Updated August 08, 2015.

The good thing about health insurance is that it protects you from financial disaster when medical calamity strikes. Having health insurance gets you easier access to expensive health care without delay and makes it more likely you’ll actually get the care you need.

The bad thing about health insurance is that it’s confusing. Even if you understand how your health plan’s provider network works, understand the difference between copay and coinsurance, and know what counts toward your deductible and what doesn’t, you’re probably not familiar with the two most important aspects of your health insurance.


Yet, these two numbers are arguably the two most important defining characteristics of any health plan.

Actuarial Value

Arguably, the single most important characteristic of a health plan is its actuarial value. If you know nothing else about your health plan, you should know the actuarial value. This number, expressed as a percentage, defines how much your health plan is worth and how much cost-sharing you’ll have to pay when you get care.

The actuarial value of a health plan tells you what percentage of the cost of covered health care services the health plan will pay, on average, across all of its members. A health plan with an actuarial value of 85% will pay about 85% of the cost of its members covered health care services. The other 15% of those costs will be paid by the members themselves in the form of deductibles, copayments, and coinsurance. A health plan with an actuarial value of 90% offers more robust protection and is more valuable than a health plan with an actuarial value of 60%.

The tricky thing about actuarial value is that it’s accurate only as an average across the entire membership. The percentage of your health care costs the plan pays varies depending on how you use your health insurance. Let’s illustrate how this works with an example of two different people who are both members of the same 85% actuarial value health plan.

• Member A was healthy and his health care was limited to an annual physical exam. Since annual physicals are considered preventive care, the health plan paid 100% of the cost. Since Member A had no other health expenses that year, the health plan paid 100% of Member A’s health care costs for the year even though its actuarial value was 85%.
• Meanwhile, Member B had to have an outpatient procedure and three appointments with a surgeon. His health care cost a total of $10,000. He paid the $1,000 deductible, $150 in copays, and $1,350 in coinsurance resulting in total cost-sharing expenses of $2,500 for the year. His health plan paid the other $7,500 of his health care expenses. Although it’s an 85% actuarial value health plan, it only paid 75% of Member B’s health care expenses that year.

It’s sometimes difficult to learn the actuarial value of a job-based health plan, but it’s worth the effort. Check your health plan literature, your Summary Plan Description, call your employee benefits office, or call the health plan itself. It took two phone calls, several transfers, and 20 minutes on hold with employee benefits to finally get that information on my own health plan.

If you get your health insurance from an Affordable Care Act health insurance exchange, it’s easy to tell the actuarial value; it’s reflected in the metal-tier of the health plan.

• Bronze plans are 60% actuarial value.
• Silver plans are 70% actuarial value.
• Gold plans are 80% actuarial value.
• Platinum plans are 90% actuarial value.

Out-Of-Pocket Maximum

Although most people know their annual deductible, most don’t know their annual out-of-pocket maximum even though the out-of-pocket maximum best reflects the financial protection that health insurance provides.

The most important benefit of health insurance is to protect you from potentially unlimited financial losses if you require expensive health care. Yes, it’s nice to get your annual physical for free, but if you need a $400,000 bone marrow transplant to treat your life-threatening multiple myeloma and you don’t have health insurance, you’re in a world of trouble. It’s that type of scenario that the out-of-pocket maximum addresses.

Think of the out-of-pocket maximum as the point at which you stop hemorrhaging money. When you’ve paid enough in deductibles, copays, and coinsurance to have reached the out-of-pocket maximum for the year, you stop paying cost-sharing. Your health insurance pays 100% of the cost of your covered health care for the rest of the year.

If you’re facing that $400,000 bone marrow transplant and your health plan has an out-of-pocket maximum of $6,000, then you’re only paying $6,000. Your health plan picks up the rest of the bill. If, later that year, you break your leg and need another $30,000 worth of health care, don’t sweat it. You’ve already paid your total $6,000 out-of-pocket maximum. As long as you follow your health plan’s rules about how to get your care, your health plan will be responsible for that bill, not you.