Alternate payment contracts (APCs) are being employed to shift utilization risk from payers to providers in an effort to align financial compensation with provider performance. As a result, regulators may require that healthcare providers quantify their financial exposure and maintain adequate reserves to reduce their risks of insolvency. In this paper, Milliman consultants outline items that actuaries consider when reviewing a provider’s APCs and also provide perspective on modeling appropriate levels of financial reserves.
Here is an excerpt:
…The actuary will likely build a model to estimate the appropriate level of financial reserves required for the risk exposure borne by the provider through the APCs. Taking the above points into consideration, a deterministic model can be built to estimate the expected APC’s surplus or deficit based on projected claims and budget. The larger the projected surplus, the less likely random fluctuation from adverse events will cause financial strain on the provider, which will lower the level of required reserves.
A stochastic simulation can be built on top of this model to assign probabilities that the provider’s APC produces a deficit as a result of unforeseen events. A claims probability distribution can be created either from the provider’s actual APC historical claims data or another similar source.
Two main sources of claims variation that should be modeled in the simulation include:
• Mis-pricing. It is possible (probable) that the projected claims cost will not come in as expected because of inaccurate trend setting/assumptions.
• Random fluctuation. Even if the trend assumption is correct, there is always the possibility of chance events from year to year (i.e., larger-than-expected high-cost claimants).