Reinsurers to The Rescue.

Reinsurers may keep the declining health-provider capitation market alive... at least for a while.

Only a few years ago, capitation was one of the darlings of the managed-care market. If insurers could pay providers a fixed amount per patient, they could keep costs down and inspire providers to practice efficient medicine. Lately, some providers who haven't seen the profits they expected aren't so crazy about capitation any more, and many observers have predicted its demise.

Others aren't as skeptical. "There have been a lot of headlines over the years that capitation is dead; however, we and others absolutely refute that," said Charles Crispin, president of consulting firm Evergreen Re and an author of the "Fourth Annual Managed Care Indicator," a recent study that examined the current state of provider capitation.

As capitation struggles to survive, one thing remains clear--provider reinsurance for catastrophic loss is helping to keep it alive. But as the capitation market faces a decline for the first time in its more than 10-year history, many insurers fear the provider excess-loss industry will follow a similar pattern.

Capitation and Reinsurance

Since the early 1990s, many hospitals, single-specialty and multispecialty physician practices and integrated systems have used capitation in the delivery of health services. Under capitated agreements, provider organizations receive a fixed per-member, per-month payment for providing medical care to health-plan members. More than half of the provider organizations surveyed by Evergreen Re said that they are currently involved in these agreements. In addition, 25% plan to seek additional contracts in the coming year. "This suggests that more providers are willing to sit down and have pragmatic discussions with health plans, and it is no longer a 'take it or leave it' philosophy but rather a willingness among plans and providers to work together in a way that they haven't done before," Crispin said.

On the other hand, fewer provider organizations are entering the capitation market. "A lot of providers thought capitation was a good idea, but never developed the necessary critical mass," said Genie Newville, director of medical and managed-care reinsurance for ING Re.

Lack of profitability and inadequate reimbursements from HMOs are also being linked to this trend. In addition, many HMOs are making the shift from capitation to a discounted fee-for-service approach, particularly for multi-specialty practices.

Since one of the pitfalls of capitation for providers can be the potential for severe economic loss caused by patients suffering catastrophic events, some providers have moved toward carve-outs, or the elimination of costly services from a health maintenance organization contract. Others have turned to reinsurers' excess-loss policies as the answer.

Changing Market

"Every practice that has a risk contract considers reinsurance as one of their options," said David Gans, director of practice management resources for the Medical Group Management Association, an Englewood, Colo.-based organization that represents medical group practice professional managers and physicians. Over half of the association's multispecialty practices report capitation revenues and frequently turn to reinsurers for provider excess-loss policies to stave off potential economic loss.

The Health Intelligence Network's 1999 Capitation Survey also points to a rise in the number of capitated physicians and physician groups opting for excess-loss insurance. According to the study, the percentage of primary care groups involved with provider excess-loss insurance rose to 67% in 1999 from 46% in 1998, while multispecialty practices jumped from 52% in 1998 to 89% during the following year.

However, some reinsurers and insurers already involved in the market see the industry taking a somewhat different path.

Similar to the changes surrounding the capitation market, "we see the market between providers and reinsurers also changing," said Richard Berve, product manager of Provider Excess Insurance for GE Employers Reinsurance Corp., based in Overland Park, Kan.

While demand for this coverage continues, the market in general is shrinking due to changes in mechanisms for risk transfer for health-care services, said Carol Adams, managing actuary, accident and health, of Irving, Texas-headquartered TIG Insurance and past-president of the Provider Excess Loss Association, a nonprofit trade group for companies doing business in the provider excess-loss reinsurance market.

Provider excess-loss is one of TIG Insurance's core accident and health products. The industry has experienced some recent lapses in the coverage due to the decreased use of capitation arrangements, Adams said.

Lack of Understanding

Also, providers' lack of understanding of contracts and limited access to data are driving some organizations out of the market. Capitation excessloss remains one of the most complex insurance products on the market today.

Reinsurers want to write coverage that adequately addresses a provider organization's catastrophic risk transfer needs, Crispin said. "To the extent a provider organization strongly believes that its underlying facility risk is limited to straight per diems, and to the extent the reinsurer provides coverage to that strong belief, results could be devastating to the organization if their assumptions were incorrect." In these situations, a substantial and unexpected increase in expenses and corresponding drain on the organization's capital can occur. Reinsurers achieve a great deal of predictability when limiting their exposure in straight per-diem situations, and "experience is paramount therefore in structuring these types of programs," said Crispin.

ERC's Berve agrees that physicians' and hospitals' lack of understanding of contracts has been widely felt throughout the industry. When providers first moved into contracts, they negotiated what risks they were going to transfer and payment for those risks. "It appears many providers went out and blindly signed onto these arrangements and often didn't have the ability to provide some of the care within their own facilities and didn't have appropriate arrangements in place with facilities capable of providing the care," said Berve, who provided the example of a hospital that enters into an agreement to reimburse the cost of organ transplants but doesn't have the ability to perform such operations. However, providers' understanding of contracts has improved dramatically over the past several years, he said.

One way provider organizations are better comprehending these risks is through the assistance and advice of brokers and consultants. Providers need to not only look at full risks and full rewards but also the partnership aspects they are entering into, said Medical Group Management's Gans.

Evergreen Re recently developed a proprietary analysis tool-Expected Net Cost of Reinsurance Analysis-to help providers assess risks and better understand the types of contracts they are entering into with insurers. This tool allows Evergreen Re to model different reinsurance coverages against one another so clients can make better informed decisions prior to purchasing coverage. "The coverage must be custom-tailored to meet the provider organization's underlying need and appetite for risk," said Crispin. "This coverage can't be handled through traditional insurance channels...experience is vital."

Increased understanding of the product terms and improved underwriting are helping to stabilize the market, Adams said. In addition, the hardening of the market and improved pricing of an industry that many insurers once considered difficult to price will perhaps help preserve provider excess coverage, while driving new organizations into the market.

Reinsurance Advantages

Reinsurance is one of the legs on the stool in protecting organizations from insolvency, Crispin said. While few organizations understand the relationship between capital and reinsurance, there is an absolute inherent trade-off between the two. Used effectively in combination with appropriate levels of capital, reinsurance dramatically improves predictability of the desired bottom-line financial result. "Reinsurance should be turning an unknown potential cost or loss into a known expense (or the net premium)," he said.

While not all providers secure excess-loss coverage through reinsurers, but rather go directly through managed care groups, an article in Physician's News Digest points to several advantages reinsurers' policies provide over direct excess coverage contracts with HMOs:

* coverage of all of the provider's capitation contracts can be included under one excess-loss policy;

* only one company is involved for claims submittal, to answer questions and to provide direct service needs;

* there is a clearly-defined excess-loss insurance policy;

* the ability to "roll" other capitation contracts into the initial excess policy; and

* recognizable cost savings. When coverage is purchased from an HMO the deductible level is set based on the number of members covered under that contract; aggregate coverage, on the other hand, allows providers to accept a higher deductible for all members that may signiflcantly reduce premium costs.

Reinsurers and insurers who remain in the market will likely reap the benefits of continued profitability. "For those of us in the marketplace that are very conscious about looking at contracts and understanding provider groups, carriers and their underwriting process, we think this will continue to be a viable market in the future," said Mary Susan Bradley, second vice president of General Cologne Re, based in Stamford, Conn. The company plans to continue to provide resources and capacity to its insurance clients who insure provider groups.

Driving to Market

There are several motivating factors that will continue to drive provider organizations into the excess loss market.

Managed-care organizations are going to expand the scope of services they provide due to a demand now for a broader definition of managed care, said Robert Hartwig, vice president and chief economist with the Insurance Information Institute. Managed-care providers will also need to greatly expand the number of people that they service and the intensity with which they service those individuals.

Patients' Bill of Rights

Hartwig also points to the Patients' Bill of Rights as having a potential influence on the market. If passed, the bill may provide patients the increased opportunity to sue their managed care providers. "This creates an extraordinary amount of uncertainty for managed-care operators, who will have a greater need than ever for limiting the impact of catastrophic judgments against them on their earnings," said Hartwig. This, in turn, will drive providers to seek excess-loss coverage to guard against these potential losses.

In addition, rising health costs and an aging population will motivate providers to seek reinsurance coverage. "Since we are heading into an era with an increased amount of uncertainty due to a changing population seeking medical care and the re-igniting of health-care inflation, there is a very volatile mix that requires that managed-care providers seek means of stabilizing earnings," said Hartwig. "Reinsurance will certainly be a part of that."

Providers, particularly smaller players, who do not understand the potential for profitability in the capitation-reinsurance relationship will likely be driven from the market. However, "larger, more sophisticated providers will not only stabilize or grow their capitated membership but do so wisely," said ERC's Berve.

The Trials of Claims Turnaround

While reinsurance contributes significantly to maintaining physicians' and hospitals' financial stability, many health plans are finding delays in reinsurance claims reimbursement are resulting in the slowdown of providers' steady cash flow.

According to the recent "Fourth Annual Managed Care Indicator" study by consulting firm Evergreen Re, delays in reinsurance claims reimbursements are a growing problem throughout the industry, primarily for providers that are not well capitalized. As state regulators continue to add solvency and reserve requirements and, in some cases, mandate that reinsurance claims older than 90 days cannot be recognized as admitted assets, health plans and providers are feeling the ill effects.

More than half of Evergreen Re's study participants indicated that the average claims reimbursement time exceeds 60 days. In fact, a growing number (37%) of participants experienced a 90-day or longer claims reimbursement timing, a problem that has been felt by 6% more respondents than in 1999.

Not only can long-awaited reimbursements jeopardize providers' cash flow, but slowly paid claims can threaten the adequacy of a health plan's capital, according to the Evergreen Re study.

"Health systems at risk in many cases have access to significant capital, such as foundation monies," said Charles Crispin, president of Evergreen Re. In other instances, health systems may have a separate managedcare organization that serves as a holder of the risk contract. However, managed-care organizations without access to sufficient capital and those with parent companies unwilling to continually provide funding could run out of money because of delayed claims processes.

Reinsurers such as GE Employers Reinsurance Corp. are trying to eliminate this concern and are paying careful attention to ensuring that reinsurance claims are processed and reimbursed in a timely fashion. The company's goal is to have claims turned around within 45 days, said ERC's Provider Excess Product Manager Richard Berve.

Technology has a hand in simplifying this process. Once ERC's claims department works through required data elements, the company strives to receive all information electronically, which speeds up the process and allows for quicker turnaround time, said Berve. Otherwise, the manual claims process can result in a burdensome administrative task and delayed reimbursement for providers.