III. General PCF Features and Issues
Participation
Of the nine states with active PCFs, Indiana, Louisiana, Nebraska, New Mexico, South Carolina, and New York operate voluntary programs, while Pennsylvania, Kansas, and Wisconsin mandate participation by health care providers. (See Exhibit 1 for more detail on the features of each individual fund.) The choice between these two options is an important one in establishing a PCF. To add value to the medical insurance market, it is critical that a PCF increase market availability or affordability.[1] During periods of favorable market conditions, healthcare providers should be able to obtain coverage at costs equal to or less than those offered through the PCF from private insurers, rendering the PCF unnecessary. When the cost of the insurance policies in the open market rises during periods of industry crisis or instability, a PCF, by providing coverage for large losses, should mitigate these effects and ensure access to medical malpractice insurance.[2]
The very nature of these market forces therefore argues against mandatory PCFs, in that forcing providers to participate in PCFs prevents them from benefiting from favorable market conditions. Requiring all healthcare providers to pay for coverage through a state-run PCF during periods of healthy competition and efficient markets will only serve to relocate, not reduce, medical malpractice insurance costs: "A PCF, as an alternative for existing coverage at a comparable cost, does not reduce costs at all. In this case, it merely transfers costs to a different funding mechanism."[3] In simple terms, it reallocates providers' premiums from marketplace insurance carriers to the state.
Wyoming offers an instructive example of the interplay between market forces and the need for a PCF: The Wyoming legislature established such a fund in the 1970s, when the state was without a single medical malpractice insurer. However, New Mexico Physicians Mutual began operations in Wyoming shortly thereafter, and not a single Wyoming physician enrolled in the PCF. By the mid-1980s, there were several other insurance companies operating the market, and the legislature had taken back the funds it provided for the program.[4]
Mandatory PCFs may also fail to adequately ensure fairness for participating healthcare providers. Requiring all providers in a state to contribute to a fund designed to pay large damage awards transfers some of the insurance burden from high-risk providers (who, presumably, would require greater amounts of coverage) to low-risk ones (who may not require such high levels of coverage). With a mandatory PCF, a physician with no claims history would be effectively subsidizing others who have had a number of claims brought against them. Such a situation would likely anger those physicians who find themselves paying higher insurance premiums to provide coverage for so-called "bad doctors."
This equity issue is addressed to a degree in three states by linking PCF premiums to existing insurance premiums or other merit ratings.[5] For example, South Carolina physicians' PCF charges are adjusted based on the number of claims against them.[6] New Mexico and Louisiana also employ forms of experience rating. Despite these attempts at increasing fairness for participating doctors, the state ultimately is not an insurance underwriter; it lacks the both the expertise of private insurers in this area and their incentive to make profitable underwriting decisions.[7]
In addition to creating an inequitable insurance situation for individual physicians, PCFs can also result in providers in certain areas of a state "cross-subsidizing" others where large medical malpractice verdicts are more frequent. In a survey of Pennsylvania health care providers, some respondents claimed that this was the case in their state, as Philadelphia has generally accounted for half of all malpractice cases filed in the state and boasts a mean jury verdict more than double the amount in other areas.[8] Cross-subsidization represents a direct risk for any PCF implemented in Missouri because of differences in judicial climates in venues across the state. For example, the St. Louis City Circuit Court alone accounted for over 50 percent of the state's highest settlements in 2002.[9] The establishment of a statewide mandatory PCF would force providers in lower-risk geographic venues to subsidize coverage of the large awards more frequently distributed in St. Louis.
Voluntary PCFs avoid the fairness problem by giving insurers the option of participation in the PCF; if a private reinsurer will provide coverage for a lower rate than the PCF, the primary insurer is able to bypass PCF coverage.[10] For this reason, Pinnacle Actuarial Services, commissioned in 2003 by the State of Ohio to study the feasibility of a patient compensation fund for that state, opined that any such fund should be voluntary.[11]
However, such a choice makes adverse selection nearly unavoidable, as low-risk providers will be free to opt out of the PCF if premiums rise.[12] South Carolina has experienced this phenomenon to some extent, as providers have left the fund as premiums have risen.[13] A trend in the pool of participants towards only high-risk providers would lead to increased assessments and even fund deficits. Nebraska, Louisiana, and New Mexico provide incentives for voluntary participation in the form of caps on non-economic or total damages that are contingent on involvement in their respective PCFs (as these states do not have general caps on these types of damage awards) .[14] As of 2005, Missouri has implemented a cap on non-economic damages and thus would be unable to encourage participation in a voluntary PCF in this way.
However, the existence of any type of incentive for PCF participation demonstrates that health care providers clearly prefer obtaining their medical malpractice insurance in the competitive market as opposed to involving the state in the insurance business. Offering damage caps or other benefits to fund participants only suggests that to preserve the fund, the state must make it more attractive than private insurers. This brings the state into direct competition with private insurers and defeats one of the primary purposes of a PCF, which is to make medical malpractice insurance more available. Indeed, states that incentivize PCF participation have experienced problems keeping private carriers in their states. In New Mexico, nearly all physicians participate in the fund and obtain their private insurance from one of two carriers, one of which has ceased writing new business.[15] In Louisiana, over 75 percent of the state's approximately 10,000 physicians were insured by one of two private carriers until 2002, when St. Paul announced that it would not renew medical malpractice policies for the 2,500 Louisiana doctors it covered.[16]
Missouri, with its 12 private medical malpractice vigorously competing for market share, has no reason to emulate states with such different - and uncompetitive - insurance markets.
[1] Pinnacle Actuarial Resources, Inc., supra note 1, at 9.
[2] Id at 10.
[3] Id. at 10.
[4] Sloan, supra note 2, at 33.
[5] Iowa Medical Society Patient Compensation Funds White Paper 4.
[6] A Review of the Medical Malpractice Patients' Compensation Fund. South Carolina Legislative Audit Council. Jan. 2004. p. 7-8.
[7] Id; 19-24; Sloan, supra note 2, at 33.
[8] Frank A. Sloan et al., Public Provision of Medical Malpractice Insurance: Pennsylvania's Experience, available at: http://74.125.45.104/search?q=cache:islsj37pVtkJ:www.mit.edu/~eesley/Sept_29.doc+Frank+A.+Sloan+et+al.,
+Public+Provision+of+Medical+Malpractice+Insurance:+Pennsylvania%E2%80%99s+Experience&hl=en&ct=clnk&cd=1&gl=us.
[9] Missouri Citizens Should Hold Governor Accountable for Growing Health Care Crisis, 23 April 2004. American Tort Reform Association Website, http://www.atra.org/show/7764 (Last viewed July, 2005).
[10] Pinnacle Actuarial Resources, Inc., supra note 1, at 10.
[11] Id. at 2.
[12] Sloan, supra note 2, at 41.
[13] Coston, Terry. Executive Director, South Carolina Patient Compensation Fund. 9 June 2005.
[14] Iowa Medical Society Patient Compensation Funds White Paper 5, (last viewed July, 2005).
[15] Telephone Interview with Alan Steely, Chief Property Casualty Actuary, New Mexico Insurance Division (June 9, 2005).
[16] Chris Bonura, Malpractice Insurer's Exit Could Squeeze Health Providers, New Orleans City Business, Vol. 77, Iss. 82, p. 5. 21 Jan. 2002.