1999 CAS SEMINAR ON HEALTH AND MANAGED CARE

Health Care Provider Excess Insurance

Prepared By:

Milliman & Robertson, Inc.

Arthur L. Wilmes, FSA, MAAA

Prospective Trends in Healthcare

• Healthcare Providers Need to Consider Strategies That Increase Efficiency

• Forces in the Healthcare Market Will Make It Very Difficult for Status Quo Providers to Compete Effectively

• Healthcare Providers Will Need to Develop Their Patient Management Processes as if They Are Being Paid Under Capitation

Health Care Delivery Systems

• Independent Practice Associations (IPAs)• Physician Practice Management Companies

(PPMCs)• Group Practice Without Walls• Medical Group Practice• Physician Hospital Organizations (PHOs)• Medical Service Organization (MSOs)• Foundation Model

Independent Practice Associations• Umbrella Contracting Entity for Multi-Specialty or

Single Specialty Physicians

• Individual Physicians Reimbursed by the IPA

• Composed of Independent Physicians With Only Central Contracting Being Common

• Not Necessarily a Lean Mean Fighting Machine

• Some States will Regulate Like MCOs

Physician Practice Management Companies

• Tend to Be Venture Capitalized Public Companies

• Last Two Years Have Not Been Kind to PPMCs

• Continue to Be a Force in Healthcare Market

• Approximately 27 Publicly Traded PPMCs

• Combined Equity Value Declined 49.3% During 1998

• Several High Profile Collapses

PPMCs Have Experienced Some Recent Equity Improvement

• At the End of 1998, the Aggregate Stock Value of PPMCs is Up 12.8% Over the Last Six Months of 1998.

• S&P Rose 7.5% During the Same Period.

• Total Capitalization of PPMCs was Estimated at Approximately $4.8 Billion.

• Some of the Largest PPMCs Continue to Have Difficulties.

– Medpartners

– FPA Medical Management

Group Practice Without Walls

• Independent Physicians That Aggregate Their Practices Into a Single Legal Entity

• Legal Merging of All Assets of the Individual Physicians

• Individual Physician Incomes are Affected by the Performance of the GPWW as a Whole

• Independent Nature of Practices Within GPWW Means Independent Action

• Difficult to Align Incentives

• Weak Capitalization

Medical Group Practice Model

• Like the GPWW, but Physicians Become a Fully Integrated Medical Group

• No Multi-Site Independent Practice Groups• Tends to be More Integrated Than a GPWW• Be Wary of Top Heavy Groups

Physician Hospital Organizations

• Joint Hospital and Physician Entity That is Primarily a Negotiating Vehicle

• Integration Tends to Be Weak

• Trial Courtship Before a Serious Relationship

• Open vs. Closed PHOs

• MCOs tend to View PHOs as Ugly Cousins

Medical Service Organizations

• Service Bureau and Contracting Entity for Physicians

• Physicians Remain in Independent Practice

• MSO may purchase all or Some of the Physician’s Assets

• Also Viewed as an Ugly Cousin by MCOs

• Purpose Tends to Be Centralized Common Services

Foundation Model

• Generally Created as a Not-For-Profit Organization Which Purchases Physician’s Practices

• Must Provide a Substantial Community Value/Benefit

• Not Generally Formed With an Eye Towards Planned Resources

• Loose Control Over Physician Behavior

Physician Compensation

• Fee-For-Service• Capitation• Withholds and Risk/Bonus Provisions• Carve-Outs• PCP vs. Specialist vs. Hospital• Individual vs. Pooled Risk• Affecting Physician Behavior

– Product

Reimbursement is Key Underwriting Factor

• Usual and Customary Fees• FFS and Discounts• Relative Value Schedules (RVS)• Capitation• Diagnosis-Related Groups (DRGs)• Per Diems (With and Without Outliers)• Case Rates• Ambulatory Patient Groups (APGs)

Example of Effect of Reimbursement on CPDs

• Prudential• The Travelers• NYL Care

Example of Effect of Reimbursement on CPDs

• Prudential• The Travelers• NYL Care

Case Study - Scope of Engagement

• Feasibility of Offering Stop-Loss Coverage to PCPs for Institutional Services

• 12 PCP Care Councils (Practice Groups)

• $100,000 Excess Maintained by MGA

• Care Councils Going to Full Risk, Want Lower Excess Limits

Historic Costs and Variability

Developing a Claims Probability Distribution

• Combined Individual Distributions of Historic Claims

• Trended Historic Costs by Assumed Incurred Trend

• Assumed a Piece-Wise Lognormal Distribution Developed by Minimum Distance Method

Empirical vs. Lognormal Distribution

Effect of Age and Gender

Effect of Group Size and Confidence Intervals

Putting it All Together