A new way to reinsure HMO's: managed medical reinsurance with a high deductible can eliminate reimbursement uncertainty caused by internal limits.

Traditionally there has been a difference between the way health insurers and health maintenance organizations go about reinsuring their business. In today's market, however, an HMO might benefit by adopting some of the features of a health insurer's excess medical reinsurance contract and adapting these to its managed care needs. Ill call this hybrid "managed medical reinsurance."

Health insurers typically purchase excess medical reinsurance with deductibles as high as $500,000 and even $1 million to guard against large claims such as an organ transplant or a multiple birth event. HMOs may have similar risks, but have taken the position that because they manage medical costs they are able to keep claims down. Therefore they select an HMO reinsurance plan with a much lower deductible and usually several daily, per unit or annual internal limits.

Both approaches can be effective depending on a health plan's needs and risk tolerance. HMO reinsurance has evolved during the past 20 years to reflect the way HMOs try to control large claims through contracting and medical management. The low deductibles, sometimes under $100,000 per member per year, require various internal limits in order to keep reinsurance premiums affordable for the HMO. A daily limit on inpatient services, for example, is required in most agreements, limiting inpatient services eligible for reinsurance to a certain dollar amount per day, such as $3,000. Other examples are daily limits on outpatient claims or injectible drug claims, and annual dollar limits on outpatient claims.

Managed medical reinsurance is a viable "alternative to the HMO reinsurance approach found with most health plans. Instead of the low deductibles and various internal limits found in a typical HMO reinsurance contract, a managed medical reinsurance approach features higher deductibles (but not as high as with many excess medical plans) and no internal limits. Generally the HMO is still responsible for a coinsurance, for example, 10%. Eliminating the inner limits immediately makes it easier to calculate reinsurance recoveries. While the higher deductible might suggest that this approach is only for larger health plans, the example in the box shows that a managed medical approach can be both simple and cost effective for small and medium-size health plans as well.

Managed medical reinsurance eliminates the reimbursement uncertainty resulting from limit cutbacks, with the wade-off being a higher deductible. The reimbursements often may be similar or higher than coverage purchased at a lower deductible, as all of the claims count toward the deductible. While this is a new concept in the HMO market, this is the common reinsurance approach in the indemnity, preferred-provider-organization and self-funded markets where insurers typically purchase deductibles of $500,000 or more per insured per year with comprehensive coverage and no inner limits.

While the traditional HMO approach still can work well, the frequency of high-dollar claims in excess of $500,000 is increasing. This is the result of several factors, including push-back from providers on contract provisions and a trend for certain specialized procedures being performed at only a few facilities. Rising health trends, an aging population and the costs of new technologies and treatments also help drive up costs.

As the potential for these high-dollar claims increases, going to a higher dollar deductible in return for more predictable reinsurance recoveries may make sense for more HMOs.

Elizabeth J. Anderson, a Best's Review columnist, is a marketing underwriter with ING Re's Medical and Managed Care Reinsurance Unit in Minneapolis. She may be reached at [e-mail].

Sample Reinsurance Recovery
Typical HMO Reinsurance vs. HMO Managed Medical Reinsurance

Assumptions:

Incurred charges, 40 days at out-of-area facility:      $440,000
Incurred charges, additional 50 days at contracted      $195,000
Total incurred charges:                                 $635,000
Average daily minimum limit:                              $4,000
Length of stay:                                          90 days
Coinsurance (health plan's share):                           10%
Average incurred per day:                                 $7,056

Standard HMO Reinsurance Recovery

Deductible                                              $100,000
Average Daily Maximum in Agreement                        $4,000
Incurred charges                                        $635,000
Allowable (length of stay x ADM)                        $360,000
Less HMO deductible:                                   ($100,000)
Subtotal:                                               $260,000
Less Coinsurance:                                       ($26,000)
Net expected recovery:                                  $234,000

Managed Medical HMO Reinsurance Recovery

Deductible                                              $250,000
Incurred charges:                                       $635,000
Allowable:                                              $635,000
Less HMO deductible:                                   ($250,000)
Subtotal:                                               $385,000
Less Coinsurance:                                       ($38,500)
Net Expected Recovery:                                  $346,500