By Lauren Flynn Kelly

After a brief attempt to ban the use of quota share reinsurance by Medicare Advantage organizations, CMS two years ago reversed its position and said it would continue to allow insurers to “share risk proportionally” as long as it fit into one of four categories of exceptions allowed by federal law. But one industry lawyer says CMS has since applied an “inconsistent application” of the rules.

Quota share reinsurance is first dollar proportional reinsurance and is based on the sharing of a percentage of liabilities as opposed to an “attachment point” or fixed dollar amount after which point the reinsurer steps in and bears the risk. It is also widely used by MA and other insurers to manage their financial risk exposure.

According to Jon Biasetti, a partner with Locke Lord LLP, the firm has “become aware” that since CMS’s retraction of its prohibition, “several MAOs have had their quota share reinsurance agreements questioned, and in some cases, disallowed by CMS” while others have reported no issues.

CMS at the time of reversing its decision said the “statute permits MA organizations to share risk proportionally, so long as the risk (the type and amount) is in the exceptions,” referring to four categories of permissible exceptions contained in Section 1855(b) of the Social Security Act. But Biasetti says the four exceptions included in the statute do not address the traditional “amounts” of risk covered by quota share, and that his sense is CMS doesn’t fully understand how quota share reinsurance works.

Bruce Merlin Fried, a partner in the Washington, D.C., office of Dentons, adds that if quota share reinsurance is indeed prohibited in MA, smaller plans could end up using funds that might otherwise be spent on expanding their service areas, which could negatively impact competition.