A Message from the CEO
 by Charles Crispin, President & CEO, Evergreen Re

Outlook for 2007
Changing Catastrophic Risk Requires New Reinsurance Strategies

Increasing severity and frequency of catastrophic claims has prompted many health plans to reconsider their reinsurance strategy. For example, advances in medical devices, pharmacy and biotechnology are rapidly driving trend on the cost per day of the most severe hospital admissions. And the same advances in the pharmacy and overall specialty categories are resulting in claims well over a million dollars without inclusion of any hospital related expenses.

Consequently, coverage for inpatient services only, with a per diem maximum associated with it would provide little protection from a 180 day hospital admission with an average cost of $16,000. Likewise, a plan would have virtually no coverage for a factor product claim administered in a home setting – which could easily cost a million dollars – if the plan’s coverage only includes either inpatient services or outpatient and sub acute settings with limits attached. While these may be extreme cases, they are the very claims for which reinsurance was designed to provide protection.

Through utilization of more advanced analyses, plan executives are realizing traditional reinsurance approaches have resulted in poor to no claims transfer in situations of true, catastrophic risk. Unfortunately, many more are still purchasing traditional reinsurance with per diem limits, which can translate into having virtually no catastrophic coverage in today’s healthcare environment.

To illustrate the extent of this gap between coverage and risk, at the beginning of 2006, up to 60% of all health plans were purchasing reinsurance coverage with per diem or other maximum allowable charge limits. Additionally, of plans purchasing reinsurance, approximately 60% purchased coverage for inpatient acute hospital services only.

While adding covered services and removing charge limitations should naturally increase reinsurance expense on a same deductible basis, the point is that moving towards a true catastrophic reinsurance strategy will result in more effective coverage structure and deductible level, ultimately lowering the total costs of reinsurance.

Additionally, strategies for complete transfer for specific diseases, also known as “carve out” coverage, available for a variety of conditions including transplants, premature birth, severe trauma (e.g. burns), and oncology, should also be considered.

The administration of biotech and other specialty drugs, although frequently associated with transplantation, is really a broader, separate issue. A specialty drug program will typically address benefit plan design and pharmacy network management for a variety of conditions including HIV/AIDS, cancer, Hepatitis C, rheumatoid arthritis, multiple sclerosis and transplantation. As health care delivery occurs locally, solutions must be customized to the specific needs of a plan.

Plans using a PBM (pharmacy benefit manager) may want to revisit their specialty drug arrangements or ask for an independent review. Some PBMs have complicated arrangements with pharmaceutical manufacturers and may not pass along the most effective pricing on specialty drugs.

A well-designed reinsurance plan, carve-out and specialty pharmacy strategies are just a few of the tools we use to effectively help our clients protect themselves from increasing severity and frequency of catastrophic risk.