What does it mean to standardize health insurance plans, and how does it help consumers?

Often people who buy health insurance have difficulty comparing health plans based on different benefits and out-of-pocket costs. In addition, it is often difficult to know, even once a person has a health plan, the entitled benefits and costs of services. One way to address this problem is to standardize the types of benefits and cost-sharing in health plans.

Beginning in 2014, private health insurers will need to meet new requirements for standardizing health insurance plans. Research has found that when people have too many health plans to choose from, it can be confusing. Insurers may also use different benefits in health plans to attract and enroll healthier people and avoid individuals with expensive health conditions. Standardization will help individuals and businesses make better-informed comparisons between different insurance plan options and also help guard against insurance company efforts to cherry pick the healthiest people. 

How will health plan standardization work? 

Under the Affordable Care Act (ACA), insurers will be required to offer plans that fit within four levels of coverage: bronze, silver, gold and platinum. Insurers don't have to offer plans in all four levels, but within the health insurance Exchanges, all insurers must offer at least one silver and one gold plan.

Each plan level must cover the same set of minimum essential health benefits - greater detail on these benefits will be determined by the Department of Health and Human Services (HHS). But while the scope of benefits will be the same among the plans, the value of those benefits will vary across the bronze, silver, gold and platinum levels. This means the amount of cost-sharing required will differ in those tiers. Bronze plans will have the least generous coverage with more out-of-pocket costs for enrollees, and platinum plans will have the most generous benefits.

However, no health plan will be allowed to charge cost-sharing - including deductibles, co-payments or co-insurance - greater than the limits for high-deductible plans (in 2010, the limit was $5,950 for an individual and $11,900 for a family). And health plans for small businesses are barred from charging deductibles greater than $2,000 per year for individual coverage or $4,000 per year for family coverage (this amount will be annually adjusted for inflation). No health plan can apply a deductible or any cost-sharing for certain preventive health services.

How will the levels of coverage differ? 

The four levels of coverage - bronze, silver, gold and platinum - are based on actuarial value, a measure of the level of financial protection a health insurance policy offers. It indicates the percentage of health costs that a health plan would pay for an average person. The four levels provided in the ACA are illustrated in the chart below. 

For a bronze plan, the insurance would cover 60 percent of all health care costs for an average person. Enrollees, on average, would be responsible for paying 40 percent of the costs. For a platinum plan, an average individual would pay 10 percent out-of-pocket for their covered benefits and the insurer would pay 90 percent. However, individuals with high-cost health conditions could end up paying significantly more than the average person. For an example of how actuarial value will look on the Federal Employee Health Benefit Plan, see here. 

Actuarial value is different from the premium for the health plan. Premiums for different plans at the same level will vary from one insurer to another, based on the overall use of services by enrollees, the prices of health care services negotiated by the insurer, and how the plan controls the services its enrollees use.

In addition to these four levels of coverage, some individuals will be able to purchase catastrophic plans with an even lower actuarial value. Catastrophic plans will cover essential health benefits but have high deductibles. Only young adults under 30 and individuals exempted from the individual mandate because they cannot find affordable insurance are allowed to purchase catastrophic plans.

How do these plan levels work with insurance subsidies for low- and moderate-income people?

Starting in 2014, the ACA provides assistance to low- and moderate-income people up to 400 percent of the federal poverty level (FPL) (about $88,000 per year for a family of four) who need help paying insurance premiums and out-of-pocket expenses. The amount of premium assistance each individual or family receives is related to the coverage tiers. The subsidy is based on the premium for the second lowest-cost silver plan available. A silver plan will cover 70 percent of the average costs, with the enrollee paying, on average, 30 percent. However, if an individual decides to purchase a gold or platinum plan, he or she will need to pay the difference between the premium credit amount and the cost of the more expensive plan. This may be a good choice, since the person will get a more generous level of coverage of, on average, 80 percent of costs.

Individuals and families under 250 percent FPL (about $27,000 for an individual and $55,000 for a family of four) are also eligible for sliding scale cost-sharing credits. This, in addition to premium credits, will help defray any co-payments, co-insurance and deductibles. To get the cost-sharing credits, the individual has to enroll in a silver plan, and would then get assistance with the out-of-pocket expenses (meaning they would pay less than the average 30 percent of health care expenses).

What are the challenges consumers may face with standardized choices?

For people who have high health care costs there are significant implications for the plan level they choose. Gold and platinum level plans will have lower deductibles, co-payments and co-insurance for health care services, but will likely have higher monthly premiums. Conversely, bronze and silver plans will have lower monthly premiums, but could expose consumers to significant out-of-pocket costs for each health care service over time.

If people with high medical expenses gravitate to platinum plans because they cover more out-of-pocket costs, and healthy people often choose bronze plans because the premiums are lower, over time the premiums in the platinum plans will increase. Because premiums reflect the cost of providing care, when a health plan attracts sicker people, it drives premium prices higher, causing healthier individuals to seek coverage elsewhere, which add to the problem of increasing premium costs - this is called adverse selection. The ACA provides some tools to mitigate this problem, like preventing health plans from charging higher premiums based on a person's health, but it will not completely solve the it. It is likely that insurers will try to find a way to move sicker people to certain health plans, which could drive up premiums.

Another potential challenge is that standardizing benefits based on actuarial value can lead to many variations in the design of health plans. This variation could give insurers room to discourage enrollment of people with costly health conditions.