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Portfolio Risk Adjusted Premiums - Matching PI's Loss Avoidance Probabilities

When matching 's probability of avoiding losses, = 1.0662 (0.7500 + 2 * 0.1581)) and = 1.7500 (0.7500 + 2 * 0.5000) are the Portfolio Risk Adjusted portions of policyholder's premiums needs to pay each new insurer and if they are going to match 's probability of avoiding losses. 's payment must cover their risk of Claims Costs up to (PLR + 2 *
) and include a 5% Profit Margin.If pays [] less than 106.62% [175.00% of its Earned Premiums to assume the Claims Costs for transferred policies, their probabilities of avoiding losses fall below 's. If pays these amounts it becomes insolvent, incurring certain operating losses of 31.62% and 90.00% on the transfers. still needs to do this for every and it needs to transfer all its Claims Costs. About 62.41% of 's will have PLREs at, or below 0.8000, as will 53.98% of 's, so they would receive much more than they need. But overpaying all these insurers is the only way can adequately compensate all risk assuming insurers, for the risks they are assuming. But we know (See Section 9.2 that and have ``break-even`` probabilities of 0.7365 and 0.5793. If adequately compensates all its risk assuming partners, 73.65% of s and 57.93% of s will be overcompensated.

Overpaying most smaller risk assuming insurers, and most risk assuming health care providers, is the price pays to adequately compensate smaller, less efficient insurers, for assuming its Claims Costs. Yet another fatal, and uncorrectable, flaw in the theory of capitation financed health care.

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Thomas Cox PhD RN
2013-02-23