By DAN REYNOLDS, senior editor of Risk & Insurance®
Pennsylvania made headlines earlier this spring when the state's Supreme Court ordered the state's legislators to return more than $808 million they had transferred from two funds designed to provide medical-malpractice insurance for physicians and help them manage claims payments.
In their attempts to plug what have become annual shortfalls in the state's budget, the politicians had transferred to the state's general fund $100 million from the Mcare fund, the state's pay-as-you-go medical-malpractice insurance vehicle, and $708 million from the Healthcare Provider Retention Account (HCPRA), a fund established to help doctors and hospitals pay their premiums to the Mcare fund.
Physicians were expected to pay approximately $208 million in premiums into the Mcare fund in 2010. The fund is structured so that physicians obtain their first $500,000 layer of medical-malpractice insurance from the private sector and obtain the second $500,000 layer from Mcare.
Rather than behave like a typical insurance company, the Mcare fund establishes no reserves and sets rates based on the previous year's claims data. Historically, that's created price volatility.
"Probably it is correct that a majority of physicians in the state would prefer that the Mcare program doesn't exist," Peter Adams, the Pennsylvania deputy insurance commissioner in charge of the fund, said.
In 2003, with med-mal rates skyrocketing, the state created the HCPRA as an abatement program with the idea of helping those medical professionals with the nastiest medical-malpractice exposures with their Mcare fund assessments. That set of neurosurgeons, ob-gyn practitioners, general surgeons and orthopedic surgeons got a 100 percent abatement.
The HCPRA program, according to Scot Chadwick, a spokesman for the Pennsylvania Medical Association, also gave 50 percent abatements to other categories of physicians to help them with their Mcare assessments. It was a five-year program, funded by a cigarette tax.
In 2003 and 2004, according to Chadwick, the state transferred the HCPRA money to Mcare. But in 2005, 2006 and 2007, which were kinder years for medical-malpractice premiums, it didn't send the money over to Mcare. As a result, it built up a $708 million surplus in HCPRA. It was that surplus that was transferred to the general fund last year by the legislators.
The lawmakers have appealed the Supreme Court's decision, and a decision on the appeal is expected later this year.
But just as significant as the Mcare case is another legal development taking place in Pennsylvania, which could reduce med-mal claims frequency, the driver of much of that Mcare pricing volatility.
In April, the Administrative Office of Pennsylvania Courts released records indicating that Pennsylvania's med-mal
reforms are bearing substantive fruit. For the fifth consecutive year, frequency of medical-malpractice claims overall has declined.
Ostensibly, the reason for the decline are two pieces of legislation that went into effect in 2002. The first requires plaintiff's attorneys to obtain from a medical professional certification that the procedure in question fell outside of acceptable standards. The second required medical-malpractice claims to be brought only in the county where the cause of action took place.
Can you guess what happened? In terms of the impact of the second piece of legislation, the county of Philadelphia, that bastion of the plaintiff's attorney, saw its frequency of medical-malpractice claims plummet.
In 2002, the last full year before the reforms kicked in, Philadelphia saw 1,365 medical-malpractice claims filed. In 2003, the first of the tort reform years, the number of Philadelphia filings dropped to 577. Clearly, medical-malpractice cases from many of the other 62 Pennsylvania counties were being swept into Philadelphia's legal system before the reforms took place.
Still, there were some years in which filings in Philadelphia crept back up. The year 2006 saw 569 filings, and there were 586 in 2008. But in 2009, that number came down to 491.
Allegheny County, which houses Pittsburgh, the second largest city in Pennsylvania, has also seen medical-malpractice claims decline, although nowhere near as radically as Philadelphia has. There were an average of 396 medical-malpractice filings in Pittsburgh in the years 2000 through 2002.
In the years 2003 through 2009, the average was slightly more than 284 per year.
In trumpeting the improvements made in Pennsylvania, Ronald Castille, the chief justice in Pennsylvania, created linkage between what's happened in Pennsylvania and the drive for healthcare reform nationally.
"In the recent healthcare debate nationally, there is an insistent call for reform of the handling of medical-malpractice cases within the judicial system," Castille said. "By these two rule changes, Pennsylvania is far ahead of the nation and of individual states in this arena, and we stand as a model of reform."
Perhaps what he is saying is true. Perhaps just as importantly to the state's physicians and healthcare providers, the depression in the number of medical-malpractice filings statewide means that the pay-as-you-go structure of the Mcare fund won't result in volatile premium pricing.
These days, to the degree that prior year claims data is variable, it has been variable in a downward direction, at least from the period of 2003 to 2009. The decline in medical-malpractice filings in Pennsylvania on the whole has been even more impressive than the decline in Philadelphia because the filings have gone down every year.
In 2009, there were 1,533 filings in Pennsylvania. That is a 43.9 percent reduction from the statewide figure of 2,904 filings in 2002.
All that is very nice and not to be taken lightly. But there are macroeconomic or governmental issues that threaten to undermine the positive impact tort reform has had on medical-malpractice premiums in Pennsylvania.
The public fiscal year 2009-2010 in Pennsylvania marked the seventh straight year that Pennsylvania's elected officials failed to arrive at a balanced budget by the end of the previous fiscal year, which is marked every year by the end of June. By way of partial explanation, Pennsylvania has the largest full-time legislature in the country with the exception of California and provides lifetime pensions and healthcare coverage not only to its numerous elected officials but to thousands of its unionized rank and file public servants.
Adams, the deputy commissioner in charge of the Mcare fund, can see a day when Mcare might be phased out, which would allow the wholesale entry of private-sector insurance companies into a state where medical-malpractice tort reform appears to be working.
It's a tantalizing prospect. But running off Mcare will require $1.67 billion to pay off the claims.
"I am sure that even if procrastination rules, the Mcare fund should and would be phased out," Adams said.
It really is a golden opportunity for insurers if Pennsylvania's legislators could learn to manage costs and balance the state's budget.
Admittedly, that's a big if.
June 1, 2010
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