Our informants suggested that HMO reinsurance is a product that is primarily used by smaller, less well capitalized HMOs, including start-up plans. HMO reinsurance is usually written on a specific stoploss basis and primarily is for hospital claims.19 The stoploss retentions for start-up and smaller HMOs may be as low as $35,000 to $50,000 per enrollee, but rise as HMOs increase in size. HMOs with 10,000 to 50,000 members are likely to have stoploss thresholds of around $100,000 per enrollee; very large HMOs are likely to have very high thresholds (e.g., $250,000 and up per enrollee) or no coverage at all. Informants estimated the average stoploss threshold to be roughly $125,000.
The stoploss coverage usually is subject to a coinsurance requirement, with the HMO responsible for 10 to 20 percent of the per enrollee costs above the threshold. One large HMO reinsurer reported that the stoploss coverage payments to HMOs for high cost cases are based on the actual payment scheme used by the HMO to reimburse hospital costs. Out-of-area events are subject to a maximum daily average cost.
The price for stoploss coverage varies by a number of factors, including the demographics of the members, whether members are covered by Medicare, Medicaid, or commercial insurance, geographic location, members' benefits, hospital contracts, network coverage for tertiary care, and the target market of the HMO. The stoploss premium for Medicare enrollees may be twice as much as the premium for commercial enrollees.
The market for HMO reinsurance had remained stable for a many years, until two to three years ago, when a number of new firms entered the market and pricing became very competitive. Our informants characterized the current market as driven largely by reinsurers who were "buying business," that is, selling reinsurance at a loss in order to gain market share. The market is stabilizing again, and informants estimated that six to eight reinsurers will remain.
Informants stated that HMO reinsurance is a difficult market to make a profit in because HMOs have become very sophisticated purchasers of reinsurance. Large HMOs with a good understanding of their claims risk are able to play the market, and only choose to purchase reinsurance when they calculate it to be cheaper than self-insuring. As capitation increases, HMOs are less likely to purchase reinsurance coverage (although the capitated provider groups purchase provider excess coverage, discussed below).
19 State required coverages for continuation benefits and insolvency coverage usually are wrapped into the stoploss arrangements.