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    Locke Lord QuickStudy: Troubling and Conflicting Signs from CMS Over the Continued Use of Quota Share Reinsurance by MAO Plans

    Locke Lord Publications

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    InsuranceAs we previously reported in our Quick Study dated April 4, 2017, CMS, on April 3, 2017, announced that it had reconsidered its position that quota share reinsurance arrangements are not a statutorily permitted form of reinsurance for Medicare Advantage Organizations (MAOs) with respect to Medicare Part C business under Section 1855(b) of the Social Security Act. In connection with such reconsideration, CMS stated that “[a]s the comments [from industry representatives opposing CMS’s prohibition of quota share reinsurance arrangements] clarified for CMS that a quota share structure could be used in connection with the risks identified in section 1855(b)(1) through (4), CMS is not proceeding with the interpretation that quota share reinsurance itself is not permitted by the statute. CMS acknowledges that the details of an arrangement (whether reinsurance or otherwise) for an MAO to share, transfer, or otherwise shift the risks identified in the exceptions listed in the statute are generally not limited by the statutory text. The statute permits MA organizations to share risk proportionally, so long as the risk (the type and amount) is in the exceptions.”

    Following CMS’s retraction of its earlier prohibition on the use of quota share reinsurance, and in reliance on such retraction, MAOs and their reinsurers have continued to engage in quota share reinsurance transactions in the ordinary course of business as they have been doing for many years.

    Nevertheless, as we also stated in our earlier Quick Study, CMS’s April 3, 2017 announcement on quota share reinsurance would require continued monitoring and input from the industry, particularly in light of CMS’s statement that “[t]he statute permits MA organizations to share risk proportionally, so long as the risk (the type and amount) is in the exceptions”. Given that the exceptions discussed in Section 1855(b)(1) through (4) do not address the traditional “amounts” of risk covered by quota share reinsurance, we noted that there was some ambiguity as to what CMS’s future guidance may be on the permitted uses of quota share reinsurance arrangements by MAOs.

    We have become aware that following CMS’s April 3, 2017 retraction of its prohibition of quota share reinsurance arrangements, several MAOs have had their quota share reinsurance agreements questioned, and in some cases, disallowed by CMS as not being permitted under Section 1855(b), while other MAOs have reported no issues with CMS whatsoever with respect to their quota share reinsurance arrangements. Of these MAOs whose quota share reinsurance arrangements were questioned and/or disallowed, their quota share reinsurance arrangements were either included in their CMS CY 2019 Medicare Advantage contract bids or were reviewed by CMS in connection with an audit.

    In light of the above conflicting positions being taken by CMS, Locke Lord sent another comment letter to CMS dated September 12, 2018, once again defending the benefits and permissibility of the use of quota share reinsurance for and by MAOs and asking CMS to provide clear guidance on its position on the use of quota share reinsurance. Despite several phone call discussions with various CMS representatives, CMS has not provided any further public clarification on its position on the use of quota share reinsurance by MAOs. Further, it also did not comment on quota share reinsurance in its April 1, 2019 Announcement of Calendar Year (CY) 2020 Final Call Letter. As noted in our comment letter, even a CMS representative appears to be puzzled over how quota share reinsurance arrangements, which “are not prohibited,” could satisfy these exceptions, further demonstrating the need for CMS to more clearly explain its position on the use of quota share reinsurance.

    Consequently, MAOs must be cognizant that there continues to be significant uncertainty regarding the permissibility of entering into quota share reinsurance arrangements. We very much hope that CMS will soon publish clear guidance or rules regarding the permissible uses of quota share reinsurance by MAOs and work with the MAO industry, as promised, to address the industry’s concerns.

    We will continue to monitor the issue and will report back on any new developments.


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