If the health plan reinsurance market outlook for 2009 were to be described in meteorological terms, it would be “dark clouds with isolated thunderstorms, but skies clearing later in the year.”
The dark clouds currently hanging over the health plan reinsurance market-in fact over the entire global insurance industry-is evidenced in the liquidity strain faced by AIG, the world’s largest insurer.
While it is unlikely (though not impossible) that other major insurers will face financial calamity, we will almost certainly see additional mergers and consolidation in the industry. In the accident and health reinsurance market, the shakeout really began several years ago. A number of players, seeking higher returns on capital, exited the industry, significantly reducing capacity.
The recent national credit meltdown has had two key impacts thus far. First, rating agencies and regulators are subjecting reinsurers and health insurers alike to much greater scrutiny. Second, many health plans have experienced their own capital decrease and are carefully revaluating their balance sheets. The plans, along with many other companies and investment funds, are seeking to de-risk their finances on both the asset and liability side of the ledger.
For health insurance plans this often means a closer analysis of medical cost trends and reducing their exposure to catastrophic claims. In the past 6 months we have seen a significant number of health plans that were previously self-insured buying reinsurance for the first time.
Other plans are restructuring their coverage; in most cases removing internal limits and increasing maximums. For example, many reinsurance policies might carry limits of $4,000 to $10,000 per day for hospitalization and a $1 million cap overall per member. Ten years ago, this approach was not totally inappropriate, but no longer. Not only has claims severity increased dramatically, the treatment location is increasingly moving outside the hospital and into outpatient settings and patients’ homes.
A recent study by Evergreen Re was completed in conjunction with Ingenix/Reden & Anders, Minneapolis. The study found that the frequency of members with paid claims greater than $1 million per 100,000 commercial members rose from 0.07 in the year 2000 to 1.1 in 2005, and will increase to 2.4 (low trend) and possibly 3.6 (high trend) by 2010.
In addition, members with paid claims greater than $2 million, once virtually unheard of, are presenting with increasing frequency. The Evergreen Re study found that the rate of $2 million claims per million commercial members rose from 1.1 in 2006 to 1.7 in 2007, an increase of 55% in one year. Frequency is projected to increase to 1.9 or higher (as high as 7.0, if we were to assume 11% annual trend) by 2010.
What’s driving these huge claims?
The four largest sources of $1 million plus claims are premature babies/infants, organ transplants, cardiovascular disease, specialty drug therapies and cancer treatment.
For example, the number of organ transplants has doubled in the past 10 years. There are more than 100,000 Americans on the organ transplant list and approximately 25,000 solid organ transplants are performed every year. The average billed charges for a multiple organ transplant now approaches $775,000. In addition, bone marrow transplants, now used to treat some 70 different diseases, increasingly cost more than $500,000.
In response, many health plans are turning to more sophisticated case management and risk transfer strategies, and more care specialty drug programs. The former can convert an unpredictable and potentially catastrophic risk to a flat monthly expense, allowing plans to budget for claims throughout the year.
Rising costs for specialty drugs are also contributing to catastrophic claims. Specialty drugs are used to treat serious or chronic medical conditions such as multiple sclerosis, hemophilia, hepatitis and rheumatoid arthritis. They’re typically injectable and usually can be self-administered by a patient or family member.
The Blue Cross Blue Shield Association, Chicago, reports that total specialty drug costs will rise from $40 billion in 2005 to $90 billion in 2009. One major health plan, BCBS Massachusetts, reports that less than 1% of its members are taking specialty drugs, but they account for 20% of total pharmaceutical costs.
The administration of specialty drugs, although frequently associated with transplantation, is really a broader, separate issue. An effective specialty drug program–one that provides appropriate formulary inclusion and cost control for the plan–will typically address benefit plan design and pharmacy network management for a variety of conditions in addition to transplants, including cancer, Hepatitis C, rheumatoid arthritis, and multiple sclerosis. As health care delivery occurs locally, solutions must be customized to the specific needs of a plan and the populations it serves.
Plans using a pharmacy benefit manager may want to revisit their specialty drug arrangements or ask for independent reviews. The goal is to ensure that a PBM can provide the most effective and efficient specialty drug program.
We have pointed out the many clouds hanging over health plans as they seek to manage risk, so where are the rays of sunshine?
The most important factor, for insurers and plan members alike, is that the government has drawn a line in the sand and is committed to resolving the financial crisis. In the long run, this means we will have a return to more normal business conditions and a relief from the fear and paralysis that has been present in our financial markets. In addition, the administration and the Democratic congress are publicly committed to spending more money on health care. While it is difficult to predict the outcome on insurers and reinsurers, reducing the number of uninsured and bringing more money into the system should reduce strains on both providers and payers.
Finally, another ray of sunlight for health plans is that the reinsurance market remains relatively soft, with quite a bit of competition. Most reinsurers have maintained healthy balance sheets. And while many reinsurance executives have trumpeted the end of the soft market that has persisted, particularly in the p-c category, the declining economy is likely to increase competition for remaining customers. This translates into a continuance of competitive pricing and flexibility in plan design for health plan administrators, at least through the better part if not all of 2009.
Charles Crispin is CEO of Evergreen Re, Stuart, Fla., a national health care reinsurance and medical risk brokerage firm. He can be reached at [email protected].