By Christopher Guadagnino, Ph.D.
Physicians in Pennsylvania may wonder when – or if – they can expect relief from their rising medical malpractice insurance costs. In the wake of fresh premium increases, and heavy lobbying last year for tort reforms that stalled in the Pa. Legislature, physicians may look to what reforms have passed in Pa., and whether they will bring relief any time soon.
Any relief, it appears, will have to wait a few more years, still. National studies of the malpractice insurance industry document recent hardship and project a pessimistic outlook for this year and next. The two major insurance carriers remaining in Pa. – PMSLIC and GE Medical Protective – continue to file for rate increases, albeit less steep than previous years, but with minimal discount for tort reform. Their skepticism persists over whether Pa.’s tort reforms will reduce claim payouts, and actuarial evidence has not yet materialized. Physicians’ access to coverage has improved somewhat, as new companies have emerged and are writing new business in Pa., but their premium rates generally remain as high as the major carriers.
Finally, some physician leaders conclude that tort reform will not work in time to stem several years more of insurance company premium hikes and claim losses, and believe that the state needs to step in to provide full malpractice coverage at subsidized rates and that the state’s required coverage amount should be eliminated through court challenge.
Pa. Reforms Show Little Impact So Far
Insurance companies and others agree that Pa.’s tort reforms will take some time to demonstrate any relief effect, and some even doubt that the eventual effect will be significant, while new companies in Pa. nevertheless feel confident that their premium levels adequately arm their operations.
It has been nearly two years since tort reforms went into effect as part of Act 13 – the MCARE Act, which included the following:
· Modification of the collateral source rule, prohibiting “double-dipping,” whereby claimants cannot recover damages for past medical bills and past lost wages when they have been reimbursed by collateral sources such as private health insurance or workers compensation.
· Periodic payment of future medical bills with reduction to present worth for future work loss, which replaces large lump-sum damage payments for awards over $100,000 with the ability to pay in installments through an interest-earning annuity.
· A seven-year filing limit from the time of a medical incident to the time a malpractice claim can be filed, with exceptions for foreign objects left in the body, and for minors. The state still requires claims to be filed within two years of discovery of an alleged harm, but now within the seven-year filing limit.
· Stricter expert witness qualifications, whereby medical experts generally must be physicians in active clinical practice or teaching, while experts on the standard of care must be in the same or similar specialty of the defendant physician, and board-certified if the defendant physician is board-certified.
The Pa. Legislature last year also passed two significant tort reforms. The law now requires malpractice lawsuits to be filed in the county in which the alleged incident occurred, preventing “venue shopping,” in which suits over incidents in other counties had been filed in counties with historically higher jury awards, especially Philadelphia.
Pa.’s joint and several liability reform, dubbed by supporters as the “Fair Share Act,” now shields parties with less than 60 percent liability in a medical malpractice or personal injury lawsuit from exposure to the entire amount of a jury award, only exposing them to their attributed share of the overall liability. Before the law passed, each defendant in a lawsuit – even those with minimal or partial legal responsibility – was held financially liable for the full amount of a damage award if other defendants were bankrupt, failed to carry insurance or had their insurance coverage limits tapped by the award.
In addition to these two legislative reforms, the Pa. Supreme Court last year adopted a rule requiring a certificate of merit to be filed with a malpractice lawsuit, in which an expert certifies that negligence occurred. The rule is intended to weed out meritless cases early on.
Tort reforms in Act 13 were projected during legislative deliberations eventually to result in a 10 percent savings in overall premiums, with an estimated three percent reduction stemming from the Act’s reduction of physicians’ mandatory coverage level to $1 million, from $1.2 million, according to Pennsylvania Medical Society General Counsel Ken Jones. Some impact was expected within two to three years, while full impact wasn’t expected until six to eight years, he adds. To date, Jones is not aware of any independent data on specific impacts, and he notes that it would take actuaries a year after some effect occurs to spot any trends.
Jones estimates that the joint and several liability law could have a significant effect on premium reduction – in the range of ten percent – although he thinks it is vulnerable to being struck down. The Pa. Commonwealth Court has agreed with plaintiffs who challenged the measure as violating the “single subject rule” – that it was improperly added to a piece of legislation to which it was unrelated. The Pa. Supreme Court has yet to rule on the challenge.
Jones is not aware of any firm estimate of how much savings can be expected from the venue law. He has heard some Philadelphia judges say that there has been a substantial reduction in the number of cases filed in Philadelphia since the venue law passed, but it is not yet clear if that has been relative to the increased number filed before the law took effect, or whether more cases are being filed in surrounding counties. The venue rule was also affirmed by the Pa. Supreme Court, which Jones takes as a positive sign that the Court views venue shopping as a problem.
Anecdotal reports suggest that the certificate of merit requirement has also reduced the number of cases that Philadelphia lawyers are seeing, but there is no data on expected savings, says Jones.
The Pa. Insurance Department sent instructions to Pa.’s licensed malpractice insurance carriers to account for tort reforms in their premium rate filings. The Department has seen a range of tort reform reduction value between three and five percent in companies’ filings for both 2003 and 2004, according to Randy Rohrbaugh, a deputy insurance commissioner.
Although companies are placing a relatively small value on tort reform impacts, other factors appear to be playing a significant relief function. The Insurance Department has seen the level of rate increases fall dramatically in the last year or so – in the range of eight to 15 percent, compared to 40 percent increases in the recent past, says Rohrbaugh. It is likely that premium rates this year more accurately reflect companies’ incurred losses, as the gap between those figures is decreasing, he notes. An improved economic outlook is also bringing the return of consumer confidence, he adds, making more capital accessible from investors more willing to take on risk.
However, companies continue to see rising incurred loss levels – which include paid and expected claims, says Rohrbaugh. In 2000, the aggregate amount of incurred loss among private malpractice carriers in Pa. was $357 million on $340 million of direct written premiums – yielding a $17 million aggregate loss. In 2002, aggregate incurred loss was $510 million on $499 million of written premium – yielding an $11 million loss, according Insurance Dept. figures. Figures for 2003 will be available in another month, Rohrbaugh says.
Pa.’s major carriers continue to file for rate increases – much smaller than those of previous years – and remain skeptical about tort reform impacts.
PMSLIC, which issues approximately 6,300 Pa. physician policies, levied a 15.1 percent base rate premium increase for this year, much less steep than its 40 percent increase in 2002 and 54 percent increase in 2003, says Anna Lavertue, director of communications and quality.
Although the company’s financial results have not been good over the past few years, the company is not considering pulling out of Pa., says Lavertue, and continues to implement policies to get a handle on costs, including issuing only claims-made policies (coverage only applies to the year for which the premium is paid), rather than occurrence (which includes tail coverage for claims that might be filed in the future for an incident that happened during the year the premium was paid) as of January 2003; eliminating hospital coverage; not writing new physician business unless an applicant joins a practice already insured by PMSLIC; and continuing to maintain tightened underwriting guidelines.
While it continues to monitor Act 13 and other measures, PMSLIC has not yet seen concrete data that Pa.’s tort reforms have reduced payout losses, Lavertue says. Given the long-tail nature of the industry, it takes several years for claims to be resolved and, although the company can estimate future losses from economic damage awards, the absence of a cap on noneconomic losses continues to make projections on overall losses difficult, she notes.
GE Medical Protective, which insures approximately 4,800 Pa. physicians, implemented a premium increase averaging 15.7 percent in 2003, compared to 45 percent in 2002, according to William Daley, the company’s general counsel. Its rate for 2004 will be finalized in early spring, he notes.
While the company continues to write new business in all specialties and territories, and continues to offer occurrence policies, its underwriting across the board has been strict, and particularly so with emergency physicians, neurosurgeons, OB/GYNs and radiologists, says Daley. The company remains committed to Pa., and intends to continue offering occurrence policies here, Daley adds.
Despite nearly two years of tort reforms in Pa., GE Medical Protective continues to experience high loss levels and severity payouts. Daley says the company is encouraged by Pa.’s venue statute, but not enough that its actuaries feel comfortable discounting premiums. He predicts it will take five to eight years for tort reforms to translate into malpractice insurer stability, and he notes that it took eight years before California’s malpractice insurance market saw stability after the state passed reforms including caps on noneconomic damages and attorney fees.
Despite Pa.’s current slate of tort reforms, Daley does not think the state has addressed runaway losses and payouts. While tort reform provisions in Act 13 and the other reforms are helpful, he says, “These are not the factors that our actuaries tell us will drive rates.” Daley maintains that caps on noneconomic damages “have the most significant effect to reduce loss trends in the quickest way.”
First Professionals Insurance Co. (FPIC), formerly Florida Physicians Insurance Co., is withdrawing from Pa. and has issued nonrenewal notices to its 2,000 Pa. physician policyholders, according to Brian Gallagher, program manager for Professional Medical Administrators. Clarendon National Insurance Co., which is managed by Gallagher’s company, is offering to pick up FPIC physicians, at a premium rate two to three times higher than FPIC was charging, he adds.
FPIC is also pulling out of Georgia, Alabama and Texas and is concentrating its business in its home state of Florida, in which it is the largest physician medical malpractice carrier, says Gallagher. The company’s retreat to its home state illustrates the trend identified in national studies of the industry.
The Pa. Joint Underwriters Association (JUA), which currently has approximately 1,600 Pa. physician policies, implemented a premium rate increase last September averaging 4.2 percent, varying by class and territory – down considerably from its 48 percent increase in 2002, according to JUA President Susan Sersha. The JUA included a five percent reduction in its most recent rate filing to account for anticipated impacts of Pa.’s tort reforms, she adds. Sersha attributes the much smaller rate increase primarily to a smaller gap between premiums and incurred losses. The association offers occurrence policies to physicians who had occurrence with their prior carrier – currently about 82 percent of JUA’s policies.
Although JUA’s enrollment could spike or fall sharply from month to month the number has become fairly stable on an annual basis, says Sersha. Physician enrollment in the JUA was 1,500 in 2002, according to Pa. Insurance Department data. Of prospective insureds who seek JUA quotes (which number between 80 to 90 per month), about 50 percent elect to go with the JUA, roughly the same percentage as last year, Sersha adds.
JUA’s enrollment figures suggest that access by Pa.’s physicians to private malpractice coverage is reasonably good. The JUA requires that its enrollees sign a statement that they have been unable to obtain primary coverage in the private market. About 20 percent of JUA-covered physicians have qualified for a 15 percent discount, which applies to those who have been claim-free for eight years. Sersha estimates that the JUA is seeing a somewhat higher cancellation rate by its policyholders than in the past, with 25 percent canceling coverage within six months.
Pa.’s tort reforms have not begun to affect claims in the MCARE pipeline, which generally see a five to seven year lag from claim filing to resolution, and MCARE’s payouts last December generally covered claims filed in the late 1990s and early 2000s, according to Art McNulty, Esq., deputy chief counsel for general law, Pa. Department of Insurance.
Meanwhile, a mandated cost-saving plan for MCARE has been put on hold. MCARE is required by Act 13 to contract with a third party administrator to oversee claims, which is expected to reduce costs through greater efficiency and expertise in evaluating the worth of claims and how to handle them. The statute does not mandate a time frame for that contracting, and MCARE recently terminated its Request For Proposal process for hiring a contractor because of the short-term costs involved in paying a contractor – estimated to be millions of dollars, says McNulty.
MCARE has also been hit with massive abatement processing duties, further diverting resources from the contracting project, McNulty adds. A February 15 deadline has been set for physicians to submit MCARE abatement applications, and by the end of January, MCARE had processed about 20,000 of them.
Early in the application process, MCARE experienced a number of problems on the applications: over nine percent had incorrect policy dates, over seven percent had duplicate entries, over three percent had invalid specialty codes, and nearly three percent had invalid license numbers. To help minimize these errors, the online application process has been modified to assist applicants by validating the license number against the last five digits of the Social Security Number, and MCARE has posted a growing list of Frequently Asked Questions about abatement on its website, at www.mcare.state.pa.us/mclf/site/default.asp.
New Companies Weathering the Pa. Market
While Pa.’s larger private carriers appear to be stemming their losses more through beefed-up premium levels over the past few years than through tort reform impacts, new malpractice insurance carriers in the state are picking up business by offering alternatives to physicians, although they are subject to the same market factors as established companies, including the need to wait for tort reform savings to materialize. The new companies are generally charging the same premiums as established companies and, although they have far less capitalization than a PMSLIC or a GE Medical Protective, they tout being free of the “baggage” of several years of past claims exposure and underpriced premiums. They are abandoning the risk retention group model because physicians have expressed reservations about it. They are also requiring their insureds to participate in aggressive risk management activities.
Millennium Insurance Company started writing physician policies in Pa. in October 2002 as a risk retention group (RRG), a model in which insureds share risk with each other and are required to be owners of the company, paying a capitalization cost on top of their premiums. As of December 2003, the company converted to a licensed admitted stock insurance company to address physician concerns about the RRG-required capitalization contribution, which had been 80 percent of the physician’s premium, and the lack of insolvency coverage protection under the Pennsylvania Insurance Guaranty Association (PIGA), which RRGs do not have, says Greg Scott, Millennium’s executive vice president.
Millennium currently insures over 300 physicians from different specialties and territories with claims-made policies, at rates similar to PMSLIC’s, and is being very selective in its underwriting, looking for physicians with better-than-average risk profiles, says Scott. The company hopes to write 700 physicians in its first year.
Millennium has about $14 million in reserves, raised privately, and is looking into the cost effectiveness of purchasing reinsurance, Scott notes. The company also has a risk management program that includes a site inspection of a physician’s practice, and plans to offer ongoing consulting and a newsletter with risk management information, he adds.
Positive Mutual Risk Retention Group Inc. recently finished its first year with a significant capital surplus and has expanded its membership to 130 physicians, including about 20 percent of all orthopedic surgeons in Pa., according to the company’s President and CEO Lewis S. Sharps, M.D. The company is focusing on orthopedic surgeons and specialties with similar or lower risk, has brought in a large urologic group and some pain management physicians, and is looking at adding cardiology and general surgery, he notes. Sharps anticipates adding between 50 and 100 physicians next year.
Positive Mutual levied a 15 percent premium increase this year, and bases its rates for claims-made policies on those of GE Medical Protective, minus a modest discount to reflect lower overhead, says Sharps. The company has a medical review board composed of actively practicing orthopedic surgeons and urologists overseeing the group’s prospective risk-prevention protocols and retrospective reviews, and the insurer mandates that every practice have a trained, in-office risk management coordinator to notify Positive Mutual of any potentially compensable events that could result in a malpractice claim, with the coordinators attending company meetings every four to six weeks, Sharps adds.
Positive Mutual is applying to transition its company into an exchange model, domiciled in Pa., which would allow it to qualify for protection under PIGA and, Sharps believes, strengthen its competitive position and capitalization. The company is currently negotiating a reinsurance contract and anticipates finalizing it in February.
Pennsylvania Healthcare Providers Insurance Exchange has signed on approximately 750 physicians and their corporations in its first year, primarily those from southeastern Pa., but with membership expanding into the western part of the state, according to the company’s President and CEO Tom Gaudiosi. The company has PIGA protection and reinsurance, is open to all specialties and territories, and is writing one-year policies with a guaranteed minimum of three years of underwriting to physicians who pay a surplus contribution and abide by the company’s aggressive risk management policies – including a home study CME course and agreement to risk management audits. Says Gaudiosi, “As a carrier, we reinforce to physicians that reporting a bad outcome will not get you dropped. Not reporting to your carrier will get you dropped.”
The company charges premiums that are about the same as those charged by PMSLIC and Medical Protective, is anticipating a rate increase of about five percent, and expects a modest enrollment growth of about 10 percent this year, Gaudiosi notes.
Professional Casualty Association was granted a Pa. license as an exchange in June 2003 and has assumed the policies of the former Professional Risk Retention Group, after physicians had raised concerns about the lack of PIGA protection and limited Pa. Insurance Department regulation under the RRG model, says Joseph F. Brady, Professional Casualty’s vice president. The new company is charging a subscription fee of 25 percent of the first year’s premium as a capitalization measure consistent with the exchange model. Even with that fee, Professional Casualty’s rates are competitive with those of PMSLIC and other companies, and it expects to hold rates flat for three years, he adds. The company also has reinsurance.
Professional Casualty currently has over 400 physicians from across Pa., with a concentration in the eastern part of the state, says Brady. The only specialty the company won’t write is neurosurgery. Its risk management component includes visiting every physician it insures to review claim histories and to introduce an informed consent program to educate surgeons on how to explain procedures to patients, Brady adds.
Professional Medical Administrators, the company managing Clarendon National, is awaiting approval by the Pa. Insurance Department to launch a new company, Pennsylvania Physician Reciprocal Insurers, which will not charge a subscription fee and anticipates rates slightly lower than those charged by Clarendon, according to Professional Medical’s Brian Gallagher. The company has reinsurance and PIGA coverage, and is contracting with a third party to conduct risk management activities. The company hopes to be up and running by mid-February and will be open to physicians from all specialties and territories, but will implement tough underwriting standards, Gallagher says.
Gallagher believes that there is more chance for a malpractice insurer to do well in Pa. than there was five or six years ago, when premiums were far too low. Less price competition in the current market also allows companies to sustain realistic premiums, he notes, declaring, “We are not going to try to undercut the market. We will not follow if others do.”
Drastic Action Proposed
“Clearly, companies in Pa. are not yet positioning themselves to anticipate lower losses,” believes Anthony V. Coletta, M.D., statewide coordinator of the Politically Active Physicians Association (PAPA). “The commercial insurance market has responded to tort reforms: Only two major insurers are left and they continue to constrict their book of business and apply for increasing premiums,” he says.
PAPA believes that the private market is continuing to collapse, and it doesn’t have confidence that PMSLIC and GE Medical Protective will remain in the market writing commercial insurance, especially for high-risk specialists. “Even if they do,” says Coletta, “We expect escalating costs for at least the next three to five years.”
Coletta acknowledges that some new, smaller companies have entered the market, but regards them as “untried entrepreneurs” who are counting on new tort reforms and lack of prior years’ claim liabilities to allow them to thrive. He notes that most of them have only committed to writing business for three years, during which time minimal payout of claims is expected because of the time lag between filing and resolution of claims.
“We believe that the state needs to prepare for the high likelihood that the tort reforms it has passed are going to be insufficient to revitalize the private malpractice insurance market,” says Coletta. Further, PAPA believes that many of those reforms are in the pipleline to be challenged by the Pa. trial bar and others, and that the current makeup of the Pa. Supreme Court, with its slim four-to-three Republican majority, leaves a strong chance that legislative reforms will be overturned.
To remedy these risks, PAPA is advocating that the state step in to provide the full layer of physicians’ liability coverage, similar to flood insurance or the FDIC in the banking industry, where government intervention was needed to prevent a collapse of the private market, says Coletta.
The concept is similar to that proposed by Pa. Rep. Tom Tangretti (D-Hempfield) last year, in which a state fund could provide coverage and handle claims less expensively than private insurers and would insulate the availability and affordability of malpractice from private market forces.
PAPA believes that a state-run insurer with a nonprofit structure could produce significant savings because of low marketing costs, low administrative overhead and no shareholders to pay. MCARE’s existing infrastructure could be expanded to provide such an entity, although the new entity would have reserves, unlike the pay-as-you-go MCARE Fund, and premiums would be subsidized by the state, perhaps using the General Fund or the cigarette tax, says Coletta. A state-run entity, he adds, could also implement a detailed risk management program by expanding the state’s information resources on quality measurement.
Legislation establishing such an entity would have a sunset provision enabling it to be phased out, moving physicians into commercial carriers if the private market becomes healthier, Coletta adds.
PAPA also hopes within the next two months to file a legal challenge against the state’s mandatory minimum coverage level for physician malpractice insurance. According to Coletta, that approach was tried in 1988 by the Physician’s Cincinnatus Society, where a federal court agreed that there was grounds for a constitutional challenge against tying a physician’s professional license to an escalating cost factor, but found no hard evidence that any physicians were actually in danger of losing their license because of the economic harm.
This time around, that economic harm will be easier to argue, says Coletta, adding that even the current MCARE abatement is being neutralized by primary carriers’ rate increases. PAPA is raising legal funds and hopes to construct a list of physician plaintiffs who are prepared to demonstrate that the mandatory coverage level harms them financially, notes Coletta.