Understanding the Difference between Minimum Essential Coverage, Essential Health Benefits, Minimum Value, and Actuarial Value
/Written by Susan Grassli, J.D. and Lisa Klinger, J.D. January 27, 2014
There are several terms in the Affordable Care Act that sound similar and therefore cause some confusion. Each term has a different meaning and different ramifications—for employers and individuals—in terms of penalties, taxes and subsidies. This article defines four such terms and explains how each applies to individuals and to employers. The four terms are “Minimum Essential Coverage,” “Essential Health Benefits,” “Minimum Value” and “Actuarial Value.”
Brief Comparison of Similar Terms
Minimum Essential Coverage (MEC) and Essential Health Benefits (EHB): Minimum Essential Coverage is a lower threshold than Essential Health Benefits (EHB). MEC is the coverage an individual must have to comply with the individual mandate and avoid the individual mandate penalty tax – and that large employers may be required to offer to avoid the “non-offering employer” penalty. Essential Health Benefits are the 10 core benefits that “qualified health plans” (QHPs) must cover. Even if a group health plan does not provide EHB, the coverage still will likely meet MEC, and an individual who has MEC will not be subject to the individual mandate tax.
Minimum Essential Coverage (MEC) and Minimum Value (MV): Minimum Essential Coverage is a lower threshold than Minimum Value (MV). MV is the 60% Actuarial Value and is met when a plan pays on average at least 60% of the actuarial value of allowed benefits under the plan. Even if the coverage offered by a large employer does not meet Minimum Value (and “Affordability”), it still will likely meet MEC, so an individual who has such coverage will not be subject to the Individual Mandate penalty tax. (“Affordability” is the requirement that the employee cost for self-only coverage cannot be more than 9.5% of the employee’s income.)
Minimum Essential Coverage (MEC) (IRC section 5000A(f)(1))
What it is: Minimum essential coverage (MEC) is defined by the ACA as most group health plans offered by a large or small employer, or health coverage provided by the government. However, a plan consisting solely of “excepted benefits” is not MEC. (Excepted benefits are certain limited-scope health benefits that are exempt from many requirements under the ACA and HIPAA.) Additionally, guidance designates certain other plans as MEC, such as certain refugee medical assistance and Medicare advantage plans. (See our January 2014 article entitled: Minimum Essential Coverage: Guidance Update; and our December 2013 article entitled: Excepted Benefits: Newly Proposed Rule Expands Definition.)
Why it matters: Effective January 1, 2014, the Individual Mandate requires most individuals to obtain and maintain Minimum Essential Coverage for themselves and their dependents or pay a tax. Individuals can obtain MEC through their employer’s plan, through the Marketplace or through some other means to comply with the Individual Mandate and not be subject to a tax.
Effective January 1, 2015, the Employer Mandate (Employer Shared Responsibility) will create potential penalties for large employers if they do not offer to at least 95% of their full-time employees coverage that is at least Minimum Essential Coverage. To avoid all Employer Mandate penalties, large employers must offer coverage that is not only Minimum Essential Coverage but provides Minimum Value and is Affordable.
Essential Health Benefits (EHB) (PPACA section 1302(b))
A plan that does not cover Essential Health Benefits can still be considered Minimum Essential Coverage.
What it is: Essential Health Benefits (EHB) is the term used by the ACA to describe the items and services in 10 categories of core benefits that qualified health plans (QHPs) are required to cover. (Some examples of the 10 EHBs include hospitalization, prescription drugs, and maternity and newborn care.) Specifically, non-grandfathered small group and individual policies must cover EHBs as of the first day of the 2014 policy year, unless they are policies that are subject to the transition rule as explained below. The Essential Health Benefitspackage, is a package that includes the 10 listed benefits and services that should be included as well as specific cost sharing, minimum value and adjusted community rating.
Why it matters: All non-grandfathered plans sold to individuals or small employers must be Qualified Health Plans (QHPs), whether they are sold in the state or federal Marketplaces, or sold outside the Marketplaces. The only small group or individual policies that are notrequired to be QHPs are grandfathered policies sold outside the Marketplaces. The original effective dateof this requirement was the first day of the 2014 plan year; however, in November 2013, President Obama announced a transition rule under which states could allow carriers to continue to offer certain individual and small employer non-ACA-compliant policies for one additional year. (See our November 2013 article entitled: Health Insurers Providing Individual and Small Employer Plans May Elect to Continue Non-ACA Compliant Policies for One Year.)
Another reason the concept of Essential Health Benefits matters is because the ACA prohibits all sizes and types of plans from imposing annual or lifetime dollar limits on EHB. Although self-insured plans of any size and large insured plans are not required to cover EHB, to the extent they do, they cannot impose annual or lifetime dollar limits on EHB. Most such plans do cover at least eight of the 10 categories of EHB.
Minimum Value (MV) (IRC section 36B(c)(2(C)(ii))
A plan that does not meet Minimum Value often will still be considered Minimum Essential Coverage.
What it is: Minimum Value is an ACA requirement that ensures health insurance policies and plans provide meaningful coverage at or above a threshold level. Minimum Value is met when a plan pays on average at least 60% of the actuarial value of the total allowed cost of benefits under the plan. This means that enrollees pay—via deductibles, coinsurance, copayments and other out-of-pocket amounts— on average no more than 40% of the total allowed cost of benefits. Minimum Value does not take into account the amount paid for premium. An example of an employer plan that might not meet the 60% requirement is a “mini-med” or catastrophic coverage only plan.
Why it matters: Minimum value affects large employers because the health plans they offer must meet Minimum Value (and Affordability) in order to avoid possible penalties under the Employer Shared Responsibility provisions of the ACA. Individual and small employer plans (unless grandfathered) also must provide at least Minimum Value and additionally must meet specified Actuarial Values, as explained below.
Most employers are already offering plans that meet Minimum Value (i.e., 60% Actuarial Value). In fact, HHS estimated (in the Preamble to the November 2012 Proposed Regulations on Essential Health Benefits and Actuarial value), that only 1.6-2% ofparticipants in employer-sponsored group health plans are in plans that do not have an Actuarial Value of at least 60%.
Actuarial Value (AV)
What it is: Actuarial Value is defined as the proportion of covered medical expenses an insurance policy is expected to pay on average for a standard population, as compared to the percentage the insured is expected to pay via deductibles, coinsurance, copayments and other out-of-pocket expenses. An Actuarial Value of 100% means the plan would pay all medical expenses. As noted above, all non-grandfathered health plans are required to provide at least “minimum value” – defined as the 60% actuarial value. In other words, actuarial value measures the relative generosity of a health insurance plan.
Actuarial Value does not take premiums into account. Nor does itreflect other plan features that may be important for consumers who are choosing plans, such as how broad or narrow a plan’s provider network is, the quality of the provider network, or the plan’s customer service and support.
Why it matters: Issuers of small group and individual policies must specify the Actuarial Value of each policy. These are often referred to as the “precious metal” levels, because the ACA requires Qualified Health Plans sold on or outsidea Health Insurance Marketplace to sell plans that are either “bronze” (60% actuarial value), “silver” (70% actuarial value), “gold” (80% actuarial value) or “platinum” (90% actuarial value). Plans must meet their “metal level” within 2 percentage points. For example, a silver plan must pay 68%-72% of Actuarial Value. The bronze level plan will have the lowest premium cost, but if an enrollee uses medical services, the enrollee will have to pay a higher share of the cost. Conversely, the platinum level plan will have the highest premium cost, but if an enrollee uses medical services, the enrollee will have to pay a lower percentage of incurred claims.
