Tort reform rally in Harrisburg.

By Christopher Guadagnino, Ph.D.

Published December 1996

• React to this article in the Discussion Forum.

Act 135 was unanimously passed by the state House and Senate and was singed by Governor Ridge. Its provisions:

• Cap punitive damages.
• Allow for periodic payments of damages, rather than requiring lump sum payments of awards.
• Require an expert review of medical liability cases and allow for monetary sanctions against attorneys who file frivolous lawsuits.
• Create an informed consent standard prior to performance of surgery, radiation or chemotherapy, blood transfusions, insertion of surgical devices and experimental treatments.
• Allow physicians vicariously or wrongly named in a malpractice suit to be removed by filing an affidavit. Reduce the scope of CAT Fund coverage by $100,000 each year until 2001, when coverage would begin at $500,000 per occurrence.
• Change the basis of CAT Fund premium assessments to Joint Underwriting Association rates, which are determined by medical specialty and region.
• Call for a reassessment of the 254 percent surcharge for 1997, based on JUA rates, and permit physicians up to four 60-day installments to pay the surcharge.
• Allow for the CAT Fund, with Insurance Commissioner approval, to increase or decrease rates charges to hospitals by as much as 20 percent, based on the frequency and severity of claims paid by the CAT Fund for other hospitals of similar class, size, risk and region.
• Grant the CAT Fund short-term borrowing authority to obviate the need to levy emergency surcharges, although that option is still permitted.
• Create an advisory board to review the Fund's activities and to assess the future of the Fund.

Raymond J. Lodise, M.D.
PCMS

Impact of the Problem

Physicians were incensed at the prospect of paying a 254 percent surcharge next year following a 164 percent surcharge this year to a fund that seems to mete out financial punishment year by year without warning or control. A survey of 750 physicians conducted by the Philadelphia County Medical Society on October 30 yielded these reactions: "These rates approach extortion." "I have absorbed a decrease in income due to managed care. I can't afford this." "I will stop doing orthopedic surgery as of January 1st." "We are not planning on paying the surcharge in our group practice." "What next?" "I'm practicing because I love my work, but there is a limit to everything. I can always work free elsewhere." "I am looking into other occupations." "Strike, if necessary." "I will only treat my immediate family." "Please explore the possibility of a revolt."

PCMS President Raymond J. Lodise, M.D., noted that an extraordinarily high number (almost half) of the physicians to whom the survey had been faxed, responded within three days. "The practice of medicine in PA could disintegrate by year's end unless the surcharge is slashed," says Lodise.

A number of respondents expressed genuine uncertainty and insecurity about practicing medicine in Pennsylvania. Asked whether the increase would prompt considering retirement, of the 154 physicians responding, 34 answered Definitely and 44 answered Possibly. Asked if the increase would prompt considering moving one's practice from PA, of the 292 responses, 36 said Definitely and 44 said Possibly. Responses to other questions included: Consider expanding work hours (251 responses; 46 Definitely, 90 Possibly); Consider changing insurance class (293 responses; 52 Definitely, 99 Possibly).

Alternatives Considered

There were three competing approaches offered to redress the crisis. The PMS adopted the broadest scope of solutions to resolve the CAT Fund crisis:

• Insisting that comprehensive tort reform be adopted.
• Recommending that physicians suspend CAT Fund surcharge payments if tort reform were not signed into law.
• Seeking an immediate rollback of the 1997 surcharge to 164 percent, at most.
• Working toward abolition of the state-mandated CAT Fund.

A second approach to solving the CAT Fund crisis differed from the PMS's by calling for the preservation of the CAT Fund and not insisting on tort reform in the short term. CAT Fund Director John Reed was adamant that surprise shortfalls be prevented and funding inequities be addressed by redefining the CAT premium as a Joint Underwriting Association (JUA) filed rate, under which health care providers of the same specialty and region would pay the same amount. Reed believes such a change would successfully stabilize the CAT surcharge, eliminate the negative impact of insurance carrier discounting to large health systems, and redress the inequitable burden on physicians and smaller provider institutions paying into the fund. Using the JUA rate, Reed projects, would lead to many physicians paying less to CAT than to their primary carriers.

A third avenue for correcting the CAT Fund crisis, advanced by the Pennsylvania Society of Internal Medicine, adopted Reed's JUA assessment proposal for CAT Fund premiums for the present, neither insisting that the CAT Fund be abolished nor ruling out that possibility in the future. The PSIM approach also included a much narrower tort reform agenda than the PMS's, namely, altering the way tort awards are paid out to plaintiffs in medical malpractice lawsuits.

The present system (that is, before passage of HB 2210) awards plaintiffs lump sum payments, draining CAT Fund reserves much more quickly than if awards could be paid out over the lifetime of the plaintiff, a system known as periodic payments. That provision was a part of the PMS-sponsored tort reform package. The PSIM wanted periodic payments to be applied retroactively to cases already settled but not yet paid out, saving the CAT Fund another sizable chunk of short-term payouts, according to PSIM President Robert Sklaroff, M.D.

PSIM believed that seeking retroactive periodic payments immediately, rather than a full-blown tort reform agenda, was, given the political opposition, a more realistic way to secure immediate and effective relief of CAT Fund payment pain. Broader tort reform could be addressed at a later time.

Brinkmanship Pays Off

A number of significant tort reform measures were included in HB 2210. Long-sought penalties against those who file frivolous medial malpractice lawsuits may reduce the number of claims filed. Punitive damages awards are capped at 200 percent of compensatory damages. Damages may be paid in installments if agreed to by all parties. A "prudent layperson" legal definition of informed consent offers physicians better protection against lawsuits that contest that consent; the new legislation defines informed consent by a standard "that a reasonably prudent patient would require to make an informed decision."

Three key tort reform items pushed by the PMS did not prevail in the final bill, however. PMS wanted a stronger definition of what constitutes an expert witness in malpractice cases, preferably a physician with board certification. A collateral source rule would have allowed a court to deduct from awards in which there were other sources of financial redress. A statute of limitations provision would have required claims to be filed within two years of discovery or four years following the act which caused the injury.

The Bill's CAT Fund reform necessitates a reassessment of CAT Fund premiums according to a provider's specialty and region, and it grants (with insurance commissioner approval) authority to hike charges to some hospitals up to 20 percent to redress the Fund's revenue and equity difficulties. The PMS is studying the figures involved, and will soon render its judgment whether the new projection will adequately reduce the proposed 254 percent surcharge. Until that time, it has not rescinded its recommendation that physicians withhold their payments to the CAT Fund, according to PMS spokesperson Amy Dugan.

The future of the Fund is to be studied by the Medical Professional Liability Insurance Catastrophe Loss Fund Advisory Board, whose eleven members include the insurance commissioner, four members appointed by state legislators and six members appointed by the governor. The governor's appointees will include one physician, one hospital representative, one casualty insurer, one podiatrist or nursing home representative and two representatives of the public-at-large.

Among the duties of the advisory board will be:

• To review procedures and operations of the Fund.
• Commission audits of the Fund.
• Adopt claims settlement standards.
• Make annual reports to the governor and general assembly recommending management and legislative changes.
• Report to the governor and general assembly by September 1, 1997, its recommendations concerning the future of the Fund, including an opt-out provision for doctors and hospitals, and a total elimination or phase-out of the Fund.

A More Privatized Malpractice Insurance Market

Whether or not the CAT Fund is eventually eliminated, the Bill would, at a minimum, drastically reduce the involvement of the Fund and increase the scope of private insurance.

The PMS believes that the CAT Fund is too expensive to justify retaining it, even if funding inequities are redressed by Reed's JUA premium adjustment, states PMS general counsel Kenneth B. Jones, Esq. "The CAT Fund, over the last four years, has been struck by every disaster that could happen to it," says Jones. "The result is that physicians are beginning to see that they'd be better off with an insurance system that's more predictable and that's got reserves." Even though the PMS concedes that CAT Fund actuarial projections have been fairly consistent over the years and that the Fund could, in theory, become stabilized by the JUA assessment approach, it has been the unpredictable problems with the fund that brought PMS to its position of rejecting it, Jones indicates. The CAT Fund would have to remain in place, Jones explains, as a funding mechanism to pay off the $1.9 billion in unfunded liability, and until the private insurance market could respond to the need for equivalent catastrophic coverage.

Insurance markets have changed dramatically in the 20 years since the CAT Fund was established, and there are at least a half dozen carriers that can offer competitive rates for $1.2 million, states Daniel Goldberg, president and CEO of the Medical Inter-Insurance Exchange, which offers malpractice coverage for PA physicians.

Private insurers can absorb such coverage if the state Insurance Department were to approve and regulatory issues were worked out, says Pennsylvania Medical Society Liability Insurance Company (PMSLIC) President and Chief Operating Officer Sarah Lawhorne. That step has begun with HB 2210, raising basic private malpractice insurance coverage by $100,000 each year to a level of $500,000 in the year 2001.

Based on estimated actuarial projections, Lawhorne believes, malpractice premiums of private insurers for $1 million coverage would probably cost 90-100 percent more than present basic coverage for $200,000. Competition among carriers could yield lower figures than that, she adds.

Private insurers enjoy some key advantages over the CAT Fund's way of doing business, claims John Doyle, regional vice president of PIE Mutual, another malpractice insurer in the state. Whereas the CAT Fund must insure the "uninsurable risks," private insurers like PIE have declination rates of 28 percent, using review boards that weed out bad risks to keep premium costs lower. They also have prepaid defense lawyers as an internal resource, offering more control and security over cases, Doyle indicates.

For $1 million in malpractice coverage, a general surgeon in Cleveland pays an average of $30,000 a year wholly to a private insurer; a PA surgeon pays a total of $57,000 for such coverage under the present system. A Cleveland obstetrician pays $41,000; an PA obstetrician pays $68,000, notes Doyle. If full coverage were to be provided by the private companies in PA, it would be underwritten by specialty and individual risk assessment, Doyle says.

That type of underwriting is a sensible approach, as it preserves deterrence in tort contexts, believes Patricia Danzon, Ph.D., Celia Moh Professor, Wharton School. The basic premise of a sound tort system, she explains, is to deter persons from causing harm. Insurance gets in the way of that deterrence. If the cost of insurance is rated based on expected costs, that is a better deterrence than the present structure of the CAT Fund premiums, she believes, which shifts costs across generations of physicians.

Managing malpractice claims would be more efficiently done by one insurer, Danzon argues, than by a basic insurer and a catastrophic insurer. If the CAT Fund were phased out, the entity providing the comprehensive malpractice coverage would have more incentive to settle cases involving claims of more than $200,000, rather than be strictly concerned about payouts of less than that amount, she posits.

An inherent problem of the CAT Fund, it could be argued, is that it lacks the discipline required of entities that must compete on cost and quality. In addition, the mandatory nature of the CAT Fund leaves no choice for physicians who do not wish to participate, short of breaking the law. A private market would open up a number of choices and alternative arrangements for physicians.

There are potential trade-offs, however. The CAT Fund has been criticized because of its costly pay-as-you-go structure. But assuming risk of that magnitude, combined with competitive pressures of a new-found market, could lead private insurers to underwrite badly and risk insolvency.

The universal no-fault type of coverage afforded by the CAT Fund would be replaced by claims-based pricing of private insurers. "The fact that the CAT Fund does not exclude any doctors from coverage actually does a disservice to the profession and the public," states Goldberg of MIIX. He regards that as an engine to drive better self-policing by specialties, citing the Anesthesia Patient Safety Foundation, which formed standards that he says improved quality of care and forced down indemnity payments and insurance premiums.

Distinguishing bad-risk physicians from those merely with a high proportion of complex medical cases can be done by insurers, says Jones, by taking into account both the number of suits brought against physicians and how many were meritorious cases. Adds Jones, "If a doctor gets sued a lot, there is usually a reason."

To Be Continued

Although there is general agreement that the professional liability issue will not be revisited for a number of years, the remaining issues affecting the tort system will be addressed by the Civil Justice Coalition next year, according to comments made at a PMS-sponsored meeting held in Valley Forge on November 21st. This lobbying force, according to the PMS's Jerry Rothenberger, may include Fortune 500 companies in the Business Roundtable, pharmaceutical houses, insurers and physician groups. The battle for tort reform goes on, with HB 2210 providing but a brief respite.