Hobservations​: A Pair of Proposals to Help Bring Stability and Rationality to the US Medical Insurance Marketplace

Hobson Carroll, FSA, MAAA, President, MedRisk Actuarial Services, Inc., has served the self-funded health community for four decades offering valuable actuarial services. Hobson's approaches are unorthodox and creative. His thinking leads the self-funded health arena to improve and recheck our bearings. 

Hobson Carroll Proposal 1 - A National Public/Private Purchasing Cooperative for High Cost/Special Needs Drugs

MyHealthGuide Source: Hobson D. Carroll, FSA, MAAA, Originally published on 7/26/2019
Hobson Carroll, FSA, MAAA, President, MedRisk Actuarial Services, Inc., has served the self-funded health community for four decades offering valuable actuarial services. Hobson's approaches are unorthodox and creative.

Managing Known High Cost Claimants

Something direct and functional must be done to bring order as well as consistently rational humane treatment of people with acute and/or chronic high cost medical conditions in our society. Many of the people falling into such a “status” in terms of medical treatment needs are there because they require very expensive drug therapies, or the ongoing need of simply “expensive” drugs for a very long time. People who fall into this status are not people who need insurance, they are people who need their known-contingency care financed. They are past the consideration of being insurable in the technical sense.

Insurance is for Unknown Events

Insurance is the way we handle newly occurring, previously unknown-contingency events that have financial consequences. In this country, it is also the way we have chosen to finance the bulk of preventive, primary, and intermediate acute care services and what I will call health “benefits,” if not health “insurance.” It is also the way we expect the system to provide initial financial support for new “ongoing” care requirements, and what, after the initial contract year of exposure, becomes the population with ongoing high cost chronic status discussed above. This is all in addition to the majority use of true insurance, that being the intermediate to high cost, but acute, non-recurring incident or episodes of care that were not previously expected, and which have little expected cost to follow.

While we can debate whether the insurance system should cover basic and preventive care (health benefits), it is pretty much a moot point because it is what we are already doing by tradition, by law, and by regulation. I believe it is fair to expect the private risk market to handle the initial onset of previously unknown, random occurring events that make up the true element of health insurance. It is, however, quite unfair to expect either the sponsoring organization (usually an employer sponsored plan, whether carrier-insured or employer-insured), or their private risk partners (direct carriers, stop-loss carriers, and reinsurers standing in whatever order behind initial risk-takers) to be required to provide non-risk based financing of conditions and treatments that society has deemed as a right for persons to receive and to have payment covered by someone other than themselves.

With that background, I should like to propose two initiatives that I believe would significantly improve the financing, and therefore to at least some extent the delivery, of the right kind of medical care for the ongoing chronic condition population.

Proposal One – A National Public/Private Purchasing Cooperative for High Cost/Special Needs Drugs

The problem with proposals that suggest that Medicare, or state Medicaid programs, should negotiate their own special discounts from pharmaceutical manufacturers are well intentioned, but loaded with knock-on effects and unintended consequences, the chief of which is to create inevitable cost shifting to private payers. This would create an even harsher environment of a feeding frenzy from PBMs and networks and retail pharmacy companies trying to maintain market share, and increased costs overall to the private payer sector. The types of drugs and therapies I envision for this program are those for which the proper risk population is really the entire population. This avoids allowing natural market instincts to divide, price differentiate, and conquer payers that currently exists so rabidly within the Rx market sector.

The National Public/Private Purchasing Cooperative (NPC) would be run on a cost-plus basis with expenses (which should be minimal) added to the prices established via the negotiation with Pharma and passed on via the resulting “national, single, non-discriminatory” price for each of the drugs that will be handled through the NPC schedule/formulary. Essentially, the NPC will function on the “market” side as a single source wholesaler to all purchasers in the country – government programs, traditional PBM/private market clients, insurers, etc. It will provide a single pricing structure to all payers without differentiation and will be the only legal source in the nation for purchasing the drugs that are on the list.

Prices will be negotiated for the entire population with the Pharma representatives of the indicated drugs and the NPC will utilize tools that include power of authority to enforce a “most favored nation” position to negotiate the resulting price schedule, if required. No other market within the country will be legally allowed to exist for the sale of the scheduled drugs.

Having a properly negotiated, single national price for the types of drugs that fall into the high cost category will prevent the “squeeze over” cost shifting on price to take place and allow for a more properly managed total risk cost for these items. The net cost to the nation overall should also be reduced as a world equilibrium price is closer at hand, rather than the multiple “tier” pricing that has existed with the US market overpaying for the benefit of the world. Utilization/frequency use of these drug therapies and their impact on insuring entities is address more fully in the second proposal.

Hobson Carroll Proposal 2 - A National Mandatory Special Condition Reinsurance Cooperative

MyHealthGuide Source: : Hobson D. Carroll, FSA, MAAA, 9/3/2019
Hobson Carroll, FSA, MAAA, President, MedRisk Actuarial Services, Inc., has served the self-funded health community for four decades offering valuable actuarial services. Hobson's approaches are unorthodox and creative.

Proposal 1 (above) is a description to bring reasonable order to the pricing side of pharmaceutical products requiring either catastrophic cost levels, or ongoing higher, if not catastrophic, cost levels, via the formulation of a national public/private purchasing cooperative through which the legal fulfillment of all such prescriptions would have to flow within the United States, whether funded by public or commercial/private insurance payors.

In this Proposal 2, I suggest the establishment of an overriding national reinsurance cooperative for all coverage provided through commercial/private insurance payors (meaning either insurance carrier entities, or self-insured entity insurers) and whether individual coverage, small group coverage, or large group coverage.

Proposal Two – a National Mandatory Special Condition Reinsurance Cooperative

When a medical event arises for a person on a basis that was previously unknown/unexpected, that is a contingency that existing reinsurance/stop-loss markets are dynamic and robust enough to absorb for some “reasonable” amount of time following the diagnosis/start of such occurrence. However, the nature of our commercial reinsurance and stop-loss contracts is to tie everything to the contract period and relate liability solely to services/products provided during that defined time.

  • That is, there are no occurrence/per-cause based type contracts of reinsurance or stop-loss protection, such as exists in, say, Worker’s Compensation, where the liability telescopes indefinitely from the event/accident date (at least for the most part).

This does not mean we cannot construct a global, overlying reinsurance protection that works as a proxy for occurrence, and which can protect the intermediate risk-taker (carrier, reinsurer, stop-loss carrier, or self-insured employer plan) for ongoing, recurring, chronic, catastrophic expense situations.

The principles for design of such a program require certain basic elements. These include, but are not necessarily limited to:

  1. Well-defined terms for coverage, though with flexibility for appropriate change based on medical treatment evolution – who, what, when, how much, etc.
  2. Mandatory participation by all players.
  3. Fair and reasonable premium/cost construction.

Form a Taskforce

To address the first element, both initially and for ongoing updates, I propose a public/private task-force for the establishment of the working coverage details, and the definition list for the status/conditions that are to be covered by the reinsurance program. While I am sure there will be some challenging definitional discussions, I have every confidence that a well-defined set of parameters can be established that will provide the necessary framework for the more pragmatic operational and administrative elements to be designed to work effectively. Such a task-force might be an overriding management/governing body for the reinsurance program as a whole.

Cost for operating the reinsurance facility would be an expense factor built into the premium/assessment rates, and transparent to the public, justified by the governing body, and subject to government oversight as required. The entity is not for profit, and “risk” margins can be offset by the ability to adjust premiums or charge special assessments as required for financial stability of the program.

Requirements Summary

The need for the program to be mandatory for all “primary risk-taking” entities should be clear and manifest. The concept is that the only population large enough to absorb these types of “financial” risks is a proxy for the society as a whole. In this case, that proxy is the covered population of all non-governmental health insurance markets – individual carrier coverage, group carrier coverage, and self-insured entity coverage. No single insurance entity should be allowed a waiver for non-participation in the reinsurance program.

  • Mandatory for all “primary risk-taking” entities. No waivers.
  • Initial coverage design is defined.
  • Cost is actuarially based.
  • The program self-adjusts with experience.
  • Authority to assess to offset deficits.
  • Reinsured Claimants (entities with persons with ongoing claims) incur an ongoing annual co-pay and annual maximum cost cap.
Once the initial coverage design is defined, actuarial estimation of the cost of that coverage against the population involved can be made, an appropriate expense component added, and preliminary program premiums established. The general principle is that the program should be self-adjusting as experience develops, and the facility should have assessment authority to offset deficits that might accumulate in the early stages.

It is important that the initial estimates for premium rates be conservative to avoid such early assessments as it should be easier to adjust future premiums downwards than make up for deficits. This is an important and potentially challenging process to work through, but I believe the industry has the capacity to price closely the initial coverage once the definitions of that coverage are finalized. In addition to ongoing premium charges, entities with persons receiving active reinsurance protection (i.e., are being reimbursed ongoing claim amounts) from the facility will also contribute via a coinsurance, anticipated to be 10% up to a dollar cap per primary entity contract period, to maintain interest, and to offset some of the general program cost with a claimant specific contribution.

Addressing Inherent 'Financial' Risk

At this point, I will describe an example of how the reinsurance protection of this national facility might work in order to address the ongoing “financial” risk inherent in certain high cost, ongoing/chronic condition claimants. It is important to consider the concept of “status” as well as more traditional externally determined factors (such as a time period, or a dollar amount being reached) in both the establishment of whether a beneficiary covered by a primary insurer may be considered for coverage by the facility, i.e., “qualified,” and then to be in an “active” reimbursement category after meeting other contingent requirements for coverage.

For the purposes of an analogy, think “disability” insurance, where there is the primary requirement that an insured first be “disabled,” which is a form of status. Then, usually a time deductible (elimination period) must be met before benefits will actually become payable. However, once that time deductible is met, the person must continue to be in the status of “disabled” (contract definition) in order to actually activate the benefits payable and must stay in that status in order to continue to be paid.

Proposed Facility is to Pool & Fund "Ongoing, Known" Claims

The proposed reinsurance coverage would be firstly contingent on the claimant’s condition being one of those that will have been classified as eligible for this program – certain identified, ongoing (for some minimal amount of time on an expected basis), high/catastrophic cost conditions that will identify the covered status. Presuming the person remains in a covered status category continuously, then once the primary insurance entity has satisfied the initial time and/or dollar requirements to be established, then the claimant will fall into an active payment (reimbursement) designation, and the reinsurance will provide its stated protection on an ongoing basis to whomever the primary insurance entity covering the person happens to be.

This is a very important point – once the claimant is considered a covered status condition beneficiary of the facility, it doesn’t matter if the primary insurance entity changes at a contract renewal date (contract renewal for the entity and the underlying insured – individual, fully-insured group, or self-insured entity). The coverage by the facility is for that person so long as they remain continuously covered within the population “ecosystem” protected by the reinsurance pool.

An Unknown Contingency Becomes a Known Contingency

For our example, let’s assume that a previously unknown contingency event happens to a beneficiary of a given primary insurance entity coverage. I.e., there is the onset of a condition due to accident or sickness that would not reasonably be considered as a known pre-existing condition. This could be the birth of a hemophiliac child, a car crash with excessive burns and quadriplegia, a child coming down with an orphan disease for which a recent pharmaceutical treatment has been developed with catastrophic ongoing costs. The point is that the situation falls into a category that should be submitted to the reinsurance facility for preliminary notice and evaluation for “status” determination. The primary insurer would be responsible for the first $250,000 of expenses (based on the coverage of that primary insurance plan of benefits), whether in the initial contract year, or extending into a second contract year. It should be unlikely that a potential claimant could not have at least that much in expenditures within 9-24 months and still maintain the conditional status. (Note that this is an merely an example of the initial deductible.)

Once this “deductible” is met by the primary insurer (who may have other coverage, such as stop-loss protection if it is a self-insured entity, and which can respond to that first $250,000 layer), and the conditional status continues, then the claimant becomes covered by the reinsurance facility for 90% of expenses from that point on, subject to a maximum of $100,000 per underlying entity contract year applying to the 10% coinsurance for which they are responsible. That is, the maximum, in this example, that the primary entity would have to pay of the applicable claims would be 10% subject to a $100,000 cap for each contract period after reinsurance benefits become payable. I am suggesting this limitation because I believe it is not unreasonable to suggest that the primary insuring entity can budget and handle such an amount given the 10% share it represents, and it helps defray a portion of the ongoing claims cost of the facility itself without being onerous. Obviously, all these dollar and time parameters are variable to the final form of the program.

Remember that the purpose of this facility is to pool ongoing, known contingency, financial burdens that exist now with the expectation that the primary insurer and/or their reinsurance/stop-loss partners should be required to shoulder such randomly distributed situations, and not replace true unknown contingency financial risk management tools. The existing reinsurance and stop-loss market does quite well in providing protection to primary risk entities for this type of true insurance risk.

The idea is to make the renewal of such programs with ongoing major expense claimants smoother and allow for much greater competitiveness without the primary insurer always, at the end of the day, being “stuck” with the claimant, because the national pool will have taken the lion’s share of the ongoing cost of that treatment out of the equation. This should allow for a more robust, active, and fair market that is intended to address the actual risk characteristics of the group/carrier involved for essentially unknown contingencies (and minor known situations), without the ever-present peril represented by catastrophic known contingencies hanging over the event.

Additional Comment

If this mandated reinsurance facility is considered by employer sponsors, why not move to full "Medicare for all"? It is important to maintain a robust self-funded environment where employers, TPAs, stop loss carriers and others constantly compete and innovate to create customize coverage for employees and family members to improve health and achieve cost efficiencies. This solution to societal conditioned financial risk, as opposed to true insurance risk, will allow the proper function and creativity of the private risk market to perform at its best.

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