The Medical Insurance and Stop Loss Cliff-Edge Dilemma – Solving It with New Age Reinsurance
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MyHealthGuide Source: Hobson D. Carroll, FSA, MAAA, President, Entrust Risk Management Services, Inc., 10/16/2011
Preface by Mr. Hobson: This article was submitted in response to a Call for Papers 2011 contest made by the Society of Actuaries’ Reinsurance Section. This paper was chosen for one of only two awards given for entries in the competition.Example Case
Margaret participates in her employer’s medical benefit plan. Two months prior to the renewal of that program, Margaret’s covered dependent son is first diagnosed with Acute Lymphocytic Leukemia with complications requiring transplant procedures in the coming 18 months. The emotional shock to Margaret’s family is only one of the changes to the universe that expand like ripples from this unhappy event. One of those ripples sets in motion a chain of events in relation to Margaret’s health insurance coverage, and her employer’s financing of that coverage. Her employer may be faced with a cliff-edge dilemma, caught between a punishing renewal offer and the choice to continue coverage at all.
In this paper, I will discuss the problematic traditional approach of medical insurance and reinsurance renewals, and offer an alternative intended to better align the needs of society, patients, providers, and the system required for financing appropriate care.
Benefit Period for LTD and Work Comp Is Continuous Based on “Incurred” Event
Consider the foundational difference between how group LTD and worker’s compensation operate versus medical insurance and associated reinsurance programs. Group LTD and worker’s comp function on a claim “occurred,” or an “event-style,” basis, where there is a point in time identified as the start of a potential benefit period.
For medical insurance, the potential liability for claims is triggered by the “incurral” of medical expense charges, filtered through contract limitations of what is eligible, allowable, and payable coverage. Incurral is a continuous process with each daily claim standing on its own. Group LTD and worker’s comp obligations are based on the continuation of a “status” — there do not have to be new “events” to trigger benefits. The benefit period begins immediately in the case of worker’s comp, while group LTD requires an elimination period that must be satisfied to reach benefit status. The critical feature of these two coverage types, however, is when and how the obligation of the insurer ends: only when the benefit status of the individual claim ends, not when the policy ends.
Benefit Period For Medical Is Based on Contract Period
Contrast this last feature with what happens in health insurance, whether it is fully insured, self-funded stop-loss, or reinsurance of either. The benefit period for an underlying originating claimant, in Margaret’s case a beneficiary of an employer plan, may start during the insurance policy year, but ends when that policy year ends, not when the beneficiary has necessarily stopped being in “benefit status.” In this context, “benefit status” means the individual has a diagnosis that generates a predictable course of treatment extending for some time into the future. Alternatively, it may be used to describe an individual that has already accrued significant expenses, and is expected to generate substantial further expenses in the next policy year.
The current situation in medical insurance financing creates a “cliff-edge” at the policy renewal date because the sponsor of the underlying benefit plan is faced with a Hobson’s choice -
- the renewal offer from the current carrier, or
- alternative offers from competing carriers, if any.
Either option is influenced by the ongoing health benefit status of existing plan beneficiaries.
Unlike the situation that occurs with worker’s compensation or group LTD policies, the presence of potential ongoing large claim payouts on existing claimants can be factored into the renewal action of the current carrier, and the competing offers of potential new carriers, without recourse by the employer. With worker’s comp and group LTD, claims that are already “in process” belong to the prior period’s accountability. If the carrier attempts to recover such expected losses through renewal rate action, the employer may move the coverage to a competitor who starts with a clean slate.
The current carrier is compelled to offer a renewal on a similar “unknown contingency” basis in order to renew the account. This is not the case with medical insurance, stop-loss insurance, and reinsurance renewals, where the existing carrier has the ability to “rewrite” the expected losses into its renewal action, even though underlying health plan beneficiaries are in the middle of treatment plans and regimens for existing conditions.
Impact on Stop Loss
The traditional renewal cliff-edge dilemma is most problematic in the specific stop-loss element of the self-funded employer arena. The leverage represented by the specific stop-loss coverage itself is naked in relief against the total picture painted for the self-funded employer, whereas the impact of bundling surcharges for ongoing large claimants inside the total premium is far less obvious in fully insured proposals. Anything the stop-loss carrier does becomes magnified in relation to large claim expectations.
Specific stop-loss insurance is primarily pure unknown contingency coverage, and generally presented on a one year term basis. How does this allow for the handling of Margaret’s situation with predictable ongoing treatment that will not only breach the specific deductible, but is expected to accrue catastrophic levels of expense within the coming policy year?
The industry currently offers :
- “pooled” coverage,
- guaranteed rate renewal options,
- “lasering” individual claimants (the practice of excluding or modifying the stop-loss coverage of particular individuals, such as Margaret’s son), or
- using aggregating deductibles.
None of these approaches, however, properly deals with the cliff-edge renewal problem – none of them addresses the true need. The need is for a product that provides protection for the underlying durational risk aspects of appropriate anticipated medical expense treatment, as opposed to the convenience (to the risk taker) of imposing a cliff-edge opportunity to “reset” the game at the rather arbitrary time element called the renewal date.
The prospective onset of the underwriting and renewal rating restrictions of the ACA may mitigate some of the cliff-edge anxiety that exists in the current small group marketplace, at least for the employer. However, this ambiguous attribution of responsibility certainly begs a series of fundamental questions:
- Who within our society should be financially responsible for catastrophic acute medical expense episodes (such as a serious burn, trauma, or effective transplant event) and, perhaps more critically, catastrophic chronic medical expense situations (such as hemophilia)?
- How long should the employer/carrier/reinsurer that is unfortunate enough to initially encounter the occurrence of a “random” catastrophic event carry the financial burden before it somehow becomes the responsibility of society in general?
- How best should we structure a financial tool for dealing with the cost of medical treatment expense once it exists?
It behooves the industry to address these questions head on.
“New Age” Reinsurance Program
For the past two legislative sessions, progress has been made towards addressing the cliff-edge dilemma through the proposal of a mandatory “new age” reinsurance program in the state of Texas (“TexMedRe”). While politics as usual (lobbying by vested interests to avoid changing the status quo) and other pressing economic issues have delayed full consideration of an admittedly complex issue, the primary underlying reinsurance concept of the TexMedRe proposal has generated substantial interest amongst a number of parties.
- The key provision provides not simply traditional excess reinsurance coverage to underlying health plan carriers, but an extension of coverage for up to two additional policy years depending on the continuation of the benefit status of the originating claimant, and such reinsurance would be portable.
- So long as the employer provides continuous eligibility for the claimant in a qualified underlying plan, the reinsurance, including the extension feature, would move to any new carrier should one replace the previous insurer.
Such reinsurance would serve to substantially mitigate the renewal cliff-edge dilemma for covered employer plans.
Call for “Event” Related Coverage
Should a state mandated reinsurance program be the only way to provide such new age protection that better aligns the needs of participants and society? I think not. By innovating new, more longitudinal, “event” related coverage, the private reinsurance industry can provide a necessary solution for the continuation of commercial employer based medical insurance, both fully insured as well as self-funded, in an environment rapidly spiraling into a vortex of single payer inevitability.
The distortion in selection that will occur between underwriting in the insured arena versus what stop-loss carriers are allowed to do in the self-funded industry will create the vital need for a protection product that eliminates the unfair and random effect of arbitrary renewal dates, incorporates true risk mitigation of “unlimited lifetime protection” requirements, and will revitalize the marketplace with a fair and competitive environment that encourages innovation and creativity in policy design and provider compensation. Fulfilling this need with private variations of the TexMedRe concept will equally encourage new entrants to the carrier marketplace who can be competitively aggressive in evaluating initial risk due to protection against ongoing claimants covered by extended reinsurance.
The private reinsurance industry must develop products similar to the ideas inherent in TexMedRe’s design to handle the true risk profile of catastrophic, realistic time horizon medical expense costs through “back to the future” concepts such as the 3 year accumulation, 5 year benefit period, per cause style policies of yesteryear. Otherwise, the distress experienced by Margaret’s employer due to cliff-edge renewal dilemmas, and by all those employer plans similarly situated, is likely to force all of us off the cliff, like lemmings, into the jaws of the single payer monster that waits below.
About The Author
Hobson D. Carroll, FSA, MAAA is President/Consulting Actuary, Entrust Risk Management Services, Inc. For several years, Mr. Carroll has provided actuarial services to several MGUs, stop loss carriers, TPAs and other in the self-funded industry. Contact Hobson Carroll at 281 368-7878 ext 123, hcarroll@entrustinc.com or hobson.carroll@vectorrisk.com (activity formerly as President, Vector Risk Analysis, LLC).
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