By Christopher Guadagnino, Ph.D.

PMSLIC President Sarah H. Lawhorne

Published September 2000

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Soaring jury awards are fueling double-digit increases in malpractice insurance premium rates and carriers are more concerned than ever about their ratings, fiscal stability and selectivity in underwriting risk, given recent events in the Pa. market.

Although Medical Professional Liability Insurance Catastrophe Loss Fund (CAT Fund) surcharges over the past two years have not triggered as intense a physician outcry as they have in previous years, the Fund’s unfunded liability remains at an estimated $2 billion and the interim plan to phase out the Fund ends next year with no plan beyond that yet in place.

Beginning Jan. 1, the last of a series of bi-annual coverage decreases by the CAT Fund will take effect, insuring Pa. physicians for medical malpractice claims above $500,000 and requiring physicians to purchase an additional $100,000 in primary medical malpractice insurance to cover claims up to the CAT Fund’s new coverage threshold. The decreases were enacted at the end of 1996 by Act 135, which also created an advisory board to consider the Fund’s future.

With tort reform efforts apparently stalled, physicians may wonder if any relief is on the horizon.

Private Carrier Market Changes

According to Kenneth Koreyva, president and CEO of Medical Inter-Insurance Exchange (MIIX), the Philadelphia area has seen a 75 percent increase in the number of malpractice plaintiff verdicts over $1 million between 1998 and 1999. The median jury award nationwide for medical malpractice cases rose 46 percent between 1997 and 1998, and the 1998 median jury award of $755,530 was up 60 percent over the median award in 1996, American Medical News noted.

Insolvencies of two malpractice insurers notorious for slashing premiums, PIC Insurance Group and P.I.E. Mutual Insurance Company, have shifted carriers away from seeking market share through price competition and toward more cautious pricing based on actuarial assessment of size and type of risk, according to Michael Kempski, a broker at CLA Insurance in Newtown.

This May, A.M. Best downgraded PHICO Insurance Co. from A- to B++, citing poor operating performance resulting from deterioration of overall capitalization and premium growth. MIIX announced a net operating loss of $47.6 million for the second quarter ending in June, resulting from an increase in loss adjustment expense reserves and, according to a MIIX press release, reflecting a trend of increased loss severity—payouts for settlements and verdicts—and increased loss frequency.

The good news, says Kempski, is that there continues to be around ten companies in Pa. who will write physician policies and all except PHICO have an A.M. Best rating of at least A-.

But companies are raising premium rates to assure stability of those ratings. The Pennsylvania Medical Society Liability Insurance Company (PMSLIC) raised rates last year by 15 percent in all of its Pa. territories and will ask for a 10 percent increase next year, says PMSLIC President and COO Sarah H. Lawhorne.

Although it has not performed its loss study for next year, MIIX is eliminating its premium discounting and has raised rates by 10 to 15 percent during the past two years, says Koreyva. Two risk areas that have received increased attention nationally, he adds, are plaintiff verdicts against ob/gyns for injuries that allegedly occurred at birth and misdiagnoses during MRIs and mammograms.

After doing business in Pa. for only three years, ProNational Insurance Co. believes its premiums have been inadequate and plans to increase them by 10 to 15 percent next year, says Jeff Bowlby, senior vice president of sales and marketing. In the past 18 months, he notes, some specialties across the country have been hit with a disproportionately high increase in number of malpractice claims alleging either failure to diagnose or improper communication with patients, including family medicine, internal medicine and radiology, each of which he says can expect a 30 to 40 percent premium increase. The Philadelphia area is a particularly high risk, making ProNational especially cautious about underwriting there, even if it means declining to write some physicians, says Bowlby. Key underwriting criteria include number of claims filed against a practice, amount paid in claims and practice problems.

Doctors Insurance Reciprocal raised rates across the board by 15 percent this year, it’s third year in Pa., with an additional 10 percent increase for ob/gyns, emergency medicine, psychiatry and internal medicine, says Barbara Vest, senior underwriter. She notes that premiums have remained stable for anesthesiology. The majority of its Pa. physician insureds, she notes, came from P.I.E., whose insolvency created the opportunity for Doctors Insurance Reciprocal to enter the market, Vest notes.

Based on its claims frequency and severity data over the past three years in Pa., Medical Protective Co. is targeting neurology, gastroenterology, pulmonary medicine and internal medicine for premium increases 10 to 20 percent above what other specialties are seeing, while premiums for other specialties have remained stable and others have actually declined somewhat, including general surgery and orthopedic surgery, according to James Frazer, territory manager.

Pa. has not even been a marginal performer for Princeton Insurance Co., says Robert Schultz, vice president of strategic planning, who characterizes the market’s recent years of irresponsible pricing as a "bloodbath" for physicians. The company increased premium rates for physicians by 35 percent last year and is seeking a similar increase next year to position itself as a preferred provider seeking out the best and cleanest business, he says. By contrast, he adds, the company has been profitable in New Jersey, Virginia, Delaware and Maryland.

Lawhorne says that the industry needs to adjust itself because of damage done by a competitive market that for years induced a feeding frenzy by companies looking to grow through low pricing in a state that only required low limits of private carrier coverage. She adds that it will take four to six years to pay off the PIC and P.I.E. insolvencies through a two percent premium tax assessed on private carriers by the Pennsylvania Insurance Guarantee Association (PIGA).

Other key reasons for premium rate increases, Lawhorne says, are more frequent and higher Pa. malpractice settlement amounts and plaintiff recoveries than in the past, which raises the threshold for future cases. Increasing frequency and severity of claims was cited by all the other carriers interviewed as a primary contributor to premium rate hikes.

Another trend in the Pa. malpractice insurance market is the consolidation which some key players have undergone for various reasons. In late 1998, the Pennsylvania Medical Society (PMS) sold an 83.6 percent share in PMSLIC to a joint venture of two physician-owned mutual companies, giving PMSLIC access to greater amounts of capital. As of this July, PMSLIC increased its book of business by one-third, adding $17 million worth of premiums by signing on Temple University Health System and Penn State Hershey hospitals and their physicians, as well as a handful of smaller hospitals primarily in western Pa., says Lawhorne.

MIIX, a long-time reciprocal exchange, converted to publicly-held company early last year, offering stock or cash options to physicians in proportion to a percent of total premiums collected from them between 1994 and 1997, Koreyva explains. The primary reasons for the conversion, he says, were to give back ownership rights to the company’s insureds and to overcome difficulties the company was encountering doing business across states as an exchange company.

Although Koreyva claims the conversion has not had any effect on the business itself, going public puts added pressure on a carrier to increase its rates and engage in more selective underwriting to meet the earning expectations of the market, or the shareholders will sell the stock, charges Lawhorne.

Medical Protective says that its purchase in late 1998 by a subsidiary of General Electric has provided resources for it to grow in new areas such as online marketing and service, according to Tim Smith, vice president and regional manager for the mid-east region. Medical Protective hopes to offer online transactions for its insureds, allowing independent agents to access current account processing data and allowing physicians to pay for policies online, Smith adds. The GE purchase also boosted the company’s financial status, recently earning it an A.M. Best rating of A++.

CAT Fund’s Future

The CAT Fund’s coverage liability has dropped from $1 million to a scheduled $700,000 next year and surcharges have hovered around 50 to 60 percent in recent years, notes Paul D. Siegel, M.D., president of the Philadelphia County Medical Society and chairman of the claims committee of PMSLIC. Although the massive emergency surcharge of several years ago, which was fueled by an abrupt settlement of a large backlog of cases, has not hit physicians in recent years, surcharge reductions anticipated from the Fund’s phase-out have not yet materialized because CAT Fund payouts take an average of five to six years from the time of an incident, with current payouts still reflecting the Fund’s $1 million limit, Siegel notes.

The full effect of Act 135 will not be measurable until three to four years after Nov. 2001, according to CAT Fund Director John Reed.

That delay, as well as a trend toward higher jury awards, has kept the CAT Fund’s unfunded liability hovering around $2 billion for the past three years, although it should start to decrease as payouts begin to reflect the higher coverage tiers, Siegel notes.

Eventual dissolution of the CAT Fund is still the official stance of the PMS House of Delegates, but the society is concerned that an abrupt termination would produce too heavy a financial burden on physicians, notes PMS General Counsel Ken Jones.

A policy proposal approved by the PMS board in January is to continue gradually phasing out the CAT Fund, reducing its coverage by $100,000 every three years beginning in 2004, thereby spreading out unfunded liability costs and the cost to physicians of converting to private malpractice carriers up to the $1.2 million required by state law, says Jones.

During the conversion to private carrier coverage, which would take some 20 years, the PMS wants the CAT Fund to continue to function as the physician’s primary carrier for claims made more than four years after an alleged malpractice incident, classified under Act 135 as a "Section 605" claim, says Jones, so physicians can continue to purchase four-year, occurrence-based policies at reasonable rates.

The CAT Fund’s Section 605 coverage also protects physicians holding policies with companies like PIC or P.I.E. that become insolvent, once four years of coverage runs out by PIGA.

The gradual conversion proposal would also seek to have a two percent premium tax levied against primary carriers to go toward paying down the CAT Fund’s unfunded liability, which Jones says could take 30 years. As primary carriers write policies for additional $100,000 coverage amounts, the state would collect more premium taxes as the CAT Fund phase-out progresses.

A competing proposal advocated by the Hospital & Healthsystem Association of Pennsylvania (HAP) is to end the CAT Fund as quickly as possible, setting a date when physicians and hospitals have to purchase all of their malpractice insurance from private carriers, according to Jim Redmond, HAP’s senior vice president of legislative affairs. HAP’s frustration with inefficient claims handling by the CAT Fund and its desire to gain control of claims through choice of private carriers is the primary driver of such a proposal, he says.

Academic medical centers are in favor of withdrawing from the CAT Fund because they are paying high surcharges for tens of thousands of employed physicians, while small hospitals typically do not have a large number of CAT Fund claims, says Redmond.

The insurance brokerage firm, Marsh USA approached HAP with a bond issue proposal to pay down the unfunded liability, notes Redmond, who says it would render surcharge payments more predictable by replacing the current pay-as-you-go system with sound actuarial analysis.

PMS is concerned that the bond proposal’s repayment schedule could hurt physicians, who would also lose the advantages that a more gradual CAT Fund phase-out would offer, says Jones.

HAP projects that withdrawal from the CAT Fund would lead to a 12 to 15 percent increase in total medical malpractice costs to hospitals for the first seven to ten years, but that replacing the Fund and its surcharges with private carrier coverage would be less expensive in the long run, says Redmond. Medical malpractice insurance represents about three percent of a hospital’s expenses, he adds.

Redmond acknowledges that medical malpractice represents 15 to 20 percent of a physician’s expenses, which is a key obstacle to PMS endorsement of a CAT Fund close-out.

A third proposal would entail hospitals withdrawing from the CAT Fund and physicians staying in during a more gradual phase-out. HAP would support such a plan, says Redmond, who notes that 25 percent of the CAT Fund’s intake comes from hospitals and nursing homes.

HB 954, introduced in the Pa. House by Rep. Nicholas A. Micozzie (R-Delaware), calls for immediate privatization of medical malpractice for hospitals and physicians, says Redmond. HAP is trying to get PMS to agree to modifications to the bill to allow for a more gradual CAT Fund phase-out for physicians, he adds.

Allowing hospitals to withdraw from the CAT Fund could lead to other groups wishing to withdraw, destabilizing the Fund and potentially leading to huge swings in its surcharge, says Roger Mecum, executive vice president of the PMS, who notes that the Pa. Podiatric Association favors withdrawal from the Fund.

The CAT Fund Advisory Board, created by Act 135, has met a few times this year and is looking at the various proposals, according to Mecum. The Board is awaiting agreement between PMS and HAP before making recommendations to the General Assembly for legislative action, says Jones.

Mecum expects final recommendations regarding the future of the CAT Fund to be approved by the PMS Board in September and a report issued to the PMS House of Delegates in October.

Additional Malpractice Concerns

In addition to across-the-board malpractice premium rate hikes, other malpractice issues remain which may threaten physician security.

Over the last few years in Pa. there has been an increase in the frequency of "high-low" agreements between medical malpractice plaintiffs and defendants, observes Peter Hoffman, Esq., a medical malpractice defense attorney with McKissock and Hoffman in Philadelphia. The high-low agreement guarantees that, if the case goes to trial, there will be a recovery for the plaintiff, but caps a plaintiff verdict at a given amount and a defense verdict at a lower amount, says Hoffman. A mechanism to protect against runaway verdicts that was not at all common in previous years, Hoffman notes, high-low agreement figures may cost malpractice carriers less than a settlement and may bring more cases to trial that heretofore would have been settled.

Some managed care companies, including Aetna U.S. Healthcare and UPMC Health Plan, have an indemnification clause in their provider contracts, often referred to as a "hold harmless" provision, that can leave physicians open to liability not covered by their malpractice insurance carrier. Under the hold harmless provision, physicians agree to third party contract liability, which none of the carriers interviewed for this story said they would cover under their general policy, although some said they would offer additional liability coverage to protect against it.

If, for example, a patient sued an HMO for a physician’s alleged negligence, the HMO could enforce the indemnity clause and ask the physician to reimburse them for expenses related to the suit and the physician cannot submit that request to his or her malpractice insurer as a claim.

Another gap in coverage is created by Section 605 claims against the CAT Fund, requiring physicians to purchase additional tail coverage from their primary carriers to retain coverage four years from now in excess of the CAT Fund’s current limit. For example, if a malpractice claim is filed four years from now for a malpractice incident that allegedly occurred this year, the CAT Fund functions as the physician’s primary carrier and defends the claim, classified under Act 135 as a Section 605 claim.

According to CAT Fund Director John Reed, the Fund’s primary coverage limit for Section 605 cases will be $700,000 per occurrence as of Jan. 1, 2001.

PMSLIC said that, in the absence of an amendment to current Pa. law, it would no longer cover the physician in the event of a Section 605 claim because the CAT Fund becomes the primary insurer. For similar reasons, MIIX and Princeton said that they would no longer cover the physician in the event of a Section 605 claim unless the physician purchased additional tail coverage. Doctors Insurance Reciprocal and ProNational said they were researching the issue, while Medical Protective said it was not sure whether it would provide coverage for Section 605 claims.

The PMS wants to keep Section 605 protection for physicians and its legislative proposal will require the CAT Fund to cover Section 605 claims up to $1 million, says Jones.

Prospects for Tort Reform

Given the significant influence that frequency and severity of malpractice claims is having on premium rates, the role of meaningful tort reform takes on fresh importance.

Tort reform efforts have stalled, partly as the result of a moratorium agreed to by the PMS prior to passage of Act 135. The moratorium, which expires next year, precludes the PMS from seeking further medical liability tort reform in Pennsylvania, from rallying in Harrisburg and from contributing over $100,000 to the Pennsylvania Civil Justice Coalition (CJC), an organization consisting of small and large businesses, the medical community, municipalities and local governments, statewide associations, non-profits and individuals seeking to enact comprehensive lawsuit abuse reform in Pa.

The CJC does not anticipate legislative action this year on SB 5, which, among other things, would provide limits on punitive damages, says Mecum, who is also vice chair of the CJC board. The CJC will introduce a modified bill next year and is planning to launch an extensive awareness program to disseminate information on lawsuit abuse to the public, including voting records of elected judges, says Mecum.