Tag Archives: mitigation

Moving Past ERM: New Focus Is ERRM

No, the title does not have a typo. ERRM refers to Enterprise Risk and Resiliency Management. And, no, it is not necessarily new. When ERM is practiced in a mature and robust fashion, it should add to an organization’s resiliency.

Resilience refers to both the ability to rebound after a loss has occurred due to risk that could not be fully mitigated or was unrecognized and also the ability to capitalize on the upside risk.

Let’s look at two scenarios.

Company A, an industrial manufacturer, implemented ERM several years ago. Its risk committee, recognizing changing climate conditions and weaknesses in an aging facility, got approval for a multi-year investment in flood protection. This decision was made part of the strategic plan. Not only did the company invest in flood gates for its access points to lower levels, but it also cemented over unneeded windows and redesigned storage racks at sub-levels. All drainage lines around the facility were tested and repaired, if required. Very importantly, its business continuity and disaster recovery plans were updated and had been rehearsed doing table top rehearsals. So, when a one-in-50-year flood occurred and crippled other businesses in the area for weeks, Company A was virtually unaffected. It was able to resume full business operations in two days. On top of that, it was able to capitalize on the excellent press coverage it got locally, which enhanced its ability to attract the talent it had been seeking from the area.

For this company, ERM was more than identifying risks and creating reports. It was about taking action to build true resiliency in the face of risk.

See Also: How to Measure the Value of ERM

Company B, a woman’s clothes design and manufacturing company, practiced ERM with a very strategic approach. By that is meant, the risks to the company’s strategic direction were focused on first and became a key component of the risk identification and mitigation processes. When changes in customer preferences and buying habits were identified as risks to the current strategy, the strategy was adjusted accordingly. Since women were trending toward buying fewer and more basic garments, (for example, slacks that could be worn with multiple tops), while buying more accessories at more expensive prices, the company added new product lines such as jewelry and handbags.

As margins became squeezed at less diversified companies, this company prospered. Its quick reaction to emerging risk by adding product lines was rewarded with year-over-year return on equity (ROE) increases for each year of the strategic plan period. In other words, the company found the upside of risk and enhanced its resiliency because of it.

These hypothetical companies, based loosely on actual ones, illustrate that ERM is not just about risk; ERM is about resiliency. It is about the ability to address risk in such a way as to wind up in as good or better a position as the company was before having dealt with the risk or its impact.

How do companies embed resiliency into their ERM programs?   Each of the following points enables greater resiliency, when practiced consistently:

  • ERM needs to be strategic. First, risks to the strategy must be analyzed as well as operational and other risks. Second, risk mitigation plans for all risks that require a significant commitment of organizational resources need to be documented in the strategic plan to ensure there is proper allocation of such resources. In its fifth annual risk report, PwC has a recommendation that reinforces this idea while adding the element of business continuity planning, “Ensure strong triangulation between strategy, risk management and business continuity management.”
  • ERM must be seen to offer insights not only to the downside of risk but also to the upside. How does a given risk offer an opportunity in addition to or instead of a threat? If rising raw material costs are posing a risk to profitability, how can buying consortiums, vertical integration, multi-year contracts or changing the material composition of products pose opportunities? Innovation has a role to play in seeing and responding to the upside of risk. Indeed, risk and managing risk can be catalysts for innovation.
  • ERM mitigation plans need to be as bold as necessary to meet the potential impact level posed by the risk. For example, it does little good to mitigate a reputational risk by issuing a statement of corporate values when hiring a new senior team is what is needed. A particular mitigation plan may need to be as big as entering a new market or leaving an established one, moving a manufacturing center to a new location or making a sizeable technology investment to stay competitive or safeguard property.
  • Business continuity and disaster recovery plans are not sufficient to create resiliency. Public relations plans are also necessary to support resiliency. When there is a serious, public risk event, stakeholders want to know the what, why and how it will be handled. Companies such as British Petroleum (during the BP oil spill in the Gulf) and Toyota (during the faulty power window allegations and recall) learned that statements by CEOs could make the situation worse than it already was thereby heightening the risk. PR plans need to spell out how the company will communicate in terms of transparency, tone and types of meaningful responses it is prepared to make to address the issue in question.
  • ERM must be a continuous process where risks are updated and mitigation plans are monitored and adjusted on a regular basis. Given the pace of change, the ERM process must be as dynamic as the environment within which it exists. When a risk morphs, the actions planned to address it must morph with it, when new risks emerge, tactics to deal with them must be developed. Complacency or slow reaction time will sabotage an ERM process. As such, neither must be allowed to invade the process. If they do, resiliency will surely be sacrificed.

The marketplace continues to see seismic disruption and more massive shocks than ever before. Companies lacking the ability to bounce back from the effect of these will not be able to survive long-term. That is why every effort must be made to create a resilient form of risk management that deserves to be labeled ERRM.

How to Assess Costs of Business Interruption

As a professional loss accountant with more than 20 years of experience with business interruption (BI) valuation, I can understand why policyholders struggle with finding a repeatable, efficient system that produces an accurate measurement of their BI exposure. Over the years, some of my clients recognized the issues with the traditional BI values approach, and decided to make a change. Unfortunately, too many companies continue doing what they have always done, even when there is a better way available.

BI

Consider for a moment, just how important BI information is to your underwriter. The numbers you report give the underwriter the basis for writing coverage and calculating premium. Each renewal provides policyholders the opportunity to present their unique BI exposure. Unfortunately, this opportunity is often squandered because of a misunderstanding of business interruption values and the exposures they represent. The point of this article is to share a proven, alternative approach.

Understanding BI Values

First, there’s the ratable value. It is the “big number” that is calculated for the business as a whole, assuming a 12-month, total shutdown of all revenue-generating operations. This worst-case and often unrealistic scenario is the information requested by the insurance company, usually in the form of a one-page worksheet. Without additional information, the underwriter will use this information to set limits and charge premium.

The ratable value calculated is somewhat meaningless, except that it establishes the base assumption that is used as the BI value in all other scenarios, such as unincurred cost categories. The ratable value is seldom a reflection of your exposures. Better ways to assess your exposures are to examine your maximum foreseeable loss (MFL) and probable maximum loss (PML) scenarios.

What Is Maximum Foreseeable Loss?

The MFL, as the name indicates, is the worst-case scenario. This is not as extreme as the ratable value scenario, but pretty close. The assumptions used here include a complete breakdown of protection and loss mitigating factors while you are hit where it hurts at the worst possible time. An example would be the loss of a unique distribution center to a retailer during the holiday shopping season — say the distribution center that handles online orders goes up in smoke on Cyber Monday.

The factors used to measure the ratable value would be used in this scenario to determine the business interruption value. Certain assumptions may change depending on the duration of the loss scenario. For example, labor expense may be considered completely saved in the ratable value scenario because of the assumption that there is nothing left, but only partly saved in an MFL scenario.

What About the Probable Maximum Loss?

The PML is the same as the MFL, except that loss mitigation efforts and protections work properly. The PML also takes into account pure extra expenses used to retain customers. The PML can help with decision making on purchasing extra expense coverage.

What Happens in Underwriting?

Although I’m not an underwriter, I’ve typically seen insurance companies take an engineer’s approach to MFL and PML scenarios that vary only in duration. This singular perspective does not account for the rest of the pieces of the puzzle. The other pieces are the finer details that actually occur during a claim. In a real claim, topics like seasonality, make-up and outsourcing would surely come up, but you won’t see them on any BI worksheet.

The MFL and PML should be based on realistic loss scenarios and measured as if they were a claim. Simply applying the ratable value to loss-period assumptions produces misleading and inflated numbers. This is precisely why it is in your best interest to develop your own valuation method based on real scenarios.

Why Create Exposure Scenarios?

If BI values are based on assumptions, and you are using the worksheet, then the assumption is a 12-month loss scenario. Can you imagine a scenario in which your operations would only be affected for six months? The worksheet makes a blanket assumption of 12 months whether realistic or not. Coming up with various loss scenarios by location would flesh out a more realistic representation of the impact of each particular loss. The scenarios would also highlight high-risk locations along your supply chain, which could improve your business continuity planning.

An exposure analysis project is not only an accounting project; it’s an integrated business exercise offering multiple benefits to an organization. The goal is to identify and examine loss scenarios and the resulting ripple effects.

It isn’t necessary, nor is it practical, to anticipate every possible loss scenario. It’s better to prioritize by perceived risk and probability. Then, develop a good sampling of loss scenarios from which you can determine the impact to operations and the mitigating actions that would be taken. Depending on the exposure, involve the appropriate internal personnel, e.g., operations, sales, business continuity, IT and accounting. The external experts you may involve are your broker, legal counsel and, of course, a forensic accounting firm that specializes in insurance work. Additionally, your company’s business continuity plan (BCP) and incident response plan should be factored in. However your scenarios play out, the loss accountants can calculate the business interruption as though it were an actual claim.

As you can see, this approach would produce a more accurate BI value by location and overall. It’s the right way to look at business interruption, so make it a part of your approach with underwriters.

How to Measure the Value of ERM

When the question of whether ERM is a success or failure comes up, it raises a further question: Why aren’t companies doing a better job of measuring the value it generates?

The reasons that the value of ERM is not quantified by companies include:

  • It is extremely hard to know when a loss did not happen because of ERM.
  • It is just as hard to quantify the cost of loss that did not happen.
  • It is difficult to quantify the “soft” benefits of enhanced reputation because ERM is practiced or because of improved strategic alignment in the organization; ERM requires an understanding of the company’s strategic goals and objectives to identify the risks that might derail their achievement.
  • It is often hard to justify the time and expense of measuring something that is not easy to measure.

Having acknowledged some of these obstacles, the only way that companies will know if their ERM efforts are successful is to create some measurement scheme that makes sense for their particular situation. Without measurement, how would a company know not only if it wants to continue an ERM implementation but also how much to invest in it.

Let us look at a few possible approaches to measuring the value of ERM:

Before-and-After Approach

Once an ERM process has gained some level of maturity in an organization, this approach would take the form of looking at fairly common and reliable metrics on a before-ERM and after-ERM basis. (There are ERM maturity models, developed by experts, that can be used to evaluate how far along the path to full or optimal implementation a company has progressed.) In fact, each of the approaches described would only be reasonable if the ERM process had been in place and well-executed for some period.

Naturally, there will multiple variables, not just the practice of ERM, that play into these metrics, but that is true for most metrics, and explanations can and should accompany the numbers to explain such variables.

Such metrics would include: 1) number of insurance claims, 2) number of worker injuries, 3) number of lawsuits related to a risk/loss events, 4) number of days or hours production is lost because of a risk/loss event, 5) cost of insurance and 6) total cost of risk (TCOR). Thus, when reviewed before and after ERM, the metrics can be charted to show absolute changes in value as well as trend lines. It might even be possible to notice on a relative basis that there are fewer risk-related surprises brought to management’s attention because ERM effectively identified risks while there was still time to deal with them.

Each company will be able to come up with its own unique metrics based on what it is currently capturing, what it could capture and what is important to its business operations.

The value of ERM would be evident or could be computed from the before-and-after metrics.

“What If” Approach

In the “what if” approach, one or more of the most significant risks in the risk register, which did not materialize when expected because of mitigation by the company, would be selected. Perhaps this was a regulatory change that would have harmed a product line, but the company took lobbying efforts or did product redesign because the risk was appropriately identified, prioritized and mitigated.

The amount of the loss that the risk would have likely have produced would be computed. Even if it were an insured loss, the estimate would take into account such things as the potential increase in insurance rates, management time and all other attendant expenses not covered.

Since the risk did not produce a loss, the amount of the “what if” loss is the value of ERM.

Alternatively, a significant loss event that affected key competitors but did not affect the company using ERM could be used to assess value. Perhaps it was a natural catastrophe that the company was better protected for or a demographic shift that the company anticipated and reacted to because of ERM.

To get at ERM’s value, the company would have to approximate what the risk, if ignored, would have cost.

Lacking Any Other Explanation Approach

In “The Valuation Implications of Enterprise Risk Management Maturity,” a wholly independent and peer-reviewed research project conducted by Mark Farrell of Queen’s University Management School and Dr. Ronan Gallagher of University of Edinburgh Business School, pub­lished in The Journal of Risk and Insurance, using data from the RIMS Risk Maturity Model, the case is made that, failing any other explanation, the companies with greater maturity have higher valuations because of it. Specifically, the study found that there was “clear and significant statistical correlation between mature enterprise risk management practices and a firm’s value.” Organizations exhibiting mature risk management practices-as assessed with the RIMS Risk Maturity Model-realize a valu­ation premium of 25%.

Discretionary Approach

Yet another approach that does not rely on metrics, per se, is a discretionary approach. In other words, the board, CEO or C-suite could attribute a value to ERM that is based on the recognition that the ERM process has, for example: 1) created a risk aware culture, 2) helped to identify and ameliorate risk, 3) made recovery from risks that have materialized much faster and more efficiently and 4) enhanced the brand among stakeholders.

The discretionary approach does require that management is involved in the ERM process, has an open mind about its contribution and will articulate its conclusions about ERM’s value so that the entire organization is aware of this assessment. Without management’s giving voice to its success, the question of whether it is a success or failure will haunt ERM.

Conclusion

There are undoubtedly other approaches that could be used. The key point is that companies that have invested in introducing ERM should do so in a vigorous way and should measure and communicate its value. This will ensure that the entire organization maintains a commitment to this important process.

3 Criticisms of ERM: Justified?

A large retailer gets hacked, and customer data is taken, which costs millions in expense and lost revenues. A product recall is perceived to be badly handled, which tarnishes a manufacturer’s reputation and seriously erodes revenue, as well as margins. An acquisition fails to produce the expected profit lift and hurts a technology company’s share price. These organizations have implemented ERM, and, clearly, ERM has failed. Or has it?

Let’s look at three criticisms of ERM:

ERM Cannot Identify and Protect Against All Significant Uncertainties

This criticism is fair in the most literal sense only. Even a very robust and well-administered ERM process cannot find every major risk that an organization is subject to, nor can it protect against all risks, whether identified or not. However, without ERM, the ability to identify a majority of significant uncertainties facing an organization is greatly diminished. Not only that, without an ERM approach to risk, the mitigation of known risks is more likely to be addressed silo by silo even when an enterprise-wide solution is necessary.

In addition, with ERM, organizations are generally better prepared to rebound from unexpected, unidentified risks that do hit them. For example, ERM organizations typically have very robust business continuity and business recovery plans, have done tabletop exercises or drills that simulate a crisis and have maintained a lessons-learned and special expertise file that can be called upon, as needed.

According to a post by Carrier Management, citing RIMS, “A whopping 77% of risk management professionals credit enterprise risk management with helping them spot cyber risks at their companies.”

These survey results do not suggest that chief risk officers or risk managers, who are responsible for the ERM process, are cyber experts or that all cyber risks can be specifically ascertained. Rather, the survey suggests that ERM better positions a company to discover cyber risks, just as it does with other categories of risk.

If ERM can reduce business uncertainties and surprises by identifying risks and managing them better than other forms of risk management, despite not being able to do so 100% of the time, it has not failed. In fact, it has most probably added great value. Consider a CEO who can avoid even one unnecessary sinking feeling when realizing that a risk that should have been spotted and dealt with has hit the company. How much is it worth to that CEO to prevent that feeling?

ERM Focuses on the Negative Rather Than the Positive

This criticism is not fair in any sense. It requires an upside-down view of ERM. Think about it. In almost any definition of ERM, there is some sort of statement as to the purpose or mission of ERM. The purpose is to better ensure that the organization achieves its strategy and objectives. What could be more positive?

By dealing with risks that challenge the ability of the organization to meet its targets, ERM is fulfilling an affirmative and important task. That most risks pose a threat is not disputed. But by removing, avoiding, transferring or lessening threats, organizations have a better chance of succeeding.

This is not the only positive result that can emanate from ERM’s handling of risk. Often, a thorough examination of a risk will result in opportunities being uncovered. The opportunity could take the form of innovating a product or entering a new market or creating a more efficient workflow.

Consider a manufacturer that builds a more ergonomic chair because it has identified a heightened risk of lawsuits arising from some new medical diagnoses of injuries caused by a certain seat design. Or, consider an amusement park that is plagued by its patrons throwing ticket stubs and paper maps on the ground, thereby creating a hazard when wet or covering dangerous holes or obstacles. Imagine that the company decides to reduce the risk by increasing debris pick-up and offering rewards to patrons for turning in paper to central depositories, then turns it into “clean” confetti sold to a party goods manufacturers.

These are hypothetical examples, but real-life examples do exist. Some are quite similar to these. Many risk managers, unfortunately, are reticent to share their success stories in turning risk into a reward. For that matter, many are reluctant to share their successes of any kind. One could speculate why this is so. It may be as simple as not wanting to tempt the gods of chance.

ERM Is Too Expensive

Those who criticize ERM for being too expensive to implement may lack information or perspective. Consider the following questions:

  • Has ERM been in place long enough to produce results?
  • Has the organization started to measure the value of ERM (there are ways to measure it)?
  • Can an organization place a dollar value on avoiding a strategic risk or a loss that does not happen; does it need to?
  • Has the number of surprises diminished?
  • Are there successes along with failures?
  • How much is it worth to enhance the company’s reputation because it is seen as a responsible, less volatile company because of ERM?
  • How efficiently has the ERM process been implemented?
  • Is too much time being spent on selling the concept rather than implementing the concept?
  • Has the process and reporting of ERM results been kept clear and simple?

To answer the criticism of a too expensive process, the following are things that a company can do to make sure the process is cost-effective:

  • Embed the process, as far as feasible, into existing business processes, e.g. review strategic risk during strategic planning, hold ERM committee meetings as part of or right after other routine management meetings, monitor ERM progress during normal performance management reviews, etc.
  • Assign liaisons to ERM in the various business units and functional departments who have other roles that complement risk management.
  • Do not try to boil the ocean; keep the ERM process focused on the most significant risks the company faces.
  • Measure the value that ERM brings, such as reduction in suits or lower total cost of risk or whatever measures are decided upon by management.

In the author’s purview of ERM in various organizations, the function tends to be kept very lean (without diminution of its efficacy). If the above suggestions are adopted, along with other economical actions, the costs associated with the process can be kept in balance with the value or well below the value.

Conclusion

It is possible for an ERM process to be poorly executed, and thus deserve criticism. It is also possible for an ERM process to be well-executed and deserve nothing more than continuous improvement.

The caution is that no one should expect perfection or suppose that one unanticipated risk that creates a loss denotes a total failure of this enterprise-wide process. Organizations are sometimes faced with situations that are beyond a reasonable expectation of being known or managed.

It would be fair to lodge criticism of ERM under certain circumstances; for example, if an organization’s ERM process did not reveal a risk that all its competitors recognized as a risk and addressed. But even in that case, perhaps there were reasons to think the risk would not penetrate protections the organization already had in place. Suffice it to say, every process and situation must be evaluated on its own merits and within the proper context.

How to Best Use Provider Networks

We are all familiar with preferred provider organizations (PPOs), and many have utilized either subset networks (exclusive provider organizations) or other iterations to control escalating medical claim costs. While these approaches to provider networks had proven successful between 1970 and 2010, based on the impacts of the Affordable Care Act (ACA) they may no longer be sustainable in their current configuration.

There are simple strategies that build on the current model for provider networks and that may help improve a health plan’s performance, and I will get into those shortly. But first let’s develop a common understanding of how PPOs contract.

The marketability of a PPO is based on reducing the cost of claims and providing access to a large number of providers. Typically, PPOs use a variety of cost mitigation techniques including discounts, per diems, case or global rates and relative value schedules (RVS). For a PPO to negotiate its greatest savings, it must enroll a large number of members and be able to steer utilization.

When negotiating for professional services, a PPO typically works with two models, though a third could be added when specialty care is involved. The first model is a discount off billed charges. This is a relatively easy agreement to secure because it doesn’t affect the provider’s practice unless highly utilized. The second model is based on a relative value schedule (RVS), which was implemented in the late 1950s when the California Foundation for Medical Care established a cost for services and applied factors by region. This model was known as the California Relative Value Schedule (CRVS). A similar approach was implemented by Medicare under the title of Regionally Based Relative Value Schedule (RBRVS), which has become a standard for contracting of professional services today. As a result, most professional contracts are now based on Medicare RBRVS plus 10% to 30% depending on the region, type of provider and enrollment population. In some cases, specialty providers may contract based on fixed fees, or a variation of other methods.

Contracting with institutions is very different. In a traditional PPO, hospitals may contract through either a discount off what is billed, fixed per diems for room and board, ICU or CCU or a combination. The discount model is relatively straightforward. A contract that includes per diems will typically have a number of variations such as an “outlier.” The outlier or hospital deductible is a dollar threshold that, when exceeded, triggers re-pricing. In outliers’ purest form, the claim reverts back to a discount off billed charges to first dollar. Some contracts may allow the re-pricing to begin with amounts above the outlier, but this is not the standard.

In situations where treatment is standardized, such as childbirth and knee replacement surgery, a PPO may contract on a case rate basis, which establishes a fixed reimbursement for all care associated with the event. Some of the charges that may fall outside of the event would be physical therapy, durable medical equipment and medications. There will be other treatments, including transplantation, that may include case or global rates. While case and global rates may appear similar, they can vary greatly by network and provider organization. In some cases, the application of a case rate does not limit the claim liability to the contracted amount. As an example, we had an experience with a national network where the $1.8 million transplant charge was paid at $1.3 million even though the PPO had a $250,000 case rate.

This method is not characteristic of case or global rate practices, but consultants and clients should be mindful of exposure as it could affect the plan’s claim reserves and medical excess coverage.

The Affordable Care Act continues to affect claim costs in both fully insured and self-funded environments. Overall claim trends appear to be manageable, although some specialty care and acute care hospitals have changed billing practices as a result of unlimited lifetime benefits. An example is dialysis, where the total cost per patient has skyrocketed. In an audit of dialysis claim costs, we have identified two national provider groups as being abusive in the billing of services. Claims that prior to implementing ACA would average $28,000 to $40,000 per patient per month are now ranging between $60,000 and $105,000 per patient per month. These patients have not been of major concern to PPO contracting managers because of the low volume of claims. As a result, networks have settled for discounts of 15% to 35% off billed charges. Depending on the patient’s diagnosis, Medicare pricing could come into play, resulting in allowable charges closer to $10,000 per month, which may stabilize the group’s overall health plan spending. These and other tools will be discussed in future articles.

In addition to contracting for cost control, most PPO agreements include claim filing requirements and auditing authority. In today’s electronic age, the use of clearing houses such as WebMD have significantly improved claim submission and processing times. As a result, many PPO contracts may require the professional provider to submit claims within 30 to 90 days of treatment, or sacrifice reimbursement. The same principle may apply to institutional contracts, though the timeline for submission may be 90 days. In some cases, a PPO contract may allow an institutional provider to submit claims for a premature birth or transplant patient as long as 150 to 180 days following discharge. Risk managers, consultants and claim payers need to be aware of exceptions to the claim submission rules as they could create a non-reimbursable event if the medical stop loss policy run-out period ends before the processing of the claim.

As part of the due diligence process, it is in the client’s best interest to identify any barriers to audits of financial and medical appropriateness. A number of provider networks surrender the client’s audit authority to secure greater pricing concessions. While pricing concessions are important to the overall claim spending, it only takes one catastrophic claim to hurt a health plan’s performance. Many leaders in the PPO industry understand the need for transition, but it could take a few years to re-engineer existing provider contracts in the areas of auditing for appropriate pricing and care setting, cost to charge, captitation or other non-discounted approach to re-pricing, as well as a reduction in network size to efficiently manage the consumption.

Now that we have a common understanding of PPO contracts and we agree that change will take time to implement, let’s briefly discuss simple strategies using the current PPO model that may help improve a health plan’s performance. A strong PPO can assist clients in controlling costs when the plan design encourages people to use in-network providers. Therefore, when offering a PPO, it is appropriate to include a minimum 20% differential benefit between in- and out-of-network providers. Additionally, providing for deductibles and out-of-pocket amounts will drive patients to network providers. To avoid emergency room frequent fliers, a health plan should have an appropriate co-payment as an inducement to have patients seek care in a clinical setting.

In reviewing our block of business, which includes commercial employers, public agencies and healthcare clients, we have determined that over-utilization is not a significant concern. We have identified a number of areas where a properly crafted plan document coupled with specialty vendors may aid in the control of high-dollar claims. For example, implementing a dialysis management program can reduce average claim cost by 70%.

Beware of vendors who require a percentage of savings, as their fees could double the net claim amount. Consider the addition of domestic medical tourism. While medical tourism is a hot topic, and many of these vendors redirect care outside of the U.S., a number of employers are finding local solutions through direct contracting of specialty care and adding these under domestic tourism provisions.

An employer might include the addition of cost-plus or in-network allowable amounts and the maximum allowable reimbursements for out-of-network claims. One final concept is to utilize an exclusive provider organization-type plan design packaged with a PPO network. Essentially, the health plan would only offer in-network benefits unless care is on an emergency based outside the network’s service area.

This is the first in a series addressing all forms of provider networks. Future articles will introduce the reader to establishing local networks, direct provider contracting and capitation of medical groups, which generates provider engagement in health outcomes and financial management. Recent discussions with leaders of a number of national PPO networks found that many are currently attempting to apply these principles with varying success.