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Future of Stop-Loss in a "Markets" Environment

(This is based on a sent letter to SPBA Service Partners in Summer 2007.)

Background for the "Stop-Loss Federal Policy Trends" session at the  SPBA Fall 2007 Meeting

During a recent public policy symposium in Washington, DC, entitled "Is There a Role for Markets in Health Care?" influential national of policy thinkers of both parties privately shared their very candid experiences and thoughts about handling adverse selection in health care.  We share these thoughts with you, our Stop-Loss Service Partners, as a heads-up for you in forging a new approach to adverse selection for the betterment (and preservation) of the private Stop-Loss industry serving self-funding.  SPBA asks you to think very broadly about the future direction of the industry in a political environment that desperately needs solutions and not business as usual.  

What's the trigger for the change?  The federal government, through the implementation of Medicare Part D, now has experience in running a successful risk adjustment/reinsurance mechanism for private plans.  The Medicare Part D program employs a risk adjustment mechanism to limit the exposure of private plans offering Part D to Medicare beneficiaries. Companies with Part D plans attracting primarily healthy people receive far less payments from the government than companies with Part D plans attracting patients with multiple expensive chronic conditions.  The results so far for the Part D program are astounding – the cost of the Part D program is running 30% to 40% below the original cost projections (unheard-of in a federal entitlement program)!!   There is also a lot of talk on the P&C side.

Market-based political & economic policy thinkers from both political parties believe that this outcome is largely due to the collaborative effort between private sector companies which were given incentives to offer numerous plan options to Medicare beneficiaries, along with a government risk-sharing mechanism that insulated insurance companies from excessive risk exposure.  All other health payment formats are hurting (government & private), so building on the Part D success appeals to them as the way to go.

So, given this early success with Medicare Part D, policymakers on both sides of the political aisle are likely to draw from this experience for ideas in how to assist the broader health insurance industry in managing risk in a way that will not overly burden employer groups who have individuals with serious health conditions.  In other words, Uncle Sam may get into the Stop-Loss business, or become the driver of reinsurance and thus Stop-Loss customs.  (In other words, eliminate the sad stories of lasers & denials.)

The political thinkers' preference is for the private reinsurance industry to solve the problem on their own.  If not, perhaps design some joint government/private format, and if not, Uncle Sam will dictate L.

When the government seeks to assist an industry there is always reason for concern as their good intentions may inadvertently wipe out entire industries or lead to problems.  With this caution in mind, we urge the Stop-Loss community to be creative and begin thinking of ways to develop your own industry-wide risk adjustment mechanism that would offer protections to individual Stop-Loss companies for taking on higher risk individuals.  Such a mechanism would reduce the need for underwriting groups, as the risk would be spread throughout the industry and not impact the profitability of any one company.  

The traditional insurance methods of underwriting groups and reducing coverage for people with serious health conditions (such as ESRD) will not continue to be a viable way to do business.  If there is not progress to adequately insure (protect) those individuals who need health coverage the most, that will send a clear message to the federal policymakers that the industry has failed and that the government must take over.  Some Stop-Loss companies are already moving ahead with ideas & products.     

NOTE:  SPBA is giving you this early heads-up, but the leadership for this evolution will need to come from the upper levels of the Reinsurance industry, of which Stop-Loss is considered a subset.  SPBA's role will be limited to helpful insights, consumer (TPAs & plans) input, and encouragement from the sidelines.  SPBA just wants you to be informed as your industry proceeds.

Meeting Handout