Provider excess loss insurance: a safety net for risky business

Healthcare Financial Management, August, 1996 by Carl L. Phillips

Capitation agreements are challenging healthcare providers to keep the cost of delivering care at or below their agreed-upon capitated payment. To protect themselves when this cannot be accomplished, providers are purchasing provider excess loss insurance, which reimburses providers if their patient costs exceed a deductible or per-member-per-month dollar threshold.

It is important that managers understand differences among the three general types of provider excess loss insurance: per-person, aggregate, and carve-out.

With the rise of managed care capitation agreements, providers are assuming more of the economic risks that accompany healthcare delivery. The most obvious financial risk associated with managed care is losses incurred when a provider's costs greatly exceed its agreed-upon capitated payment. Provider excess loss insurance is one way to mitigate this risk. This type of insurance reimburses providers if the costs of providing care exceed a deductible or per-member-per-month (PMPM) dollar threshold.

Many HMO capitation agreements include provisions for excess loss coverage, but understanding these provisions can sometimes be difficult. It is important to determine exactly what is covered, whether the coverage is adequate to the risk level the provider organization is willing to assume, and whether the price for coverage is reasonable. These and other considerations are discussed below.

Covered services. When provider organizations purchase provider excess loss insurance, they must ensure that the services covered match the risk the organization has assumed. They need to look carefully at the entire portfolio of services the organization provides and identify areas of unusual exposure. For example, ancillary services, such as ambulance and outpatient pharmacy services, often pose special risks. Providers should make sure the excess loss insurance they purchase covers these types of service as well as the more commonly covered inpatient and professional services.

Reimbursement levels should be addressed. These levels can be set in a number of ways, including determining a fee schedule for specific services, a percentage of the total fee for services, or a per diem rate. The reimbursement amount can be varied for in-network and out-of-network patients.

Most provider organizations should be wary of reimbursement provisions that could increase their risk. For example, many carriers insist on an overall per diem limitation as part of their provider excess loss policy. Unfortunately, this limits coverage for out-of-network claims, which are often the most costly because such claims are paid in "hard dollars." This means that the cost of care delivered by an out-of-network provider cannot be considered part of the daily cost of running the liable provider's facility and therefore must be paid directly out of the provider's pocket once the per diem limit is reached. "Soft dollar" claims, on the other hand, involve services that would be provided ordinarily to any patient on any given day in the provider's facility and thus do not necessarily represent an extra expense.

It is advantageous for provider organizations to refuse to accept per diem limits for out-of-network care and negotiate instead reimbursement of actual billed charges for out-of-network patients. In-network coverage can be set on a fee schedule or per diem basis, and some providers may accept lower reimbursement or higher deductibles for in-network coverage in order to keep premium rates down.

Co-insurance provisions. Typical provider excess loss co-insurance provisions keep a certain level of risk at the provider level after the deductible has been met. Episodes of illness are easier to predict for a large covered population than for a small one, making risk for the former group easier to manage. Thus, providers that have comparatively small managed care enrollments carry a higher level of risk. These providers should start with a high co-insurance rate, perhaps even as high as 95 percent, and then lower it as their ability to manage risk improves.

There may also be a financial incentive to retain a higher co-insurance level. For instance, a 70 percent co-insurance rate might reduce the price of the policy by more than 30 percent, resulting in more than a dollar-for-dollar trade-off.

Time limits defined in provider excess loss policies should be reviewed. Time limits define when a claim must be incurred and reported or paid for the claim to be reimbursable. Most policies are written to cover a 12-month period, and most policies stipulate a 12/15 reimbursement time limit. This means that claims must be incurred within the 12-month policy period and reported to the insurer within the 12-month period or within 3 months following the end of the policy period in order for the claim to be reimbursable.

Some policies require claims to be paid - as opposed to reported - within a certain time period to be eligible for reimbursement. Since most provider groups do not pay claims, their risk exposure increases under this type of provision. In most instances, providers should not agree to such an arrangement.