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Background
Katrina, the financial sector collapse, and health care (finance) reform
entail poor risk appraisal and ineffective risk management.
Risk transfers promote clinical and financial inefficiency – not efficiency.
Risk is disruptive: Redundancy , Capacity , Disaster preparedness ,
Service quality/quantity , and Health disparities .
Risk assuming health care providers (RAHCPs) are the HCS’s Bernard
Madoff’s – High risk takers, incapable of sustained service delivery.
Insurers reduced Katrina costs by low-balling claim offers to desperate
victims, health providers do this as well
Professional Caregiver Insurance Risk
Wall Street, Katrina & Health Care Finance Reform
Thomas Cox PhD, RN
2008 financial sector collapse began, decades earlier, with poor risk appraisal, excessive risk taking, and regulatory failures
Excessive risk taking and regulatory failures occur when health providers accept insurance/financial risks: “Professional Caregiver Insurance
Risk” in Managed care, DRGs, the Prospective Payment Systems, and Capitation contracts
Central Limit Theorem (CLT): Portfolios , Standard Errors , Risks , Poor financial and clinical outcomes ensue
RAHCPs should be paid more to accept insurance risks, but are not. Should maintain redundant resources, but do not
RAHCPs must reduce services to compensate for inefficient insurance operations
Illustrative Insurer Performance Characteristics by Portfolio Size
Insurer Size
307,000,000
1,000,000
500,000
100,000
50,000
10,000
5,000
Standard Error
0.0029
0.0500
0.0707
0.1581
0.2236
0.5000
0.7071
Probability of Profits GE 5% (LR < 0.80)
1.0000
0.8413
0.7603
0.6241
0.5885
0.5398
0.5282
Probability No Losses (LR < 0.85)
1.0000
0.9772
0.9214
0.7365
0.6726
0.5793
0.5562
Probability No Insolvency (LR < 0.90)
1.0000
09987
0.9831
0.8286
0.7488
0.6179
0.5840
Surplus Required for 99.87% Solvency
$0
$202,400,000
$225,800,000
$150,440,000
$114,680,000
$56,228,000
$40,588,000
Total Surplus for 1,000,000 Policies
$0
$202,400,000
$451,600,000
$1,504,400,000
$2,293,600,000
$5,622,800,000
$8,117,600,000
0.7971
0.7500
0.7293
0.6419
0.5764
0.3000
0.0929
99.64
93.75
91.16
80.24
72.05
37.50
11.61
Maximum Sustainable Benefits
Benefit Efficiency Compared to 0.80
Multi-disciplinary Research Opportunities
Partnerships: Nursing, Medicine, Law, Finance, Accounting, Political science, Business Administration, Mathematics, Statistics, Sociology, Planning, Health
care administration, Actuarial science and insurance, Social work, Psychology, Philosophy, Engineering, Cybernetics, Urban affairs…
Examples: Managed care; Prospective payment systems for MDs,
hospitals, LTC and HHA, Global Capitation.
Reform: Expand risk transfers, ignore inefficiencies.
Model Assumptions & Implications
Insurer: 1,000,000 policies, $4,000 per policy. Loss ratio = $0.75,
Expense ratio = $0.15, Profit margin = Risk premium = Standard Error =
$0.05. P[Profits>$0.05] = 0.8413, P[No Net Loss] = 0.9772, P[LR<0.90]
= 0.9987. Smaller insurers (See Table) have lower probabilities.
Flaws in Health Services/Disparities Research
Acute, chronic, and prevention costs are current and certain - Savings are
distant and uncertain.
MCOs profit by avoiding risks – Providers profit by delaying Dx/Tx.
Failure to identify capitation as insurance  No observable effect.
The HCS has been compromised - Everyone gets less
Claim Denial in Clinical Settings
Providers must deny some claims. Easy targets: Poor, racial, ethnic,
gender & geographic minorities – True across all insurance lines
“Evil insurance company won't let me…” Not: “I won't pay for...”
Appointment delays, crowded facilities, problem focused exams, Rx
pads, ignored secondary concerns: Providers reduce costs by delaying
Dx/Tx and discouraging clients from coming. The antithesis of
“population focused” practice.
Random Sampling, the Central Limit Theorem & Insurance
Insurance is random sampling. The CLT defines relationships between
insurer size, standard errors, operating results, and Maximum Sustainable
Contracts: RAHCPs are under-funded, under-capitalized, inadequately resourced and unregulated insurers. MCOs avoid insurance risks, compete unfairly with
insurers, and impose “Take it or Leave It” contracts. Superior knowledge of risk and other provider’s contracts, relative power, and unfair contract conditions
create “Contracts of Adhesion” and “unconscionable” advantage. Litigation risks are enormous.
Benefits:
Risk Management: Risk adjusted payments are inefficient and ineffective. Risk adjusted payments should exceed risk retaining insurer’s costs. Payment delays,
withholds, retrospective audits, and performance based bonuses increase provider’s risks. Reinsurance further reduces resources.
Katrina: Providers not “population” focused, not prepared, abandoned
clients. Should have had sufficient resources to stay indefinitely.
Legal/Ethical Issues: Unregulated and undisclosed insurance operations, poorly defined performance standards, inadequate accounting standards, non-existent
surplus reserves, inadequate oversight, ethical/role conflicts, lead to inadequate and unreliable service delivery (Katrina).
Fallacious Ideas
Deregulation: Few states regulate now. Weak insurers will incorporate
in lax States – Little recourse in remote State courts.
Rugged individualism: We all set aside $250,000. $76.75 Trillion
dollars in idled wealth, reduced consumption, economic stagnation,
increased unemployment, and will not cover high costs.
More insurers/competition: We have 1,300+ inefficient insurers,
benefits vary, poor claims practices, inadequate regulation, and contract
ambiguities. Better choice: Fewer, more efficient, insurers, uniform
benefits, reduced inefficiency, and less litigation.
Insurers produce 'estimates' of population loss ratios
Large insurer’s estimates are more accurate (lower standard errors)
Small insurer’s estimates are less accurate ((higher standard errors)
Risk premiums depend on insurer size – One size does not fit all
Small insurers assume greater risk - need higher risk premiums
Small insurers require higher surplus reserves (redundant capacity)
Clinically efficient providers become inefficient insurers
Inadequate compensation + Risk  Reduced service capacity
Reduced service capacity  Delayed/denied Dx & Tx
Providers profit if clients stay away – Antithesis of population health
Rewards for prevention activities are distant and uncertain
Public Health: Katrina - Fee for service providers were free to leave New Orleans. Their clients were voluntary and could choose other providers anywhere. Prepayment providers had a duty to prepare and stay having been paid to serve a “population.” Providers deny claims they should honor if they leave or have
inadequate resources. As insurers they should be prepared for disasters and supply chain disruption. What is the analog in health care for insurer surplus?
Professional standards: How do the obligations of provider/insurers differ from FFS/OOP providers? How are RAHCPs deciding which clients/services to cut?
How do providers see and adjust to their new roles? Are providers targeting many small cost clients or few, high cost clients?
Health Disparities: How do reduced service capacities effect clients? All insurers target high cost claims for intense review, investigating their liability, and
delaying claim decisions. When providers are insurers how do they deal with high cost claimants? How do clinicians delay claim/deny claims?
Holism: Transferring insurance risks to health care providers encourages a piece meal approach to health care. It exacerbates rather than corrects a parts focus.
Instead of holistic comprehensive care, the system has moved to greater fragmentation.