Traditional Indemnity Insurance vs. Managed Care and Provider Risk/Profit Sharing: The Myth of Equitable Treatment

Monday, 12 July 2010: 3:25 PM

Learning Objective 1: Describe the role of insurer size on operating characteristics such as profitability, avoidance of net operating losses, and solvency and how this affects nursing environments

Learning Objective 2: Explain how and why service capacity is reduced when providers accept insurance risks and quantify the level of service capacity reduction based on portfolio size

Purpose: This paper discusses and demonstrates the use of risk theory in analyzing the impact of health provider insurance risk assumption through capitation agreements, prospective payment plans, managed care, and budgeted nursing operations.

Methods: We use risk theory and sampling theory to analyze the effect of portfolio size on insurer performance (Profitability, Avoidance of operating losses, and Solvency maintenance) for identical risks. We then apply this analysis to risk assuming health care providers, demonstrating that they must reduce services to compensate for their inefficient insurance operations.

Results: Smaller insurers are quantifiably less efficient than large insurers. They must reduce benefits or charge higher premiums for identical benefits. Insurance risk assuming health care providers, as small, inefficient, insurers must reduce targeted service levels to levels below those assumed in insurance premiums solely due to their inefficient insurance operations. Failing to do this means that they cannot achieve identical profitability goals as non-risk assuming providers.

Reductions in service capacity can easily exceed 50% of insurer premiums when health providers manage portfolio shares smaller than 10% of the risk transferring entities policyholders. Despite this, health systems researchers have not established the existence of such performance differentials despite the anecdotal experiences of health consumers and providers.

Conclusion: Risk theoretic analysis of insurer performance by size shows large insurers manage risk more efficiently than small insurers. A common myth is that more competition between insurers will reduce insurance prices, but more insurers means more smaller, less efficient insurers, which must either reduce benefits or increase premiums. Like insurers, nurse managers and executives should plan for insurance risk assumption by assuring redundant supplies, equipment, and staff to better manage risks at the point of care. Unfortunately this is exactly the opposite of the usual response to managed care contracting: reducing equipment, supplies, and staffing.