Tag Archives: complexity

Revisiting the cost and complexity of the most popular FEHBP plan

With the idea of expanding the Federal Employees Health Benefits Program (FEHBP) now in the news, it makes sense to revisit an earlier paper about cost and complexity in health plans, which includes analysis of the most popular FEHBP plan. For example, consider the range of costs among different health plans:

Plan Design

PMPM Value*

Ratio to MMI PPO**




Alternate PPO



HMO-style plan



Most popular FEHBP plan






*For the United States as a whole and a demographic cross-section of the labor force population (including spouses and dependent children).
**This paper uses the plan design employed in the Milliman Medical Index as a baseline for comparison.

Read the full paper here.

Age rating in vogue

An article in yesterday’s Wall Street Journal about the role of “age rating” in healthcare reform is just the latest to examine what’s been described as an “arcane” issue by some in the press. The fact of the general media taking notice is quite a departure for a topic that has in the past largely generated discussion only in insurance and academic circles (and sometimes outside of healthcare).

But with healthcare reform shining light on so many different topics, age rating is a big story from coast to coast. We have blogged about age rating before and how it contributes to healthcare cost and complexity.

The Kaiser Family Foundation offers an online calculator that looks at how age rating and other reforms under various scenarios might affect premiums. The Robert Wood Johnson Foundation and Urban Institute have also collaborated on a study. And we have weighed in before on the topic of young invincibles.

Young Invincibles

What follows is a preview version of a healthcare reform briefing paper due out later this week.

“Young invincible” provision points to lingering questions
about cost and sustainability

An unresolved quandary under reform arising from the complexity in health plans

By Thomas D. Snook, FSA, MAAA


For the last several months, various Congressional committees have sought to categorize different benefit levels and establish certain minimum “actuarial values” for benefit plans. While the motivation for these requirements may make sense – if you’re going to mandate coverage, it should meet certain criteria – there are a number of potential unintended consequences that may ultimately defeat some of the purposes of reform.

This dynamic is documented in a June healthcare reform briefing paper, “Understanding Healthcare Plan Costs and Complexities.” That paper looks at various benchmarks of “actuarial value” put forward by the Senate Finance Committee and highlights a challenge to reform efforts; namely, that the values initially suggested as minimums were in fact higher than those for many existing plans. For example, the minimum “actuarial value” suggested for a “platinum” or “high option” benefit plan (i.e., the richest plans) had a value of .93 when in fact typical HMO-style plans carry an “actuarial value” lower than that, such as the one with a .91 value shown in our paper. The operating definition of “actuarial value” is borrowed from the Finance Committee: “the ratio of benefit costs to allowed cost (i.e., the cost of covered services, prior to member cost-sharing).”

Since releasing these initial actuarial values in May, the Senate Finance Committee has modified the ratios downward somewhat. A paper published by Sen. Max Baucus over Labor Day weekend, “Framework for Comprehensive Health Reform,” includes values that are lower than those suggested in May (e.g., the new value for “platinum” plans is .90, more in keeping with the typical HMO-style plan).

That said, the risk still exists that any minimum benchmark may in fact exceed benefits for existing plans, which may result in cost increases for payers and consumers.  This is particularly true of the “bronze” level of benefits cited in the Baucus paper.  At 65%, this minimum “actuarial value” would preclude high-deductible health plans, which currently constitute a preponderance of policies in the individual health insurance market.  Essentially, the position in the Baucus proposal is that reform will require these individuals to buy up to a richer benefit package than they currently have.


A new wrinkle

The “Framework” paper also highlights another possible issue when it outlines an exception to the bronze, silver, gold and platinum benchmarks set forward. Quoting from the paper:

“A separate ‘young invincible’ policy would be available in addition to these benefit options. This policy would be targeted to young adults who desire a less expensive catastrophic coverage plan but with a requirement that preventive services be covered below the catastrophic amount. Cost-sharing for preventative benefits would be allowed.”

On the one hand, the creation of a “young invincible” group makes a certain amount of practical sense. Many uninsured are young people with modest income who do not see the need for insurance, and they are likely to desire the most affordable option. Indeed, their particular risk profile may warrant a less-expensive option.  This same thinking may also apply to other population sub-groups.

On the other hand, creating a separate pool for these people will result in unintended consequences elsewhere. The people most likely to be attracted to “young invincible” policies—obviously the young and healthy—are people with precisely the kind of risk profile that can help offset the costs posed by older and/or less-healthy individuals under community rating. 

Put another way, any insurance pool has a mix of healthy and non-healthy lives. If you take, say, the healthiest 10% and isolate them in their own pool, the cost for the remaining 90% will be higher. Might participation by these healthy individuals have otherwise helped minimize the cost of the standard platinum, gold, silver and bronze benefit options without the lure of a “young invincible” policy?  Would they have been willing to pay the cost associated with any of the four standard options?  These are challenging issues that need to be considered carefully.  The “risk mix” is a key consideration when developing benefit options and risk pooling provisions that may be prescribed under insurance reform.

  Continue reading

Divergence in actuarial value

Different healthcare benefit plans have different actuarial values, which have been defined by some as the ratio of benefit costs to allowed cost (i.e., the cost of covered services, prior to member cost-sharing). In other words, the actuarial value (using that definition) represents the portion of the total cost of covered benefits that are paid by a health insurance plan.

  Continue reading

More on plan complexity

Managed Healthcare Executive interviewed Milliman principal Tom Snook about his recent health reform paper, “Understanding health plan costs and complexities.” Excerpting from the article:

“Looking forward into the post-reform world, execs will need to be prepared for the possibility of a different—possibly dramatically different—landscape,” says Thomas D. Snook, FSA, MAAA, principal and consulting actuary, Milliman. “All of us will need to be agile and flexible to adapt to new market conditions and perhaps give up old maxims. Evolve or prepare for extinction.”

The paper provides a primer on certain key variables that influence the cost of healthcare—and thus health insurance—in complex ways.

“Our primary intended audience is those outside the managed care/health insurance industry,” Snook says. “These individuals may not intuitively grasp some of these ideas, which those of us in the industry have dealt with for years and hence are intimately familiar with. Our goal is to caution those in a position to reform healthcare that the issues are very complex and will not be easily solved with a simplistic approach.”

What role do reimbursement rates play?

What follows is excerpted from the new health reform briefing paper, Understanding Healthcare Plan Costs and Complexities.


Not all health plans pay providers at the same rates, creating another layer of complexity. The Centers for Medicare and Medicaid Services can pay less for Medicare services than commercial insurers because of the strength that comes with its size (it is the largest payor in many if not all U.S. markets) and because of the fact that it is backed by the power of federal law. The same principles apply to state Medicaid programs, although the relatively low levels of reimbursement, even compared to Medicare, have led to problems in a number of geographic areas with access to certain types of providers. In private commercial healthcare plans, the largest insurers can generally negotiate better rates than smaller payors, and typically enjoy competitive advantages as a result.


The fact that large government programs such as Medicare and Medicaid generally pay lower rates than commercial insurance plans creates a pattern of differential revenue levels to providers, which can produce a variety of consequences. For example, hospital payment rates for Medicare and Medicaid are determined unilaterally by those respective public programs. By contrast, most private healthcare plan payment schedules are negotiated. Cost-shifting to nongovernment plans and/or other steps to balance revenue against costs occur because of the overall budget needs and revenue desires of individual hospitals—which vary based on such factors as their mix of patients, their underlying cost structure, and the efficiency of their operations.


There is no easy solution given the need for fair and adequate payment to providers and the need for improved efficiencies and lower costs that do not impair access or quality. Both the potential revenue shortfalls and the need for increased efficiency are real. This added layer of complexity overlays the other variables at work to create a sometimes confounding interplay that demonstrates the shortcomings of simple solutions.