July 17, 2017
Overview of The Liquidity Impact in the Healthcare Ecosystem
Liquidity in the healthcare ecosystem originates with the Payer upon the collection or contribution of capital in return for the promise to promptly and fairly indemnify policyholders. From there, the subjective process of assessing contingencies and making judgments about future events takes place whereby reserve pools are established and then used to provide liquidity to pay claims. Incorrect projections or slow work flow processes can result in Payers being reactionary rather than proactive, or unnecessarily straining cash flow from operations rather than an efficiently allocating resources to maximize margins through capturing discounts or investment yield. From the perspective of Providers, the unpredictable length of the payment process also causes cash flow and operational hurdles resulting in less solvent entities and requiring them to borrow money for operating, legal and administrative costs, or otherwise turning to factoring companies that pay significant haircuts to acquire outstanding claims (and by extension potentially increasing Payer costs).
Each party walks an economic tightrope of balancing cash flows and liabilities, with Payers constantly trying to strike a balance of maximizing profits (underwriting claim handling and investment yield from floats or claim reserves), capturing discounts and maintaining a strong network of reliable and quality Providers to eliminate barriers of access to health care services. The timing of claim reimbursement and the appropriate allocation of risk associated with time delays is the driver that can materially impact profitability, growth capital and overall liquidity for all parties.
To better gap the divergence in interests and strive for more efficiencies, the claims administration function has become a specialist discipline, which is why partnerships between Payers and Provider and third party administrators/networks and revenue cycle management firms, respectively, have become commonplace. The inter-positioning of third party administrators and other agents has not only created sought after efficiencies, but has also mitigated risk and allowed for the proactive management of claims.
Payers are able to access networks, exploit payment discounts and allocate workload more effectively, and Providers are promptly paid allowing them to better operate their businesses – all of which brings Payers and Providers closer together in terms of cost efficiencies, reliability and improved margins.
Discounts and Network Access
During the past decade, Provider discounts have become a fundamental component of most health insurance plans intended to incentivize prompt payments that are factored into the administration and pricing of insurance plans. Networks have further been able to offer prompt pay discount incentives to eligible participants, resulting in expeditious claim resolution and offsets to lost yield from short-tail floats – claim reserves. The inability to capture discounts, however, when coupled with aggressive policy pricing or projections, can translate into less than desirable loss and combined ratios for Payers, with underwriting margins moving towards the fringes. To compound matters, network administrators have taken steps to require its Payer participants to meet defined and stringent payment terms to gain much needed access to its networks that, in turn, generally provide compelling discounts (Note: In the US, Payers also face regulations requiring prompt payments that impose penalties upon not meeting defined claim reimbursement payment periods).
At the end, Payers strive to maximize the amount of time it can take to pay out claims within established payment terms to allow it to capture discounts and operational margin.
A Payer’s financial strength and the strength of its claims operation are intricately linked and carry significant administration costs, with such costs and claims-processing systems being overwhelmed at times of growth or regulatory change. Where Payers require constant monitoring to meet projections, rigorous screening to mitigate against fraud risk and validation to ensure that costs are usual, customary and reasonable, Providers must deal with fragmented, complex and costly billing processes. The unfortunate result of events that cascade from these administrative burdens and potential liquidity strains are extended payment periods, increased costs for all parties, a struggle to balance liquidity with an efficient allocation of resources, potential integrity concerns that could compromise networks and strained relationships among all parties. It goes to say that those Payers that can efficiently administer and control cash-flow in the short term will create operational efficiencies and cost reductions that impact the bottom line despite having pricing restraints.
For the parties to maintain optimal operations and the healthcare system to run efficiently, it is incumbent on the Payer to create sufficient short-term liquidity. Ultimately, the current healthcare ecosystem fails to operate efficiently, in part, because of the difficulty in projecting claim volume and the inability to quickly make determinations relating to fraud risks and appropriate cost reimbursements. The accuracy of projections and veracity of claims verification directly correlate to whether there is sufficient liquidity to cover short-tail lines associated with healthcare. Unanticipated catastrophic claims, lasering, reallocation of risk from stop-loss providers back to healthcare plans for high risk employees, or spikes in claim volume also enter the equation and can cause significant squeezes to cash flow and reserves. Although backstop protections with stop-loss reinsurers can be helpful, it cannot fill the short-term liquidity gap. For Payers, inadequate liquidity prevents it from exploiting the float/claim reserve (the longer it takes to pay out claims, the more value the float or claim reserve can create as the basic notion that you need time to create value), or otherwise capturing discounts. For Providers, short-term liquidity gaps result in opportunity and reputation costs, short-term liabilities, costs and expenses not being met.
Notwithstanding the above, short-tail lines can be optimized by maximizing the return on the float – claim reserve while handling claims fairly and expeditiously to capture discounts. In general, Payers establish a liquid reserve to pay the expected future costs of the claim – although this adds to the Payers administrative burden and costs. During the lag between the time that a Payer establishes a reserve for a claim that originated and the time that the claim would be fully paid and closed, the Payer generally invests the float/reserve to earn investment income. The quality, liquidity and maturity structure of the Payers investment portfolios assure that funds will be available to pay claims as they arise. However, short term tails act as an implicit barrier to achieving anything other than low yields in liquid instruments. In order to offset lower yields, discounts become more important to achieving greater operational margins, and overall improvements to key performance indicators. Needless to say, inadequate management of shorttail lines can ultimately strain cash flow and capital reserves and, potentially, severely impact the solvency of the Payer (and indirectly the Provider).
Floating Deposit Accounts
Among the more significant opportunities to contain cost and provide short-term liquidity is the use of floating deposit accounts. Under this structure, the Payer maintains established reserve amounts based on historical claims volume and payment in a liquid deposit account. Claims are then drawn down from the deposit account for the claims value. This process has allowed a Payer to access networks or prompt pay discounts that they might not otherwise have been able to capture from a processing time perspective. However, this model requires continuous monitoring to make effective use of the deposit amounts. If not managed properly, the account could be over-funded – in which case the Payer could lose investment yield from the float/reserve—or under-funded, in which case the float/reserve will be impacted by stressing Payer cash flow to cover the claim amount in addition to potentially creating a claim back log that could result in having to materially alter cash flow allocations. In each case, additional administrative costs could ensue.
In collaboration with various Payers and administrators, MD Capital Solutions, “MDC“, has launched its Payer Liquidity Management Program to assist the financial, operational and administrative teams of Payers and TPAs in managing short-term cash flows. The MDC program provides immediate funding to Payers (directly or through a TPA or ASO) upon receiving an adjudicated claim or portfolio of claims eligible for prompt pay discounts. The product is designed to be utilized directly by a Payer, used as an enhancement to services provided by TPAs or a supplement to Stop-Loss insurance.
The MDC Payer Liquidity Optimization Program is intended to:
- Extend the short-tail lines and spreading health-care costs to maximize investment return from the float or claim reserves by “buying” time and liquidity
- Extend the claim reimbursement period to allow adequate time to seek reimbursement from stop-loss providers
- Create liquidity so Payers can gain access to new networks and comply with payment terms
- Reduce or eliminate floating deposit requirements for TPAs
- Create more stability in investment allocations and planning by minimizing cash outflow impacts
- Extend the short-tail liabilities to smooth volatility associated with unpredictable claim volume or unforeseen catastrophic events
- Create short-term liquidity to capture prompt pay discounts, satisfy network payment terms and avoid ramifications of late payments
- Decrease administrative costs by simplifying claim payments to defined payment dates and eliminating need to oversee benefit deposit accounts (and whether they are over- or underfunded)
- Create a funding mechanism that is not characterized as debt on balance sheets
- Pay financing costs from savings obtained from prompt pay discounts
- Extend time to plan the adequacy and timeliness of reserves
- Create stronger relationships with Providers through prompt payment
- Integrate, if necessary, with TPA systems to not disrupt work flow
- Provide supplemental cost containment and case management support, if necessary, and provide access to MDabroad networks that exist throughout Latin America
- Use its industry expertise to help facilitate system improvements
The program allows Payers time to methodically resolve claims whilst capturing discounts and driving down expenses. The overall savings and cost reductions (and potential increase in investment yield) should result in the Payer seeing a more efficient use of funds, with institutional carriers seeing improved combined and loss ratios and higher underwriting and investment margins, as well as a more aligned relationship with the Provider.
MD Capital Solutions
2999 NE 191st STREET, AVENTURA, FLORIDA 33180 T.+1 786 618-1080
MD Capital Solutions is a newly established specialty finance company that provides Healthcare participants with strategic funding to control liabilities and cash flow, minimize claim volatility, and modify claim reimbursement periods and payments to enhance key performance indicators, profitability and liquidity.