Healthcare firms should conduct a detailed “net cost” analysis annually to determine if reinsurance provides sufficient financial protection without excessive cost. Adjusting deductible levels, negotiatingbetter terms or consideration of alternative risk-sharing models can optimize net costs and value.

National Risk Advisors (NRA) has linked Risk + Reinsurance + Actuarial Science to offer a Unique One-of-A-Kind solution unlike any other risk advisory/consultancy firm in the reinsurance marketplace.

NRA’s risk solutions and actuarial advice is unavailable from any other risk advisory/consultancy firm. Our Risk/Reinsurance is linked to Actuarial Data all in-house and under one umbrella. This seamless and coordinated risk assessment program affords clients with the insights and perspective to manage their Reinsurance Program for maximum protection, minimum cost and increased success/profits.

Our actuarial data/sabermetrics analysis uses your historical data and industry data to form a risk assessment picture on a “Net Cost Basis” in making optimum risk decisions. This is unparalleled in the industry and affords firms a unique opportunity to detect hidden gaps and deficiencies for broader and assured protection at a cost-efficient cost using the client’s data.

Here’s a focused breakdown of what a Reinsurance Net Cost Analysis typically includes, structured to keep it clear and actionable. An HMO or Capitated At-Risk Provider’s reinsurance net cost analysis actuarially evaluates the financial impact of reinsurance on a firm’s operations. It helps determine whether purchasing reinsurance is cost-effective compared to retaining risk internally.

Reinsurance Net Cost Analysis – Capitated Providers & HMOs

Purpose: To assess the net financial impact of reinsurance arrangements on a healthcare firm’s bottom line, considering premiums paid, recoveries received, and administrative costs. This analysis helps clients understand whether reinsurance provides financial value or just shifts cost timing.

What Is Reinsurance: Reinsurance is a financial tool to gauge the impact of reinsurance on a net medical costs basis for clients. Reinsurance helps limit exposure to hide false claims by shifting risk and cost to another insurer.

Reinsurance transfers risk for high-cost claims to a reinsurer. It protects from claims financial volatility and large individual losses. Key benefit: Stabilizes medical loss ratios and supports rate predictability and stability.

Overview: Health Maintenance Organizations (HMOs) and Capitated Providers often purchase reinsurance (also called stop-loss coverage) to protect against high-cost catastrophic claims and financial volatility. Analyzing the “net cost” of reinsurance is essential for firms to determine its value, optimize coverage, and ensure financial stability.

Key Components:

A. Reinsurance Premiums – The cost paid to the reinsurer for coverage on PMPM basis.

•        Annual premiums paid by the provider for reinsurance coverage.

•        Types of coverage (e.g., specific/individual stop-loss, aggregating spec, global risk).

•        Attachment points (e.g., $100K per member, per year).

•        Carve-outs or exclusions.

B. Deductibles & Retentions – The portion of claims the firm must pay before reinsurance applies.

C. Coinsurance: The percentage of claims paid by the firm after the deductible is met.

D. Administrative Costs – Any additional fees associated with managing the reinsurance arrangement.

E. Claims Recovered – Reinsurer amount reimbursed when claims exceed the deductible or attachment point.

•        Total claims reimbursed by reinsurer.

•       Cash-Flow Timing – Lag time between claim submission and recovery.

•        Comparison to expected recoveries based on actuarial projections.

F. Net Cost Calculation: Net Cost = Reinsurance Premiums – Claims Recovered + Retention & Coinsurance Admin/Processing Fees

This provides the actual financial burden or benefit of the reinsurance policy.

Actuarial Assessment by NRA to Calculate the Net Cost of Reinsurance:

•        If the net cost is positive, the client is paying more for reinsurance than it is getting in return.

•        If the net cost is negative, the client is benefiting from reinsurance coverage.

Compare to Self-Insurance –

•        Estimate expected claims under a self-insured model.

•        Compare expected claims versus actual reinsured claims and premiums.

•        Evaluate volatility and risk tolerance.

Assess Financial Impact –

•        Risk Mitigation: Does reinsurance reduce financial risk for high-cost claims?

•        Cash Flow Impact: Does it help stabilize expenses?

•        Profitability & Reserves: Does it improve financial performance over time?

Conduct a Sensitivity Analysis –

•        Model different claim scenarios (high, low, and expected).

•        Adjust for changes in premiums, deductibles, and reimbursement rates.

Additional Considerations:

Risk Transfer Effectiveness –

•        How much financial risk is actually transferred?

•        Did the reinsurance trigger often enough to be worthwhile?

Cash Flow Timing –

•        Did delayed recoveries create cash flow strain?

•        Were there timing mismatches between high-cost claims and recoveries?

Opportunity Cost –

•        What would the net result have been if the provider had retained the risk and reserved capital internally?

Alternative Scenarios –

•        What’s the impact of adjusting the attachment point up or down?

•        Evaluate multiple reinsurance structures (e.g., global costs, risk corridor, aggregating spec, incurred or

alternative basis, etc.) for maximum cost-effectiveness.

Net Cost Overview: This analysis evaluates the net financial impact of reinsurance on a healthcare firm’s operations. It focuses on comparing the cost against the reinsurer’s reimbursement while considering additional cost components and claims recovery timing.

Firms should conduct a detailed net cost analysis annually to determine if reinsurance provides sufficient financial protection without excessive cost. Adjusting deductible levels, negotiating better terms, or considering alternative risk-sharing models can optimize net costs for best cost-efficiencies.

Net Cost Analysis & Calculation – Reporting Format (Example):