Establishing an Analytical Framework for Measuring the Role of Reinsurance in the Health Insurance Market. 2. HMO Reinsurance


The HMO Annual Statements provide some information about the range of types of reinsurance arrangements into which HMOs enter. Tables C-1 and C-2 in Attachment C present selected information from these statements for the HMOs in Pennsylvania and Wisconsin, respectively. Unfortunately, these HMOs do no report the details of their reinsurance arrangements consistently. Some report only a deductible amount, others only a coinsurance percentage, and still others only an annual or lifetime maximum. Many have a combination of these. While these inconsistencies make it difficult to interpret the information that is provided, we can make several observations.

Generally, the range of arrangements in Pennsylvania and Wisconsin are similar. Specific deductibles (sometimes called stoploss thresholds) range from $50,000 to $250,000in Pennsylvania and from $25,000 to $200,000 in Wisconsin.15 (One HMO in Pennsylvania reports a deductible of $1 million). A clear relationship between total earned premiums and deductible size does not appear to exist in Pennsylvania, although the two reinsuring HMOs with the largest premiums (above $400 million) do have the largest deductibles ($250,000). In Wisconsin, deductibles and premiums appear to follow a more clear pattern. HMOs with higher total earned premiums (above $60 million) tend to have higher deductibles ($100,000 to $200,000), while HMOs with lower earned premiums tend to have lower deductibles ($50,000 to $85,000).

Fewer than one third of Pennsylvania HMOs and one quarter of Wisconsin HMOs report copayment percentages in their Annual Statements. Among reporting HMOs in both states, the amount the reinsurer pays after the deductible is reached ranges from 50 to 90 percent, usually closer to the latter. It is unclear whether the HMOs that do not report copayment percentages have 100 percent of their claims paid after reaching their deductible, or merely omit this information.

Just under half of the HMOs in both states report either annual or lifetime limits on coverage. Annual limits are more common than lifetime limits in Wisconsin, but both occur with equal frequency in Pennsylvania. The annual or lifetime limit is most often set at $2 million, and less frequently at $1 million.

Several different arrangements exist in Wisconsin. One medium-sized HMO has aggregate coverage in addition to its specific coverage, with an aggregate deductible of $750,000. One reports coverage for physician services as well as hospitalization. In this case, the deductible is lower for the physician coverage ($15,000, versus $35,000 for hospitalization). One reports coverage only for certain transplant procedures, while another reports a separate (lower) coverage percentage for transplants in non-approved hospitals. Finally, one has a lower deductible for Medicare risk utilization than for commercial and Medicaid utilization.

All HMOs in Wisconsin have some type of reinsurance, while the two largest HMOs in Pennsylvania (U.S. Health Care and the Keystone Health Plan East) are self-insured. These two HMOs have earned premiums of more than $1 million.

We located one analysis looking at HMO reinsurance arrangements.16 The analysis suggested that the size of the deductible is related to the HMO's financial strength, and generally correlates with the size of the HMO. Figure 1 shows the relationship between the deductible level and the number of members in an HMO. Deductibles under $50,000 are most common among HMOs with fewer than 10,000 members, while deductibles in excess of $75,000 are most common among HMOs with more than 50,000 members.

HMO by Size of Specific Deductible

Figure 1: HMO by Size of Specific Deductible

Source: Jack LaMar, Pricing and Underwriting Stoploss: "HMO Reinsurance." Presented at the Society of Actuaries Spring Meeting, 1996.

15 Based on our interviews with reinsurers, we assume that the deductibles reported are specific deductibles unless otherwise labeled, and that they apply only to hospitalization unless otherwise noted.

16 Jack LaMar, Pricing and Underwriting Stoploss: "HMO Reinsurance." Presented at the Society of Actuaries Spring Meeting, 1996.