Do you have 'idiot's coverage'?

Be wary of HMO-based policies

Here are three key rules of the reinsurance game from a man who ought to know - Ed Berger, vice president of managed care at Sutter Health, one of the largest health systems in the United States, based in Sacramento and spread across northern California:

1. In capitation, be sure to buy reinsurance.

2. Don't buy reinsurance from HMOs you're contracting with for capitation.

3. When you buy reinsurance, pay special attention to how claims are valued in the language of the contract.

"Idiot's insurance" is Berger's description of HMO-provided insurance that values outlier claims based on what the insurer pays, not what your charges are. Here are key steps to take in purchasing the critical commodity of reinsurance when you accept capitation contracts, according to Berger, who addressed the issue in-depth at the 10th Annual National Managed Care Health Congress held recently in Atlanta:

1. Buy it from a reinsurance carrier, not an HMO. Your state medical associations can help. You also can research carriers via specialty organizations and even via the Internet. It's often a good idea to have a broker help you make the selection.

2. Your practice has to decide what your trigger points should be. "Typically, trigger points [points at which the insurance will start paying the bills] are $15,000 on the physician side, $75,000 on the hospital side. And, you're usually more conservative your first couple of years."

4. Ensure that outlier claims are based on your billed charges. The key here is to determine from your potential carriers how the claims are valued. "In our reinsurance policies, we have insisted that the claims be valued at a percentage of our billed charges," he says. Examples include kidney transplants, bone marrow transplants, serious burn cases, or premature births. If the bill is $300,000, the reinsurance payment would be $300,000 X 50%, which is $150,000, minus a $75,000 deductible. Payment to the practice is $75,000.

5. Reject typical HMO offers, or what Berger calls "idiot's coverage." Typically in this scenario, the reinsurer says to you, "We are going to value your claims at $1,000 a day, or $1,200, or $1,500."

If your claims are valued at $1,000 a day, do the math. "It will take you 75 inpatient days to meet your $75,000 deductible. And if you should be so fortunate, and if you should defy statistical probability and actually have a case that stays in more than 75 days, then they will graciously pay you $1,000 for every day that patient stays beyond, and that's why we call it idiot's coverage," he says.

"I've seen situations where a hospital paid $2 million in premiums for idiot's coverage and their return was not one claim. Reinsurance people say you must have had a good year. And the hospital renewed."

6. Don't expect a reinsurer to offer you what you want at first. The reinsurance carrier will not come to you and offer 50% of billed charges, Berger advises. "I actually start at 60% of billed charges, and go down to 50%." Also, don't make insurer loyalty a high priority. "I'm on the third reinsurance carrier in three years. There are 15 in the world. I figure I have 12 years to go."

Only one thing dumber than idiot's coverage

7. Consider reinsurance money well-spent. "I've known major providers who have gone bare," Berger says. "That's the one thing that's even stupider than having idiot's coverage. Don't be shy about spending a couple of bucks of your commercial capitation on good reinsurance. If you spend it well, you will get it back and maybe then some."

The same is true for Medicare capitation contracts, but expect to pay a higher reinsurance premium, he notes. "Don't be shy about spending $5 or $6 [of your PMPM] on your Medicare reinsurance out of a $250 premium. We had 50 cases on the Medicare side that went over [the threshold], justifying the investment." In addition, strong reinsurance counteracts any incentive capitation contracts might have to reduce needed services to save costs. That's a clear trap to avoid, he advises.