By Emily J. Tipping

PMSLIC President Sarah H. Lawhorne

Published December 1998

• React to this article in the Discussion Forum.

Larger companies like Clarendon National Insurance and Travelers have moved in to pick up available market share. And other companies, including the Pennsylvania Medical Society Liability Insurance Company (PMSLIC), have sought to strengthen their market position by selling to larger entities or converting from mutual to public companies.

While market experts say these changes mean doctors will have more, financially stable insurers to choose from, they could also come at a price—higher premiums and less physician say in how malpractice companies are run and how claims are handled.

The jury is still out on how the latest market changes will impact physicians, said Michael Kemski, a broker at CLA Insurance in Newtown, since malpractice companies just began to consolidate in the last couple of years. But numbers aside, he said there is a perception that bigger companies will be less personal.

"They tend to take rate increases when needed instead of saying, ‘We have to think of our doctors in Pennsylvania.’ There are more bottom line decisions than touchy-feely decisions," Kemski said.

John McCann, senior vice president of Gulf Atlantic Insurance Services, a Florida-based company that has specialized in malpractice insurance for 20 years, said there’s always a risk that irresponsible underwriters will gain market share through price-cutting. He said that the increased competition will put some pressure on companies to refrain from raising rates in the short-term, but down the road he predicted that companies with little malpractice insurance experience will either "raise rates or pull out altogether."

The Pennsylvania Medical Society created PMSLIC in the 1970s out of necessity, said Ken Jones, general counsel for the society. At that time, commercial insurance was prohibitively priced and difficult to find.

"PMS, on behalf of physicians, wanted a physician-friendly company," said Jones. "We wanted to be in the market for the long-term. We weren’t going to leave them out on their own."

Last month, PMSLIC sold an 83.6 percent share in its company to Medical Group Holdings, a joint venture of two physician-owned insurers—NORCAL Mutual Insurance Company of California and Medical Mutual Liability Insurance Society of Maryland. Money generated from the sale has been set aside for one year so the society can "calmly" consider ways to utilize it, Jones said.

Jones said PMSLIC, with an A.M. Best rating of A minus, was not a weak company. Insurance industry analysts have suggested, he said, that single-line, single-state companies will have trouble surviving over the next decade as health care providers continue to merge or sell across state lines.

PMS wanted to make sure Pennsylvania had a physician-friendly malpractice insurance company.

"The question is," Jones said, "how do you continue that kind of service in a time of market consolidation, when things are more complex and where everyone has to get bigger? The answer is to get together with companies that are the same as you."

Jones said Pennsylvania physicians will retain their voice in how PMSLIC is governed. Although PMSLIC retains only 17.4 percent of the stock in its company, Jones said it will nominate one less than half of the board positions. NORCAL and Medical Mutual, he said, have expressed their intent to keep a majority of Pennsylvania physicians on the PMSLIC board, since claims procedures and other industry regulations vary from state to state.

That argument falls flat for Louis Meier, M.D., president of the Physicians’ Cincinnatus Society, a group opposed to the CAT Fund and mandated malpractice insurance. Unless PMSLIC has a majority share, he pointed out, it’s powerless to stop Medical Group Holdings from selling to a commercial company or going public.

"They have a voice, but if you can’t affect policy it’s a voice in the dark," he said.

Jones said that Medical Group Holdings has a niche market and would be unlikely to abandon physician ownership.

Another mutual company writing policies in Pennsylvania, Medical Inter-Insurance Exchange (MIXX), is going public, further reducing the physician’s role in how policies are written and how claims are defended. A company spokeswoman would not comment for this article.

Consolidation among commercial companies, especially large ones, could result in more anonymous treatment of insureds. Jones said the first thing PMSLIC investigated about Medical Group Holdings was how its member companies treated physicians who had been targeted in malpractice claims.

"We wanted to know if they were going to defend good medicine, even if it’s a case that will be lost in court," Jones said.

Cindy DelPriore of Princeton Insurance said small, specialized companies like hers don’t always worry about the arrival of large companies like Gulf Insurance Group, backed by Travelers, and Gulf Atlantic Professional Liability Program, a contract manager for Clarendon National Insurance, into the market because "malpractice insurance is a small component of their business."

Still, some specialists are broadening their services to stay competitive. The Employers Reinsurance Corporation, a subsidiary of General Electric, last month acquired the Medical Protective Company, which says it invented the concept of professional liability insurance in 1899. Like PMSLIC, Medical Protective will retain its name and management as part of the sale, said Robert Dowdy, vice president of the Eastern Region for Medical Protective. who adds that the company now will be able to offer more products. Hospital and physician practice integration, he said, means the medical malpractice buyer has become more sophisticated.

So has the market. In Pennsylvania’s growing list of commercial malpractice insurers, said Michael Kemski, there are "no more PICs and P.I.E.s," only stable companies.

Unlike PIC and P.I.E., which slashed premiums, the state’s current menu of malpractice insurers has been holding steady on rates or applying for increases.

"The general malpractice market is very soft right now, and companies want cash flow coming in," said Kemski. "At one point, companies will make decisions on a marketing basis, and then when the claims start coming in, they make decisions on an actuarial basis and raise rates."

Kemski said it’s difficult to make a blanket statement regarding global shifts in commercial insurance premiums and CAT Fund surcharges. He believes there will be a 10 percent variance, depending on the physician’s company, geographic location and specialty. "I think they’ll pay a little less, a little more or about the same," he said.

"If we raise rates and lose business, we lose business," said DelPriore, who manages the New Jersey market for Princeton Insurance. DelPriore said the company is in the market for the long-term and will do what it can to remain solvent.

According to the state Department of Insurance, Princeton Insurance filed for a base rate increase of 38.7 percent and MIXX filed for base rate increases of 15 percent. Other companies asked for Increased Limit Factor increases because of shifts in the CAT Fund, but did not seek to raise base rates.

Beginning Jan. 1, the CAT Fund will insure physicians for claims above $400,000 instead of $300,000. That number will rise to $500,000 in 2001. In that respect, the CAT Fund’s reduced role fuels consolidation of private malpractice insurance companies, potentially contributing to a less-friendly market for physicians by providing commercial insurers with a larger chunk of the market.

At the same time, the CAT Fund plays an important role for doctors holding policies with companies like PIC or P.I.E. that become insolvent.

The Pennsylvania Insurance Guarantee Association (PIGA) will cover claims filed against PIC doctors for four years. After that time, the CAT Fund will provide coverage for those physicians. Jones said PMS expects to file documents requesting PIGA coverage for physician clients of the Ohio-based P.I.E., as well. Those doctors face a three-year gap in coverage before the CAT Fund would be activated.

Physicians were willing to risk signing up with a less financially stable company like PIC or P.I.E. to get lower premium rates. The price they paid was an insolvent company, coverage gaps and an impersonal CAT Fund and PIGA to dispose of their claims as they see fit.

"The CAT Fund, in my opinion, has settled lawsuits capriciously," said Meier, who worried that market consolidation might also spur price fixing among companies.

A number of physicians and PMS still would like to see the CAT Fund replaced with a different, more equitable mechanism. Jones said the fund has applied for a surcharge of 55 percent for next year. Although that’s a drop from the current 64 percent surcharge, he said the amount collected in total dollars would be nearly the same.

Meier said he believes shifting coverage from the CAT fund to commercial companies will help control costs, at least initially.

The biggest question mark for physicians and insurers remains the CAT Fund’s more than $2 billion in unfunded liability, gap doctors might have to help fill through surcharges.

When the CAT Fund was created in response to a lack of affordable malpractice insurance, premiums were not based on an estimate of future claims, said Richard Lipovich, partner in charge of the health care audit practice at Arthur Andersen in Pittsburgh. Instead, it was a "pay-as-you-go" fund where premiums were adjusted as claims were filed and settled.

Lipovich said the fund’s "pay-as-you-go" practice of adjusting premiums as claims were filed and settled has left it severely underfunded. The fund posted a $47 million balance in June 1997, Lipovich said.

For Meier, the problem with Pennsylvania’s malpractice insurance market is the state’s mandatory insurance law.

"No other profession requires $1.2 million in insurance or you lose your license," he said. "As long as it’s mandatory, (insurance companies) will demand what the market will bear," he said.