Options for purchasing provider excess insurance

Healthcare Financial Management, July, 1996 by William D. Dyer, Ira J. Forkish

Provider organizations accepting capitated payments often purchase provider excess insurance to protect themselves from catastrophic loss. These organizations have the option of purchasing such insurance coverage from the HMOs with which they contract or from commercial insurance companies.

To determine which purchase strategy will be cost-effective, provider organizations must carefully analyze their risk, determine how much coverage they need, and exercise due diligence.

When purchasing provider excess insurance to insure against catastrophic loss, managed care provider organizations can buy a policy from their health maintenance organization (HMO) or from a commercial insurer. Provider organizations purchasing provider excess insurance from commercial insurers have the option of purchasing coverage directly from an insurance company, or they may choose to work with a managing general underwriter or an insurance broker.

When purchasing provider excess insurance from a commercial insurer, healthcare financial managers should take an analytical approach, rather than an intuitive one, to determine the appropriate level of provider excess insurance coverage to purchase. The first step is to calculate the real cost of doing business and then design provider excess insurance coverage that will reimburse the organization at that cost, or slightly below it.

Provider organizations can exercise considerable control over the costs of providing care within their facilities and in subcontracted facilities, and thus require minimal provider excess insurance protection - typically 45 percent to 50 percent of billed charges. Charges for care provided outside provider facilities or by noncontracted provider facilities are subject to greater uncertainty, so provider organizations should seek coverage for these charges in the range of 70 percent to 90 percent of the amount paid to outside facilities or provider organizations.

Managing General Underwriters

One way provider organizations can purchase provider excess insurance contracts is through entrepreneurial underwriting professionals, called managing general underwriters, who act as insurance company representatives. These underwriters perform all the major tasks normally performed by insurance companies, including marketing insurance products, underwriting risk, receiving premiums, and paying claims.

Provider organizations should consider the following criteria when selecting a managing general underwriter:

* Length of service. A managing general underwriter should have at least five years' experience and a solid financial track record. The underwriter collects all premiums on behalf of the insurance company but does not pay those premiums to the insurance company until year-end. If a managing general underwriter goes bankrupt, commits fraud, or is unable for other reasons to pay a provider organization's claims, the provider organization may be left uninsured or forced to take legal action to have its claims paid.

* Comparative quotations. If one managing general underwriter's quotation is drastically lower than those of other insurers, the provider organization should scrutinize the coverage for differences. Insurance companies represented. Managing general underwriters should provide lists of insurers with whom they work, including the length of their relationships. Underwriters that change insurance companies every few years could be losing money for their insurers.

* Location. By working with a managing general underwriter in their own state, organizations can turn to their state's department of insurance to help resolve disputes that may arise. Also, should it be necessary to take legal action, it is easier and less expensive to file a lawsuit against an in-state business.

Although an insurance company may have chosen to affiliate with a particular managing general underwriter, that affiliation does not mean that the provider organization can forego its own due diligence. As with all aspects of purchasing provider excess insurance, provider organizations are advised to conduct their own independent research.

Using an Insurance Broker

Financial managers who choose to work with a provider excess insurance broker often do so to receive a professional evaluation of their organizations' risk and guidance on appropriate insurance against this risk. Purchasing insurance from a broker also may give the organization access to multiple insurance markets and the leverage it needs to receive competitive pricing and attentive service.

Organizations considering use of a broker should apply several selection criteria:

* Client volume. A broker should have at least 12 verifiable, current provider excess insurance clients. Brokers with fewer accounts are relatively inexperienced and may not be sufficiently knowledgeable about this specialized type of insurance.

* Underwriting experience. Brokers that have underwriting backgrounds themselves usually have stronger rapport with insurance company underwriters and, therefore, can gain leverage for the provider organization.