In its 2021 Proposed Rule for the Medicare Advantage program, the Centers for Medicare & Medicaid Services (CMS) proposes to alter the rules under which Medicare Advantage Organizations (MAOs) may obtain reinsurance. The changes would provide more flexibility to MAOs seeking to obtain reinsurance but also are likely to disappoint some plans that want to make a broader use of reinsurance.
MAOs, like other health insurers, often seek to obtain reinsurance for a variety of reasons. For small MAOs, a larger-than-expected number of extremely high-cost enrollees can cause substantial losses for the plan. Small MAOs cannot absorb such losses in the same manner as national MAOs. Reinsurance is therefore a key means of limiting financial risk for small MAOs. In addition, reinsurance can be important to both large and small MAOs engaging in transactions. If one organization sells a plan to another, the parties may want to use reinsurance as a means of keeping financial risk with the selling organization for a limited time period.
However, CMS has historically limited the circumstances under which MAOs can obtain reinsurance. Section 1855(b) of the Social Security Act says that MAOs “shall assume full financial risk on a prospective basis for the provision of the healthcare services,” subject to limited exceptions. In February 2017, CMS said that this statutory language means that MAOs may not obtain reinsurance unless the reinsurance falls squarely into one of the statutory exceptions. Since none of the statutory exceptions explicitly permit quota share reinsurance—an arrangement where the MAO and reinsurer share risk on a percentage basis, potentially beginning with the first dollar of coverage—CMS proposed at the time that quota share reinsurance would be prohibited under Medicare Advantage. Two months later in its final call letter for plan year 2018, CMS declined to finalize this guidance. Nevertheless, since then, CMS has never explicitly stated that MAOs may use quota share reinsurance.
CMS now proposes to more precisely define one of the exceptions set forth under Section 1855(b). CMS proposes that a MAO should be permitted to obtain stop-loss reinsurance for an individual enrollee whose costs for basic benefits will equal or exceed $10,000. For example, if the costs of providing basic benefits to a particular member are $50,000 in a given year, the MAO may reinsure $40,000 of that amount.
Importantly, the proposed regulation would also permit quota share reinsurance on a limited basis. Quota share reinsurance would be allowed so long as the value of such reinsurance does not exceed a value that is actuarially equivalent to the value of a $10,000 stop-loss reinsurance policy. That is, if an MAO’s actuaries estimated that reinsurance on all per-enrollee amounts above $10,000 would result in the reinsurer absorbing 25% of costs, then the MAO could also enter into a quota share reinsurance arrangement under which the reinsurer would obtain 25% of the premium in exchange for coverage of 25% of costs, while the MAO would remain responsible for 75% of the premium and 75% of costs.
These changes would provide more flexibility to MAOs regarding reinsurance than exist under CMS’s prior guidance on the subject. Nevertheless, they may disappoint some MAOs. In particular, MAOs still would struggle to shift full or substantial financial risk on a temporary basis in connection with a transaction.
CMS’s reluctance to further relax the reinsurance restrictions may be motivated by concerns about its statutory authority to do so. Allowing MAOs to rely heavily on reinsurance could be construed as a violation of the rule that an MAO must “assume full financial risk,” although MAOs have countered that they remain fully at risk under Medicare Advantage even when they use reinsurance. Notably, the president’s recent budget proposes that MAOs be allowed to obtain reinsurance so long as doing so is permissible under state law; the inclusion in the budget may be an acknowledgement that statutory change is necessary.
Beyond the statutory limits, CMS also may be concerned that if it allowed for 100% quota share reinsurance, the organizations with which CMS contracts would not have sufficient financial incentives under the program. On the other hand, allowing for reinsurance in many circumstances could help encourage smaller, provider-led organizations to participate in Medicare Advantage.
Notably, under the proposed rule, reinsurance arrangements between subsidiaries under the same parent organization would not be subject to the statutory limits on reinsurance. Because a joint venture can be considered a subsidiary of a parent organization even if a party unrelated to the parent has some control over the joint venture, this limitation provides another pathway for the sharing of financial risk under Medicare Advantage.