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Medicare Advantage: As Enrollment Grows, So Do Risks For Plans
By Charles Crispin

The new, revamped Medicare Advantage program has proven surprisingly popular with the public—and with plan sponsors. As of July 1, 2006, nearly 7 million Americans had signed up for an MA plan and 20 million had enrolled in the separate Part D drug benefit. The number of individual health plans participating in the MA program has also increased this year. According to a recent Kaiser Family Foundation report, as of July 1, there are 512 separate MA plans, up from 292 in July 2005.

As the number of beneficiaries and the number of plans grow, the potential rewards and risks for each plan also grow. Many new contractors are smaller, regional health plans, competing in a market that is dominated by large, publicly traded plans.

UnitedHealth, Humana and Wellpoint, the “big 3,” have more than 40% of the enrollment in MA and more than 60% of the membership in the new Part D program.

Given the projected MA growth, there is still plenty of room for new entrants. However, small, regional plans, with relatively tight margins, need to be very careful in managing their risk.

From our experience in dealing with health plans from all parts of the country, we have identified 4 key risk areas that could create financial issues for MA plans in coming years.

1. Provider contracts. Too many health plans entering the new MA program have fashioned their provider contracts along the lines of their existing commercial network. This can result from leverage existing provider networks use to garner richer terms on commercial business as barter for more competitive Medicare terms. Or, for a new MA-only plan, lack of membership leverage and the Center for Medicare Services’ (CMS) requirement of an existing network leaves them vulnerable to commercial-like contracts.
   
   Faulty assumptions relative to the underlying cost of non-emergency, out-of-network referral claims can also be made.
   
   For example, take the case of an MA member who is referred to a major medical center for a solid organ transplant. The center is highly qualified, but out-of-network. Even though the member is in Medicare, the medical center can bill the health plan for fees comparable to commercial plans, not traditional “Medicare allowable” rates. In such cases, it is not uncommon for the hospital to invoice the plan for billed charges, ultimately agreeing to a 20-30% discount. For a major procedure, such as a heart or lung transplant, this invoice could easily top $500,000.
   
   One way for MA plans to protect themselves is to obtain access to national transplant networks for deeper discounts through case fees. Another strategy is to obtain specialized case management and UR assistance in managing potential transplant candidates. With these programs, their members have access to a range of highly qualified transplant providers and these difficult-to-predict medical costs are much more tightly managed.
   
   
2. High-cost procedures. Advancement of medical science, introductions of new technology and applications of biotechnology have dramatically changed the cost landscape. Advancements in immunosuppressant drug treatment, driven largely by research done for AIDS patient treatment, have enabled very expensive transplant procedures. One example is small bowel transplants, which can easily cost a plan $800,000. Considered experimental 4 years ago, there were 178 such transplants last year.
   
   And while Medicare organ transplant incidence is historically much below a typical commercial membership, we predict a narrowing as the baby boomer bubble moves into Medicare membership. Again, advancement in science combined with an insatiable demand for the newest and most effective life-extending treatments will lead to increased incidence and severity.
   
   Plans also face a proliferation of new expenses in the areas of implants and prosthetics with newer, vastly improved remotely monitored and managed heart pacemakers, as well as more sophisticated prosthetics exceeding $60,000 each.
   
   
3. Outlier claims. Claims that Tenet Healthcare fraudulently abused the Medicare outlier payment system resulted in a high-profile $900 million fine. And while CMS has changed its methodology in processing Medicare outlier payments, this change is not well understood. Many plans still assume that claims will not reach outlier status, and therefore do not understand how expensive “Medicare Allowable” can be.
   
   Earlier this year, CMS announced it will “reprocess” many existing outlier claims and the review could take up to 4 years. We know of a number of MA plans that have recently submitted claims of $1 million and more to CMS, only to be told they will have to wait a year or more for the review to be completed.
   
   While this processing delay may not be a critical factor for a large national plan, for a smaller plan with limited capital, having to reserve a million dollars or more in outstanding claims for an indefinite period can create real pressure on capital.
   
   
   
4. Risk retention. The above factors have contributed to inappropriate risk transfer for many plans. In addition, historical reinsurance approaches have focused on inpatient claims only. Now, plans should consider the bigger picture.
   
   To take one example, consider blood clotting factors, which were once administered only in inpatient settings. These products can cost $50,000-100,000 per patient annually and are now routinely administered in outpatient clinics and homecare settings. The incidence of hemophilia and other blood diseases requiring the use of these clotting factor products has historically been low among Medicare recipients. However, with the introduction of new Medicare/Medicaid “dual eligible” plans and the increasing diagnoses of blood illnesses such as von Willebrand disease (vWD), a blood clotting disease, MA plans may see increasing claims in this area. New research projects that up to 3% of the U.S. population suffers from vWD. A traditional, inpatient-only reinsurance approach could leave plans vulnerable to some large costs.
   
   Plans should also reconsider their use of “inside limits” such as average daily maximums (ADMs). These are per diem, inside limitations on reinsurance reimbursement. In the past, many plans have accepted inside limits to obtain lower deductibles and save money—or so they thought. Some have had a rude awakening when they are faced with little or no reimbursement on a large claim.
   
   Let’s take an example of a claim involving clotting factor products. In this scenario, we have a 46-day inpatient claim of $650,000. Assuming the health plan had reinsurance with a $100,000 deductible and a $3,500 ADM, the total eligible reinsurance claim would be limited to $161,000. Excess retention, or the amount of the claim ineligible due to the ADM, would equal $489,000. In this example, the plan would have been “effectively reinsuring” at a deductible of $589,000. If the claim involved clotting factor products in an outpatient setting, the inpatient-only coverage could potentially result in zero reimbursement, or an effective deductible of $650,000. In either situation, the plan has failed to achieve an effective transfer of risk.

What can be done?

As a result, more health plans are turning to reinsurance with higher individual deductibles, a broader range of covered services, and no inside limits. The pure reinsurance expense will be similar, but the risk to the plan in situations of true, catastrophic claims is significantly reduced.

The Medicare Advantage program is bringing new benefits to the American consumer and new business opportunities to the nation’s health plans. For plans, the key to success in this arena will be in fully understanding and managing the risks that come with the opportunity.

Charles Crispin is President and CEO of Evergreen Re, a national healthcare reinsurance and medical risk brokerage firm based in Stuart, Fla.