Locke Lord QuickStudy: No Quota Share Reinsurance For Medicare Advantage Organizations, Says CMS

CMS stated in the Notice that “Section 1855(b) [of the Social Security Act of 1935 as amended (the Act) (42 U.S.C. 139w-25(b))] provides four categories of permissible reinsurance arrangements and the types of risk for which an MAO may seek reinsurance. These are:

(1) insurance or other arrangements for the cost of providing to any enrollee such services the aggregate value of which exceeds such aggregate level as CMS specifies;

(2) insurance or other arrangements for the cost of such services provided to its enrolled members other than through the organization because medical necessity required their provision before they could be secured through the MAO;

(3) insurance or other arrangements for not more than 90 percent of the amount by which the MAO’s costs for any of its fiscal years exceed 115 percent of its income for such fiscal year; and

(4) arrangements with physicians or other health care professionals, health care institutions, or any combination of them to assume all or part of the financial risk on a prospective basis for the provision of basic health services by such physicians or other health professionals or through such institutions.”

According to CMS, “…quota share arrangements, a pro-rata reinsurance where the insurer and the reinsurer share risk (possibly from the first dollar of coverage) based upon an agreed percentage, do not fall within the four categories of reinsurance arrangements permitted by the statute.  Accordingly, this type of reinsurance arrangement is not permissible.”  

Quota share reinsurance, which is subject to comprehensive state insurance regulation and oversight, is a very useful financial tool for any insurer, including a MAO.  It allows the insurer to reduce its liability exposure on the reinsured business starting with the first dollar of claims, reduce the insurer’s overall financial exposure to adverse fluctuations in claims, and reduce the amount of risk based capital the insurer must maintain as it grows its business, thus freeing up capital that the insurer can use for further expansion, growth and other strategic initiatives.

However, CMS’s interpretation of Section 1855(b) of the Act removes this useful and commonly used financial tool for MAOs with respect to their Medicare Part C business.  We question whether CMS is concerned about “fronting”, whereby a MAO could cede 100% of the risks of its Medicare Part C business to a non-CMS approved insurer.  While we note that a handful of states view fronting arrangements unfavorably as attempts to avoid statutes prohibiting insurers from transacting business without obtaining a certificate of authority in the state and restrict the ability of licensed insurers to cede all or substantially all of their risks to an unauthorized insurer, such states nonetheless generally do not prohibit quota share reinsurance but instead require that the licensed insurer retain a minimum percentage of risk on its ceded risks.  

Unfortunately, unless CMS is persuaded otherwise, or Section 1855(b) is amended to expressly allow quota share reinsurance, MAOs will no longer be able to cede their Medicare Part C business on a quota share reinsurance basis.  This will, among other things, limit the ability of MAOs to obtain capital relief or share risk with respect to their Medicare Part C business with joint venture partners (including insurers and providers).  In addition, it may surprise many in the reinsurance industry that offer quota share reinsurance solutions to MAOs including with respect to their Medicare Part C business.