IV. State Case Studies
South Carolina
As in nearly all of the states with currently operating PCFs, South Carolina's Medical Malpractice PCF was created in response to concerns that the 1970s "crisis" would lead to private insurers abandoning the market.[1] It functioned as a voluntary "pay-as-you-go" system and assumed unlimited liability for amounts in excess of $100,000 per incident and $300,000 aggregate (as opposed to other states which capped the liability of their PCFs, providing a "layer" of coverage). In 2000, the state's Legislative Audit Council ("LAC") reviewed the operations of the PCF and reported a substantial number of problems to the state legislature.
A Department of Insurance analysis revealed that as of June 1999, the PCF had a minimum $30 million deficiency in its reserves (its maximum estimate was $108 million).[2] The LAC review also noted that early members had paid much lower fees than current ones did, a circumstance attributed to the fund's failure to maintain adequate reserves to pay future liabilities. The fund's voluntary nature and lack of a cap on PCF liability were cited as factors increasing its risk of instability.[3] The LAC review also faulted the fund's lack of appropriate oversight, the absence of adequate internal controls over fund management, and failure to comply with a number of state laws.[4] In addition to recommendations tailored to these specific problems, the LAC recommended that the South Carolina General Assembly consider terminating the reserve and allow the private market to supply medical malpractice insurance: "In most states, private insurers are the only providers of medical malpractice coverage. We found that the private insurance market in South Carolina should be able to provide sufficient and affordable medical malpractice insurance."[5] Additionally, the LAC noted that the state did not provide other professionals in need of liability coverage, such as attorneys and contractors, with similar benefits. It admitted that the price paid by healthcare providers may rise without the PCF but predicted that PCF rates would increase significantly in future years because of its inadequate current reserves. Finally, the LAC report argued the state would benefit financially through abolition of the fund in the form of increased tax revenue on privately obtained medical malpractice premiums, a figure estimated to be $175,000 in fiscal year 1998-1999.[6]
In a January 2004 follow-up to its original review, the LAC reported on statutory and operational changes since 2000 and noted marked improvements in the fund's administration. The General Assembly passed laws assigning PCF oversight to the state Department of Insurance and increasing the minimum limits of coverage but took no action on the recommendations to cap the PCF's overall liability or discontinue the fund.[7] Internal control and technological improvements were also implemented. However, the report revealed increases in PCF claim payments, premiums paid by providers, and estimated unpaid claims liability between 1998 and 2000. Claims rose to such an extent that in 2002 the PCF began deferring payment on certain claims to better manage its cash flow.[8] In September 2000, the PCF issued a special assessment of 100 percent of its members' annual premiums in an attempt to cover its liabilities. These annual premiums have themselves increased an average of 40 to 47 percent (depending on medical specialty) between 1999 and 2003.[9] Despite its own financial instability, the PCF was tapped as a source of general fund revenue in the governor's attempt to balance the state's budget - a $1,499,559 transfer in fiscal year 2002-2003.[10] In 2005, legislation was passed to prevent a repeat of this occurrence, changing the PCF's jurisdiction from the state treasury to its own Board of Governance and providing that monies may be withdrawn only at the signature of the chairman of the that board.[11]
According to the PCF's 2005 executive director, Terry Coston, South Carolina Governor James Hodges fired the fund's Board of Governors following the 2000 LAC report. Under its new management, the fund has increased its stability, focused on building equity in the fund (as opposed to "pay-as-you-go" funding) and maintained a steady level of membership.[12] Other reforms have made the PCF more equitable and flexible for participants: in 2002 the fund began a program for experience rating participating providers, and in 2003 it implemented variable coverage limits to allow members to choose to pay lower premiums for lower coverage.[13]
[1] South Carolina Legislative Audit Council. ,A Review of the Medical Malpractice Patients' Compensation Fund, 8 (Jan. 2004).
[2] Id. at 8.
[3] Id. at 11.
[4] Id. at vi.
[5] Id. at 14.
[6] Id. at 16.
[7] Id. at 2.
[8] Id. at 3.
[9] Id. at 4.
[10] Id.
[11] Office of Research, South Carolina House of Representatives, Legislative Update, April 5, 2005 http://www.scstatehouse.net/reports/hupdate/lu2213.htm (last visited Nov. 10, 2008).
[12] Id.
[13] A Review of the Medical Malpractice Patients' Compensation Fund 7-8.