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1 The Affordable Care Act 1302(d)(1) defines the levels of health plan coverage for the purpose of meeting the following main objectives: To establish the minimum level of coverage an applicable individual must have under the Individual Mandate or be subject to a penalty To introduce health plan coverage standardization to enable individuals and small businesses to compare, select and purchase insurance through state exchanges or other markets. To set the a baseline for tax credits and subsidies to help offset premium costs for families earning less than 400% of the Federal Poverty Line when they acquire coverage through State Exchanges The law specifies four metal levels of coverage that provide benefits based on their distinctive actuarial value (AV) as follows: BRONZE A plan that provides equivalent to 60% of the full AV of This sets the lowest or minimum level. SILVER A plan that provides equivalent to 70% of the full AV of GOLD A plan that provides equivalent to 80% of the full AV of PLATINUM A plan that provides equivalent to 90% of the full AV of The May 14, 2012, IRS Notice states that the IRS intends to issue regulations on determining minimum value. The notice outlines ways in which the method for minimum value determination is to be different than how actuarial value is determined for Qualified Health Plans (QHPs). This distinguishes QHPs and employer sponsored plans in their levels of standardization and the populations covered. The Notice stated that employer sponsored, self insured and insured large group plans are not required to conform their plans to any of the essential health benefits (EHB) benchmarks that Health and Human Services (HHS) intends to propose to apply to QHPs. These employer sponsored plans need not offer all of the EHBs or even cover each of the ten statutory EHB categories. 1 drop/n pdf Page1

2 Actuarial value (AV) On February 24, 2012, HHS issued the Actuarial Value and Cost Sharing Bulletin 2 to provide information and solicit comments on the HHS proposed approach to define AV for QHPs and other nongrandfathered coverage in the individual and small group markets. AV is a measure of a health planʹs coverage of expected health care costs and serves as a general guide regarding a health planʹs generosity. AV is defined as a relative measure against the coverage of the EHB for a standard population. AV is expected to be used to compare health plans with different levels of cost sharing designs and as a method for consumers to understand relative plan value. pharmacy benefits; and laboratory and imaging services. AV is generally calculated by computing the ratio of: (i) the total expected payments by the plan for EHB, adjusted for the plan s costsharing rules (i.e., deductibles, co insurance, co payments, out of pocket limits), for a standard population; over (ii) the total costs for the EHB of the standard population (not defined) is expected to incur, rather than the population that a plan actually covers. (iii) HHS intends to permit a de minimis variation of plus or minus 2% (e.g. a bronze plan could have an actuarial value between 58% and 62%). The November 2011 research published by the HHS Office of the Assistant Secretary of Planning and Evaluation (ASPE) titled ʺActuarial Value and Employer Sponsored Insurance 3ʺ, outlined four core benefits and services categories that are the greatest contributors to a health plan s AV: physician and mid level practitioner care; hospital and emergency room services; 2 bulletin.pdf 3 ESI/rb.pdf For example, a plan with a 70% AV would be expected to pay, on average, 70% of a standard population s expected medical expenses for the EHB. The individuals covered by the plan would be expected to pay, on average, the remaining 30% of the expected expenses in the form of deductibles, co payments, and coinsurance. To satisfy the minimum value requirement [IRC 36B(c)(2)(C)(ii)], a health plan s share of the total allowed costs of benefits provided under the plan 4 must equal or exceed 60% of such costs. ʺ[P]ercentage of the total allowed costs of benefits provided under a group health plan is determined 4 Affordable Care Act 1302(d)(2)(C) Page2

3 under rules to be proposed by HHS 5. The determination of whether an employersponsored plan provides minimum value will be based on the AV rules with appropriate modifications. Proposed Minimum Value Determination Approaches IRS was seeking comment regarding the three approaches outlined in the notice. (A) Calculator Approach The actuarial value calculator (AV calculator), or a minimum value calculator (MV calculator), is to be made available that would permit an employer sponsored plan to enter information about the plan s benefits, coverage of services, and costsharing terms to determine whether the plan provides minimum value. The data underlying the MV calculator (which would be designed for use by employer sponsored, self insured plans and insured large group plans) is expected to be claims data reflecting typical self insured employer plans. This calculator is for plans that have standard cost sharing features. An employer sponsored plan would be able to input a limited set of information on the benefits offered under the plan and specified cost sharing features (for example, deductibles, co insurance, and maximum 5 Affordable Care Act 1302(d)(2) (A) & (B) out of pocket costs) for the four core categories of benefits: physician and midlevel practitioner care, hospital and emergency room services, pharmacy benefits, and laboratory and imaging services. The calculator would also take into consideration the annual employer contributions to an HSA or amounts made available under an HRA, if applicable. (B) Checklist Approach An array of design based safe harbors checklists would be made available to ascertain if employer sponsored plans provide minimum value. The safe harbor checklists would be used for plans that cover all of the four core categories of benefits and services and have specified cost sharing amounts. Each safe harbor checklist would describe the cost sharing attributes of a plan (such as deductibles, copays, co insurance and maximum out of pocket costs) that apply to the four core categories of benefits and services. An employer sponsored plan providing the four core categories would be treated as providing minimum value if its cost sharing attributes are at least as generous as any one of the safe harbor checklist options. (C) Actuarial Certification Approach Plans with nonstandard features such as quantitative limits on any of the four core categories of benefits (e.g. a limit on the number of physician visits or covered days in the hospital) would seek an appropriate certification by a certified actuary. There are two approaches: Page3

4 1. using a calculator to derive an initial value and then engage a certified actuary to make appropriate adjustments that take into consideration any nonstandard features 2. engaging a certified actuary to determine the plan s actuarial value without the use of a calculator. The certified actuary performance must be in accordance with prescribed continuance tables, Actuarial Standards of Practice established by the Actuarial Standards Board, and other conditions that may be prescribed. does not need to cover each of the categories of EHBs nor conform the employer s plans to any of the EHB benchmarks that HHS intends to apply to QHPs, but would be permitted to take into account all benefits provided by the plan that are included in any of the EHB benchmarks would be permitted to add to the plan s value the employer contributions to an HSA and amounts made available under an HRA using a similar method used by QHPs that are offered through a SHOP Exchange 8 Minimum Value Determination Assumptions The minimum value of an employersponsored self insured plan and insured large group plan: would be determined in the same manner as AV for QHP might be valued using a comparison to claims data reflecting typical selfinsured employer plans, which would be based on continuance tables 6 published specifically for use by such plans 7 6 A health insurance continuance table is a distribution of annual paid claims arranged in a format that shows the amount of claims paid at each increasing level of expenditure, adding up to the total amount of expenditures for a covered group of enrollees. 7 The use of claims data reflected in the continuance tables only for the purpose of determining minimum value, and does not imply that a plan must provide a particular set of benefits. 8 Affordable Care Act 1311 (b) AMERICAN HEALTH BENEFIT EXCHANGES. (1) IN GENERAL. Each State shall, not later than January 1, 2014, establish an American Health Benefit Exchange (referred to in this title as an Exchange ) for the State that (B) provides for the establishment of a Small Business Health Options Program (in this title referred to as a SHOP Exchange ) that is designed to assist qualified employers in the State who are small employers in facilitating the enrollment of their employees in qualified health plans offered in the small group market in the State; Page4

5 Continuance Tables Two types of continuance tables would be made available for use by employersponsored plans. 1. HHS intends to publish continuance tables based on claims representing the entire range of EHB benchmark benefits and population data for employer sponsored and individual market plans, with permissible state or regional adjustments to the standard population, utilization and pricing. These continuance tables would be incorporated into the AV calculator and would be used by QHPs and employer sponsored plans in the small group market. Final regulations regarding minimum value and actuarial value have not been published and related tools have not been made public. These are core tenants to the implementation of the ACA beginning in 2014 and should be thoroughly understood and properly applied by plan sponsors of self insured plans and insured large group plans. 2. HHS intends to publish continuance tables based on claims and population data for typical selfinsured, employer sponsored plans. This in effect recognizes the differences in populations. This second set of continuance tables would be incorporated into an MV calculator, which would be provided and could be used to calculate the actuarial value of an employersponsored self insured plan or an insured large group This set of continuance tables would not include claims or population data for plans that are required under the law to provide EHBs or to meet state benefit mandates. This document is provided as an informational summary regarding the subject matter by and it is intended for general information purposes only and should not be considered or perceived as benefit, legal, tax or regulatory advice. The contents are neither an exhaustive discussion nor do they purport to cover all aspects or developments related to the subject matter. Chao & Company, Ltd. has no obligation to update this document further. Readers should consult with their legal counsel, tax advisor and benefit consultants to determine how this subject matter may relate to or impact their specific situations Page5