Establishing an Analytical Framework for Measuring the Role of Reinsurance in the Health Insurance Market. b. Provider Excess


Many HMOs capitate the hospitals and physician groups with whom they contract, effectively transferring the risk onto these providers. These provider groups in turn seek reinsurance, or "provider excess" coverage, to guard against inordinately high losses. This coverage is almost always specific coverage; aggregate coverage is extremely rare. Providers purchase this coverage in one of two ways. Some provider groups purchase provider excess coverage through the HMOs with whom they contract. In this case, a reinsurer may price the coverage for the HMO, which includes it as a package in its contract with the provider group. Other provider groups purchase the coverage directly from a reinsurer. A provider group that contracts with several HMOs may find that purchasing reinsurance from a single reinsurer is more efficient than purchasing it from each HMO separately.

Informants stated that provider groups tend to be thinly capitalized and want to purchase a significant level of protection. Informants suggested that a number of provider groups are still relatively unsophisticated and sometimes reinsure too much of their risk. On the physician side, one informant reported stoploss thresholds in the range of $7,500 to $12,000 per enrollee, although he had seen thresholds as low as $5,000. The informant reported a broader range for hospitals -- from a low of $35,000 per enrollee to as much as $100,000 to $125,000 for commercial risk. The stoploss threshold for Medicare risks might be much higher.

The market has been marked by extreme competition over the past five to seven years. An influx of new competitors offering large discounts over existing provider excess premiums brought prices down to artificially low levels. Informants estimated that prices may be as much as 50 percent too low, caused by a number of factors, including aggressive pricing to build market share, a large number of competitors, and lack of sophistication by reinsurers of appropriate prices for a new market. Informants reported that the market is stabilizing and that prices are rising. One informant suggested that provider groups were unaware of the low prices and would be unwilling to pay a greater percentage of their capitations for stoploss. He indicated that prices were unlikely to rise dramatically, but that the terms of coverage would become less favorable to providers (i.e., they would have to retain much more risk).

Informants estimated that there were about 20 sellers of provider excess coverage. One informant estimated that only one company was profitable in the prior year in this business. The largest carrier left the market; its competitors estimated that it was running at a loss ratio of over 200 percent (i.e., claims were twice premiums).