Liability insurance: Doctor-owned or not?

Published in California Physician - August 1998


If you haven't already done so, take a moment to read Dr. Robert A. Reid's article "Refining the CMA mission" which appears on the President's Page of the May 1998 edition of California Physician.

At the top of CMA's agenda is the preservation of the Medical Injury Compensation Reform Act of 1975 (MICRA) which was enacted by the California legislature at the peak of the 1975-76 medical malpractice crisis. CMA has called upon its members and partners in health care to prevent MICRA from being "gutted by initiative or the legislature." Dr. Reid admonishes, "Increasing liability premiums in this era of reduced reimbursement and risk assumption would be intolerable."

CMA is to be commended for its proactive agenda. However, it must be remembered that MICRA was only one dose of the medicine which cured the 1975-76 crisis.

In 1975 it was estimated that over 70% of the State's medical doctors were insured by Travelers. When Travelers, Argonaut and other commercial underwriters withdrew their facilities or raised their premiums prohibitively high, local medical associations and other doctor groups responded by organizing five "non-profit" insurance companies and one risk sharing cooperative. They initially capitalized their companies with less than $20 million in unsecured loans known as Surplus Contribution Certificates. Despite the commercial carriers' predictions of failure, four of the five companies and the cooperative are still active and have collectively accumulated nearly $900 million of policyholders surplus. In 1985 the fifth carrier's policyholders were acquired by commercial company which last December, sold them to Southern California Physicians Insurance Exchange (SCPIE).

During the past eight years most of the doctor owned non-profit carriers have been able to materially increase their surplus despite steady increases in malpractice claim frequency and severity. Because of the time it takes to settle their claims, they have accumulated vast reserves to pay losses which they have invested. As the result of a prolonged bull market, they have earned unprecedented returns on their portfolios which have significantly exceeded their underwriting losses and enabled them to materially increase their policyholders' surplus. Capital rich commercial carriers want a piece of the apparently lucrative malpractice insurance pie and are willing to accept the risk of an underwriting loss in anticipation of the expected investment gains. Their quest to capture market share is placing intense pressure on the doctor owned companies to change the way they do business.

The growth of health maintenance and managed care organizations has played a significant role in changing the way malpractice insurance is underwritten and priced. With a relative handful of corporate administrators making the buying decisions for literally thousands of doctors, underwriters are able to capture millions of premium dollars with single bites of the malpractice pie. It's the large pieces that have whet the appetites of commercial underwriters. Because they are willing to underwrite and price large group practices as single risk, doctor owned companies that treat each practitioner as an individual risk are being forced to face reality. They must either change their underwriting methods so they can compete for the large groups or devote their resources to serving the needs of the solo and small group practitioners which are being ignored by the commercial carriers.

When prices are forced down by competition, it then becomes a game to see who will blink first. Like poker players, only those who have the staying power will survive the game. Some have already been forced out. Most disturbing is the conversion of two major doctor owned companies from non-profit to for profit status. To raise the capital needed to compete with the giant commercial carriers, SCPIE went public in 1997. The Doctors Company has announced its intention to do the same.

CMA must remind its members of the fundamental difference between doctor owned and commercial insurance companies. Doctor owned companies are accountable to their policyholder/owners; commercial carriers to their stock holders. It's as simple as that! If California's solo practice and small group doctors do not support their own non-profit companies, the companies cannot survive. And if the companies fail, they will once again be faced with the availability and affordability problems which expedited the 1975-76 crisis.

Buying low priced photocopiers and computers, or even shopping for volume discounts on pharmaceutical supplies and x-ray film, is not the same as buying low cost medical malpractice insurance. The choice of carriers you make today can affect you financial future. The safest way to maximize the security and peace of mind you obtain from purchasing insurance is to buy it from a carrier that is committed to serving your long term needs by affording the best possible protection at the lowest reasonable price. Doctor owned, non-profit, financially stable markets for soloist and small groups is your first stop. For profit, financially stable commercial markets should be a second choice in making this important buying decision.

Rick Mortimer is co-owner and Executive Vice-President of HealthCare Professionals' Insurance Services in Brea, California. He has specialized in insurance and alternative funding mechanisms for the health care industry for over 20 years and is responsible for the daily management of HCP. He can be reached at 714-990-4430.