A New Special Relationship? US Value Based Care and the London Reinsurance Market.
For decades, the US healthcare system has predominantly paid providers for what they do: consultations, procedures, admissions and tests. Increasingly, however, healthcare providers are being paid for what they achieve.
This shift towards Value-Based Contracting (VBC) has potentially significant implications for the international reinsurance market.
Under traditional fee-for-service arrangements, much of the financial risk associated with the cost of healthcare ultimately sits with insurers and government programmes. Under value-based arrangements, healthcare systems and physician groups can assume responsibility for some or all of the cost of caring for a defined population.
If healthcare costs come in below an agreed target, the provider may participate in the savings. If costs exceed the target, however, the provider can increasingly be required to share in the loss.
At the more developed end of the spectrum, providers accept full or near-full financial risk, receiving a capitated payment per member and assuming responsibility for the medical costs of that population.
In effect, organisations that were historically providers of healthcare are increasingly becoming risk-bearing entities.
A substantial new pool of risk
The scale can quickly become significant and the financial consequences of claims developing differently from expectations can be substantial.
A handful of multi-million-dollar patients can affect results, but so can something less dramatic: medical costs across an entire population simply running several percentage points above expectations.
This creates two distinct categories of risk.
Specific risk is the possibility of exceptionally expensive individual patients—for example, complex neonatal cases, transplants, oncology or increasingly expensive cell and gene therapies.
Aggregate risk is different. It is the possibility that the overall cost of caring for a population exceeds expectations because of utilisation, medical inflation, disease prevalence or numerous other factors.
Both are fundamentally insurance and reinsurance problems.
From insurance buyer to insurance risk
This creates an interesting inversion.
Historically, a hospital system principally approached the insurance market to protect itself against risks such as medical malpractice, property damage, cyber incidents and directors' liabilities.
Under value-based care, that same healthcare system can effectively acquire a healthcare underwriting portfolio of its own.
It must understand expected claims, volatility, concentration, catastrophic exposure and the amount of risk its balance sheet can comfortably retain.
That begins to look remarkably familiar to a reinsurer.
And it creates an opportunity for the reinsurance industry to bring techniques routinely applied to insurers into the healthcare provider market.
Where reinsurance could participate
The most obvious product is specific medical stop-loss, protecting the provider against very high-cost individual members.
But arguably the more interesting opportunity is aggregate protection.
A provider might, for example, be comfortable retaining medical-cost performance up to 103% of its actuarially expected claims but want protection against deterioration beyond that point.
A reinsurer could provide a layer of protection above the healthcare system's retained corridor, limiting the effect of an unusually adverse year on earnings and capital.
More sophisticated structures could potentially include multi-year covers, quota shares, risk corridors and other mechanisms designed to reduce volatility rather than simply insure individual catastrophic claims.
The objective is not to remove the provider's incentive to manage healthcare effectively—that alignment is central to value-based care. It is to distinguish between risk the healthcare system should retain to incentivise performance and tail volatility that it does not need to retain on its balance sheet.
That distinction is precisely what good reinsurance is designed to achieve.
Why London?
The US already has a sophisticated medical stop-loss market. The opportunity for London should therefore not simply be to reproduce products that are readily available domestically.
London's potential advantage lies further up the risk curve.
The London market has long specialised in risks that are large, unusual, difficult to model or require bespoke structures. It also brings together substantial insurance and reinsurance capacity, actuarial expertise and an ability to construct syndicated solutions where a single carrier may not wish to assume the entire exposure.
Those characteristics appear particularly relevant to value-based healthcare risk.
Rather than competing for relatively conventional low-attachment stop-loss business, London and other international markets could focus on high-attachment specific risk, aggregate medical-cost volatility and bespoke structured solutions for large healthcare systems accepting substantial downside risk.
That could represent genuinely incremental business for the international market.
Data will be critical
There are, of course, significant challenges.
Healthcare underwriting requires considerably more than knowing the number of covered lives. Underwriters will need detailed information about demographics, historical claims, diagnoses, utilisation, provider networks, pharmacy exposure and the contractual arrangements through which risk has been assumed.
They will also need confidence in the healthcare organisation itself.
Two systems managing apparently identical populations could produce very different results because of differences in clinical management, contracting, network design and operational capability.
Consequently, successful underwriting is likely to combine traditional actuarial analysis with a much deeper assessment of the provider's ability to manage population health.
That creates an opportunity not just for capacity providers, but also for brokers and specialist intermediaries capable of translating complex US healthcare exposures into risks that international reinsurers can understand and price.
A potentially strategic market
Value-based contracting is not new. What is changing is its scale and the amount of genuine financial risk healthcare providers are prepared—or being encouraged—to assume.
As that transition progresses, the question for healthcare systems increasingly becomes:
How much healthcare risk should we retain, and how much should we transfer? That is a reinsurance question.
For London and the wider international reinsurance market, the opportunity may therefore be considerably larger than another specialist healthcare product.
It is the possibility of participating in the transfer of a substantial pool of risk that historically sat predominantly with US health insurers but is progressively migrating towards healthcare providers.
The market is still developing, the data requirements are substantial and the appropriate structures will need careful design.
But those characteristics have rarely deterred the London market.
Indeed, they are often precisely where it has been at its best.
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