FAS: The focus was to look at one aspect of the medical malpractice situation in Pennsylvania and in other states: the markets for reinsurance or excess insurance. We looked at the rationale for government involvement in this market, and specifically at various government risk pooling arrangements, patient compensation funds and no-fault patient compensation programs. The question is whether having government coverage improves availability and lowers costs of medical liability insurance to physicians and to hospitals.

FAS: Government provision is probably not as major as tort reform. Tort reform like caps and modification to the collateral source rule are top level changes for physicians, while excess coverage is a more important issue for hospitals.

FAS: State JUAs, guaranty funds and patient compensation funds largely came in the 1970’s when there was a crisis, where insurance was not available. The idea was, if we can somehow either pool efforts or provide excess insurance, that insurance would be more available. It was really the lack of availability that the programs were addressing, and they seem to have addressed that, in part. The bad side of the story is that in many cases the programs have not been subject to a lot of oversight. What happens is that the legislature and others get very exercised, they pass a law, the crisis is over and then nobody cares, nobody looks, and these programs go on their own course without a whole lot of government scrutiny.

Another major generic problem has been the pay-as-you-go system. Insurance is ordinarily reserved: a claim is filed, losses are projected and premiums are collected to cover those projected losses. Or, there’s some forecast of investment income that will be added to that premium income to pay for those losses. In states like Pennsylvania and South Carolina, they went on a pay-as-you-go system, which provided for assessing policyholders at the time that payouts occur. What that does is, when you start the program – say in 1976 or in 1980 – there aren’t very many claims and so you’re not assessing physicians or hospitals very much. As those claims mount, you’re observing that you have these tremendous losses and so you go out and assess the providers existing at the time. Those providers may not have been in practice at the time when the losses were generated. There are physicians who have retired or moved to other states who were not asked to pay those losses. Politically, a pay-as-you-go system enables a governor or legislators to act like you’ve done something without having to pay very much of a cost. By the time the price is paid, you’re out of there and the bill comes due. The downside is equity, because essentially the people who are incurring the losses aren’t covering the losses. It’s a flawed system. It’s also not clear that you can run these programs without any public scrutiny, and that has largely been the case.

FAS: The MCARE Fund is a pay-as-you-go arrangement that essentially is pooling assessments of individual doctors and individual hospitals to provide a specific layer of coverage for those people it covers. It doesn’t cover large losses anymore because the liability limits have not been indexed. Very rarely do the lawyers go higher than the MCARE layer for physicians. What hospitals have had to do, because they have felt that the MCARE layer is not enough – and I think this is a concern for physicians who practice at hospitals and for those who are covered by the hospital policy – is go to private markets and offshore markets to seek excess coverage. Those excess insurers are not willing to attach to the MCARE upper limit, and so hospitals have had to go bare up to the minimum that the private excess insurer is willing to insure. After the MCARE layer, the hospital might be liable for the next $5 million of loss before their excess insurance attaches.

Another issue I looked at is: how can we mitigate having claims filed and how can we mitigate the amount paid once the claim has been filed? It doesn’t seem as though any of these public funds, not just MCARE, are terribly active in loss prevention. If there’s no loss prevention, and no experience rating, you worry that physicians and hospitals may be less loss conscious than they otherwise would be. One of the problems with the system is that it’s so split up that it makes it hard to be correctable: you have the primary insurer, then you have MCARE, then you have the buffer, then you have the excess insurance. MCARE doesn’t make any sense at the current time if it’s not going to insure the higher layers. You’ve got to go to MCARE for your middle layer, then you’ve got to pad the buffer and then you’ve got to go to the private excess for the rest. It’s just as well to go to a private excess insurer, period, and forget MCARE. The layer that MCARE is covering could be covered by the private market. One of the real problems is that you have the unfunded liability, so you would be coming to the physician twice – to take care of the past and to fund the present. That might not be too popular with Pa. physicians.

FAS: That’s a very complex question. You’re asking smokers to subsidize physicians, so there’s a question of equity. Essentially, what we’re looking for are easy pockets to tap. It is easy in this environment to tax cigarettes. So we raise the tax. But it’s undeniable that you are having poor people subsidizing richer people. To the extent that there’s a public health benefit that’s fine, maybe, but we haven’t demonstrated that. So I think it raises a lot of questions of public policy. Another question is, Should physicians be subsidized? There are several sides to that. Maybe medical care would be more available if in fact physicians pay lower premiums, so the public will be better off. The problem is, that is a theoretical possibility, but there’s no empirical proof that, in fact, physicians are leaving Pennsylvania or curtailing high-risk procedures because of the medical malpractice crisis. Obviously, we could show anecdotes. The problem is that one person may be curtailing and another person is entering, so the net effect is neutral. We need studies that look at entry and exit, not just exit.

FAS: One thing it could do is a two-pronged approach. It could, for a temporary period, go in and avert the problem. It could at the same time require that studies be done to monitor the situation so that the public sector is not totally dependent on the special interests. So, I would say go ahead and do it, but at the same time require very careful monitoring of what is happening to access in the state of Pennsylvania. I would not pay a dime without the monitoring.

FAS: The problem is lack of oversight, again. We’re just paying subsidies and we don’t know what we’re getting for it. Sometimes, we don’t have much information, as policy people, and so we have to jump into the cold water.

FAS: The JUA is really an alternative source of insurance for people who can’t get insurance. The JUA should not compete with the private market, and I don’t know that it does in Pennsylvania. If you get to that situation, you run the risk that you’re going to have a huge JUA and drive out private carriers. The flip side is that, if the cost of the JUA is too high, it doesn’t serve its mission to cover doctors who can’t find coverage.

FAS: I don’t know, but I assume it has. Again, this is a critical area for research.

FAS: A guaranty fund provides some method of assessing other insurers to pay the losses of an insurer that goes bankrupt. It can contribute to those insolvencies, like in the federal savings and loan situation, to the extent that the effect of bankruptcy is reduced. It can serve as a disincentive to policyholders to be careful who they do business with. I think the medical malpractice market may be better off not relying on guaranty funds and maybe there’s a role for state solvency regulation. We don’t want to just rely on the guaranty fund as the only policy instrument. I certainly wouldn’t use a guaranty fund as the front line insolvency control.

FAS: If the premiums are subsidized, then you’re just going to move to a public insurance system because the private market would be driven out. I don’t know if that’s all bad. It would be an interesting experiment. Private insurers are saying that malpractice coverage is such risky business that they need high prices, and excess insurance premiums are through the roof. So, maybe a public insurer could do it better. The question is, who bears the risk of overruns? The physicians bear the risk, but they’re sharing that somewhat with the public subsidy.