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As we reported in our QuickStudy on February 13, 2020, CMS filed and made available for public inspection on February 5, 2020, a new proposed rule (the “Proposed Reinsurance Rule”) under the authority of Section 1855(b)(1) of the Social Security Act (the “Act”) to formally establish reinsurance standards for the Medicare Advantage program for both excess of loss and quota share reinsurance. On June 2, 2020, CMS published its final rule on reinsurance in the Federal Register which can be found at 42 CFR §422.3 (the “Final Reinsurance Rule”). The Final Reinsurance Rule is effective August 3, 2020 but will only become applicable beginning on January 1, 2021.
A significant number of Medicare Advantage Organizations (“MAOs”) and their representatives submitted comments to CMS on the Proposed Reinsurance Rule. We submitted a comprehensive set of comments to CMS on March 27, 2020 with respect to quota share reinsurance.
Although we are disappointed that CMS did not adopt our suggestion to allow an MAO to cede risk on a quota share reinsurance basis in excess of a minimum ten percent (10%) quota share retention (the “Minimum 10% QS Retention”), we are very appreciative that CMS carefully considered the comments that were submitted and comprehensively responded to them as we summarize below.
Permissibility of Quota Share Reinsurance Under the Final Reinsurance Rule:
CMS acknowledged in its commentary to the Final Reinsurance Rule the administrative simplicity of adopting a single standard for the amount of risk an MAO must retain, such as the Minimum 10% QS Retention approach. CMS, however, chose to retain the “actuarially equivalent” requirement that was included in the Proposed Reinsurance Rule. This requires the MAO to retain a quota share percentage of losses which are expected to be, in the aggregate, equivalent to an excess of loss reinsurance arrangement with a $10,000 attachment point.
CMS, in its commentary, explained that CMS “sought to establish a way to equate the $10,000 stop loss threshold to sharing the risk proportionally on a first dollar basis (that is, pro rata insurance) to provide additional flexibility to MA organizations while ensuring compliance with the statute.” Because the Final Reinsurance Rule is being promulgated under the authority of Section 1855(b)(1) of the Act, which imposes limitations of an excess of loss or stop loss nature, we understand CMS’s predicament in fashioning a regulation that allows quota share reinsurance but complies with its statutory authority. However, CMS acknowledged the potential uncertainty and difficulties in determining actuarial equivalency between an excess of loss and a quota share reinsurance arrangement.
To help address such uncertainty, CMS further explained in its commentary that an “MA organization may use insurance to share costs proportionally on a per member per year first dollar [i.e., quota share] basis as long as the amount of risk retained by the MA organization is actuarially equivalent to the risk retained in purchasing $10,000 per member per year first dollar stop-loss insurance.” To address commenter’s concerns about actuarial equivalence valuations, CMS stated that “actuarial equivalence may be calculated as the expected percentage of the MA organization’s claim cost of providing basic benefits to an individual enrollee that is greater than or equal to $10,000 during a contract year. The MA organization may share its costs proportionately on a first dollar basis up to the expected percentage.” CMS provided the example that if the “actuarially supported expected percentage is 66 percent . . . the MA organization may reinsure (cede) up to 66 percent of such costs proportionally on a first dollar basis.”
We interpret CMS’s commentary to mean that the MAO can cede a quota share percentage on a first dollar basis in excess of a quota share percentage retention that is the actuarial equivalent to the MAO retaining the first $10,000 in claims on any individual member during a calendar year. The higher the expected claims per member over $10,000, the higher quota share percentage that may be ceded by the MAO. We believe that the ceded quota share would be equal to (i) total expected claim cost for basic benefits per member less $10,000, divided by (ii) total expected claim cost for basic benefits per member. As a simple example, if an MAO’s expected claim costs per member are $20,000, the MAO should be able to cede a 50% quota share. Unfortunately, based on comments we have received from several MAOs following the publication of the Final Reinsurance Rule and publicly available information, it appears that the typical annual MAO spending per individual member is around $10,000. If our interpretation is correct, MAOs who spend this amount will have little or no risk that can be reinsured on a quota share basis pursuant to the Final Reinsurance Rule.
CMS also stated that there are other reasonable actuarial approaches that could be used to determine the actuarial equivalence cost when purchasing pro rata insurance and that CMS would accept other approaches that are based on a reasonable actuarial methodology. Although CMS did not provide an example, CMS stated that an MAO may also value its pro rata insurance by establishing a specific percentage level of risk that it can reinsure that is not more than the actuarial value of $10,000 individual stop-loss insurance. We note that since CMS did not provide an example of such approach it is uncertain how this method of determining actuarial equivalence differs from the approach discussed above.
MAOs will have to work very closely with their actuaries on each quota share reinsurance arrangement to determine the quota share percentage they can cede pursuant to the Final Reinsurance Rule.
Application of Final Reinsurance Rule to Other Exceptions Under the Act:
CMS confirmed that the actuarially equivalent requirement of the Final Reinsurance Rule only applies to reinsurance under the authority of Section 1855(b)(1) of the Act. Consequently, any reinsurance arrangement that is allowed under exception (b)(2) (arrangements for services that the MAO could not provide), (b)(3) (arrangements for up to 90% of the MAO’s costs in excess of 115% of its income) or (b)(4) (arrangements between MAOs and providers) of Section 1855(b) would not be subject to the Final Reinsurance Rule limitations.
Quota Share Reinsurance with Provider-Affiliated Insurers:
In our comment letter we requested CMS to confirm that MAOs may continue to enter into quota share reinsurance arrangements with provider-affiliated insurers under the authority of Section 1855(b)(4) of the Act. Although CMS did not expressly confirm such arrangements, CMS stated that Section 1855(b)(4) permits an MAO to make arrangements with physicians or other health care professionals, health care institutions, or any combination of such individuals or institutions, to assume all or part of the financial risk on a prospective basis for basic benefits furnished by such physicians, by such other health professionals or through such institutions. CMS also stated that the “type of payment arrangement used between the MA organization and contracting physicians, other health professionals or institutions for this specified financial risk is not limited by [the actuarially equivalent requirement of the Final Reinsurance Rule].”
Based on CMS’s commentary to and response to our specific questions regarding reinsurance under the authority of Section 1855(b)(4) of the Act and prior precedents that we are aware of, we interpret CMS’ response to mean that the actuarially equivalent requirement of the Final Reinsurance Rule does not apply to quota share reinsurance arrangements between MAOs and provider-affiliated insurers such as captive insurance companies under the authority of Section 1855(b)(4). Unfortunately, CMS did not respond to our question regarding whether the provider-affiliated insurer has to be wholly-owned by the provider or whether a lower percentage of ownership by the provider would be permitted. CMS also did not provide any information on the terms and conditions on which CMS has previously permitted MAOs to enter into such quota share reinsurance arrangements with provider-affiliated insurers. Such guidance would have been very helpful to MAOs and providers.
Reinsurance of MA Supplemental Benefits:
CMS confirmed that the actuarially equivalent requirement of the Final Reinsurance Rule is intended to apply only to reinsurance covering the costs of providing basic benefits to the MAO plan enrollees and consequently does not apply to the reinsurance of supplemental benefits offered by MAOs. Specifically, CMS stated that MAOs “are not prohibited from obtaining reinsurance for supplemental benefits and this final rule does not limit either the form or amount of reinsurance for supplemental benefits.” This means that an MAO can cede basic and supplemental benefits in the same quota share reinsurance agreement.
Application of Final Reinsurance Rule to Reinsurance Within the MAO Affiliated Group:
CMS confirmed that it would “evaluate compliance with [Section] 1855(b) of the Act and [the Final Reinsurance Rule] at the parent organization level, such that risk sharing or allocations of losses and costs among wholly-owned subsidiaries would not be evaluated.” Such “internal arrangements would be treated as the MA organization retaining full financial risk for the losses or risks that are covered through the internal arrangement.” This would allow, for example, reinsurance risk pooling arrangements between or among wholly-owned MAOs within an affiliated group.
In response to a commenter’s specific question regarding reinsurance by MAOs with non-affiliated joint venture partners, CMS stated that such joint venture reinsurance arrangements would have to “comply with [Section] 1855(b) of the Act, CMS regulations and requirements, other federal laws and regulations, and state laws and requirements.” We interpret this to mean that any reinsurance arrangement with a non-affiliated joint venture partner would be subject to the actuarially equivalent requirement of the Final Reinsurance Rule if such reinsurance is being entered into under the authority of Section 1855(b)(1) of the Act, unless the joint venture partner is a provider and the reinsurance is with the provider’s affiliated insurer under the authority of Section 1855(b)(4) of the Act. CMS specifically stated that the exception in (b)(4) is not subject to the actuarially equivalent requirement of the Final Reinsurance Rule. But, as indicated above, CMS did not provide guidance on whether the provider’s affiliated insurer must be wholly-owned by the provider to qualify for the exception in (b)(4).
Although CMS was thorough and comprehensive in its responses to the comments submitted on the Proposed Reinsurance Rule, several key questions remain unanswered. For example, because the Final Reinsurance Rule will become applicable beginning on January 1, 2021, will CMS grandfather existing reinsurance arrangements by MAOs that do not comply with the Final Reinsurance Rule? Also, the actuarially equivalent requirement of the Final Reinsurance Rule limits the quota share an MAO may cede based on its expected per member costs in excess of $10,000. This amount will vary by MAO, but in general, will the rule allow MAOs to cede sufficient risk on a quota share reinsurance basis to make it useful to the MAO? If it does not, then CMS’s stated objective of giving MAOs additional flexibility will be frustrated. What, if any, terms, conditions and limitations will CMS impose on quota share reinsurance arrangements between MAOs and provider-affiliated insurers under the authority of Section 1855(b)(4) of the Act? What percentage of ownership must the provider have in the provider-affiliated insurer in order to quality for this exception and may the reinsurance cover claims for medical services rendered by the provider, referral services and all other medical services? We hope that CMS will provide additional guidance on these remaining questions.
We will continue to monitor the issue and will report back on any new developments.