Report Says State Malpractice Funds Show Promise

A new report says state-created insurance funds can play a useful role in softening the periodic crises that threaten medical malpractice insurance coverage.

The report, from the Project on Medical Liability in Pennsylvania, an independent nonpartisan effort supported by The Pew Charitable Trusts, studies public plans in nine states known as Patient Compensation Funds (PCF). The report was compiled by four academic researchers and published in the Winter 2005 DePaul Law Review, as part of a special issue on tort law and social policy.

PCFs have existed since the 1970s but little is known about their performance because they have received "virtually no attention" from scholars, the report declares. Pennsylvania's MCARE fund is one of the few PCFs to spark public policy debate.

The states that created PCFs, and the years they began, are Pennsylvania (1975, 2002), Indiana, Louisiana and Wisconsin (1975), Nebraska and South Carolina (1976), New Mexico (1978) and New York (1986). A Florida PCF closed in 1983 but was still paying claims in 2003.

PCFs, as described by the study, are public organizations, created by state law and organized as either a state agency or a trust fund. In eight of the states they are funded from assessments on providers and investment returns (the exception is New York, where the state subsidizes the PCF).

The purpose of a PCF is to provide physicians and hospitals with affordable and reliable medical malpractice insurance by covering high-end losses while providing adequate compensation for injured patients.

PCFs are intended to balance the needs of potentially competing medical, legal, insurer and patient stakeholders, prevent premium spikes, and keep liability insurance available to physicians and, in some states, hospitals.

The key to the value and success of a PCF lies in the details of its design. Those designs vary widely from state to state. Politics is often a major factor in determining a PCF's makeup. Two aspects of Pennsylvania's MCARE Fund that make it more vulnerable to financial failure are pay-as-you-go-financing, which leads to large accrued liabilities over time, and the state's lack of a cap on malpractice damages.

“PCFs address the fundamental issues of medical malpractice that have led to reoccurring crises in the availability of medical malpractice insurance coverage and in its premiums for such coverage," the study concludes. "As such PCFs represent a potentially effective policy instrument when designed correctly."

The study notes, however, that it "may be politically impossible to craft a PCF of optimal design" when competing interests cannot agree. PCFs can also "be seen as unduly passive and apathetic toward promoting patient safety and other worthwhile objectives."

The study's authors are Frank A. Sloan, Ph.D., Duke University professor of health policy and management and professor of economics; and Carrie A. Mathews, B.A., associate in research; Christopher J. Conover, Ph.D., Duke University assistant research professor of public policy studies; and William M. Sage, M.D., Columbia Law School professor and principal investigator for the Project on Medical Liability in PA. Sage is also the author of commentary on medical malpractice insurance reform that was published in the same issue of the DePaul Law Review.

They authors conclude that PCFs can smooth out the short-term effects of large verdicts in an often-volatile private malpractice insurance market.

"Crises in availability and in premiums tend to be serious when they occur. But the disruptions tend to be quite limited in duration," the study said.

The authors found "no evidence that private excess insurance was unavailable in any PCF state" except where PCFs had crowded out the coverage.

"Thus the issue is whether states wish to have the PCF in reserve as a 'back-up' plan in case coverage goes away. Because this can happen so quickly it may be preferable to have the PCF already in place, with the kinks worked out, rather than attempt to create this mechanism on the fly in the heat of a crisis," the study said.

The authors offer five recommendations and factors for an effective PCF:

• PCF coverage limits should clearly position the PCF as an excess insurer. Private insurance for high-level claims can be the costliest and most scarce layer of coverage.
• PCFs should offer the physicians they insure incentives for injury prevention.
• PCFs should avoid pay-as-you-go financing, which "almost assures a future financial crisis" as major claims eventually settle and premiums must rise sharply from their deceptively low initial rates in order to cover them.
• Damage caps on liability are useful from a PCF's standpoint.
• Public provision generally works better than public subsidies. While subsidies might work in New York where insurance is highly regulated, it is not preferred in states where subsidies might simply increase demand for insurance.

The Project on Medical Liability in Pennsylvania provides Pennsylvania policy makers with objective information about the medical liability system; broadens participation in the medical liability debate to include new constituencies and perspectives; and focuses attention on the relationship between medical liability and the overall health and prosperity of the Commonwealth. The Project is working with leading health policy experts from across the nation and will continue to publish both original research based on new data and expert analyses. The Project will generate information from a broad range of perspectives, without promoting the agenda of any of the stakeholders in the debate.

The Pew Charitable Trusts (www.pewtrusts.org) serves the public interest by providing information, policy solutions and support for civic life. Based in Philadelphia, with an office in Washington, D.C., the Trusts will invest $177 million in fiscal year 2005 to provide organizations and citizens with fact-based research and practical solutions for challenging issues.