Crispin: Capital requirements and reinsurance protect against insolvency - Managed Care - interview with Charles Crispin, president of Evergreen Re - Interview

Healthcare Financial Management, Dec, 2001

Charles Crispin is president of Evergreen Re, a managed care consulting firm with expertise in the reinsurance industry. Before joining Evergreen Re, Crispin served as a consultant to the managed care industry. He is a member of the American Association of Integrated Delivery Systems, Glen Allen, Virginia, and the Provider Excess Loss Association, Princeton, New Jersey. Crispin recently talked with HFM about risk-based capital requirements for health plans and the impact these solvency guidelines could have on healthcare providers.

HFM: What are risk-based capital requirements, and what is their importance?

Crispin: Risk-based capital (RBC) requirements were developed by the National Association of Insurance Commissioners (NAIC) as a method for evaluating a health plan's ability to cover potential liabilities adequately. These requirements have existed in the life insurance industry and other lines of insurance for a long time. Only in the past couple of years have they been applied to health plans.

Most states have adopted the NAIC RBG recommendations in some form, generally as a tool to monitor health plans' ability to operate with sufficient capital to avoid failures. Twenty-one states have made meeting the RBC recommendations a requirement for doing business in that state. If the plan is operating in a state that has mandated that health plans satisfy the RBC requirements, the plan may face certain actions by the state in the event that they fall below certain RBC levels, including--in the extreme--liquidation of the plan.

HFM: What brought about the states' adoption of the RBC requirements for health plans?

Crispin: For many years, health plans nationwide were operating unprofitably. The Northeast had a few failures. There were enough failures nationwide to cause, in some cases, significant problems for consumers, providers, and in turn, state regulators. States don't want to run health plans.

States are adopting RBC requirements as either a guideline or a regulation mandating compliance because they want to make certain that health plans are able to operate efficiently. Without sufficient levels of cash in reserve, a plan may make decisions that can reduce its ability to manage medical expenses and provide benefits to members. For example, the plan may choose not to enter into a contract that carries an associated, short-term, additional expense, when over the long term that contract could provide tremendous benefits to the plan's financial health and to members' medical services.

HFM: Do you foresee these guidelines becoming regulations in more states?

Crispin: I think state departments of insurance have done a good job of monitoring the plans operating in their states, particularly in the past several years. States always have required health plans operating within their areas to maintain certain levels of financial reserves, so there always has been oversight. The RBC formula is a much more conservative, rigid guideline. In general, even states that have not adopted the RBC as a guideline or requirement are showing an interest in tightening surplus requirements.

A health plan that does not meet the desired RBC ratio is not necessarily in danger of going out of business. That plan could continue operating very successfully for a long time at its present RBC level.

HFM: How do the RBC recommendations for health plans affect providers?

Crispin: The number-one purpose of the RBC recommendations is to protect consumers from being denied medical services for which they've prepaid through their premiums. By extension, the recommendations also protect providers. If a member or employer has paid premiums for a member and the plan becomes insolvent and goes out of business, members will continue to seek services for which they have already paid from providers in the network. Unfortunately, these providers have nowhere to turn for payment, at least on a short-term basis.

Providers also may have rendered the services before the plan went out of business. Arguably, they will not get paid in accordance with their contract. They might get only a percentage of what was agreed upon. Those providers are counting on certain receivables that they may not be able to collect.

HFM: Will states legislate surplus requirements for providers?

Crispin: California and a few other states have enacted legislation similar to the RBC recommendations that apply to provider organizations that are accepting risk. However, we do not anticipate a major movement by states to enact similar legislation. Most health plans already have implemented certain solvency guarantees or protections in the capitation agreements they have in place with providers. Consequently, legislative action is not needed.

HFM: What are health plans doing to meet the new capital requirements?

Crispin: Health plans need to restore profitability by, for example, dropping unprofitable service areas or increasing premiums. Over the past several years, there has been tremendous inflation in premiums for commercial membership. That higher revenue helps restore profitability A number of plans have dropped Medicare membership because they were operating in regions of the country where the funding was deficient. Another way to meet the new capital requirements would be to add new capital by raising capital from investors, or in the case of provider-owned or sponsored health plans, from a parent organization.