Evaluation and Recommendation

V. Evaluation and Recommendation

In 2006, Mo. Rev. Stat. � 383.250 created the “Health Care Stabilization Fund Feasibility Board” whose primary goal is to “determine whether a health care stabilization fund should be established in Missouri to provide excess medical malpractice insurance coverage for health care providers.” As this Board reviews the evidence currently available, it will likely find that most evidence indicates that establishing a PCF is not an effective way to improve a state’s medical liability environment, particularly that of Missouri.

First, of the relatively few states that employ forms of PCFs, over half are still experiencing medical liability problems.

Second, several of the states with PCFs have experienced significant problems with fund operation and solvency, at least some of which can be attributed to the State’s assumption of the role of insurance provider.

Third, placing the State directly in the insurance business adversely affects the competitive marketplace, in that it will eventually force out other carriers or diminish the aggressive marketing necessary to promote true competition.

Fourth, the State’s assumption of the role of medical malpractice insurer exposes taxpayers to liability in the event that the fund is incapable of meeting its obligations.

Fifth, other reforms such as non-economic damage caps and restrictions on venue shopping will have a far greater impact on the medical liability environment in Missouri than the creation of a PCF. Research studies have found that PCFs have little, if any, effect on the medical liability environments in the states that employ them.[1]

Sixth, it is almost inevitable that a state’s involvement in a PCF will create problems of equity and moral hazard for the PCF participants. These points are addressed in more detail below.

In the American Medical Association’s 2004 assessment of states’ medical liability environments, four PCF states were labeled “currently ok” (New Mexico, Wisconsin, Indiana, and Louisiana); three (Kansas, Nebraska, and South Carolina) were designated as showing “problem signs”; and two (Pennsylvania and New York) were deemed to be a “crisis” states. It is true that of six states considered “OK” by the AMA, four had PCFs; however, with 55 percent of PCF states experiencing problems or crises, it appears that the existence of a PCF alone is not enough to solve a state’s medical liability difficulties. Furthermore, there is no national trend towards the creation of PCFs. Pennsylvania’s fund is scheduled to be phased out by 2009,[2] while Florida’s PCF failed in 1983. After commissioning several actuaries to study the possibility of creating a PCF in Ohio, the state’s Medical Malpractice Commission was not persuaded by arguments in favor of such a fund and skeptical of its benefits: “Members do not believe that a PCF with only a 5 percent possible reduction in premiums would be beneficial.”[3] In November of 2004, the Iowa Medical Society (“IMS”) issued a white paper opposing the creation of PCF in Iowa (a state with no non-economic damage cap), warning of “a very real possibility that such a mechanism threatens to worsen Iowa’s medical liability condition.”[4]

The unwillingness of the IMS to support an Iowa PCF in an environment without caps on medical malpractice damages demonstrates that any PCF is only one component of a state’s medical liability environment and not a determining one. This point is further supported by a study sponsored by Harvard’s John M. Olin Center for Law, Economics, and Business. The study analyzed the complete data files of the National Association of Insurance Commissioners from 1984 to 1991 for all 50 states, data representing the experience of over 8,000 insurers. Their results indicated that states with non-economic damage reforms had losses 16 to 17 percent lower than states without such reforms, while punitive damage reforms produced a 6 to 7 percent loss reduction.[5] They also found that “the existence of a state patient compensation fund is not significantly related to insurer losses.”[6]

Another series of studies examined the effects of direct and indirect forms of liability reform. Direct reforms were defined as changes in laws that “specify statutory limits or reductions in malpractice awards,” such as caps on punitive, non-economic, or total damages.[7] Indirect reforms, in contrast, affect awards indirectly and include changes like mandatory periodic payments, caps on contingency fees to attorneys, the abolition of joint and several liability for non-economic or total damages, and patient compensation funds.[8] Indirect reforms – of which patient compensation funds are a form – were found to have no statistically significant effect on claiming behavior or malpractice premium trends.[9] Based on these studies, the medical malpractice reform passed in Missouri in 2005, which limits punitive damages and caps non-economic damages at a non-inflation indexed level, should be far more effective in improving the state’s medical malpractice environment than would the creation of a PCF.

Furthermore, the creation of a PCF by its very nature brings the state into the business of providing insurance and all that such a role entails. The historical experience of a number of states and the nature of the Missouri medical malpractice insurance market suggest that this is a charge that it is neither desirable nor necessary for the state to assume. First, all protestations and provisions to the contrary, a PCF is ultimately subject to the oversight of the state and its funds available for state purposes. Funds in Kansas, South Carolina, and Wisconsin have all experienced attempts at appropriation for various other uses, from balancing the budget to funding Medicaid. Legislators in Wisconsin, a state whose fund is often held out as a model for others, have recommended that the fund be made a private enterprise to prevent any more attempted “raids.” Taking money from a PCF risks deficits and fiscal instability that could leave it unable to pay claims and force it to raise rates.

Additionally, while private insurers are driven by the competition in the market to base their decisions on actuarially sound principles and data, PCFs can be motivated by a host of other factors, from concerns about how rate increases will be received by physicians to the desire to protect the PCF from interference by state government officials. In practice, the recommendations of actuaries are not always followed, depending on the weight given to other political and financial concerns by the Board’s directors: “[P]olitical pressures often lead to risky behavior.”[10] Competent oversight can also be a significant problem: “State budgetary constraints may cause understaffing and civil service rules may limit the ability to compete with the private sector for personnel.”[11] Both of these factors present considerable risks to the successful operation of a PCF by the state.

The experience of states such as Pennsylvania and New York offer particular warnings to taxpayers of states contemplating entering the insurance business through PCFs. The Pennsylvania fund’s failure to reserve for losses and reliance on “pay-as-you-go” funding is hurting current physicians and taxpayers, as the former face higher premiums and the latter taxes to supplement the fund. In New York, the excess liability pool was originally funded through a surcharge on per bed rates in participating hospitals and then from the surplus of the state’s Medical Malpractice Insurance Association.[12] When those monies were exhausted in 2002, the State of New York’s general fund took over funding of the pool, a condition that “has become a cause of great concern for parties interested in the ongoing viability of the Pool.”[13] New York taxpayers are now subsidizing excess medical malpractice insurance for New York doctors.[14]

Nebraska’s recent experience with its fund offers an additional area of concern for states contemplating establishing a PCF. In 2002 and 2003, 99 individuals contracted Hepatitis C infections due to unsanitary conditions at a Nebraska cancer clinic.[15] If each of these individuals had sued and won $1.25 million maximum award, Nebraska’s PCF would have had to pay $124 million, plus $46.2 million in non-related claims, for a total payout far exceeding the fund’s $55 million in reserves at the time.[16] While a state law would have allowed the fund to charge members more to cover actual claims, the Nebraska Insurance Department’s Director admitted that “No one ever contemplated or even perceived such a horrible claim” as the Hepatitis Cases.[17] In part in response to these cases, the PCF in 2004 increased the required primary coverage of its participants from $200,000 to $500,000 and in 2005 increased the surcharge on participating physicians to 50 percent.[18] By February of 2005, over half of the Hepatitis C plaintiffs had settled, and the Director of the Insurance Department predicted that the fund would be able to break even.[19] Nevertheless, because of one reckless doctor – who has since fled the U.S. for his native Pakistan[20] – every Nebraska physician participating in the PCF faces higher surcharges and less coverage. This is a concrete example of PCFs’ inherent equity problems. Additionally, it is noteworthy that before the majority of the Hepatitis C cases were settled, PCF administrators, by their own admission, did not know how they would pay for so many judgments. In the end, taxpayers may have been tapped for the deficit, as has been the case in Pennsylvania.

In Missouri’s case, supporters of a PCF may point across the state line to Kansas, which by all accounts operates a successful PCF, with little history of instability or financial problems. However, even the Executive Director of the Kansas fund cautions against merely grafting Kansas’ approach onto Missouri because the states are so different. [21] The demographics, tort environment, and the private medical malpractice insurance markets in the two states make them difficult to compare. (See Exhibit 2 for quantitative measures of these differences). The PCF approach functions well in Kansas, Hayes reports, in part because the state is smaller and has roughly 40 percent as many doctors as Missouri: In 2007, Kansas had 2.7 million residents and 7,665 non-federal physicians, while Missouri had 5.79 million residents and 17,762 doctors.[22] The Kansas market is thus much less attractive to private insurers and availability of medical malpractice insurance more of a problem.[23] (Indeed, of the states with PCFs, only Pennsylvania and New York have more physicians than Missouri, and both states are AMA “crisis” states with struggling PCFs.)

The different tort environments in each state also adversely affect the ability to project Kansas’s PCF experience onto Missouri. Both qualitative and quantitative metrics show that Missouri experiences higher levels of claims and payments in medical malpractice cases than Kansas. The Institute for Legal Reform surveys 1,400 practicing corporate attorneys and general counsels each year to determine how fair their court systems are perceived to be.[24] In 2005, Kansas ranked 16^th of all states; Missouri was 40^th. Venue shopping between the two states is an acknowledged phenomenon, and Missouri in particular is recognized as having more plaintiff-friendly venues: “[If] a Johnson County Kansas doctor who’s being sued also happens to have an office in Kansas City, Mo., the patient’s lawyer can shop for a better, i.e., more liberal’ jury, in Kansas City, Mo. Considered somewhat more generous to victims than their surrounding towns, Kansas City and St. Louis are locations of choice for plaintiffs’ attorneys and tend to attract more lawsuits.”[25]

The available data confirms these observations. Exhibit 3 shows the number of medical malpractice claims filed with Kansas’ HCSF from 1989 to 2008, as well as the number of claims against Missouri physicians, surgeons, and hospitals during that timeframe. (Claims against other providers, such as dentists, HMOs, nurses, and physicians’ assistants are excluded for the sake of comparison because they are not covered by the Kansas HCSF.[26]) On average, Kansas’ level of claims during those years was 24 percent of Missouri’s claims. In 2007, the most recent year for which Missouri and Kansas data is available, there were at more than 2.6 times as many claims filed in Missouri as in Kansas (825 vs. 314). These comparisons are most likely understated, as the data provided by the Kansas fund includes claimed filed in Missouri against Kansas physicians practicing there. If this “double-counting” was eliminated, Missouri would outpace Kansas in terms of malpractice claims by an even greater margin.

Considering available data in terms of physicians alone results in the same conclusion: As of 2007, twice as many medical malpractice claims against physicians were paid in Missouri as in Kansas (202 vs. 109), and the average claim payment was nearly twice as large in Missouri ($262,593 vs. $132,787).[27] Total payments on medical malpractice claims against physicians in Missouri totaled over $53 million in 2007 – a figure nearly four times greater than Kansas’ $14.5 million.[28] These undeniable differences in the number and size of claims filed in the two states suggest that a Missouri PCF would face far greater liability than the Kansas fund does. It would accordingly require more financial support from physicians – in the form of higher surcharges – and be more likely to experience fiscal instability or insolvency.

The Kansas fund itself acknowledges the vastly different medical malpractice environments in the two states with the 25 percent additional surcharge levied on its participants who practice in Missouri.[29] It attributes this difference to various legal differences between the two states, including problematic venues in Missouri such as Jackson County and St. Louis and the state’s previous lack of a firm cap on non-economic damages.[30] According to Executive Director Hayes, the cap is an especially important element of the malpractice environment and if Missouri payments decrease after it takes effect, the Kansas fund may consider reducing the surcharge on its Missouri-practicing physicians. (One issue that would have to be addressed in the event that Missouri did implement a PCF is the situations of physicians who practice in both states, who could find themselves subject to “double premium surcharges” for excess insurance.)[31] Regardless, however, the creation of a PCF in Missouri will not impact the demographics of the state or other key determinants of its liability climate.

Furthermore, the Kansas medical malpractice insurance market appears to be more concentrated than that of Missouri, indicating that the availability of coverage may be more of a problem and a PCF more appropriate in Kansas. The Executive Director of the Kansas HSCF provided data on the premiums written in 2004 for basic coverage for providers covered by the fund (see Exhibit 4). One insurance company – Kansas Medical Mutual Insurance Co. (KaMMCO) – covers 44 percent of this market, writing $28.5 million in premium for the basic coverage required by the fund for all licensed Kansas health care providers.

In contrast, Missouri Professionals Mutual, the top Missouri medical malpractice insurer in terms of premiums written for 2007, accounts for almost 25 percent of the market; the top three insurers covered less than 53 percent (see Exhibit 5). The Kansas data is more limited than the Missouri data in that it includes only premiums written for Kansas health care providers for basic coverage ($200,000/$600,000).

Based on the information available, Missouri is clearly the more competitive market, as its top two medical malpractice insurers are separated by less than eight percentage points of market share. In contrast, Kansas market is hardly competitive, as the Kansas Medical Mutual Insurance Co., its lead carrier, has a 29 percent advantage over its next largest competitor. This situation is not surprising: there is little incentive for a private insurance carrier to enter a market in competition with the state, as the state can always change laws and manipulate the market to eliminate competition. A mandatory PCF effectively puts a ceiling on the level of coverage an insurance carrier can write in a state because providers must obtain coverage above the statutory limits from the fund. As a result, the private carriers are left to compete for the smaller policies in the condensed market for coverage below those fund limits. KaMMCO has clearly emerged as the leader in that market, and, as such, has every reason to support the HCSF as a mechanism for stabilizing and controlling it. In addition, the State has turned over to KaMMCO the administration of its Health Care Provider Insurance Availability Plan, which insures providers who are denied basic coverage in the voluntary market.[32]

Missouri has numerous insurers currently writing medical malpractice insurance,[33] as well as a Medical Malpractice Joint Underwriting Association (JUA) created by the state to provide coverage for those unable to obtain it in the private sector. (The JUA was formed in 2003 under the direction of the state’s Director of Insurance.[34] It is a mandatory association of all of the malpractice insurance companies in the state who join together to provide coverage to those unwilling or unable to obtain it in the private market.) The current competitiveness of the Missouri malpractice insurance market, the availability of medical malpractice insurance in Missouri, and the existence of the JUA completely emasculate the contention that a PCF is necessary to ensure the accessibility of medical malpractice insurance in Missouri. Ultimately, a PCF appears a much more of a natural fit across the border in Kansas, which represents a smaller and more concentrated market for medical malpractice insurers.

Finally, the establishment of a PCF introduces problems of equity and moral hazard that are not simply resolved. Mandatory funds interfere with the workings of the private market, and during favorable conditions merely effect a transfer of some of the liability burden from private insurers to the PCF, with low-risk providers being forced to subsidize high-risk ones in the process. Voluntary funds run the risk of instability when premiums rise and low-risk providers who can afford to opt out do so. Additionally, funds that assess surcharges merely by a provider’s class or specialty fail to consider the provider’s specific experience. Thus, a provider against whom no claims have been made could be assessed the same surcharges as one with a history of malpractice problems, provided they engage in the same type of practice. In addition to raising problems of fairness, such a situation may reduce the individual’s motive to avoid engaging in high-risk behaviors. PCFs may also interfere with primary insurers’ underwriting decisions and adversely impact their motive to vigorously defend large claims. If they know that the PCF will pay judgments above a certain threshold, there is little motivation to invest time and resources on a claim that appears to be above that level.

---

[1]Kip W .Viscusi,. and Patricia H. Born, Damages Caps, Insurability, and the Performance of Medical Malpractice Insurance, Harvard. John M. Olin Center for Law, Economics, and Business, 11 (Mar. 2004),http://www.law.harvard.edu/programs/olin_center/papers; David P. Kessler and Mark B. McClellan, The Effects of Malpractice Pressure and Liability Reforms on Physicians’ Perceptions of Medical Care, Law and Contemporary Problems, 89, (1997),http://www.law.duke.edu/journals/lcp/articles/lcp60dWinter1997p81.htm.

[2] Sloan and Eesley, supra note 30, at 17.

[3] Final Report and Recommendations of the Ohio Medical Malpractice Commission, (April 2005), http://www.ohioinsurance.gov/documents/04-27-05FinalReport.pdf.

[4] Iowa Medical Society Patient Compensation Funds White Paper 6.

[5] Viscusi, supra note 113, at 11.

[6] Id. at 15.

[7] Kessler, supra note 113, at 89.

[8] Id.

[9] Id. at 97.

[10] Sloan and Eesley, supra note 30, at 19.

[11] Id. at 19.

[12] Pinnacle Actuarial Resources, Inc., supra note 1, at 14.

[13] Id.

[14] Sloan et al., supra note 5.

[15] Nichole Aksamit, Hepatitis C Lawsuits Could Drain State Fund Money Available for Malpractice Claims Omaha World-Herald, (Aug. 1, 2005), accessed via Westlaw, 13 July 2005.

[16] Id.

[17] Id..

[18] Nebraska Department of Insurance Website, www.doi.ne.gov/medmal.

[19] Nichole Aksamit, Hepatitis C Lawsuits Could Drain State Fund Money Available for Malpractice Claims Omaha World-Herald, (Aug. 1, 2005), accessed via Westlaw, 13 July 2005.

[20] Id.

[21] Hayes Phone Interview.

¹³⁶The Kaiser Family Foundation, statehealthfacts.org. Data Source: Kaiser Family Foundation analysis of data from the National Practitioner Data Bank (NPDB), Public Use Data File (NPDB0412.POR),http://www.npdb-hipdb.com/PUBLICDATA.HTML, http://www.statehealthfacts.kff.org/cgi-bin/healthfacts.cgi?.

[23] Hayes Phone Interview.

[24] ILS/Harris Poll, (2005), http://www.instituteforlegalreform.com/harris/ (last visited July 2005).

[25] Across the Great Divide: Missouri’s Medical Malpractice Crisis, Ingram’s Online, (Mar. 2004), http://www.ingramsonline.com/march_2004/tortreform.html.

[26] E-mail from Rita Noll, Chief Attorney for the Kansas Health Care Stabilization Fund, (July 14, 2005).

[27] The Kaiser Family Foundation, statehealthfacts.org. Data Source: Kaiser Family Foundation analysis of data from the National Practitioner Data Bank (NPDB), Public Use Data File (NPDB0412.POR), accessed 5/12/05, http://www.npdb-hipdb.com/PUBLICDATA.HTML, http://www.statehealthfacts.kff.org/cgi-bin/healthfacts.cgi?. Accessed 13 July 2005.

[28] Id.

[29] Charles, L. Wheelan, Fiscal Year 2009 Annual Surcharge Rating Classification System (April 2008), http://www.hcsf.org/FY09Bulletin+Brochure+Forms.pdf

[30] Kansas Health Care Stabilization Fund Website, http://www.hcsf.org/faq_p_1.htm#legaldif

[31] Hayes Phone Interview.

[32] Kansas HCSF Website, http://www.hcsf.org/faq_p_2.htm.

[33] Missouri Department of Insurance, Medical malpractice insurers for physicians in Missouri, http://insurance.mo.gov/consumer/medmalinsurer.htm.>

[34] Missouri Medical Malpractice JUA Website, http://www.mmmjua.com/.