III. Features and Issues
Funding Method
The method of funding a PCF is another critical factor in its impact on a state’s medical malpractice insurance climate and overall budget. Historically, two options have been employed: “Pay-as-you-go,” or cash-basis, funding and accrual, or loss reserve, funding. In the former, PCF surcharges are assessed on the basis of the fund’s current outlays. Current providers may therefore be responsible for paying claims that occurred years in the past, shifting the financial burden from participants in the program’s early years to those who join in the future: “[P]roviders who enter practice are among the financial losers.”[1] “Pay-as-you-go” funding combined with voluntary participation represents a particular hazard for the state, as the ability of providers to opt out of the fund when rates increase can leave the state with a substantial unfunded liability.[2] This method of funding was once employed by several states, but many have abandoned it. South Carolina was the most recent state to take this step, after a 2000 review of its PCF by the South Carolina Legislative Audit Council warned about the program’s high level of risk and transgenerational inequity: “The PCF’s current members may be paying for claims, and face possible assessments, for incidents that occurred years ago and were caused by healthcare providers who are no longer members of the PCF.”[3]
The alternative to “pay-as-you-go” financing is the loss reserve technique currently employed by private insurers. In this method, premiums for a particular year are set based on anticipated future payments from claims filed in that year. Though in theory a state’s reserves are set based on actuarial calculations, states have failed to follow these recommendations on more than one occasion.[4] Additionally, the very existence of PCF reserves makes them vulnerable to diversion to unrelated measures in the budgetary appropriation process: in
[1] Frank A. Sloan and Charles E. Eesley. Governments as Insurers in Professional and Hospital Liability Insurance Markets, Center for Health, Policy, Law, and Management, Duke University, 29, 29 (2004).
[2] Pinnacle Actuarial Resources, Inc., supra note 1, at 16.
[3] Report to the General Assembly: A Review of the Medical Malpractice Patients’ Compensation Fund 11.
[4] Sloan, supra note 2, at 42.
[5] Id .at 43.
[6]