Concept Architecture
Concept
Theoretically, Actuarial Value is a measure of the proportion of expected healthcare costs for a standard population that is paid by a health insurance plan, with the remainder paid by insured individuals through deductibles, co-payments and coinsurance. It provides a standardised measure of the financial generosity of insurance coverage, enabling comparison between benefit designs independently of the health status of any individual enrollee. The concept is grounded in actuarial science and health insurance economics.
Mathematically, Actuarial Value is represented as the ratio of expected healthcare expenditure paid by the insurer to the total expected allowed healthcare expenditure for a defined standard population. The calculation is based on expected values derived from actuarial models that simulate healthcare utilisation and benefit design under specified assumptions.
In practice, Actuarial Value is estimated using actuarial models that combine claims data, utilisation distributions, benefit structures and cost-sharing rules. Standard populations and prescribed modelling assumptions are typically used to ensure comparability across insurance products. In health policy, actuarial value is widely used to classify health insurance plans according to coverage levels and to evaluate compliance with regulatory standards.
Purpose
Used to quantify the generosity of health insurance coverage, compare benefit designs, classify insurance products, support premium development, evaluate cost-sharing arrangements and assess compliance with health insurance regulations.
Mathematical Formulae
Primary Formula
AV = Expected Plan Payments � Expected Allowed Healthcare Costs
Supporting Formulae
Expected Allowed Healthcare Costs = Expected Plan Payments + Expected Member Cost Sharing
Member Cost Sharing = Expected Allowed Healthcare Costs ? Expected Plan Payments
Related Mathematical Methods
- Expected value analysis
- Actuarial modelling
- Claims simulation
- Probability modelling
- Risk adjustment
Example
A standard insured population is projected to incur expected allowed healthcare costs of �12,000,000 during one year. The health plan is expected to pay �9,600,000, while members pay the remaining �2,400,000 through deductibles and co-payments.
AV = �9,600,000 � �12,000,000 = 0.80
The insurance plan therefore has an actuarial value of 80%, indicating that it is expected to cover 80% of healthcare costs for the standard population.
Excel Implementation
| Function | Example Formula | Health Economics Application |
|---|---|---|
| SUM | =SUM(B2:B1000) | Calculates total expected plan payments. |
| SUM | =SUM(C2:C1000) | Calculates total expected allowed healthcare costs. |
DIVIDE (or /) | =SUM(B2:B1000)/SUM(C2:C1000) | Calculates actuarial value. |
| SUMPRODUCT | =SUMPRODUCT(ProbabilityRange,CostRange) | Estimates expected healthcare costs used in actuarial value calculations. |
VBA (Optional)
A VBA routine can automate actuarial value calculations by aggregating simulated claims data and recalculating plan generosity following changes to benefit design.
Sources
- American Academy of Actuaries. Actuarial Value and Health Insurance Benefit Design.
- Centers for Medicare & Medicaid Services. Actuarial Value Calculator Methodology.
- Dickson DCM, Hardy MR, Waters HR. Actuarial Mathematics for Life Contingent Risks.
- Drummond MF, Sculpher MJ, Claxton K, Stoddart GL, Torrance GW. Methods for the Economic Evaluation of Health Care Programmes.
- ISPOR Good Practice Reports.
Related Concepts (2)
Library
Publications
1
The Economics of Health and Health Care — Folland, Goodman, Stano & Danagoulian, 9th Edition ed., 2024 (Routledge)
The market-leading general health economics textbook, giving comprehensive coverage of health economics through core economic themes and balancing theory, empirical evidence and public policy. The ninth edition adds chapters on health disparities and pandemic economics.
BookView source →
Frequently Asked Questions (6)
What is actuarial value?
A measure representing the percentage of average healthcare costs a health plan is expected to cover for a standard population.
Source: CMS, ACA Actuarial Value Calculator
What percentage of costs does actuarial value say a plan covers?
Actuarial value represents the percentage of average healthcare costs that a health plan is expected to cover for a standard population. It condenses a plan's generosity into one figure, so a plan with a higher actuarial value pays a larger share of costs and leaves the patient paying less. This makes it a useful way to compare plans and understand their cost-sharing, since the remainder of the cost falls on the patient through deductibles and copayments. The share of costs a plan is expected to meet is what it expresses. The CMS ACA Actuarial Value Calculator sets this out.
Source: CMS, ACA Actuarial Value Calculator
What does actuarial value represent?
Actuarial value represents the percentage of average healthcare costs a health plan is expected to cover for a standard population, so it indicates how much of the costs the plan covers on average. So actuarial value represents the share of costs a plan covers, which is why it is a percentage, since it expresses the proportion of average costs covered, and representing the percentage of average costs a plan covers means actuarial value indicates the plan's coverage generosity, showing how much of the costs it is expected to bear.
Source: CMS, ACA Actuarial Value Calculator
How is actuarial value used?
Actuarial value is used to compare the generosity of health plans by expressing the share of average costs each covers, so plans can be compared and categorised by how much of the costs they cover. So actuarial value is used to compare plan generosity, which is why it is a standard measure, since a percentage of costs covered allows comparison, and using actuarial value expresses how much of average costs a plan covers, supporting comparison of plans by their coverage generosity for a standard population.
Source: CMS, ACA Actuarial Value Calculator
What does a higher actuarial value mean?
A higher actuarial value means the health plan covers a larger percentage of average healthcare costs, so it is more generous, leaving the enrollee to pay less of the costs. So a higher actuarial value means more generous coverage, which is why it matters, since covering a larger share of costs means the plan bears more and the enrollee less, and a higher actuarial value indicates the plan covers a greater percentage of average costs, reflecting more generous coverage for the standard population.
Source: CMS, ACA Actuarial Value Calculator
How does actuarial value relate to cost-sharing?
Actuarial value relates to cost-sharing in that a higher actuarial value generally means lower cost-sharing for enrollees: as the plan covers more of the costs, the enrollee pays less through cost-sharing. So actuarial value and cost-sharing are inversely related, which is why they are connected, since the share the plan covers and the share the enrollee pays are complementary, and a higher actuarial value, covering more of the costs, means lower cost-sharing for the enrollee, linking the plan's generosity to what the enrollee pays.
Source: CMS, ACA Actuarial Value Calculator
Trust Record
Verified by Dr Darrin Baines
British health economist
Professional identity: darrinbaines.org
Verification date: 8 Jan 2026
Content version: 1.0.0
Canonical Identity
- Persistent URI
- https://healtheconomics.wiki/concept/actuarial-value
- Term code
- HS-HP-HI-003
Stable URI · Machine-readable · Resolvable · CC BY 4.0