While physicians and health care providers look forward to the new law's promise of material relief from soaring medical malpractice insurance costs, many continue to face a short-term crisis that the law is less well-equipped to redress. Insurers and medical community leaders point to specific components of the law to gauge when, and how much, the law is likely to reduce premiums and improve access to medical malpractice insurance in the state.

Coverage Vacuum in Pa.

An adverse malpractice climate is taking its toll on Pa.'s malpractice insurers: some have folded, some have left the Pa. market, some have stopped writing new policies, others have hardened their underwriting policies and have raised premiums substantially.

The Pa. Insurance Department recently took over PHICO Insurance Co., one of Pa.'s largest carriers, canceling its remaining policies and liquidating it because of financial insolvency.

St. Paul Companies announced late last year that it was exiting the medical malpractice insurance business nationwide because of mounting losses that threatened its solvency, despite average increases of 24 percent in its malpractice insurance premiums.

MIIX Insurance Co., another of Pa.'s larger carriers, said it is no longer writing new physician policies. The company's financial rating was recently downgraded by A.M. Best Company to C+ with a negative outlook, reflecting significantly weakened capitalization from extensive losses—particularly in the Pa. market, according to A.M. Best Assistant Vice President Joseph Roethel.

Princeton Insurance Co. said it is no longer writing or renewing Pa. physician or hospital policies as of May 1, noting that the severity, or award size, of claims makes business in Pa. considerably unprofitable, according to Robert Schultz, vice president of strategic development. He says that Princeton has been writing medical malpractice policies in the state since 1990 and has not had a single profitable year doing so, noting that the 30 percent premium increase it was granted by the Pa. Insurance Dept. was still not enough to cover its losses here.

Market departures of medical liability companies have left some physicians scrambling to find coverage, with some having to settle for a more restrictive type of coverage. Paul Horenstein, M.D., part of a five-physician orthopedic group in Broomall, Philadelphia and Roxborough, says his group had great difficulty obtaining coverage after the group's malpractice insurer left the market. The groups' insurance broker had advised them to apply for coverage through the Pa. Professional Liability Joint Underwriting Association (JUA), which would have boosted premium costs by 250 percent, says Horenstein.

The group instead found coverage through a company from Florida, but under a one-year, claims-made policy, which covers only those claims made or reported during the year of coverage. If the company drops the policy or leaves the market, Horenstein says, his group would be required to purchase much more expensive "tail" coverage for claims that might be filed in subsequent years for incidents that occurred during a year that the group had its claims-made policy in effect—coverage that was included under the group's previous type of policy, known as "occurrence." Although claims-made policies are typically offered at a substantial discount for the first year compared with occurrence policies, Horenstein's group could not get occurrence-type coverage and is paying the same premium amount for claims-made that it was paying for occurrence.

Pa.'s JUA has seen its roll of insureds grow from 227 in late 1999 to about 525 at the end this March, 80 percent of whom are physicians, according to JUA President Susan Sersha, who says that the number typically grows as the market tightens. Most JUA insureds come from companies not renewing them, and represent a wide range of medical specialties, she notes, including many low-end specialties such as family medicine. Most do not have an insurance broker to help place them with primary carriers, and Sersha believes that groups with agents are easier to place, given that the higher premium involved makes it more cost-effective for a commercial carrier to underwrite.

On a base-rate basis, JUA coverage could cost anywhere from 20 percent to 300 percent more than a physician's commercial carrier premium, depending on specialty, classification within specialty, county, individual claims history and other aspects of an insured's practice, says Sersha. JUA coverage for a family practice physician in Philadelphia is 57 percent higher than PMSLIC's claim-free premium rate and 49 percent higher for a family practice physician in Allegheny Co. The same rate comparison applies to orthopedic surgeons in both counties. A full-service OB/GYN in Philadelphia would pay a base rate of 36 percent more than PMSLIC's claim-free premium rate, while a full-service OB/GYN from Allegheny Co. would pay 29 percent more.

Underwriting standards of the insurers that continue to offer malpractice insurance to Pa. physicians are changing so rapidly that insurance brokers who used to be able to advise clients about their coverage eligibility now have to submit completed applications for companies to review before they know if an application will be accepted, says Greg Rodgers, president of Trans Service Insurance Agency.

Any physician with two claims against them, especially recent claims, faces not having their applications accepted by the companies that are still writing in the market because of the large influx of new physicians coming to their doors, says Rodgers.

"You'd want to write the best risks out there, given that you have a lot of applications and you have to be—depending on your capitalization—more selective in what new business you enter the books," says Roethel, who adds that sizable premium rate increases on companies' existing books of business enable them to be even more selective in writing new business.

Medical liability companies that continue to write Pa. physicians include PMSLIC, GE Medical Protective Co., and First Professionals Insurance Co. (formerly Florida Physicians Insurance Co.), the three of which Rodgers estimates to cover 70 percent of Pa. physicians who are not covered under hospital-affiliated or employee plans.

The only company besides the JUA that is still writing new occurrence policies in Pa. is GE Medical Protective Co. (GE), whose book of business is primarily concentrated in central and western Pa., according to Michael Cavanaugh, vice president of marketing, clinical risk management and public policy. GE is still writing all regions and all specialties, although it has adopted a nationwide policy not to cover certain medical procedures, says Cavanaugh, such as those not considered the accepted standard of care or procedures not performed on a regular basis, e.g., general surgeons extending their practice to include some gastric bypass surgeries on the morbidly obese, or ENTs performing plastic surgery beyond the facial area, such as tummy tucks.

He notes that orthopods, OBs and neurosurgeons remain among the company's preferred specialties, while other specialties—such as radiologists and emergency medicine physicians—are tougher to write and are likely to have their claims history undergo particular scrutiny. The company requires a ten-year loss history from all of its new applicants, whereas most carriers require a five-year history, notes Cavanaugh.

GE is writing significantly more physicians in Pa. than it has in the past, and feels confident about its ability to sustain its book because it was granted a premium increase—varying by specialty and location—averaging 45 percent, effective this July, compared to last year's average increase of 15 percent, says Cavanaugh.

PMSLIC implemented a 40 percent across-the-board premium increase in Jan. 2002, toughened its underwriting criteria regarding claims history and, since March, is only writing new physicians who join existing PMSLIC-insureds or -insured group practices, according to Anna Lavertue, director of communications and quality. PMSLIC took these steps to protect its financial viability in the Pa. market, she adds. The company is still reviewing whether it will offer occurrence policies for 2003.

First Professionals Insurance Co. is offering a claims-made policy only, says Rodgers.

Premium Subsidies

Some of the CAT Fund provisions of Act 13 will offer immediate financial relief to physicians. The law caps the Fund's 2002 surcharge at 95 percent of the 2001 surcharge and caps the Fund's 2003 and 2004 surcharges at 90 percent of the 2001 surcharge, says Art McNulty, Esq., deputy chief counsel for general law, Pa. Department of Insurance. The law gave the Insurance Dept. oversight of the CAT Fund, which in Oct. is to become a special fund of the State Treasury known as Medical Availability and Reduction of Error (MCARE) Fund.

The law allocates the first half of those surcharge discounts to five health care provider categories: hospitals and four high-risk specialties, says McNulty. The specialties are neurosurgeons, orthopods, ob/gyns and a broader major surgery class including, but not limited to, cardiac, general, plastic, trauma and vascular. The law then allocates the second half of the surcharge discounts to health care providers across the board—including those five classes.

The high-risk specialty physicians will therefore effectively see a 7 1/2 percent discount off their 2001 CAT Fund surcharge for their 2002 surcharge, and a 15 percent discount off their 2003 and 2004 CAT Fund—now MCARE Fund—surcharge. All other physicians will see a 2.5 percent discount off their 2002 surcharge and a five percent discount off 2003 and 2004.

The Insurance Dept. will rebate next year's surcharge for physicians who have already paid their 2002 surcharge, says McNulty. He adds that the Act authorizes the MCARE Fund to borrow money to cover any shortfalls.

Additional surcharge reductions will materialize after 2004. Act 13 directs receipts from Pa.'s Auto Catastrophic Loss Fund to defray MCARE's surcharge each year for a ten-year period beginning in 2004. That defrayal will total about $40 million each year, according to McNulty.

The Insurance Dept. hopes to further reduce the Fund's claim payment costs by contracting with a third party administrator to handle claims, as per Act 13 mandate. McNulty believes that a dedicated administrator with savvy claims handling expertise can reduce costs, for example, by knowing when some claims are better settled sooner rather than later.

Although it is in favor of lower surcharge costs for physicians, the Pennsylvania Medical Society (PMS) recently testified at a CAT Fund stakeholder's meeting hosted by the Insurance Dept., expressing concern that claims handling by the new administrator be structured so that it defends good medicine, and warning that a physician faces potentially serious consequences if a claim is mishandled and settled for the wrong reasons.

Act 13 reduces a physician's mandated medical liability coverage to $1 million, from $1.2 million, beginning in 2003—a provision that actuaries estimate will save physicians four to five percent off of their total coverage costs, says PMS General Counsel Ken Jones. Even though the MCARE Fund's risk exposure will be reduced next year, it will take a while for a surcharge reduction to be felt, since malpractice cases can take from six to eight years from the time of a medical incident to reach a settlement or an award, according to Jones.

That estimate may be overly conservative. GE Medical Protective's claim open-to-close interval is 29 months in Pa. and 22 months nationwide, according to Cavanaugh.

Savings from the lower mandated coverage amount will eventually carry over to primary malpractice insurance carriers in Pa., who are scheduled to assume $750,000 of liability in 2006, up from $500,000 currently, and will assume the full $1 million of liability in 2009.

Tort Reform Savings

More difficult to predict is what relief physicians will see from Act 13's tort reform provisions. Most of the provisions apply to malpractice claims for medical treatment rendered after March 20, 2002—the date Gov. Schweiker signed the Act into law—so their impact wouldn't be felt until new claims are filed and resolved.

Two provisions that can be applied to cases already filed, notes Jones, include one that toughens expert witness qualifications (described below) and a provision for remittitur, which allows judges to reduce excessive verdicts after considering the effect that the payment of the verdict will have on the community's access to care.

The PMS points to three provisions in Act 13 that offer the most promise in reducing the cost of malpractice for physicians, according to Jones:

• Modification of collateral source rule, generally prohibiting claimants from recovering 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.

• Statute of repose, imposing an absolute seven-year limit from the time of a medical incident to the time a claim can be filed, with exceptions for foreign objects left in the body, and for minors. The state's two-year statute of limitation is still in effect, requiring claims to be filed within two years of discovery of an alleged harm, but the seven-year filing limit still applies, regardless of the time of discovery. This provision applies to incidents occurring after Jan. 1, 2003.

Actuarial data from similar tort reform provisions passed in California shows that each of these three provisions can reduce physicians' malpractice premium costs by five to eight percent, with some impact being seen in two to three years and full impact in six to eight, says Jones. Using GE's 29-month claim resolution average for Pa., the impact may be felt sooner.

Jones cautions that Ca.'s saving estimates may not be directly applicable to Pa. because Ca.'s legislation had a four year statute of repose that included minors, and also had caps on awards—a provision which he says could have influenced the effect of the other provisions. Ca.'s award caps produced significantly more savings than any other tort reform provision, from 15 to 20 percent, says Jones. Obstacles to such a measure in the Pa. Constitution prevented an award cap from being included in Act 13.

The Hospital & Healthsystem Association of Pennsylvania (HAP) points to a fourth significant cost-saving provision of Act 13: one that imposes stricter standards for the qualifications of expert witnesses. Experts on medical matters 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.

PMS, HAP and Pa. Insurance Dept. actuaries project that the above four provisions of Act 13 will eventually yield a malpractice premium reduction in Pa. of 10 to 15 percent, according Jim Redmond, HAP's senior vice president of legislative services.

Those provisions may lead to more malpractice cases being settled, or to cases being settled for lesser amounts. Those cases that involve claims for significant pain and suffering will likely not be affected, given the absence of a limit on their value, but there may be more settlements of cases involving claims for past and future medical bills and past and future lost wages, given the change in the collateral source rule, the ability to reduce verdicts to present value and the ability to purchase annuities instead of paying in lump sum, believes Benjamin A. Post, Esq., of Post & Schell, P.C. in Philadelphia.

Overall, the settlement of medium value cases, which don't include heavily-weighted lost wage and medical bill components, will probably not be affected, while the larger cases should be reduced in value to some degree, and therefore have an increased chance of settlement, Post believes.

Act 13 also creates an Inter-Branch Commission on Venue to study venue—from a physician standpoint, the problem of lawsuits being filed in Philadelphia, where juries tend to award higher verdicts, rather than in the county where the alleged malpractice occurred. The 11-member commission includes attorneys from around the state appointed by Pa. legislators, the governor, the attorney general and the chief justice of the Pa. Supreme Court. Among the commission members are Rep. Curt Schroder (R-Chester), Sen. Mary Jo White (R-Butler) and the governor's General Counsel James M. Sheehan, Esq. The commission must report by Sept. 1 to the General Assembly and the Supreme Court its recommendations for legislative action or promulgation of court rules on the issue of venue.

While Act 13 sets up conditions in which the malpractice environment can get better for physicians, what ultimately matters is whether Pa. becomes more attractive to malpractice insurance carriers and how quickly other carriers come into the market. Says Jones, "The sooner they come back, the sooner we can start to see savings from marketplace competition."

McNulty said the Pa. Insurance Dept. has had two or three inquiries since the passage of Act 13 from companies wishing to discuss in a preliminary fashion the startup of a malpractice carrier in the state.

PMSLIC says that provisions it has found to be effective in other states are the modification of the collateral source rule and the periodic payment allowance, according to Lavertue. "Based on the effect of legislation in other states, we know that it could take a number of years before there are any true savings that come in the form of premium reductions," she notes, adding that the goal of Act 13 was to bring some stability and predictability to the marketplace rather than immediate savings through premium reduction. PMSLIC will be watching how the various provisions in the law play out in the courts.

Princeton Insurance Co., most of whose business was in eastern Pa., does not anticipate rescinding its decision to exit Pa. as a malpractice insurance carrier, says Schultz, who notes that it would have taken caps on noneconomic damages for them to consider staying. "We only have so much surplus to write business, and we need to free that up to allow us to write business in New Jersey, regardless of the new legislation in Pa.," says Schultz.

"We're not overly excited about Act 13," says Cavanaugh of GE Medical Protective Co., who maintains that the big piece that is missing is caps on noneconomic damages: "Act 13 doesn't address the severity issue. If the sky's the limit for a claim, it makes it very hard for an underwriter to try to model what is a reasonable premium for a risk."

Cavanaugh points to tort reform a few years ago in Texas, which he says did not have caps on damages and did not significantly reduce malpractice insurance premiums there.

Given that GE was able to get the price increases it requested for its Pa. business, says Cavanaugh, "We don't see any reason to pull back in the foreseeable future."