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Structuring Health Insurance Markets
Assuring Financial Solvency
From Risk-Based Capital Standards to Oversight of Down-Stream Risk
Stephanie Lewis, Counsel for Health Policy and Regulation, Institute for Health
Policy Solutions, Washington, D.C.
Kip May, Deputy Director, Ohio Department of Insurance, Columbus, OH.
This was the first of two sessions examining States' major objectives in regulating managed care
organizations and other forms of risk-bearing entities: assuring financial solvency and assuring
accountability to consumers. This session examined the methods used to assure financial solvency
and the following session examined health plan accountability.
The session began by reviewing the types of risk associated with the business of insurance and the
consequences of insurer insolvency. The five types of risk include the following:
- Affiliate Risk. The risk that the financial condition of an affiliate entity causes an adverse
change in capital.
- Asset Risk. The risk of adverse fluctuation in the value of assets.
- Underwriting Risk. The risk that premiums will not be sufficient to pay claims.
- Credit Risk. The risk that providers and plan intermediaries paid by capitation will not be
able to provide the services contracted as well as the recoverability of amounts due from
- Business Risk. The general risk of conducting business, including the risk that actual
expenses will exceed amounts budgeted.
If these risks are not managed appropriately, an insurer may become insolvent. The major
consequences of insolvency include disruption of care for enrollees and lack of payments of medical
expenses to providers. Unless another insurer can step in to honor the contracts in force, there may
be a loss of premiums paid in advance and significant disruptions to the market.
To protect against insolvency, most States employ four key types of regulations/activities, including
- Capital Standards. including minimum net worth requirements, reserves, as well as other
asset and investment requirements.
- Insolvency Protections. most commonly these include deposits held by the State to cover
administrative costs, hold harmless provisions, continuation of benefits clauses, fidelity
bonds and insurance, an uncovered expenditures deposit. Some States also require
reinsurance and/or guaranty funds.
- Financial Monitoring and Examination. including financial Statement filings and on site
- Liquidations. supervision of the liquidation process.
Ms. Lewis explained that States have traditionally used a series of "freestanding" regulatory
structures to oversee indemnity insurers, health maintenance organizations (HMOs), and even certain types of risk-bearing provider-sponsored organizations. Over the past few years, however, regulators have found it increasingly
difficult to oversee a growing array of new types of risk-bearing organizations, including downstream risk arrangements whereby a licensed insurers pass on significant financial risk to a providers
network or other entity. As a result, the National Association of Insurance Commissioners (NAIC) has been
leading the field to develop a more "consolidated" approach to regulating health insurers, based on
specific functions rather than ownership type.
The overall theory of functional regulation is to treat
organizations that perform the same or similar functions in the same or similar manner irrespective of their organizational structures. Examples of this approach include the development of NAIC's
Consolidated Licensure for Entities Assuming Risk (CLEAR) initiative, and its risk-based capital
formula model act.
In 1997, Ohio became the first State to enact such an approach in law, through
its Managed Care Uniform Licensure Act (MCULA). The State now regulates by function,
regardless of an entities function, referring to all risk-bearing entities that provide managed care
plans as "Health Insuring Corporations."
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