As the world struggles to come to grips with the global pandemic of the novel coronavirus (COVID-19) and what it means to our everyday lives, unavoidable questions arise. In the forefront, are questions related to managing unforeseen costs. Specifically, how do insurance carriers and health systems deal with the vast cost overruns associated with treating those stricken with the virus?
Insurance coverage is based primarily on the ability of a group of actuarial professionals to project the cost of claims expense, coverage, and needed premium to cover the services offered. This is normally based on historical data that is averaged over several periods and trended forward to determine the amount of premium needed. In addition, a premium deficiency reserve (PDR) is calculated to cover unforeseen expenses. Even the most clairvoyant actuary would likely not have prepared a PDR to allot for the onset of the financial implications of the cost associated with COVID-19.
A second related challenge to the PDR, is that global financial markets have been hit by a sudden downturn, resulting in less investment income. Since insurance carriers have portfolios that invest in the global economy, even an accurate prediction of all other factors going into your PDR, would not likely have taken this into account. For example, on December 31, 2019, the Dow Jones Industrial Average (DJIA) closed at 28,538. On March 31, 2020, a mere 90 days later, the DJIA closed at 22,327, having lost more than 20 percent in the first quarter. This is a “silent killer” in the world of insurance that most consumers do not consider. Carriers do not just depend on premiums to defer the cost of coverage, but they also depend on investment portfolio income as a component of their revenue. Without that, premium costs would be even higher. Even if claim costs are accurately predicted, what happens when the investment portfolios of carriers are hit with this type of unprecedented loss based on mandated economic stoppage?
In all lines of business, Commercial (ACA), Medicare Advantage (MA), and State Sponsored Medicaid Plans (SSMP), carriers are likely to have costs associated with the COVID-19 epidemic that were not built into their bidding process for the coverage and/or benefit year. So, how can the government help allay the fears of consumers, carriers, and the insurance industry as a whole? Below are several examples of what can be done to help, and, in fact, has been done in the past to help with these uncertain times we now face.
So, what are the options available to address these cost issues?
Option 1: High-cost case or risk pool
High cost risk or case pools have been a staple of the insurance industry for quite some time. SSMPs have for years used these types of reinsurance arrangements for certain conditions (like blood factor products, for example) to ensure that insurers liability is limited in the case of a catastrophic claim amount. The concept of reinsurance, however, is based on the idea that all insurers pay a set amount, usually per member per month (PMPM) to cover the cost of potential catastrophic losses that cannot be predicted accurately by historical trends.
In this option, insurers would pay a set upon rate (for example, $5 PMPM) as part of their administrative costs of doing business. As of March 2020, MA plans had roughly 23.6 million members in local coordinated care plans (Local CCPs). It is a common practice in the MA market for actuaries to assume an average of 10.5 member months to allow for the exiting of members over a year due to a variety of factors.
Based on those assumptions, a rudimentary calculation of the funds available in a high-cost case pool of this type would be as follows:
23,600,000 members * $5 PMPM * 10.5 member months = $1,239,000,000 total available
Keep in mind, this is only an example, and the $5 PMPM reinsurance rate is arbitrary for example purposes. The 23.6 million members in Local CCPs is CMS’ March 2020 number, and the 10.5 member months is a standard value most actuaries use to project member months forward during the annual bidding process. Even assuming only $1 PMPM contribution, still leaves you with a pool of almost $250 million dollars to distribute to defer the costs of the catastrophic claim costs associated with the pandemic.
Once an “attachment point” is reached, the plan can get reimbursed for every dollar over that attachment point, based on the agreement. The attachment point is the threshold that a member’s claims cost must exceed before the reinsurance arrangement will provide a benefit. In our case, a plan would have to demonstrate, based on the published ICD10 codes for COVID-19 billing, that the member had the condition, and claims accumulator reached the attachment point. Every dollar beyond that, would be reimbursed a certain percentage amount. If the attachment point is $100,000, every dollar above that could be reimbursed at a rate of, say, 75 percent, or another agreed upon rate. This would ensure that the covering entity would recoup 75 cents on every dollar over the attachment point to mitigate the unforeseen losses.
However, there is a catch to the above solution (“Isn’t there always?” I imagine you are saying right about now). The fly in this particular ointment is that it requires insurers to agree to pay this cost upfront, incorporate it in the bidding process, and attempt to reasonably predict what the volume of these high cost cases will be to your plan. Since the COVID-19 pandemic is already well underway, have we already missed this boat? Not necessarily, as I will outline below.
Option 2: Temporary unfunded (or government funded) high-cost case or risk pool
Times dictate changes in rules, as we see throughout history. Before WWII, for example, the idea of women working in factories, or outside the home in general was considered out of the ordinary and not the social norm. But, as the men of our country were conscripted into military service, the women of our country rose to the challenge, taking their place on the assembly lines, laying the very foundation of the modern equal rights movement. These pioneering women did not wait to be drafted, but eagerly stepped forward to fill the needed labor gap. Today’s challenge requires a similar paradigm shift in thought.
On March 27, President Trump signed a $2 trillion economic stimulus package, that included $100 billion in rescue funds requested by the hospital industry, as well as a 20 percent bump in Medicare payments for treating patients with COVID-19. This demonstrates the government understands how devastating this pandemic is to the health care delivery system and its insurers. As a result, emergency funding for a COVID-19 risk pool is not that far of a stretch for the insurers to request to get through these unparalleled times. Considering a vaccine is not likely for 12 to 18 months, a two-year unfunded federal mandate (for payment years 2020 and 2021) seem to be a reasonable request to keep insurers from collapsing while treating the most vulnerable of its membership.
This would work exactly like the funded risk pool, but instead of the plans paying in a PMPM reinsurance amount, the government would fund the pool, for a temporary period of time (probably payment/benefit years 2020 and 2021). The one advantage this option would have, is since it was not prefunded via a PMPM contribution, the government would know the exact amount needed to distribute and would not bear the concern of running out of funds, or what to do with unallocated amounts.
For example, in this case, since insurers would submit their impacted claim costs after they are incurred, the government (or administrator) would know up front the exact total costs associated with covering these cost overruns. In the straight reinsurance example, the prefunding may or may not cover the total costs incurred, based on actuarial predictions and historical trending.
Regardless of which reinsurance option is used, it is a valuable potential remedy for insurers in these uncertain times. It was, in fact, one of the original three legs of the stool in the original ACA funding.
Option 3: Risk corridors
The ACA also used a temporary risk corridor program in the beginning of the program from 2014-2016 to discourage insurers from setting premiums too high in response to the uncertainty of who will enroll in the new program. This was used as a stabilizing mechanism to assure insurers that they would not be in danger of huge losses. It is also used in other areas of government sponsored insurance, most notably, Medicare Part D.
A modified risk corridor program involving the use of a plan’s medical loss ratio (MLR) is worth examining as a possible option in these uncertain times. Both ACA and CMS have defined MLR calculations. Generally, an MLR is expressed as a percentage of expenses over revenue. An MLR of 92 percent means that for each one dollar of revenue earned, 92 cents go to expenses. MLRs calculated first with, and then without the associated COVID-19 costs could be used in this corridor. COVID-19 costs would be defined as previously outlined by way of the CMS defined codes above.
In this example, we will assume CMS will set the target MLR to be 88 percent for the proposed COVID-19 risk corridor. In other words, a plan would have to have an MLR of at least 88 percent or greater to participate. A plan would first compute the MLR with all expenses, but, do a second pass that would take out the COVID-19 associated costs. If the MLR with the COVID-19 costs included increase to 92 percent, but, the MLR with those same costs excluded were 89 percent, then the additional 3 percent increase in expenses MLR would be reimbursed back a percentage of the costs responsible for the 3 percent increase in the plan’s MLR.
If the associated additional loss in the jump from 89 percent to 92 percent is $1M, the corridor would pay 50 percent, or $500K back to the insurer to aid in reduction of the loss. The first corridor could be if the plan’s MLR increases from anywhere between 1 percent and 5 percent, there would be a 50-50 split in coverage of the additional loss. The second corridor would then be if the plan’s MLR increases between 5 percent and 10 percent, the reimbursement of the additional loss between the with and without COVID-19 costs could be covered at a 75-25 percent ratio, with the government providing the 75 percent additional loss coverage.
As the health care industry and the world struggle to deal with the fallout of this unprecedented pandemic, it is important for the government to take steps to assure plans that some safety net is in place to address and defer from these added costs to treat COVID-19. What has been outlined here are several options that have been used in the past, and are currently being used now on Medicare Advantage Part D. Perhaps it is time to think about these solutions as a built-in provision for Part C as well.
Although the short-term future is unknown, and in many senses, foreboding, there is solace that can be taken that the costs of treating COVID-19 will, in all likelihood, be temporary. Potential vaccines and treatments are being developed as we speak, every day, around the country. The industry must remain vigilant, and not panic in the face of this crisis. One of the best ways to facilitate that is to give the assurance that losses will be mitigated, and normalcy will return in the coming months and years. These options can help provide that.