The U.S. medical reinsurance marketplace may not be as large as the life reinsurance and property-casualty markets but still plays an integral part in the smooth functioning of the U.S. health care system.
One coverage trend among plans buying reinsurance is movement to higher deductibles and higher coverage limits. This is a normal response to increased industry profitability. In fact, some plans now are looking for coverage that has few, if any, exclusions and limitations. Carriers will offer such coverage with various underwriting guidelines.
The primary risk for reinsurance underwriters to assess continues to be inpatient hospital risk, including contractual features of outliers, particularly for catastrophic claims such as neonatal and transplant cases. Outpatient facilities and drugs claims have trended at higher rates than other carriers. Interestingly, most of the high cost pharmaceutical charges are occurring in outpatient or home settings rather than in the hospital.
An analysis of reinsurance contract terms and conditions shows that what might appear to be small differences can have a large impact on cost. Some contracts still have separate definitions for experimental treatments, medical necessity and treatment in lieu of acute care. Others are more likely to follow the form of the health plan policy.
Despite some demand for increased coverage, some reinsurers may also apply more contractual exclusions and limitations in an effort to control costs or shift costs back to the health plan.
Specific Reinsurance Market Trends
The following is a brief commentary on the various health reinsurance market segments. (Note: Health plans in this article generally refer to an insurance company, Blue Cross plan, HMO or PPO or self-funded employer group health plan). The commercial medical reinsurance market is a fraction of the medical insurance market as a whole (estimated at less than 5%).
The A&H reinsurance market is still segmented into reinsurers, which acquire business through brokers and those who write business directly. Direct writing could be through a company’s own employees or by contracting with a managing underwriter. Some carriers will accept business both ways–directly and via brokers.
Employer Stop Loss. This is the largest market segment by reinsurance premium volume. Direct writers and reinsurers of employer stop loss programs have become much more actively involved in managing these programs. Capacity is carefully provided and carefully reviewed on an ongoing basis. It is very difficult for start-up programs to obtain backing. The overall employer stop loss market remains stagnant from a growth perspective. Rates continue to be very competitive with pressure on profit margins. There is very little following line or retrocession capacity in the market and only the strongest managing underwriters have prospered.
Carrier Reinsurance Market. Generally, there are few reinsurance carriers involved in small group and individual products. This is due to the relatively significant amount of market knowledge and resources that are required to be successful in these markets. A majority of these types of arrangements were on a quota share basis and did not perform well. There are more reinsurance participants in the larger group medical portfolio excess market. This market is easier to participate in since it is less resource intensive. However, this results in the market being very competitive and often causes a soft market that makes it difficult for target profit objectives to be obtained.
HMO Reinsurance Market. The commercial segment of this market continues to decrease due to consolidation. Medicare and Medicaid are the growth segments. The number of reinsurers providing capacity has been stable. However, pricing remains very competitive, and there continues to be a trend in expanding the reinsurance coverage provisions to eliminate or reduce exclusions and limitations.
The consolidation among commercial and Medicaid plans is offset somewhat by new opportunities in Medicare and Medicaid. State and federal governments are providing incentives for new and existing players to service these populations.
Provider Excess Market. There is still a modest market for excess of loss reinsurance for health care providers that have entered into risk capitation arrangements. This market segment is primarily controlled by brokers. The number of reinsurers participating has remained stable after several exited over the last few years due to very unfavorable results. Over the past several years, rates have increased and terms have tightened. The market size for this segment has declined somewhat and is about one half that of the HMO market, with heavy concentration in California in particular. There are a few new capitation arrangements in addition to established capitation risk-takers adding additional lives to their risk arrangements.
Most providers moved to higher deductibles with higher maximum daily reinsurance limit combinations. Therefore, the rates may be less significant to their balance sheet, and there is less negotiation over rates. Carriers that stayed in the market deserve their current profitability, given a historical pattern of losses in this segment. Perhaps the carriers and providers that remain are the ones that truly understand and manage the risk.
Catastrophic Claim Trends
The most common types of catastrophic claims are still the usual suspects: organ transplants, high-risk maternity and neonates, severe trauma (including burns), catastrophic illnesses, high-cost prescription drugs or blood products (such as Factor VIII), complex cardiovascular and neurological conditions, and cancer. There are three main trends in this area.
Organ transplants are still limited by the supply of organs. There is still a significant waiting list for organ transplants.
A rising rate of multiple births continues due to advances in and greater access to fertility therapies and an older age of childbearing.
Many plans like HMOs offer disease management programs or work through disease management vendors. Typical programs target asthma, diabetes, cardiovascular disease, chronic obstructive pulmonary diseases and maternity, as well as end stage renal disease. Although most disease management claims still do not reach the catastrophic claim level, they have the potential to in the future as costs increase.
There is a continued mindset in our society that there should be no limits to the amount of medical care applied to life-threatening situations. The cost of care is generally not a key consideration in these situations. Our society will continue to struggle with this cost/benefit tradeoff.
From a reinsurer perspective, there are certain negative aspects to the current medical reinsurance marketplace. It has consolidated and softened somewhat but still has plenty of opportunity for knowledgeable, disciplined reinsurers. The relative increase or decrease in the entire market depends upon future consolidation trends in the industry, as well as the growth of membership in private plans accepting government health care liabilities in Medicare/Medicaid.
Mark Troutman is president of Summit Reinsurance Services, Inc., Fort Wayne, Indiana (www.summit-re.com). Summit Re is a managing underwriter for GE Insurance Solutions (HMO excess) and for Companion Life Insurance Company (employer stop loss). He can be reached at email@example.com.
The primary risk for reinsurance underwriters to assess continues to be inpatient hospital risk