In an abrupt change in position, the US Centers for Medicare & Medicaid Services ("CMS"), in its Advance Notice of Methodological Changes for Calendar Year (CY) 2018, the "Call Letter", published February 1, 2017, announced, for the first time, that quota share ("QS")reinsurance arrangements for Medicare Advantage ("MA") plans are "not permissible."

Currently, almost all MA organizations (MAOs)—large and small—use QS reinsurance to spread risk and/or achieve surplus relief. In particular, QS reinsurance has been critical for small and mid-market MAOs to compete with larger and better-capitalized MAOs. Reinsurance is prevalent even though federal law requires MAOs to "assume full financial risk … for the provision of [] health care services." 42 U.S.C. §1395w-25(b). Most practitioners believe this requirement did not prevent MAOs from reinsuring their risk due to the very nature of reinsurance. Under a two-party Medicare Advantage Plan (i.e., between the MAO and consumer), the MAO (i) always retains the "full financial risk" for providing health care services; (ii) must pay the consumer's claim whether or not any reinsurance is recoverable; and (iii) only has a claim under its indemnity reinsurance contract after it has paid the consumer's claim.

From time to time, however, questions had surfaced whether QS reinsurance for MAOs was permitted under federal law. And in a CMS user group call on December 1, 2016, a question was submitted seeking specific guidance on whether QS reinsurance was permitted for Part C plans. CMS responded at that time: "CMS has not thus far provided additional regulatory guidance interpreting or applying this provision to specific arrangements and does not provide legal advice to outside parties, including MAOs. Depending on the specifics of the arrangement, quota share [reinsurance] may or may not comply with the terms of the statute. Please note that CMS may at a later time provide further clarifying guidance for future years to which MAOs would be held accountable." MAOs and reinsurers proceeded to finalize their QS reinsurance arrangements for 2017.

Now, just two months later, in the Call Letter, which seeks MAO comments for "planned changes in the MA capitation rate methodology and risk adjustment methodology applied under Part C of the Act for CY 2018," CMS, in an apparent reversal of that position, stated flatly that QS reinsurance arrangements are "not permissible," presumably for past, current and future years. This new position is especially curious in light of the federal government's opposition to the Aetna-Humana and Anthem-Cigna mergers claiming they would have an anti-competitive effect, since preventing small to mid-market MAOs from access to reinsurance would have that very impact on the market.

Although the Call Letter seeks comments from interested parties on the proposed risk methodologies on or before March 3, 2017, the Call Letter's language regarding QS reinsurance arrangements does not invite comment or discussion. Nevertheless, we are aware that MAOs and reinsurers alike have reached out to CMS in an effort to persuade the agency to withdraw its determination and give notice, publicly, that the Call Letter was a proposal, open for comment, and that MAOs using QS reinsurance for 2017 will not be considered noncompliant as a result of those arrangements.