Adding stop loss provisions to an HMO administrative services package

This study involves finding a pricing model for a stop-loss provision for clients that utilize an Health Maintenance Organization (HMO) Administrative Services Package (ASP). Essentially, under such a package, the HMO client does self-insurance and simply uses the facilities of the HMO's for a fee. Thus, there is no transfer of risks, and the HMO client becomes open to risks of runaway claims. With the stop-loss provision, the client puts a cap on such risks and transfers these to the HMO. In terms of the modeling exercise, the stop-loss provision can be thought of as a call option being sold by the HMO to the client such that if the claims go above the cap, the option is automatically called and the HMO shoulders such claims above the cap.