01/31/2012 10:56 am ET Updated Apr 01, 2012

Identifying Value In Health Insurance

Purchasing health insurance is often fraught with peril for consumers. The options can be unclear and confusing, yet the consequences of a poor choice can carry grave health and financial consequences.

Consumers Union, the policy and advocacy arm of Consumer Reports, conducted several studies to identify the obstacles facing consumers. A key finding is that consumers don't want the cheapest health plan they can find, but rather the best value plan they can afford. That is where it can get tricky, however. A consumer's notion of value is usually a sophisticated balancing act, including what services are covered by the plan and what share of costs the patient will have to pay.

The rub is that it is nearly impossible for most consumers to calculate health plan value. Traditional health plan summaries don't provide much insight into overall coverage provided by the plan. The discrete features of the plan -- deductible, coinsurance, copays, plan limits -- are too numerous and confusing to be calculated by the consumer into an overall coverage "number." Even plan features like the patient's "out-of-pocket maximum" can't meet this need because there are often too many exceptions.

The Affordable Care Act (ACA) has some key provisions to address this gap. In 2014, health plans sold to individuals and small businesses must conform to one of four levels of coverage called the "metal tiers." These tiers (platinum, gold, silver and bronze) represent the overall coverage or cost-sharing provided by the plan for a fixed set of medical services with platinum containing the most generous plans and the bronze the least generous. The ACA uses the concept of "actuarial value" to measure the overall financial protection offered by health plans in a standardized way. Even though the specific health plan features (like the deductible) will likely vary within a tier, the average, overall financial protection will be about the same. Our testing showed that these metal tiers made it significantly easier for consumers to navigate their options and make sound choices.

However, it remains to be seen how well the metal tiers will meet consumer's preference to identify value in their health insurance choices. The final regulation governing actuarial value has not yet been written. In order for the metal tier designation to be comparable across health plans, the regulation must include strong rules to standardize how actuarial value is calculated. Studies have shown that different models can produce very different actuarial values for the same plan design. For example, a "standard population" must be used when the overall financial protection is calculated. If this aspect of the calculation is allowed to vary each time the value of a plan design is estimated, the results will not be comparable across plans in a strong, apples-to-apples process.

Actuarial value -- along with the essential health benefits package -- will determine the level of coverage available to many consumers in 2014. A fair and robust regulation is needed to fill the gap that exists today and ensure that consumers can finally find the value in their health insurance choices. In turn, creating the tools that allow consumers to act as informed shoppers is a critical element in creating health insurance markets that are truly competitive.

The Consumers Union study referenced can be found here.