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By DAN REYNOLDS, senior editor of Risk & Insurance®

Pennsylvania must return approximately $808 million taken from two public medical-malpractice funds to fill a hole in the state budget, a state court has ruled.

Dr. James Goodyear, president of the Pennsylvania Medical Society (PMS), said he was "deeply gratified" by the court's decision, as the fund is designed to help compensate successful medical-malpractice claims.

"They seized the money for the fund, and we have two entirely different lawsuits, both of which were decided last week," said Scot Chadwick, a vice president for government affairs with PMS.

PMS, along with the Hospital and Healthsystem Association of Pennsylvania, filed the lawsuits seeking the return of the money.

State officials characterized the verdict as a windfall for doctors. They will appeal to the Pennsylvania State Supreme Court., which is expected to rule on the issue later this year.

Physicians and hospitals paid $209 million in premiums into Mcare in 2009. They are expected to pay another $208 million in premiums into the fund in 2010, according to Peter Adams, the Pennsylvania deputy insurance commissioner in charge of the fund.

THE FUND STRUCTURE

Mcare is structured so that physicians and hospitals procure the first $500,000 of their medical-malpractice coverage from the private sector and then pay annual premiums to the fund for the second layer of coverage, an additional $500,000.

Doctors and hospitals are free to go back into the private market for layers in excess of the first $1 million.

The fund differs from a standard insurance structure in that it doesn't set aside reserves, said Adams. It's a pay-as-you-go vehicle, with premium assessments based on the previous year's claims.

Rosanne Placey, a spokeswoman for the Pennsylvania Department of Insurance, said the fund was set up as a catastrophic loss fund, not a simple insurance company.

Mcare can be very jolting for doctors, who can see their premiums jump substantially if the previous year, for example, was a bad year for med-mal claims.

"The vast majority of physicians dislike the Mcare fund and would prefer to go to a fully private market," said Chadwick.

ENTER THE FREE MARKET?

Med-mal rates have been falling from the highs of more than a decade ago, and there now is plenty of capacity in the traditional market. So what's keeping the state from phasing out Mcare and going to a private sector insurance model?

Under the statutes that created Mcare, the state's insurance commissioner, Joel Ario, must assess the private-market med-mal capacity every other year.

Assuming sufficient capacity in the traditional market, the state could phase out the funds. Ario assessed private-market med-mal capacity in 2009 and found that there was, unsurprisingly, enough capacity to begin the phaseout, said Adams.

State lawmakers, however, saw the fund as a pool of money to tap to fill the budget gap.

So where does that leave things? Mcare has an unfunded liability of $1.67 billion. Unless the economy improves and elected officials can keep their hands off that premium pile, the state's doctors could be dealing with Mcare and its topsy-turvy premium rates for decades.

"There certainly is great interest here on the part of private medical-malpractice insurance to take over the Mcare layer. I don't think that is an issue," Adams said.

April 24, 2010

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