Glossary of Terms

Adverse Selection - Adverse selection arises due to asymmetric information because individuals have a better sense of their risk than the company that insures them. Adverse selection is said to occur when individuals are able to purchase health insurance at rates which are below actuarially fair rates plus administrative costs.

Business risks - Risks that arise in the organization’s conduct of its business. These risks generally refer to the risks involved in remaining profitable or in avoiding bankruptcy. For example, Medica Premier might have charged the right premium for the University population it covered (it got the insurance risk right), but might have been unprofitable because it spent too much of the premiums on administrative costs or suffered a huge liability from an unexpected lawsuit.

Carrier - An organization such as an insurance company, that provides or administers programs that arrange for medical, dental, life, or other insurance services. All of the companies that offer medical, dental, life, and optional insurance through the State Employee Group Insurance Program may be called carriers.

Direct Contracting - Direct contracting refers to a contract for health care services offered by a provider sponsored organization, such as a Physician-Hospital Organization (PHO), to an employer in which the PHO accepts the risk for utilization of health care services above the anticipated level. Direct contracting between an employer and a PHO eliminates the health plan as the bearer of insurance risk, and substitutes the employer and the PHO as the bearer of insurance risk.

Insurance risk - Risk arising from the pooling of risks and the advance funding of expected average costs. These are risks associated with matching the actual and expected medical costs of a given insured population.

Self-insurance - Employer acceptance of insurance risk for its employees by paying for all incurred expenses. Also referred to as self-funding.

State Employee Group Insurance Program - The health insurance purchasing arrangement organized by the State of Minnesota Department of Employee Relations. In the 1997-1998 contract year, SEGIP represented approximately 60,000 State and University employees. Health insurance is negotiated by representatives of DOER, AFSCME representatives, and representatives of the participating carriers. The University offers the health plans that result from these negotiations.