Medical Indemnity Premium Allocation Model

Background

The Department of Human Services (DHS) and the Victorian Managed Insurance Authority (VMIA) are undertaking a two-year trial of a new model for the allocation of the premium for medical indemnity insurance for Victorian public hospitals. The trial commenced in June 2008.

Current Situation

Under the existing system, DHS pays an annual premium to VMIA for medical indemnity insurance for the projected claims for all the Victorian public health services and public hospitals for the next financial year. This premium does not have a direct financial impact upon individual public hospitals. For the duration of the two-year trial, the existing system will continue to operateand DHS will pay the total medical indemnity premium for the Victorian public hospitals directly to VMIA.

The New Premium Allocation Model (PAM)

Under the proposed PAM each public hospital will receive a budget allocation (“budget premium”) from DHS for their own medical indemnity premium. Each public hospital will then be directly responsible for payment of a final premium (“final actual premium”) to VMIA. This final premium will incorporate an adjusted amount to the budget premium in the form of a bonus or penalty up to agreed tolerance limits. As a result, there will be a real impact on the annual budget for each public hospital.

The specific goals of the PAM are to:

• more accurately reflect the risks of medical indemnity claims and their ultimate cost
• reward good performance and penalise poor performance to provide incentive for risk management
• not penalise public hospitals for events beyond their control or for random fluctuations
• be accepted by public hospitals as being fair
• not endanger the delivery of important services or programs

If endorsed, it is planned for the PAM to commence actual operation in the 2010-2011 financial year.

Calculation of individual hospital premiums

Each public hospital will receive a “Final Actual Premium” that will be the invoiced premium derived from an actuarial formula incorporating the following items:

I. “Final Budget Premium” (risk exposure) – that is based upon reported WIES specialty and emergency presentations by triage category, with WIES numbers incorporating historical average claims cost for the specialty for premium benchmark purposes

II. “Experience Premium” (claims) – that is based upon the previous four years weighted experience for below cap claims (currently $647,000) and apportionment of all above cap claims costs by specialty

III. “Scaling Factor” (gross-up) – premium calculations are adjusted upwards for the insurers risk margin, statutory charges and the like so that the sum total of the premium equates to the total renewal premium; and

IV. “Reliability Factor” (reality check) – actuarial factor that adjusts the premium amount to reflect the reliability of the calculation in line with hospital size and predictable losses

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About the Trial

The purpose of undertaking a two-year trial is to give public hospitals the opportunity to assess the PAM’s impact and functionality and provide feedback to DHS and VMIA. The major feature of the trial is providing each public hospital with the following information:

• ‘Sensitivity tool’ – a spreadsheet that provides the individual hospital related data used to calculate its final actual premium under the new PAM. It also enables the hospital to assess how changes in claims outcomes and separations per medical specialty will impact its individual premium
• Methodology Paper – the detailed explanation of how every hospital’s medical indemnity premium is calculated (prepared by Ernst and Young, the actuaries who developed the PAM)
• Validation Paper – essentially an appendix to the main methodology paper, this document presents further analysis that validates the performance of the PAM
• Claims information – this is a spreadsheet that contains the individual hospital claims related data held by VMIA (note: only for those hospitals that have not already received a recent claims report from VMIA)
• “Dummy” invoices - it is intended that VMIA will produce a “dummy” invoice for every Victorian public hospital. These invoices will be dispatched to each public hospital in July 2008 and July 2009.

PAM Steering Group

A Steering Group has been established to oversee the trial, assess feedback on the PAM’s feasibility and make recommendations to the Secretary, DHS, about whether the PAM should be implemented, including the final structure of the PAM.

Membership of the Group has been drawn from a cross-section of public hospitals, DHS and VMIA and incorporates financial and risk management perspectives. The steering group will meet on a regular basis throughout the course of the two-year trial.

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Resources

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Contacts

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