirement is met in accordance with the Affordable Care Act (ACA).

1.2 Scope

This standard applies to actuaries performing professional services with respect to calculating actuarial values and testing minimum value requirements in accordance with the ACA and related regulations, specifically for purposes of (1) categorizing individual and small group health insurance plans into metal levels; (2) testing whether employer-sponsored health insurance plans meet the federal minimum value
requirements; or (3) making any required certifications.

This ASOP does not apply to actuaries performing calculations of actuarial values for other purposes. For example, the calculation of an actuarial value used for converting allowed costs to plan-incurred costs when calculating plan-level premiums is not covered by the standard.

If the actuary departs from the guidance set forth in this standard in order to comply with applicable law (statutes, regulations, and other legally binding authority), or for any other reason the actuary deems appropriate, the actuary should refer to section 4.

1.3 Cross References

When this standard refers to the provisions of other documents, the reference includes the referenced documents as they may be amended or restated in the future, and any successor to them, by whatever name called. If any amended or restated document differs materially from the originally referenced document, the actuary should consider the guidance in this standard to the extent it is applicable and appropriate.

1.4 Effective Date

This standard will be effective for any actuarial work product covered by this standard’s scope issued on or after January 31, 2016.

Section 2. Definitions

The terms below are defined for use in this actuarial standard of practice.

2.1 Actuarial Value (AV)

A measure of the proportion of total allowed medical costs for a specified population that the health insurance plan is contractually obligated to pay.

2.2 AV Calculator (AVC)

Data and methodology released or approved by Health and Human Services (HHS) that is used to determine the AV of a health insurance plan.

2.3 AVC-AV

The AV calculated using the AVC, including any adjustments for nonstandard plan designs.

2.4 Essential Health Benefits (EHBs)

The specific items and services that the ACA requires issuers to cover in benefit plans offered in the individual and small group markets. EHBs must include any benefit defined by the Secretary of Health and Human Services. In addition, some EHBs may be defined by individual states.

2.5 Health Insurance Plan

A contract or other financial arrangement providing hospital, medical, prescription drug, dental, or vision benefits, including a self-insured employer plan.

2.6 Minimum Value (MV) Requirement

The minimum required AV for certain employer-sponsored health insurance plans, as defined by regulations issued pursuant to the ACA.

2.7 MV Calculator (MVC)

Data and methodology released by HHS that is used to determine whether the MV requirement is met.

2.8 MVC-AV

The AV calculated using the MVC, including any adjustments for nonstandard plan designs.

2.9 Non-Standard Plan Designs

Plan designs that include benefits not reflected in the AVC or MVC.

Section 3. Analysis of Issues and Recommended Practices

3.1 Use of AVC or MVC

The actuary should use the appropriate calculator when calculating the actuarial value.

HHS requires use of an AVC for certain health insurance plans offered in the individual and small group markets for the purpose of determining metal levels of coverage.

HHS and the Internal Revenue Service (IRS) require use of the MVC to determine whether an employer-sponsored health insurance plan meets minimum coverage requirements, unless it is determined that the safe harbor requirements established by HHS or the IRS are met.

3.2 Exceptions to the AVC

If a health insurance plan’s design is a non-standard plan design, the actuary should determine the plan’s AVC-AV using one of the following options:

a. adjust the inputs to the AVC in such a way that the results are consistent with the actual coverage being provided (i.e. estimating a fit of the plan design into the AVC); or

b. use the AVC to determine the AVC-AV for the plan provisions that are consistent with the calculator’s parameters and then make appropriate adjustments.

3.3 Exceptions to the MVC

If a health insurance plan’s design is a non-standard plan design and the safe harbor test is not met, then the actuary should determine the plan’s MVC-AV using one of the following options:

a. adjust the inputs to the MVC in such a way that the results are consistent with the actual coverage being provided (i.e. estimating a fit of the plan design into the MVC); or

b. use the MVC to determine the MVC-AV for the plan provisions that are consistent with the calculator’s parameters and then make appropriate adjustments.

3.4 Evaluating Non-Standard Plan Designs

The AVC and MVC do not accommodate all plan designs. In situations of a non-standard plan design, the ACA requires the actuary to evaluate the plan and to certify the value of the plan. When evaluating non-standard plan designs, the actuary should confirm that the data, methods, and assumptions used are consistent with those underlying the applicable AVC or MVC, as required by regulations. For example, the actuary should use a model that is based on data for a population that is consistent with the population underlying the applicable AVC or MVC, where possible.

3.5 Reasonableness of Assumptions for Non-Standard Plan Designs

The actuary should review the assumptions used for making adjustments for non-standard plan designs. These assumptions should be reasonable in the aggregate and for each of these assumptions individually. The actuary should determine whether these assumptions are reasonable based on the actuary’s professional judgment, using relevant information available to the actuary.

3.6 Unreasonable Results

In some circumstances, the AVC or MVC may, in the actuary’s professional judgment, produce unreasonable results. The actuary may use unreasonable results from the AVC or MVC if required to do so by regulators. In such cases, the actuary should document within the actuarial memorandum the nature of the unreasonable results.

When the AVC or MVC produces an unreasonable result for either a standard plan design or a non-standard plan design, the actuary should document the value of the unreasonable result, the plan design used to produce the AV before adjustments for non-standard plan design, why the actuary considered the result unreasonable, and by what authority the actuary was required to use the unreasonable result.

If the unreasonable result was after adjustment for a non-standard plan design, the actuary should document the approach used to develop the adjusted AV.

3.7 Documentation

The actuary should prepare and retain documentation in compliance with the requirements of ASOP No. 41, Actuarial Communications. The actuary should also prepare and retain documentation to demonstrate compliance with the disclosure requirements of section 4.1 of this ASOP.

The actuary should document results from the AVC or MVC and the plan design used to produce the AV before adjustments for non-standard plan design.

In addition, for a non-standard plan design, the actuary should document the approach used to develop the adjusted AVC-AV or MVC-AV. The actuary should indicate the data that was used and its source, the rationale for using that data, and how it was used to calculate the adjustments;

Section 4. Communications and Disclosures

4.1 Actuarial Certifications

When issuing an actuarial certification, the actuary should include the following information:

a. a statement that the actuary is a member of the American Academy of Actuaries, meets the Qualification Standards for Actuaries Issuing Statements of Actuarial Opinion in the United States promulgated by the American Academy of Actuaries, and has the education and experience necessary to perform the work;

b. a statement describing the actuary’s relationship to the issuer or the employer;

c. the purpose of the certification, including whether the certification is for an employer-sponsored health insurance plan(s) or for a plan(s) offered in the individual and small group markets;

d. the plan year for which the AVC-AV or MVC-AV certification applies;

e. a statement that the AVC-AV or MVC-AV was determined in accordance with the ASOPs established by the ASB and with applicable laws and regulations; and

f. a certification that the plan meets the minimum requirement for the MVC-AV determination in the case of an employer-sponsored health insurance plan; or a certification that the metal levels were appropriately assigned based on applicable law, in the case of plans offered in the individual and small group markets.

When issuing actuarial certifications related to work subject to this standard, the actuary should also produce an actuarial memorandum.

4.2 Other Communications and Disclosures

When issuing other actuarial communications related to work subject to this standard, including the actuarial report accompanying a certification, the actuary should refer to and follow ASOP Nos. 23, Data Quality, and 41.
In addition to the disclosures required by ASOP Nos. 23 and 41, the actuary should include the following, as applicable:

a. for a non-standard plan design, the approach and assumptions used to develop the adjusted AVC-AV or MVC-AV. The actuary should indicate the data that was used and its source, the rationale for using that data, and how it was used to calculate the adjustments;

b. a statement that the AVC-AV or MVC-AV is based on prescribed methodology and, therefore, may not reasonably reflect the actuary’s estimate of the portion of allowed costs covered by the health insurance plan;

c. the disclosure in ASOP No. 41, section 4.2, if any material assumption or method was prescribed by applicable law (statutes, regulations, and other legally binding authority);

d. the disclosure in ASOP No. 41, section 4.3, if the actuary states reliance on other sources and thereby disclaims responsibility for any material assumption or method selected by a party other than the actuary; and

e. the disclosure in ASOP No. 41, section 4.4, if, in the actuary’s professional judgment, the actuary has otherwise deviated materially from the guidance of this ASOP.

Appendix 1 – Background and Current Practices

Note: This appendix is provided for informational purposes only and is not part of the standard of
practice.

Background

Section 1302 of the Affordable Care Act (ACA) establishes the use of actuarial value to categorize health insurance plans into bronze, silver, gold, and platinum metal levels. Section 1401 of the ACA adds Section 36B to the Internal Revenue Code of 1986, which creates a minimum value requirement for employer-sponsored health insurance plans.

In certain circumstances, ACA regulations require an actuary who is a member of the American Academy of Actuaries to certify that the actuarial value calculation is in accordance with generally accepted actuarial principles and methodologies.

Section 1302 of the ACA establishes the use of actuarial value (AV) to help consumers compare different plan designs and cost-sharing provisions. Similarly, Section 1401 of the ACA added Section 36B to the Internal Revenue Code of 1986, which creates a minimum value (MV) requirement for employer-sponsored health insurance plans. The AV of a health insurance plan is a measure of the percentage of health care costs, on average, that the plan is expected to cover. AV is a measure of the level of a plan’s cost sharing provisions, whereas MV is the minimum AV that certain employer-sponsored health insurance plans must provide.

In the individual and small group markets, the AV is defined as the ratio of (i) total expected payments by the plan for essential health benefits (EHBs) computed in accordance with the plan’s cost-sharing provisions for a standard population over (ii) the total allowed costs for the EHB that the standard population is expected to incur. Benefits that are not considered part of EHB are not included in the AV calculation.

AV is a key concept in the ACA. AV is used to categorize health insurance plans sold in the individual and small group markets into coverage tiers. These tiers are referred to as “metal levels”—bronze, silver, gold, and platinum—with AVs of 60 percent, 70 percent, 80 percent, and 90 percent, respectively. Federal tax credits for certain individuals and families with qualifying incomes are tied to the cost of a silver plan. Federal cost-sharing reductions for certain individuals and families with qualifying incomes are also defined in terms of AV.

The benefits offered by applicable large employers will be assessed to see whether or not they can be considered to meet the “minimum value” requirement, currently set at 60 percent. In the employer market, the MV requirement is a component of the determination of whether an employer is subject to a penalty.

Current Practices

The AV Calculator (AVC) and Minimum Value Calculator (MVC) were developed using standardized populations that are applied across all geographic locations. The calculators take into account cost-sharing parameters; the AVC accounts for induced demand in the underlying assumptions while the MVC does not. Beginning in 2015, a state may elect to utilize state-specific tables in the AVC, with HHS pre-approval.

The AV calculated with the AVC and MVC may differ from AVs that may be used in pricing, and several items are reflected in health insurance plan premiums that are not considered in the Federal AVC/MVC. These items include, but are not limited to, provider negotiated payments, administrative costs, and the impact of care management and utilization management programs. In addition, the calculators use a standard population with a prescribed nationwide data set and specific assumptions on price and utilization, which may differ significantly from a specific health insurance plan’s population, price and utilization assumptions, and other assumptions used to develop premium.

The AVC and MVC are not intended to be used as pricing tools. As a result, two plan designs with the same Federal AV/MV may not have the same premium for the reasons stated above. The intent of the AV and MV calculation process is to apply a standardized population and cost structure.

Additional Resources

The following resources may assist in furthering actuaries’ understanding of AV and MV.

Appendix 2 – Comments on the Exposure Draft and Responses

The exposure draft of proposed ASOP, Determining Minimum Value and Actuarial Value under the Affordable Care Act, was issued in December 2014 with a comment deadline of May 1, 2015. Fourteen comment letters were received, some of which were submitted on behalf of multiple commentators, such as by firms or committees. For purposes of this appendix, the term “commentator” may refer to more than one person associated with a particular comment letter. The Task Force on Actuarial Value/Minimum Value under the Affordable Care Act and the Health Committee of the Actuarial Standards Board carefully considered all comments received, and the Health Committee and ASB reviewed (and modified, where appropriate) the changes proposed by the task force.

Summarized below are the significant issues and questions contained in the comment letters and the responses.

The term “reviewers” in appendix 2 includes the Task Force, the Health Committee, and the ASB. Also, unless otherwise noted, the section numbers and titles used in appendix 2 refer to those in the exposure draft.

Click here to view Appendix 2 in its entirety.

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