By Ward Humphreys
With the continued evolution of managed care, health care providers are increasingly accepting capitation risk from HMOs. Under capitation, physician groups and hospitals receive a fixed per-member, per-month payment for providing medical care to HMO members, rather than payment for the actual services rendered. With capitation contracts, risk varies from modest, “soft dollar” risk—where the provider is at risk only for professional or facility charges—to full risk—where the provider has “hard dollar” exposure to charges from other providers, care received from outside of the HMO’s contracted panel and out-of-area emergency care.
When providers sign capitation contracts, they assume two types of risk: catastrophic and “cash flow.” Catastrophic risk occurs when a member, for whose care the provider is responsible, requires costly medical treatment for a burn, organ transplant, pre-term birth or other catastrophic condition. “Cash flow” risk occurs when a large, “hard dollar” claim early in the contract period exceeds the capitation income the provider has received to date—for example, a $500,000 claim incurred during the second month of a capitation contract which pays the provider at $100,000 per month. Without excess insurance, the provider is responsible for paying all claims.
Provider Excess Loss (PEL) insurance, also referred to as capitation stop-loss, is available from insurance carriers to reduce the provider’s financial exposure. While similar coverage is typically offered with the capitation contract from an HMO, there are clear benefits to securing excess loss coverage from an insurance company.
• Coverage for all of a provider’s capitation contracts can be included under one excess loss policy. This means only one policy effective date for claims tracking and submission purposes, one deductible level and one excess policy to review annually.
• One company to which claims are submitted and to which questions and service needs are directed.
• Clearly-defined excess loss insurance policy. Excess loss coverage is underwritten on a “risk attaching” basis, where the policy attaches to the risk and obligations that a provider accepts when signing a capitation agreement. The policy specifies the contract period, deductible and coinsurance levels, reimbursement basis, maximum reimbursement and limitations and exclusions.
• The ability to “roll” other capitation contracts into the initial excess policy. A provider can add risk contracts as they are signed or as existing HMO agreements are converted to capitation contracts.
• Cost economies. When excess loss coverage is purchased from the HMO, the deductible level is set based on the number of members covered under that contract. Maintaining separate deductibles for each contract is not only cumbersome for reporting and claims submission, but usually results in keeping deductibles at artificially low levels with more costly premiums. By establishing the deductible level based on the aggregate number of members from all capitation contracts, the provider is able to accept a higher deductible for all members which may significantly reduce premium costs.
Provider excess loss is one of the most complex insurance products on the market today. The potential for losses resulting from improperly priced coverage is great, and can be compounded by an underwriter’s lack of experience and access to data. When purchasing PEL, a provider must carefully review the proposed coverage and the underwriter’s PEL experience. While the contract term, deductible and coinsurance levels are usually straightforward, the reimbursement basis might vary from one underwriter to the next. For example, with physician risk using the Resource Based Relative Value Scale (RBRVS), some insurance companies will specify a conversion factor, whereas others will state “geographically adjusted” for a specific area. Similarly, with hospital risk, there may be differences in the per diem schedules that are specified.
Out-of-area emergency, one of the most difficult exposures for providers to manage, and consequently one of the largest areas of risk for an underwriter, is always an important concern. Often times, by offering a lower per diem in this area, an underwriter can drastically reduce the premium quoted. However, consider a modest, out-of-area burn claim that runs 50 in-patient days and totals $250,000. With a low $1000 per diem, for example, only $50,000 would be eligible for reimbursement. In addition, most policies which include hospital risk require a deductible of at least $50,000, leaving the provider responsible for paying the claim.
When evaluating an underwriter, health care providers should look at three factors:
• Experience with PEL. Given the complexity of this coverage, it is important to know the underwriter’s experience with PEL insurance. For example, how many years has the staff been underwriting this type of coverage? Also, does the underwriting firm work mainly with PEL, or is it a multi-line underwriter that has recently begun to underwrite this line?
• Claims staffing and philosophy. An experienced PEL underwriter should have claims administrators familiar with all aspects of the coverage. How many claims adjudicators are fully trained and experienced in PEL? Recently, a claims adjudicator with our company found a duplicate charge for a referral claim to our client in the amount of $925,000. The claim had already been paid twice, and was not caught by the provider’s system. A working knowledge of the information management systems used by providers is essential.
In addition, are the adjudicators dedicated to PEL or do they handle claims in other lines as well? How quickly does the underwriter reimburse claims? An experienced underwriter, who is more likely to price the coverage correctly, will expect claims, reserve for them appropriately, and be in a position to “turn them around” promptly. In contrast, an inexperienced underwriter will face unanticipated claim volume and, by necessity, be more stringent in reviewing claims, resulting in slower reimbursements.
• Policy assistance. When a provider accepts risk from an HMO, they are in essence forced into the role of insurer, assuming complete responsibility for providing and managing the medical care of their members. An experienced underwriter should have the staff available to meet with the provider and review the coverage purchased, assist with data gathering and reporting requirements and help with managing catastrophic claims.
As capitation contracts continue to proliferate, physicians and health care providers need to fully understand the financial risks associated with capitation. While price is an important factor when purchasing PEL insurance, choosing a PEL program designed and administered by an experienced, specialized underwriter should be the number one concern.
Ward Humphreys is regional vice president in the Fort Washington, Pennsylvania office of Excess Risk Underwriters, an insurance marketer and administrator based in Coral Gables, Florida.