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Questions About Essential Health Benefits

The Institute of Medicine (IOM) recently issued its long-awaited report on defining the essential health benefits under the Affordable Care Act (ACA). As expected, the committee preparing the IOM report did not recommend which specific services should be covered, but rather discussed what the process should be for defining the essential benefits, which all insurers selling coverage to individuals and small businesses will have to provide beginning in 2014. Somewhat unexpected was their recommendation to set a dollar target – reflecting the current average cost of a small business health insurance plan – as the benchmark for decisions about what to include and not include in the essential health benefits package.

The ACA gives the task of identifying the essential health benefits to the Secretary of Health and Human Services (HHS). The law specifies that the essential health benefits package must include at least 10 categories of items and services: ambulatory patient services; emergency services; hospitalization; maternity and newborn care; mental health and substance use disorder services, including behavioral health treatment; prescription drugs; rehabilitative and habilitative services and devices; laboratory services; preventive and wellness services and chronic disease management; and pediatric services, including oral and vision care. It also requires that the scope of benefits be equal to that of a “typical employer plan.” A few other criteria in the law (e.g., that the benefits reflect an appropriate balance among the categories and take into account the health needs of diverse segments of the population) guide the Secretary’s decision making.

HHS commissioned the IOM report, but it is under no obligation to follow any or all of it. The report makes a number of recommendations about the processes and criteria the Secretary should use to identify the essential health benefits, but some big and important questions are left largely unaddressed. Here are a few:

What kind of limits on covered services will be permitted?

The services categories listed in the health reform law are quite broad and inclusive, and while there may be some ambiguity around a few specific services that are not explicitly listed (such as imaging or transplants), most health care will fit pretty easily into the enumerated list. The bigger question may be about the scope of benefits within the specified categories and what limits might be allowed on otherwise covered services. For example, could a plan cover only up to 10 physical therapy visits a year, or 15 prescriptions, or 30 days in a hospital? These kinds of service-specific limits won’t matter to the vast majority of people in any given year and will reduce premiums, but they could matter a lot to a small number of individuals who in any given year come down with serious illnesses or who have chronic conditions. The IOM report gives little guidance about how limits on coverage should be handled, suggesting that they should be based on medical evidence and applied to individual circumstances (see page 5-21). However, for most types of services, it is difficult to see how explicit caps that limit coverage in all circumstances for all covered individuals can be evidence-based. Also, unlike situations where a plan denies a claim because it’s not medically necessary, caps on covered services cannot be appealed to an independent reviewer.

This is one of the more difficult issues facing the Secretary. Will the regulation from HHS specify when limits will be permitted, or will these decisions be left up to the state health insurance exchanges or even to insurers? Note that the IOM report did recommend that the regulations “should list standard benefit inclusions and exclusions at a level of specificity at least comparable to current best practice in the private and public insurance market.”

 How will the essential benefits interact with the calculation of actuarial value?

The ACA defines the coverage insurers are required to provide in two different ways, separating the services covered (the essential health benefits) from the amount of cost-sharing enrollees pay (the “actuarial value”). For individual and small group plans, the ACA defines four tiers of coverage: bronze, silver, gold, and platinum. Patient cost-sharing will vary across the tiers, but all plans selling to individuals and small businesses will have to cover the essential health benefits. The different tiers of coverage in the law are not defined using specific deductibles, copays, and coinsurance. Rather, they are specified using the concept of an “actuarial value” (AV). For example, a silver plan has an actuarial value of 70%, which means that for a standard population, the plan will pay 70% of their health care expenses on average, while the enrollees themselves will pay 30% through some combination of deductibles, copays, and coinsurance. The higher the actuarial value, the less patient cost-sharing the plan will have on average. The percentage a plan pays for any given enrollee will generally be different from the actuarial value, depending upon the health care services used and the total cost of those services. And, the details of the patient cost-sharing will likely vary from plan to plan.

How the actuarial value is calculated – which has not been addressed in regulations issued so far by the federal government and was not part of the IOM’s charge – could have significant implications for what the scope of services covered might be. For example, a recent brief from the American Academy of Actuaries recently suggested that any benefit limits “that are not defined specifically in the essential benefits package presumably would be reflected in the numerator of an actuarial value calculation, but the allowed cost of the entire episode(s) would be included in the denominator.” This means that a plan imposing benefit limits – covering, say, no more than 30 days in a hospital – would lower its actuarial value and have to make up the difference somewhere else in the coverage it provides. However, different rules for calculating actuarial value might not penalize plans for limiting benefits, making such limitations more likely.

What does it mean to peg the essential benefits to a typical small employer plan?

The IOM report recommends that the ACA’s requirement that the essential benefits reflect what’s provided under a typical employer plan be interpreted to mean a small employer plan. Leaving aside whether this is a good idea or a bad idea – which reasonable people could disagree about – it’s somewhat unclear what it really means in practice. There’s little doubt that small employers offer less comprehensive coverage than large employers. For example, our recently-released annual employer survey found that half of workers with health coverage through small businesses have a deductible for single coverage of $1,000 or more, compared to 22% among those working for large employers. But, as the IOM report acknowledges (see page S-4), the differences in the overall scope of coverage between small and large firms stem more from differences in benefit design (i.e., patient cost-sharing, which is governed by the actuarial value thresholds defined in the ACA and the purchasing decisions made by employers) than in the services covered (which is governed by the definition of the essential benefits). So, attempting to distinguish between large and small employer plans is largely immaterial to the task facing HHS in specifying the essential health benefits, and may become a distraction if debate focuses on cost-sharing differences between large and small employer plans rather than the services that they offer.

Defining the essential health benefits was always going to be one of the toughest issues policymakers would face in implementing the health reform law. It determines what insurance protection people will have when they get sick or injured (with the aim of improving that protection relative to the status quo). It affects the federal budget, since a more comprehensive package means higher federal costs for subsidizing the premiums of low- and moderate-income people buying insurance on their own. And nearly every segment of the health care industry has a stake in it. The IOM report offers some guidance for resolving the inevitable tradeoffs, though it’s only one of many possible roadmaps and still leaves some big questions unaddressed.

–Larry Levitt, Gary Claxton, Karen Pollitz