- Email: [email protected]
The Future of Medical Indemnity
EDITORIAL
Editorial
The Future of Medical Indemnity Paul Nisselle, AM, MBBS, FRACGP (FORMER) Chief Executive, Medical Indemnity Protection Society Department of Law, University of Melbourne, 442 Auborn Road, Hawthorn, Vic. 3122, Australia
Medical indemnity insurance faced a crisis of unprecedented proportions in Australia at the start of the 21st century. Collapsing investment returns over the last 5 years combined with increasing litigation rates and soaring reinsurance premiums have acted together to force insurers to raise annual premiums by up to 50% in 2003. The Federal Government’s response in providing significant subsidies for high claims is seen as helpful, but practitioners and insurance bodies alike are seeking a long-term plan centring on a reduction in the cost of fault-based compensation. Between 2002 and 2003, many of the states introduced Tort Law Reforms such as capping of economic loss and general damages, the introduction of a shorter statute of limitations, the adoption of the principle of proportionate liability, reductions in awards for contributory negligence and the re-defining of the term ‘professional negligence’. Part of the longer term solution may be the transfer of costs of catastrophic injury from the insurer to the public purse or a statutory, no-fault, accident compensation scheme. The book and film, ‘The Perfect Storm’,1 told the story of what happened, in late 1991, when three weather systems collided off the coast of Nova Scotia and combined, synergistically, to form a monster hurricane, described by meteorologists as “a perfect storm”. Similarly, the concurrence of the following three factors in the late 1990’s created a ‘perfect’ insurance storm.
•
•
•
Investment returns collapsed Interest rates fell, producing lower returns on cash investments, and the stock market collapsed. Insurers could no longer rely on investment income to subsidize underwriting losses. Litigation costs soared Consumerism pushed litigation rates up faster than quality assurance programs could reduce adverse events. The longer life expectancy of the severely disabled caused a huge increase in the cost of high claims, causing a substantial increase in average claim cost. Total claims costs inflated by at least 15%, compounding, annually, over the last 5 years or so. Insurance and reinsurance costs soared Insurance markets are cyclical. The ‘hard’ markets of 1975 and 1985 precipitated malpractice insurance crises in the US. The ‘soft’ markets of the early 1980s and most of the 1990s led some insurers to discount the premiums they charged, to get more cash to place in the
booming investment market. In 2000 and 2001 the insurance and equities markets both hardened. Then the Twin Towers’ terrorist attack in September, 2001, and the Eastern European floods in August, 2002, together took US$60B–$80B of capital out of the reinsurance market. Reinsurers are now competing for a smaller pool of capital. If they have to pay more for their capital, they have to charge higher premiums. Reinsurance costs soared—by an average of 45% in 2002. In 2001, US malpractice insurers’ claims costs exceeded premium income by 53%. Even when claims costs were discounted by investment income, the loss was still 35%. St. Paul Insurance, one of the largest general insurers in the world, withdrew from the medical malpractice insurance market globally at the end of 2001. Insurance brokers Aon and Macquarie Insurance quit the Australian market at the same time. The Australian medical defence organisations (MDOs) had only one line of business and were committed to stay in it—as long as they were allowed to or were able to. But can MDO members afford to pay the rates MDOs must charge to fund their members’ risk securely? Most MDOs raised their subscriptions substantially in 2002. For example, MIPS increased rates by an average of 18%, the Medical Defence Association of Victoria (MDAV) by 30%, the Medical Defence Association of Western Australia (MDAWA) by 40% and United Medical Protection (UMP) by 50%. Private hospitals were hit even harder, by rises which averaged 140% in 2002—and the rise was contained to only 140% by a trebling of the average ‘selfinsured retention’, the excess met directly by the insured or per claim, from $23,000 in 2001 to $75,000 in 2002. The Federal Government announced a subsidy for very high claims of 50% of the excess over $2M, and then, in December 2003, made it 50% of the excess over $300,000 to the maximum of the policy. The Government also announced that it would pay 100% of the excess on any claim over $20 million which, in effect, restored the ‘uncapped’ cover previously provided on a mutual basis by the MDOs. The impact of these subsidies on medical indemnity insurance premiums cannot yet be calculated, but should be substantial. Factors which drove medical indemnity costs up:
•
The medical defence organisations did not charge enough in the 1970s and 1980s
© 2004 Australasian Society of Cardiac and Thoracic Surgeons and the Cardiac Society of Australia and New Zealand. Published by Elsevier Inc. All rights reserved.
1443-9506/04/$30.00 doi:10.1016/j.hlc.2004.03.001
•
•
•
Despite offering claims-incurred cover, MDOs funded basically on a claims-reported basis. In the late 1990s, many recognised their historic under-funding and took steps to correct it. UMP did not. It seemed to operate on the principle that a combination of membership growth, low reinsurance costs and an aggressive investment strategy would plug the gap. The insurer HIH aggressively discounted premiums during the 1990s in order to boost market share Ultimately HIH collapsed but, before it did, its competitors felt forced to follow it down a discount spiral. The MDOs which used HIH as a reinsurer faced a double blow. ◦ Reinsurance costs in the 1990s were artificially low and when a sense of reality returned, the increase in cost to its client-base was savage. ◦ Anticipated HIH recoveries have had to be written off. For example, UMP has had to write off about $50M of anticipated HIH recoveries. Legal costs have soared This is largely because of a growth in the number of small claims, in which the percentage of total cost related to legal expenses is high. Large claims are inflating in value but not rising as fast in number as small claims. Many states have now introduced thresholds for claims which means plaintiffs will not be able to pursue small claims. Whilst this will not have a substantial impact in total claims liabilities, it will eliminate disproportionately high legal costs in small claims. Consumerism The dark side of consumerism is the growing culture of Name and Blame and Shame and Claim. Acceptance of personal responsibility has disappeared. The twin catchcries of Australian society are now “It’s somebody’s fault” and “Somebody’s gotta pay”.
So did all that set up a medical indemnity ‘crisis’? In the late 1990s the two major UK mutual funds, the Medical Protection Society (MPS) and Medical Defence Union (MDU), both exited Australia. That was partly because of their deteriorating claims experience in Australia but also because of UMP’s aggressive competition. UMP sought to grow its membership by acquisition of other organisations, or by taking their members, but UMP embarked on that campaign before completing the funding of its existing members’ incurred but not reported liabilities (IBNRs). UMP’s provisional liquidator said in a report provided on August 29th, 2002, to the court which appointed him: “The [UMP] group did not build up reserves to pay future claims but relied on charging membership fees that would meet the following year’s estimated claim notifications and reinsurance premiums.” The other Australian MDOs managed their underfunding differently. Some moved to provide claims-made protection, which meant, by definition, that no new IBNRs would accrue. That left the task of completing the underfunding of ‘old’ IBNRs.
Nisselle The Future of Medical Indemnity
89
The two Victorian MDOs made ‘calls’ on their members in late 1999 that completely corrected their IBNRs underfunding. In mid-2002, The MDASA made a ‘call’, and changed to claims-made protection, but those steps did not completely correct their IBNRs underfunding. MDAWA changed to claims-made protection in 1997, but continued to charge subscriptions at claims-incurred levels. That raised funds above those needed just to fund ‘new’ risk, and these were applied to the IBNRs shortfall. Was that a ‘Clayton’s call’? UMP’s 2000 accounts showed net assets of $100M but no provision for IBNRs. If UMP had provisioned for its members’ IBNRs in those accounts, the result would probably have been a net deficiency of over $300M. As that year’s total subscription income was about $100M, it seemed obvious that the ‘call’ UMP made in late 2000—for s um equal to that year’s subscription—was simply too late. And there was another cloud on the horizon. UMP said repeatedly in its Annual Reports that the IBNRs remained each member’s responsibility until they became known to the member, reported to UMP, and UMP formally resolved to provide indemnity. Hence UMP made no provision for those IBNRs in their accounts. Other MDOs began to provide for the IBNRs in their accounts because they recognised that virtually all IBNRs would become their liabilities, once reported. In its 2001 annual report, UMP included, for the first time, a valuation of the members’ IBNRs—but only in a note to the accounts. The Australian Accounting Standards Board adopted a standard, to apply from and including the accounts for the year ending June 30th, 2002, which required MDOs to take up the IBNRs into their accounts. It seemed certain that UMP’s 2002 accounts would show a net deficiency of assets to liabilities. In April 2002 UMP’s Board decided to apply to have UMP placed into voluntary provisional liquidation. The future: In response to the three elements of the Perfect Storm, the Federal and State Governments have taken three steps: (1) Direct Commonwealth (Tax-Payer) funded subsidies The measures announced by the Prime Minister on October 20th 2002 were designed to stabilise medical indemnity—and guarantee UMP’s survival. The underfunding remaining after UMP’s 2000 ‘call’ was more than could be covered by another ‘call’. UMP’s Constitution specified that a ‘call’ can be no more than the current year’s subscription. The imposition by government of an IBNRs levy stepped around that limitation. UMP’s 2002 subscription income is thought to be about $150M. An actuarial assessment of UMP’s members’ IBNRs as at May this year was reported by the provisional liquidator to be between $368M and $500M, i.e. about three times the sum which could be raised by a second UMP call. The profession, led by the AMA, rebelled against the government’s IBNRs levy. In the ultimate, the government increased its (or rather the tax-payers’) subsidy
EDITORIAL
Heart Lung and Circulation 2004;13:88–91
90
Nisselle The Future of Medical Indemnity
EDITORIAL
such that UMP’s members would ultimately meet only about one-quarter of the IBNR liabilities accrued in the period before January 1st, 2001, i.e. the period in which UMP offered claims-incurred protection. The government, on top of the IBNRs subsidy, and the High Claims subsidy (50% of >$300K) and the Exceptional Claims subsidy (100% of >$20M) also now provides direct premiums subsidy to some groups— such as Obstetricians, Neurosurgeons and GPs performing procedures. In the ultimate, the total cost to the taxpayer of all these subsidies will exceed $600 million. (2) Indemnity Reform Requiring the MDOs to provide insurance contracts through an insurance vehicle will add to the cost of providing professional indemnity for doctors through added compliance costs, the need to raise extra capital and the stamp duty which must be paid on insurance premiums but which is not paid on membership subscriptions. ‘Insuranising’ the MDOs will not reduce professional indemnity costs. That requires effective containment of litigation and compensation costs-if meeting the needs of patients injured through medical accidents continues to be fault-based and determined by Tort Law actions. (3) Tort Law Reforms • Thresholds If all claims with a total cost of, say, $40,000 or $50,000 were removed from the system, by the introduction of ‘thresholds’, total claims costs could reduce by around 15%. For example, in NSW a claim for general damages cannot be taken unless the claimant has a permanent disability greater than 15% of a ‘worst possible case’. In Victoria the threshold is a permanent physical disability of more than 5% when measured using the tables in the American Medical Association’s Guide to Permanent Impairment (Fourth edition, third reprint) or more than 10% permanent psychiatric disability using the psychiatric impairment rating scale adopted in Victoria. • Capping General damages have been capped in most states at between $250,000 and $400,000. This will have little impact as general damages are usually substantially below those levels but it will prevent judicial enthusiasm for much higher awards. Economic loss payments (future loss of earnings) have been capped at twice Average Weekly Earnings (AWE) in Qld and NSW, and three times AWE in Victoria. As average weekly earnings are just that, the average, this will have little impact on the aggregated cost of personal injury claims. However, again this will prevent judicial excesses. • Discount rate Most states have moved the discount rate from 3 to 5%. This will have a significant effect on the cost of large claims. For example, the award of $14M in Simpson-v-Diamond2 would have been $10M–$11M if the discount rate applied had been 5%.
Heart Lung and Circulation 2004;13:88–91
• Future costs of care
•
•
•
•
•
This is a huge component in large claims (about $9M of the total $14M in Simpson2 ). Structured settlements are more equitable than lump-sum payments in providing for future care costs, but will not reduce significantly the aggregated cost of high claims. A statutory, needs-based, publicly funded, support program for the care of the catastrophically injured, as the Australian Medical Association has proposed, would dramatically reduce personal injury insurance costs—by transferring funding from the pool of insureds, as premiums, to the general community, as taxes. Further, making ‘need’ the only basis of compensation will increase the number of claims as many more claimants can prove ‘need’ than can prove ‘fault’ and ‘causation’. Statute of limitations A shorter SOL would allow insurers to close off the risk associated with any one insurance year much more quickly. There are, however, equity problems with such an approach, for example, with children and with diseases like mesothelioma (caused by asbestos exposure) which have a very long latency period. Proportionate rather than joint and several liability Previously, if one defendant was only, say, 10% responsible for an injury, the plaintiff was entitled to recover 100% of the award from that defendant, who then tried to recover the other 90% from the co-defendants. If the co-defendant had no assets and no insurance, that was tough luck for the one insured defendant and his or her insurer. Under a scheme of proportionate liability, each defendant is required to fund only that fraction of the award which accords with their proportion of the liability. Contributory negligence Reductions in awards for the plaintiff’s contributory negligence have been rare in tort liability claims, as have been reductions for ‘voluntary assumption of risk’. Further, all states, for example Victoria in its Wrongs Act, by statute prevented the plaintiff’s contributory negligence from completely defeating a claim. Many states have now legislated in both areas to make potential plaintiffs accept personal responsibility for their own actions. Exemplary/aggravated damages A number of states have now abolished payment of punitive damages in personal injury cases. But there have only been three such awards made—ever—in Australia, in medical negligence claims, and the such award in NSW3 was reversed on appeal. Hence this step will not impact on indemnity insurance costs. Limits on contingency fees This will have little impact in Australia except if used as a means of imposing a threshold below which a claim is not worth pursuing, both for potential litigants and their lawyers.
• Definition of negligence
•
The Eminent Persons Committee chaired by Justice Ipp recommended a step back towards the Bolam test for professional negligence and a retreat from the current High Court test of foreseeability (‘not far fetched or fanciful’) to a more moderate test of reasonableness. Many states have now legislated these recommendations—but far from uniformly. Pre-action notification A requirement that potential plaintiffs must give a period of notice of, say, 90 days, before they can issue proceedings will give time for communication outside of litigation leading either to settlement or a decision not to proceed to litigation, and so avoid substantial costs being incurred.
Tort Law and Compensation reforms could equitably reduce both the frequency and cost of liability claims. However, overseas insurers think our judiciary is very plaintifforiented and are waiting to see whether judges will enter into the spirit of Tort Law Reform. These measures may be useful in reducing the cost of compensation for personal injuries and the insurance that ultimately funds awards and settlements. But it needs to be emphasised that HIH and UMP did not fail because litigation was out of control. Both failed because they did not adequately fund the risk they assumed. The artificially low
Nisselle The Future of Medical Indemnity
91
prices offered by HIH and UMP cushioned those whose risk they assumed, but ultimately caused disaster. It all comes back to Mr Micawber who said to David Copperfield: Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.4 If we do not reduce expenses, by cutting the cost of faultbased compensation, then to keep Mr Micawber happy, medical indemnity costs must continue to rise. Conclusion. Whatever type of medical indemnity cover is provided for doctors, the fund or insurer must charge what is needed to fund the risk, not what it thinks its members or the insured or the community can afford.
References 1. Sebastian J. The perfect storm. Harper Collins; 1997, ISBN 006101351X. 2. Simpson v Diamond & Anor. NSWSC 925 Judgement; 5 November 2001. 3. Benkovic v Tan. NSWDC; 5 Jan 1999. 4. Dickens C. David copperfield. Chapter 12.
EDITORIAL
Heart Lung and Circulation 2004;13:88–91
Editorial
The Future of Medical Indemnity Paul Nisselle, AM, MBBS, FRACGP (FORMER) Chief Executive, Medical Indemnity Protection Society Department of Law, University of Melbourne, 442 Auborn Road, Hawthorn, Vic. 3122, Australia
Medical indemnity insurance faced a crisis of unprecedented proportions in Australia at the start of the 21st century. Collapsing investment returns over the last 5 years combined with increasing litigation rates and soaring reinsurance premiums have acted together to force insurers to raise annual premiums by up to 50% in 2003. The Federal Government’s response in providing significant subsidies for high claims is seen as helpful, but practitioners and insurance bodies alike are seeking a long-term plan centring on a reduction in the cost of fault-based compensation. Between 2002 and 2003, many of the states introduced Tort Law Reforms such as capping of economic loss and general damages, the introduction of a shorter statute of limitations, the adoption of the principle of proportionate liability, reductions in awards for contributory negligence and the re-defining of the term ‘professional negligence’. Part of the longer term solution may be the transfer of costs of catastrophic injury from the insurer to the public purse or a statutory, no-fault, accident compensation scheme. The book and film, ‘The Perfect Storm’,1 told the story of what happened, in late 1991, when three weather systems collided off the coast of Nova Scotia and combined, synergistically, to form a monster hurricane, described by meteorologists as “a perfect storm”. Similarly, the concurrence of the following three factors in the late 1990’s created a ‘perfect’ insurance storm.
•
•
•
Investment returns collapsed Interest rates fell, producing lower returns on cash investments, and the stock market collapsed. Insurers could no longer rely on investment income to subsidize underwriting losses. Litigation costs soared Consumerism pushed litigation rates up faster than quality assurance programs could reduce adverse events. The longer life expectancy of the severely disabled caused a huge increase in the cost of high claims, causing a substantial increase in average claim cost. Total claims costs inflated by at least 15%, compounding, annually, over the last 5 years or so. Insurance and reinsurance costs soared Insurance markets are cyclical. The ‘hard’ markets of 1975 and 1985 precipitated malpractice insurance crises in the US. The ‘soft’ markets of the early 1980s and most of the 1990s led some insurers to discount the premiums they charged, to get more cash to place in the
booming investment market. In 2000 and 2001 the insurance and equities markets both hardened. Then the Twin Towers’ terrorist attack in September, 2001, and the Eastern European floods in August, 2002, together took US$60B–$80B of capital out of the reinsurance market. Reinsurers are now competing for a smaller pool of capital. If they have to pay more for their capital, they have to charge higher premiums. Reinsurance costs soared—by an average of 45% in 2002. In 2001, US malpractice insurers’ claims costs exceeded premium income by 53%. Even when claims costs were discounted by investment income, the loss was still 35%. St. Paul Insurance, one of the largest general insurers in the world, withdrew from the medical malpractice insurance market globally at the end of 2001. Insurance brokers Aon and Macquarie Insurance quit the Australian market at the same time. The Australian medical defence organisations (MDOs) had only one line of business and were committed to stay in it—as long as they were allowed to or were able to. But can MDO members afford to pay the rates MDOs must charge to fund their members’ risk securely? Most MDOs raised their subscriptions substantially in 2002. For example, MIPS increased rates by an average of 18%, the Medical Defence Association of Victoria (MDAV) by 30%, the Medical Defence Association of Western Australia (MDAWA) by 40% and United Medical Protection (UMP) by 50%. Private hospitals were hit even harder, by rises which averaged 140% in 2002—and the rise was contained to only 140% by a trebling of the average ‘selfinsured retention’, the excess met directly by the insured or per claim, from $23,000 in 2001 to $75,000 in 2002. The Federal Government announced a subsidy for very high claims of 50% of the excess over $2M, and then, in December 2003, made it 50% of the excess over $300,000 to the maximum of the policy. The Government also announced that it would pay 100% of the excess on any claim over $20 million which, in effect, restored the ‘uncapped’ cover previously provided on a mutual basis by the MDOs. The impact of these subsidies on medical indemnity insurance premiums cannot yet be calculated, but should be substantial. Factors which drove medical indemnity costs up:
•
The medical defence organisations did not charge enough in the 1970s and 1980s
© 2004 Australasian Society of Cardiac and Thoracic Surgeons and the Cardiac Society of Australia and New Zealand. Published by Elsevier Inc. All rights reserved.
1443-9506/04/$30.00 doi:10.1016/j.hlc.2004.03.001
•
•
•
Despite offering claims-incurred cover, MDOs funded basically on a claims-reported basis. In the late 1990s, many recognised their historic under-funding and took steps to correct it. UMP did not. It seemed to operate on the principle that a combination of membership growth, low reinsurance costs and an aggressive investment strategy would plug the gap. The insurer HIH aggressively discounted premiums during the 1990s in order to boost market share Ultimately HIH collapsed but, before it did, its competitors felt forced to follow it down a discount spiral. The MDOs which used HIH as a reinsurer faced a double blow. ◦ Reinsurance costs in the 1990s were artificially low and when a sense of reality returned, the increase in cost to its client-base was savage. ◦ Anticipated HIH recoveries have had to be written off. For example, UMP has had to write off about $50M of anticipated HIH recoveries. Legal costs have soared This is largely because of a growth in the number of small claims, in which the percentage of total cost related to legal expenses is high. Large claims are inflating in value but not rising as fast in number as small claims. Many states have now introduced thresholds for claims which means plaintiffs will not be able to pursue small claims. Whilst this will not have a substantial impact in total claims liabilities, it will eliminate disproportionately high legal costs in small claims. Consumerism The dark side of consumerism is the growing culture of Name and Blame and Shame and Claim. Acceptance of personal responsibility has disappeared. The twin catchcries of Australian society are now “It’s somebody’s fault” and “Somebody’s gotta pay”.
So did all that set up a medical indemnity ‘crisis’? In the late 1990s the two major UK mutual funds, the Medical Protection Society (MPS) and Medical Defence Union (MDU), both exited Australia. That was partly because of their deteriorating claims experience in Australia but also because of UMP’s aggressive competition. UMP sought to grow its membership by acquisition of other organisations, or by taking their members, but UMP embarked on that campaign before completing the funding of its existing members’ incurred but not reported liabilities (IBNRs). UMP’s provisional liquidator said in a report provided on August 29th, 2002, to the court which appointed him: “The [UMP] group did not build up reserves to pay future claims but relied on charging membership fees that would meet the following year’s estimated claim notifications and reinsurance premiums.” The other Australian MDOs managed their underfunding differently. Some moved to provide claims-made protection, which meant, by definition, that no new IBNRs would accrue. That left the task of completing the underfunding of ‘old’ IBNRs.
Nisselle The Future of Medical Indemnity
89
The two Victorian MDOs made ‘calls’ on their members in late 1999 that completely corrected their IBNRs underfunding. In mid-2002, The MDASA made a ‘call’, and changed to claims-made protection, but those steps did not completely correct their IBNRs underfunding. MDAWA changed to claims-made protection in 1997, but continued to charge subscriptions at claims-incurred levels. That raised funds above those needed just to fund ‘new’ risk, and these were applied to the IBNRs shortfall. Was that a ‘Clayton’s call’? UMP’s 2000 accounts showed net assets of $100M but no provision for IBNRs. If UMP had provisioned for its members’ IBNRs in those accounts, the result would probably have been a net deficiency of over $300M. As that year’s total subscription income was about $100M, it seemed obvious that the ‘call’ UMP made in late 2000—for s um equal to that year’s subscription—was simply too late. And there was another cloud on the horizon. UMP said repeatedly in its Annual Reports that the IBNRs remained each member’s responsibility until they became known to the member, reported to UMP, and UMP formally resolved to provide indemnity. Hence UMP made no provision for those IBNRs in their accounts. Other MDOs began to provide for the IBNRs in their accounts because they recognised that virtually all IBNRs would become their liabilities, once reported. In its 2001 annual report, UMP included, for the first time, a valuation of the members’ IBNRs—but only in a note to the accounts. The Australian Accounting Standards Board adopted a standard, to apply from and including the accounts for the year ending June 30th, 2002, which required MDOs to take up the IBNRs into their accounts. It seemed certain that UMP’s 2002 accounts would show a net deficiency of assets to liabilities. In April 2002 UMP’s Board decided to apply to have UMP placed into voluntary provisional liquidation. The future: In response to the three elements of the Perfect Storm, the Federal and State Governments have taken three steps: (1) Direct Commonwealth (Tax-Payer) funded subsidies The measures announced by the Prime Minister on October 20th 2002 were designed to stabilise medical indemnity—and guarantee UMP’s survival. The underfunding remaining after UMP’s 2000 ‘call’ was more than could be covered by another ‘call’. UMP’s Constitution specified that a ‘call’ can be no more than the current year’s subscription. The imposition by government of an IBNRs levy stepped around that limitation. UMP’s 2002 subscription income is thought to be about $150M. An actuarial assessment of UMP’s members’ IBNRs as at May this year was reported by the provisional liquidator to be between $368M and $500M, i.e. about three times the sum which could be raised by a second UMP call. The profession, led by the AMA, rebelled against the government’s IBNRs levy. In the ultimate, the government increased its (or rather the tax-payers’) subsidy
EDITORIAL
Heart Lung and Circulation 2004;13:88–91
90
Nisselle The Future of Medical Indemnity
EDITORIAL
such that UMP’s members would ultimately meet only about one-quarter of the IBNR liabilities accrued in the period before January 1st, 2001, i.e. the period in which UMP offered claims-incurred protection. The government, on top of the IBNRs subsidy, and the High Claims subsidy (50% of >$300K) and the Exceptional Claims subsidy (100% of >$20M) also now provides direct premiums subsidy to some groups— such as Obstetricians, Neurosurgeons and GPs performing procedures. In the ultimate, the total cost to the taxpayer of all these subsidies will exceed $600 million. (2) Indemnity Reform Requiring the MDOs to provide insurance contracts through an insurance vehicle will add to the cost of providing professional indemnity for doctors through added compliance costs, the need to raise extra capital and the stamp duty which must be paid on insurance premiums but which is not paid on membership subscriptions. ‘Insuranising’ the MDOs will not reduce professional indemnity costs. That requires effective containment of litigation and compensation costs-if meeting the needs of patients injured through medical accidents continues to be fault-based and determined by Tort Law actions. (3) Tort Law Reforms • Thresholds If all claims with a total cost of, say, $40,000 or $50,000 were removed from the system, by the introduction of ‘thresholds’, total claims costs could reduce by around 15%. For example, in NSW a claim for general damages cannot be taken unless the claimant has a permanent disability greater than 15% of a ‘worst possible case’. In Victoria the threshold is a permanent physical disability of more than 5% when measured using the tables in the American Medical Association’s Guide to Permanent Impairment (Fourth edition, third reprint) or more than 10% permanent psychiatric disability using the psychiatric impairment rating scale adopted in Victoria. • Capping General damages have been capped in most states at between $250,000 and $400,000. This will have little impact as general damages are usually substantially below those levels but it will prevent judicial enthusiasm for much higher awards. Economic loss payments (future loss of earnings) have been capped at twice Average Weekly Earnings (AWE) in Qld and NSW, and three times AWE in Victoria. As average weekly earnings are just that, the average, this will have little impact on the aggregated cost of personal injury claims. However, again this will prevent judicial excesses. • Discount rate Most states have moved the discount rate from 3 to 5%. This will have a significant effect on the cost of large claims. For example, the award of $14M in Simpson-v-Diamond2 would have been $10M–$11M if the discount rate applied had been 5%.
Heart Lung and Circulation 2004;13:88–91
• Future costs of care
•
•
•
•
•
This is a huge component in large claims (about $9M of the total $14M in Simpson2 ). Structured settlements are more equitable than lump-sum payments in providing for future care costs, but will not reduce significantly the aggregated cost of high claims. A statutory, needs-based, publicly funded, support program for the care of the catastrophically injured, as the Australian Medical Association has proposed, would dramatically reduce personal injury insurance costs—by transferring funding from the pool of insureds, as premiums, to the general community, as taxes. Further, making ‘need’ the only basis of compensation will increase the number of claims as many more claimants can prove ‘need’ than can prove ‘fault’ and ‘causation’. Statute of limitations A shorter SOL would allow insurers to close off the risk associated with any one insurance year much more quickly. There are, however, equity problems with such an approach, for example, with children and with diseases like mesothelioma (caused by asbestos exposure) which have a very long latency period. Proportionate rather than joint and several liability Previously, if one defendant was only, say, 10% responsible for an injury, the plaintiff was entitled to recover 100% of the award from that defendant, who then tried to recover the other 90% from the co-defendants. If the co-defendant had no assets and no insurance, that was tough luck for the one insured defendant and his or her insurer. Under a scheme of proportionate liability, each defendant is required to fund only that fraction of the award which accords with their proportion of the liability. Contributory negligence Reductions in awards for the plaintiff’s contributory negligence have been rare in tort liability claims, as have been reductions for ‘voluntary assumption of risk’. Further, all states, for example Victoria in its Wrongs Act, by statute prevented the plaintiff’s contributory negligence from completely defeating a claim. Many states have now legislated in both areas to make potential plaintiffs accept personal responsibility for their own actions. Exemplary/aggravated damages A number of states have now abolished payment of punitive damages in personal injury cases. But there have only been three such awards made—ever—in Australia, in medical negligence claims, and the such award in NSW3 was reversed on appeal. Hence this step will not impact on indemnity insurance costs. Limits on contingency fees This will have little impact in Australia except if used as a means of imposing a threshold below which a claim is not worth pursuing, both for potential litigants and their lawyers.
• Definition of negligence
•
The Eminent Persons Committee chaired by Justice Ipp recommended a step back towards the Bolam test for professional negligence and a retreat from the current High Court test of foreseeability (‘not far fetched or fanciful’) to a more moderate test of reasonableness. Many states have now legislated these recommendations—but far from uniformly. Pre-action notification A requirement that potential plaintiffs must give a period of notice of, say, 90 days, before they can issue proceedings will give time for communication outside of litigation leading either to settlement or a decision not to proceed to litigation, and so avoid substantial costs being incurred.
Tort Law and Compensation reforms could equitably reduce both the frequency and cost of liability claims. However, overseas insurers think our judiciary is very plaintifforiented and are waiting to see whether judges will enter into the spirit of Tort Law Reform. These measures may be useful in reducing the cost of compensation for personal injuries and the insurance that ultimately funds awards and settlements. But it needs to be emphasised that HIH and UMP did not fail because litigation was out of control. Both failed because they did not adequately fund the risk they assumed. The artificially low
Nisselle The Future of Medical Indemnity
91
prices offered by HIH and UMP cushioned those whose risk they assumed, but ultimately caused disaster. It all comes back to Mr Micawber who said to David Copperfield: Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.4 If we do not reduce expenses, by cutting the cost of faultbased compensation, then to keep Mr Micawber happy, medical indemnity costs must continue to rise. Conclusion. Whatever type of medical indemnity cover is provided for doctors, the fund or insurer must charge what is needed to fund the risk, not what it thinks its members or the insured or the community can afford.
References 1. Sebastian J. The perfect storm. Harper Collins; 1997, ISBN 006101351X. 2. Simpson v Diamond & Anor. NSWSC 925 Judgement; 5 November 2001. 3. Benkovic v Tan. NSWDC; 5 Jan 1999. 4. Dickens C. David copperfield. Chapter 12.
EDITORIAL
Heart Lung and Circulation 2004;13:88–91