Actuarial Equivalence

Means that for a given population, spending patterns and covered services under the plan, total costs, and net plan per member per month costs are the same. Actuarial equivalence does not necessarily result in the same premiums, because premiums often reflect behavioral reactions to different plans, actual negotiated prices with providers, and different management techniques. The method used to determine actuarial equivalence consists of four basic steps (American Academy of Actuaries (AAA) 2003) Analyze historical data adjusted to the time period under scrutiny. Calculate the total allowed cost before applying the plan design. Apply the different plan designs to the total allowed cost to determine the split between the plan and the members. Adjust alternative plan design until the total member cost sharing under the standard plan and alternative design is equal.