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An April 3, 2020 a study by Health Management Associates projected likely gains in Medicaid plan enrollment resulting from the economic downturn from the COVID-19 pandemic. The study outlined low, medium, and high unemployment scenarios with the projected member numbers in 50 states. (At the date of this writing, unemployment figures are already well into the ‘high’ scenario.) The report has proven prescient. A rapid infusion of new members could result in Medicaid health plans experiencing an unanticipated need for capital to meet reserve requirements and administrative expenses. While some states could elect to ease Risk Based Capital (RBC) requirements given the circumstances, Medicaid plans may still face capital constraints to fund additional staffing, systems, and overhead.
There is a lesser known reinsurance structure, Capital Motivated Reinsurance (CMR), that enables plans to diversify their mix of capital, allowing them, for example, to deploy funds for expansion, investment in infrastructure, and to increase their RBC ratio. A CMR structure is a common source of funds for Life and Property & Casualty insurance companies and a relatively inexpensive source of capital. It does not require giving up equity, as with an investor, or repayment of a loan. Variations of the structure can be used for plans that want to use a captive insurance company.
How does CMR work?
A basic CMR structure is very straightforward: a health plan cedes a percent of premium (or a fixed dollar amount) to a reinsurer, which has the effect of removing this share of premium and claims from its RBC calculations. In contrast to traditional quota share reinsurance, however, a CMR structure includes an experience refund provision that returns the profit to the plan (under a traditional quota share, profits would be shared proportionately).
CMR Key Insights
Flexibility – a particular strength of a CMR structure is the plan’s ability to increase the ceded premium level during the contract year to meet unexpected needs. Similarly, if it is determined that the program is no longer needed, it can be halted at year end, or the amount of premium ceded under the CMR agreement can be reduced. This compares very favorably with the encumbrances of other capital sources such as loans requiring repayment.
Projected impact / objective setting – we begin the CMR process with clients by understanding what objectives they want to meet with a potential program. We then project the impact of different ceded amounts on the plan’s capital and the impact on the plan’s RBC ratio based on the financial specifics of the plan.
Reinsurer appetite – with the majority of new Medicaid members likely to have most recently been insured by an employer’s plan, the expectation is for a healthier base of new members. As a result of this and the fact that Medicaid plans tend to be more stable, there is strong interest from reinsurers in CMR transactions with Medicaid plans.
Transaction planning – while a commonly used reinsurance structure, putting CMR in place does involve stakeholders from multiple areas, including Board members, actuarial, legal, the plan’s auditor and outside counsel, and the state insurance department. If CMR is of interest, we highly recommend starting discussions with reinsurers 6-12 months in advance of the need.
Risk transfer – in order for a plan to earn statutory credit, a CMR structure must meet statutory risk transfer requirements.
It’s fervently hoped the economy recovers quickly, obviating additional capital needs. Health plans have a range of options from debt instruments, private investment/venture capital, surplus notes, and traditional quota share reinsurance. Capital Motivated Reinsurance, while less well known, is potentially the lowest cost option, and offers flexibility of duration and capital availability. Want to explore the availability of this structure and its potential use as a valuable tool? Please contact us for additional information.
Connect with the authors to learn more:
Tracy Hoffman, Executive Vice President
Matt Smith, Executive Vice President
Senior Vice President
Riggs Stephenson, Managing Director