Provider Stop Loss Reinsurance or Provider Stop Loss (PSL) came into being in the 1980s when HMO’s began capitating Medical Groups and Independent Physician Associations (IPA’s) as well as facilities. The coverage at the time had limited options and was overpriced and was provided only through the HMO’s.
We at HCP entered this market in 1989. We offered the coverage at a cheaper price and with better terms. This allowed the capitated provider or facility to buy Provider Stop Loss Reinsurance directly from an insurer, via HCP, versus buying from the HMO.
This new area of insurance blossomed as did HCP. At one point we insured 1 out 5 capitated patients in the United States. Many insurers jumped into the provider stop loss market and thus too many insurers were chasing too few prospects. Consequently, the pricing of the coverage became insanely cheap, and the capitated providers made a profit off their PSL year after year, at the expense of the insurers who concentrated on volume rather than underwriting discipline.
By the early 2000’s many capitated IPA’s, and Medical Groups and facilities went out of business, since they had no clue as to how to manage the risk they had. Also many merged into large groups. The pricing of provider stop loss began to harden, or increase in price, as insurers who lost money left the market.
Why does a capitated IPA, Medical Group or Facility need provider stop loss today?
• If you have a particularly bad year and you receive more in claims than you do in premiums from your provider stop loss policy that added reimbursement may make the difference in you being profitable.
• Your managed care E and O and D and O insurance coverage requires you to have Provider Stop Loss Reinsurance coverage. The reason is if you are sued for denying services, or giving a referral to a specialist, the plaintiff’s attorney will look to your financial motivations for denying care. If you have reinsurance, which shows you have coverage to protect your entity from a high dollar patient, you have a plausible defense. Without the PSL you do not have this defense.
• If you have stockholders and you do not meet your numbers for their distribution due to having several catastrophic patients, they can sue you under for D and O type claims if you do not have PSL. They can sue you for not properly insuring the business.
• In California, the Department of Managed Care audits groups more frequently than other states. Having PSL does make a group look more financially stable.
• The HMO’s, though they seem to be lacking in policing this coverage, require in your MCO agreements to maintain stop loss. If you do not have this you may be in breach of contract.
The purpose of provider stop loss is the same as all insurance, to finance a risk that you cannot readily absorb from your operational cash flow. If you pay your premiums, then in most years you should get back about half in claims. In the years you need it, it can pay off big if catastrophic claims erode your profit margin.
HCP National is a Stop Loss and HMO Reinsurance provider or broker. We are not a law firm and the above is not meant to provide legal advice, nor is it meant to interpret coverage. Your insurance policy is the final authority on coverage.
