During the last three decades, the organization, delivery, and financing of health care services have changed dramatically. While much analysis has been undertaken with regard to the changes in the health care system there is one area that has received little attention in the nursing and health care literature. Considerable insight into the changing nature of organization and delivery of health services and nursing services can be achieved by reviewing the history, structure, and function of insurance services and applying the insights of insurance and risk theory to the operating characteristics of health care organizations and providers. The premise of this work is that due to the use of average cost based reimbursement plans such as capitation contracts, per diem reimbursement formulae used under Federal, State, and private insurance systems, professional caregivers and health care organizations have assumed responsibility for managing financial risks normally handled with insurance contracts. Adopting this view raises several concerns. What ethical issues arise when health care organizations and providers make diagnostic and treatment decisions concerning patient care when they have a financial stake in the outcomes? Is it legal, under State and Federal insurance laws and regulations for health care providers and organizations to engage in operations that bear a startling similarity to insurance? Third, viewed as insurers do health care providers and organizations meet the criteria for financial stability and liquidity normally demanded of insurers? Last, do health care providers and organizations provide the same benefits to society as insurers when they assume these insurance risks? This paper will address each of these issues after reviewing the structure and function of insurance company operations.
Why Do Individuals and Organizations Buy Insurance?
Insurance consumers such as: individuals, government, or business organizations, buy insurance because they experience uncertain possibilities of financial loss (Mehr & Cammack, 1976). Homeowners buy insurance for their houses because their houses might burn or be torn apart by windstorms. Burglars may break into their homes and steal their belongings. Business organizations buy insurance to protect themselves, their property, equipment, and employees from uncertain financial adversity. There are alternatives to insurance. Homeowners could choose not to have insurance at all and suffer the complete loss of the financial value of their homes in the event of a catastrophic loss. They might choose to put aside enough money to replace their house in the event of a natural disaster. Business organizations might forego insurance and accept the possibility that they will not be able to carry out their normal business activities in the event of natural disasters or unexpected circumstances. Some losses are not insurable at all. If the probability of loss is very high, insurers would not offer insurance and consumers would not purchase insurance because the costs of the policy would greatly exceed the costs of covering the losses out of pocket.
Buying insurance is palatable to consumers because when insurance companies issue many similar policies, with small probabilities of loss on each policy, their average loss per policy is small enough to be within the financial ability of their policyholders to pay. Policyholders faced with a choice between losing the value of property, facilities, or critical human and material resources find they can protect themselves by paying a relatively small amount to an insurance company to cover the insurer's average losses, expenses, and profits. There are three mathematical bases that underlie insurance as a valued social mechanism and which are critical to understanding why transfers of such risks to health care organizations and providers are ill-advised: The theory of utility; the central limit theorem; and the law of large numbers. The theory of utility says that the more of a good that we have, the less we value one additional unit of that good. On the other hand, the loss of a large number of units, when resources are scarce, is very threatening. Hence, for a consumer with a reasonable amount of money, paying a small amount of it to be protected from a large loss is a sound idea (Bowers, Gerber, Hickman, Jones, & Nesbitt, 1986). The central limit theorem and the law of large numbers explain that as an insurer writes many similar policies they can accurately estimate the average cost of insuring those policyholders (Long, 1981). Insurers, by writing large numbers of policies decrease the fluctuation in their losses from period to period. In essence, insurance works because when many people face rare, though similar losses, it is inexpensive to protect themselves from the consequences of those losses by mutually participating, through insurers, in sharing the burden. This is the public benefit of insurance.
Insurance Company Operations
The effective management of insurance companies requires the performance of several key functions, including: marketing, underwriting, securing and managing reinsurance, ratemaking, reserving, claims adjustment, financial management, and investing. It is essential to understand some of these aspects of insurance company operations in order to understand what professional caregivers and health care organizations should and may be doing when they accept insurance risks. The key structural and functional aspects of insurance company operations evolved over several hundred years and represent the core concerns in managing insurance risk assumption. The need to perform these functions is a function of insurance risk assumption; it does not disappear when health care organizations and providers assume insurance risks. The following sections describe these basic insurance functions. After reviewing these areas of insurer operations some suggestions about how they may manifest among health care providers and organizations that agree to risk-sharing contracts will be offered.
Marketing of insurance products involves the sale of insurance policies to individuals and organizations. In many cases, marketing is difficult. Life insurance products are one such case. On the other hand, some products are easy to market because of regulations requiring individuals or organizations to provide proof of insurance coverage. Workers compensation and personal automobile liability insurance are examples of required insurance coverage. Professional caregivers and health care organizations actively sought out risk sharing as profit-making opportunities (Gold, Lake, Hurley & Sinclair, 2002; Hurley, Grossman, Lake & Casalino, 2002) and they found eager insurance consumers among organizations that were already assuming and managing risk. In essence, professional caregivers and health care organizations willingly marketed insurance, or more accurately reinsurance, to insurers. However, one thesis of professional caregiver insurance risk is that health care providers and organizations did not base their decisions on a full comprehension of the fact that they were accepting insurance risk transfers and the consequences of those decisions. Instead, providers and health care organizations focused too heavily on the profit potential in risk sharing rather than on how they would manage the insurance operations implicit in their assumption of insurance risk transfers, if they could do that at all.
Insurance company underwriting includes: risk classification; risk assessment; ratemaking; and the selection, retention, or elimination of policyholders (Mehr & Cammack, 1976; Michelbacher & Roos, 1970). These areas are critical to the success of an insurance company. Poor decisions, such as accepting policyholders that are highly likely to produce losses will cause an insurer to become insolvent very quickly. The underwriting functions, like all insurance company operations, require skilled experts to evaluate complex aspects of insurance risk management and the insurability of applicants and policyholders. Health care professionals that engage in risk-sharing relationships with policy aggregators do not have the requisite skills, expertise, or information to make complex decisions about the risks they are accepting or the adequacy of the premiums they need to accept and manage these risks successfully.
As suggested earlier, not all risks are insurable. Risks that do not have a clearly articulated financial value are difficult to insure. I may think that my grandfather's clock is priceless, but that doesn't mean an insurer will agree to insure it for $100,000 for a price I would be willing to pay. Some risks of loss are under the control of the insured and might actually produce a net benefit to the insured if they are insured. A policyholder who seeks loss represents a poor risk for an insurer. However, in health insurance, policyholders are seeking care, and care-seeking behavior produces costs or losses. The fact that health insurance coverage may be over-utilized is part of the reason that policy aggregators find risk transfers to professional caregivers so desirable and yet it presents a fundamental conflict for health care providers who accept insurance risk transfers. In fact, as will be shown below, the nature of insurance is that risk sharing between providers and insurers violates several principles of effective and efficient insurance.
Ratemaking and Reserving
While not all risks are insurable, the usual issue is the cost of providing insurance for an insurable loss. Even a very high risk of loss is insurable as long as the premium meets the requirements for rate adequacy, i.e. the average premium will cover the losses, expenses, risk management services, and profit requirements of the insurer. However, as a competitive industry with many substitute products available, underlying loss characteristics blend with market forces in the determination of insurance rates. In general, the effect of competitive forces is to drive the price for insurance services to the lowest level consistent with profitable insurance operations. Again, these decisions are complex, requiring expertise in the forecasting of uncertain future losses and expenses. Specific groups of insurance experts, actuaries, analyze these issues and perform the assessments of insurer rate adequacy and financial capacity. Two specific areas of concern are rate adequacy and insurer financial well being or solvency. Once again, professional caregivers that participate in risk-sharing agreements should perform these analyses during the process of negotiating risk-sharing agreements, but this rarely occurs because they lack the requisite expertise and information. Although professional caregivers and health care organizations could hire actuarial consultants to perform these functions, the costs of such consultation would further exacerbate the discrepancy between the adequacy of premiums paid to professional caregivers and health care organizations and the amount needed to fulfill both the care delivery and insurance functions of risk assuming professional caregivers and health care organizations.
The claims handling function involves verifying, settling, and paying claims. Claims adjustment experts make assessments about the validity of the claims and decide which claims to honor and which to deny. This insurance company function presents the most difficult challenge for risk-sharing professional caregivers and health care organizations because the claims adjustment process conflicts with the role of trusted diagnostician and service provider. Claims adjustment personnel handle delicate communications with claimants who may be dissatisfied with the time it takes for decisions to honor a claim, delays in payments for claims, and decisions to reject claims. When professional caregivers or health care organizations, rather than impartial third parties perform this critical insurance function, the potential for misunderstanding and injury is profound.
Transfers of the claims adjustment function to professional caregivers and health care organizations, presents two benefits to policy aggregators. The two most difficult claims for insurers to deal with are those that are small but numerous and claims that are large but rare. Numerous but small claims increase record keeping and claims handling expenses. Each claim has to be processed and for very small claims the costs of reviewing, authorizing, and paying claims may exceed the actual dollar value of the claim. Insurance companies try to limit the volume of small claims by including deductibles in their policies, that the insured must bear, before they seek financial remuneration from the insurer. Rare but large claims are the major source of variability in insurance operations, the protection from which is the major purpose of an insurance company. While rare but large claims are the major incentive for policyholders to purchase insurance, they are also the claims most likely to result in efforts on the part of claims personnel to deny coverage to the insured. Risk-sharing contracts with professional caregivers relieve the insurers of these two major sources of expense, one highly predictable and one highly unpredictable. The expenses of handling many, inefficient small claims and the insurance risks represented by large claims are shifted to professional caregivers and health care organizations, when they participate in risk sharing agreements. A critical, though unexamined issue is: How do professional caregivers handle the claims adjustment function when they accept insurance risk transfers and what is the impact of this claims adjustment function on professional caregivers? In particular, how do registered nurses experience the changes in roles that arise when their service provision role duties conflicts with their duty to deny services to their patients on behalf of their employers?
Insurer Financial Management
Insurance companies are required to operate in a manner, which minimizes the potential for insolvency. Insolvency is a concern for insurance companies because insolvency means that policyholders and claimants have no insurance coverage. There are two major threats to solvency: First, rate inadequacy coupled with a high volume of business will quickly weaken the financial strength of an insurance company. Second, improper accounting and inadequate preservation of assets will also put an insurance company in jeopardy. To avoid these two threats to solvency, state and federal regulations and special accounting standards requires insurance companies to manage their assets and report their financial transactions according to very strict standards. Investments must be in secure assets rather than, for example, investments in the stock market or risky business ventures. As well, insurers are required to maintain secure assets that exceed the volume of their current exposure to loss, a common rule being secure assets that are three times as large as the current volume of premiums.
The assets referred to above are called ‘surplus’ and an insurance company’s surplus allows it to weather very bad losses such as destructive storms, epidemics, and the kinds of losses represented by unforeseen events such as the attacks of September 11, 2001. A critical issue to examine when analyzing the behavior of risk-assuming professional caregivers, is the form of surplus they use, or could use, to manage unexpected losses. Of particular concern to this author is the way that the ‘surplus’ of nursing units has declined while the risk characteristics of health care organizations and nursing units have increased during the last few decades in response to finance mechanisms that transfer insurance risks to professional caregivers and health care organizations.
Surplus, on a nursing unit, may exist in many forms. Extra staff, local supply management, redundant material resources, extra equipment, and high ratios of experienced and skilled registered nurses to patients, are all traditional ways that nurses and nursing units have handled risk management in the past. However, there have been parallel changes in health care organizations that have severely eroded these forms of surplus at the same time that the risk characteristics of the nursing units have increased. As patient acuity rose, the risk characteristics of nursing environments also rose. Low acuity patients are similar, in their risk characteristics, to the smaller, more predictable claims of an insurer. As insurers have sought to eliminate small claims through deductibles, health care organizations have sought to move people with relatively low and manageable needs out, relying on relatives, friends, or home health organizations to meet their needs. Unfortunately, patients with low needs represent a form of surplus management as nurses can easily manage their care and still meet the needs of their more acute clients. When, however, all or most patients have acute needs but the staffing ratios of registered nurses to patients remain fixed, the ability to devote more time to a particular patient declines. If two or more patients require attention by one nurse at the same time, the nurse’s ability to respond is compromised in a manner quite similar to what happens when an insurer faces two different but extremely large losses in a short period.