The Resource Allocation Working Party devised a formula which operated from 1977 to 1989, based on population adjusted for age and sex, weighted for morbidity by standardized mortality ratio.
Physicians and other health care providers lack the necessary actuarial, underwriting, accounting and finance skills for insurance risk management, but their most severe problem is the greater variation in their estimates of the average patient cost, which leaves them at a financial disadvantage as compared to insurers whose estimates are far more accurate.
HMOs and insurers manage their costs better than risk-assuming healthcare providers and cannot make risk-adjusted capitation payments without sacrificing profitability.
Risk-transferring entities will enter into such agreements only if they can maintain the levels of profits they achieve by retaining risks.
Reinsurance assumes that the insurance-risk-transferring entities do not create inefficiencies when they shift insurance risks to providers.
[4][5][8] Reinsurers are wary of contracting with physicians, as they believe that if providers think they can collect more than they pay in premiums, they would tend to revert to the same excesses encouraged by fee-for-service payment systems.