Provider excess loss insurance: a safety net for risky business

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

If, in the opinion of the insurer, the risk exposure has been underestimated in the capitation agreement, the attachment point may be set higher than the capitation amount the provider receives. To avoid the financial losses this situation could entail, providers must be sure to negotiate - or renegotiate - agreements to accurately reflect their risk.

Carve-out Excess Loss Insurance

Carve-out excess loss insurance provides individualized coverage to provider groups with special needs. For example, a group of orthopedic surgeons and a hospital might form a PHO to negotiate an exclusive hip-replacement surgery contract with a managed care organization. The PHO might accept a flat fee for each procedure, confident that its superior service quality and cost-effectiveness will make it a desirable and profitable contract partner.

Unfortunately, specialty-based agreements are inherently susceptible to adverse risk selection, since they stipulate that providers must accept every patient with the condition for which they have contracted. Carve-out excess loss policies help mitigate this risk, typically combining aspects of both per-person and aggregate excess loss coverage.

Because of the riskier nature of special service agreements for which carve-out policies are written, providers should consult an experienced risk manager before entering into such agreements. The risk manager will be able to help create the risk model and determine how much risk both the payer and the provider should assume.

Conclusion

Provider excess loss insurance helps healthcare providers limit the risk they assume when they enter into HMO capitation agreements. It is, therefore, important for provider organizations to purchase a policy that provides adequate coverage, at a fair price, to cover those risks.

However, the best way for providers to limit the risks associated with HMO capitation agreements is to understand the nature of their managed care arrangements and discover where the risks to their organizations lie. Taking the time in the beginning to develop appropriate risk models and negotiate contracts that distribute risk fairly will help providers avoid using provider excess loss insurance to "fix" a bad deal.

RELATED ARTICLE: EXHIBIT 1: AGGREGATE EXCESS LOSS CLAIM SETTLEMENT

Assumptions

Insured group - Primary care physician group

Reimbursement and accumulation basis - Medicare RBRVS

Enrollment - 10,000 members each month; PMPM total of 120,000

Expected claims - $10.00 PMPM

Attachment point - 110% of expected claims, or $11.00 PMPM

Co-insurance basis - 95%

Provider excess loss premium - $0.20 PMPM or $24,000

Value of services rendered by insured group during the policy period - $1,600,000

Aggregate claim calculation

Aggregate attachment point (PMPM total enrollment multiplied by PMPM attachment point)

120,000 x $11.00 = $1,320,000

Excess loss amount before co-insurance liability (Value of services rendered minus aggregate attachment point)

$1,600,000 - $1,320,000 = $280,000

Co-insurance liability (Percentage of claim paid by provider multiplied by excess loss amount before co-insurance liability)