The proper balance: new solvency standards are forcing health-care providers to find the right combination of reinsurance and risk retention to maintain adequate surplus. (Financial Standards: Life/Health).Solvency The ability of an individual to pay his or her debts as they mature in the normal and ordinary course of business, or the financial condition of owning property of sufficient value to discharge all of one's debts. solvency n. and positive cash flow have become as hot in the health-care arena as the rising cost of pharmaceuticals. Maintaining adequate surplus is a smart business practice in any field. The unpredictable and rising costs of health care make solvency an especially relevant topic to health plans and provider groups. Almost every group in health care is subject to financial standards. Many health plans have established minimum solvency standards for the entities with which they contract. In addition, 21 states have established risk-based capital requirements Risk-Based Capital Requirement A stated requirement of liquid reserves placed upon banks and institutions that deal in risky ventures. Notes: These requirements exist for the protection of investors who hold an interest in these types of businesses. for health plans following the National Association of Insurance Commissioners' Model Act on standards for health organizations. Some states have gone even further. For example, California California (kăl'ĭfôr`nyə), most populous state in the United States, located in the Far West; bordered by Oregon (N), Nevada and, across the Colorado River, Arizona (E), Mexico (S), and the Pacific Ocean (W). has created its own state agency to oversee managed care and solvency issues. Colorado, New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of and other states have established solvency standards for physician groups. (See "States With Risk-Bearing Provider-Solvency Standards," page 81.) Recent studies have shown that roughly half of all health plans and provider groups have deficient de·fi·cient adj. 1. Lacking an essential quality or element. 2. Inadequate in amount or degree; insufficient. deficient a state of being in deficit. reserves. This can be dangerous. Sufficient capital to provide positive cash flow and protection against aberrant aberrant /ab·er·rant/ (ah-ber´ant) (ab´ur-ant) wandering or deviating from the usual or normal course. ab·er·rant adj. 1. or unexpected claims liability will help health plans and practices of any size thrive. According to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. the "Fourth Annual Evergreen evergreen, term commonly used as synonymous with conifer and applied also to all those broad-leaved plants that bear green leaves throughout the year. Of the latter, most are plants of the tropics, subtropics, and other areas where the growing season is prolonged (e. Re Managed Care Indicator," an annual study of trends in managed care, almost 60% of multispecialty health-care groups are operating with some risk agreements. The Managed Care Indicator also shows that one-third of physician groups are applying funds to reserves. Risk-Based Capital Formula The risk-based capital model includes a series of steps in defining the minimum amount of capital required to support overall business obligations in relation to an organization's size and risk profile. The risk-based capital standards take into account the following categories: * Asset Risk (Affiliates): The risk of assets default for certain affiliated investments. * Asset Risk (Other): The risk of assets default of principal and interest or fluctuation Fluctuation A price or interest rate change. in market value. * Underwriting Underwriting 1. The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt). 2. The process of issuing insurance policies. Risk: The risk of underestimating liabilities from business already written or inadequately pricing business to be written in the coming year. * Credit Risk: The risk of recovering receivable amounts from creditors. * Business Risk: The risk of general business. Underwriting risk represents the largest portion of health plans' risk. A health plan can reduce the amount of required capital through the use of managed-care credits. Credits are determined by payment arrangements, including contractual fee payments, bonus/withhold arrangements, capitation CAPITATION. A poll tax; an imposition which is yearly laid on each person according to his estate and ability. 2. The Constitution of the United States provides that "no capitation, or other direct tax, shall be laid, unless in proportion to the census, or payments and medical and hospital expenses paid as salary to providers. (See "The Risk-Based Capital Impact of Various Provider-Compensation Models," left.) Since a health plan can significantly reduce the amount of capital required through the degree of managed care it uses, providers should be aware if the states in which they practice have risk-based capital standards for health plans. If a state has risk-based capital standards, health plans must submit a report as part of the annual statement, and a provider can request a copy of the report from the health plan. Reinsurance The contract made between an insurance company and a third party to protect the insurance company from losses. The contract provides for the third party to pay for the loss sustained by the insurance company when the company makes a payment on the original contract. and Underwriting Risk The managed-care credit is only one part of the underwriting risk equation. The risk-based capital formula caps an organization's underwriting risk to the extent of stop-loss stop-loss, n a general term referring to that category of coverage that provides insurance protection (reinsurance) to an employer for a self-funded plan. protection in place. Health plans and physician groups should analyze the effect various reinsurance programs have on capital requirements Capital requirements Financing required for the operation of a business, composed of long-term and working capital plus fixed assets. , especially when considering capitation and risk-sharing contracts. But the formula itself does not address the exact structure of a given reinsurance program. Limitations on eligible charges, services and provider settings can wreak wreak tr.v. wreaked, wreak·ing, wreaks 1. To inflict (vengeance or punishment) upon a person. 2. To express or gratify (anger, malevolence, or resentment); vent. 3. havoc on predictability and surplus protection. Health-care plans and providers should conduct a rigorous analysis of their contracts and coverage to find deficiencies and ensure that they have the most appropriate levels of coverage. The primary goal of reinsurance should be to enhance predictability. As has been documented far too many times, many organizations have purchased reinsurance as a commodity and bought the "cheapest" coverage. Reinsurance is one of the most complicated insurance programs to underwrite To insure; to sell an issue of stocks and bonds or to guarantee the purchase of unsold stocks and bonds after a public issue. The word underwrite has two meanings. . For that reason, the use of actuarial-modeling tools and benchmarking data to evaluate risk-transfer efficiency in relation to the desired levels of surplus protection is critical. The analysis should include the impact of the following variables: * use; * expected premium margin; * cost of capital (rate of return); * line of business; * membership; * reinsurance coverage: inpatient inpatient /in·pa·tient/ (in´pa-shent) a patient who comes to a hospital or other health care facility for diagnosis or treatment that requires an overnight stay. in·pa·tient n. only, inpatient/outpatient services and global (hospital and professional services (job) professional services - A department of a supplier providing consultancy and programming manpower for the supplier's products. ); * reinsurance limitations; * reinsurance deductible That which may be taken away or subtracted. In taxation, an item that may be subtracted from gross income or adjusted gross income in determining taxable income (e.g., interest expenses, charitable contributions, certain taxes). ; and * expected net cost of reinsurance. Understanding and predicting the impact of coverage are mandatory to determine the appropriate levels of surplus protection. For health plans operating in states with mandatory risk-based capital, failure to do so may result in regulatory intervention A procedure used in a lawsuit by which the court allows a third person who was not originally a party to the suit to become a party, by joining with either the plaintiff or the defendant. . For risk-bearing provider organizations, a lack of understanding and modeling could result in failure of the organization. As the health-care landscape continues to change, risk contracting has proven to be a viable and profitable model for many organizations to better influence decision-making and achieve profitability. But the most successful entities will be those that protect what they have created by adequately reserving cash and preparing for the inevitable ups and downs ups and downs pl.n. Alternating periods of good and bad fortune or spirits. ups and downs Noun, pl alternating periods of good and bad luck or high and low spirits in managed-care contracting.
States With Risk-Bearing Provider-Solvency Standards
Several states have gone beyond the National Association of Insurance
Commissioners' Model Act Standards for risk-based capital requirements
for health plans and have established standards for health-care
providers.
State Law or Regulation Date
California SB 260 September 1999
Colorado Reg. 3-1-14 May 2001
New York Reg. 164 August 2001
Texas SB 890 September 1999
State Summary
California Risk-bearing organizations and
health plans are required to
report to the state Department
of Mental Health regarding
risk assumed/assigned. Health
plans are required to share
certain risk-related and
actuarial information with
risk-bearing organizations.
Colorado Alternative mechanism to
exempt a carrier from
automatic requirement to pay
in the event of nonpayment by
or insolvency of risk-bearing
entity. Establishes rules for
carriers that contract with
risk-bearing entities,
including reporting
requirement, reserve standard,
reinsurance and actuarial
review.
New York Establishes an insurer's
obligation to assess the
financial responsibility and
capability of providers to
perform their obligations
under financial risk-transfer
agreements and sets forth
standards for health-care
providers to demonstrate such
responsibility and capability
to insurers. Requires
providers to deposit reserves
with the state that can be
reduced through reinsurance.
Texas Set forth standards for health
maintenance organizations that
contract with "delegated net-
works" including data to be
furnished to the delegated
network, as well as
responsibility for oversight
of financial soundness of a
delegated network.
Source: Evergreen Re Inc.
RELATED ARTICLE: The Risk-Based Capital Impact of Various Provider-Compensation Models Under various provider-compensation scenarios, the risk-based capital formula can save health-care providers millions of dollars. The tables and calculations below show the potential cost savings. The calculations assume 100,000 commercial (not Medicare or Medicaid) membership, a global per-member/per-month capitation of $100 with no retail pharmaceutical risk and annual total capitation of $120 million. The managed-care factor is the only variable in the following calculation: Total claims x base authorized au·thor·ize tr.v. au·thor·ized, au·thor·iz·ing, au·thor·iz·es 1. To grant authority or power to. 2. To give permission for; sanction: control level (%) x factor to go to twice risk-based capital x managed-care factor (See "Managed-Care Credits," below.) = authorized control level amount Therefore, to calculate the savings between two provider compensation scenarios, one must first calculate the authorized control level amount for each: $120 million x 10% x 2 x 0.75 = $18 million * Fee-for-Service With Bonus/Withhold Arrangement (Category 2) * Capitation Payments (Category 3) $120 million x 10% x 2 x 0.4 = $9.6 million To calculate the savings of Capitation Payments vs. Fee-for-Service With Bonus/Withhold Arrangement: $18 million - $9.6 million x 10% (cost of capital) = $840,000 annual total savings To calculate the per-member/per-month savings, divide $840,000 by 100,000 members and 12 months to get a savings of 70 cents per member per month Managed-Care Credits With stability of cash flow comes a reduction in risk-based capital requirement. Category 1 -- 15% credit (0.85 factor) -- Contractual fee payments or fee for service Category 2 -- 25% credit (0.75 factor) -- Fee for service with bonus/withhold arrangements Category 3 -- 60% credit (0.40 factor) -- Capitation payments Category 4 -- 75% credit (0.25 factor) -- Medical and hospital expense paid as salary to providers Kelley J. Kaurich is vice president of Evergreen Re Inc., a health-care consulting firm Noun 1. consulting firm - a firm of experts providing professional advice to an organization for a fee consulting company business firm, firm, house - the members of a business organization that owns or operates one or more establishments; "he worked for a based in Stuart, Fla. |
|
||||||||||||||||||||
Printer friendly
Cite/link
Email
Feedback
Reader Opinion