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Recent Rulings May Slow Plundering of State Malpractice Fund Surpluses
By Robert A. Bitterman, MD, JD, FACEP, and Michelle Bitterman Fish, JD
During past medical malpractice crises, many states established "patient compensation funds" to provide accessible and affordable medical liability insurance to health care providers.1 Also called Malpractice Premium Assistance Funds or Medical Professional Liability Catastrophe Loss Funds (or CAT funds), they were created to preserve access to medical care by providing access to and / or subsidized malpractice insurance premiums to health care providers unable to secure private liability insurance or having difficulty remaining in practice due to the escalating costs of their premiums.1,2
These patient compensation funds are quasi-public organizations created by state legislatures, but their financing comes entirely from premiums paid by physicians, hospitals, and other health care providers. The state itself doesn't provide the financing (New York is an exception) or guarantee solvency of the fund should the premiums collected be insufficient to cover the fund's actual losses. In essence, the funds are a state-sanctioned mechanism for providers to pool risk, similar to the approach of private risk retention groups (RRGs).1
In the years following the most recent malpractice crisis early this decade, these funds accumulated significant capital, due in part to early increases in premiums, efficient operations, prudent claims management, tort reform laws, and maintenance of sound reserves.
However, the funds' cash balances are coming under attack by revenue-starved states with large budget deficits from insatiable spending and the recent depression. The political pressure to "reassign" or "plunder" (depending upon one's perspective) the millions of dollars of accumulated surplus in the medical liability funds is simply irresistible.
Wisconsin's experience is a case in point. Physicians and nurse anesthetists in Wisconsin are required to contribute to the states' Injured Patients and Families Compensation Fund (the "Fund"), which provides insurance coverage for excess medical malpractice claims (above a cap on amounts payable directly by the providers).3 In 2007, Governor Jim Doyle approved a transfer of $200 million from the Fund to finance various Medicaid-related health care programs, none of which had anything to do with excess malpractice claims.4
The Wisconsin Medical Society sued the state, claiming the monies were protected dollars to be used exclusively to decrease malpractice premiums and compensate injured patients.5 The physicians also claimed, among other things, that the transfer constituted a taking of private property for public purposes without just compensation, in violation of the federal and state constitutions; and a discriminatory tax, in violation of the equal protection clauses of the federal and state constitutions.5
The state argued that the physicians did not have a property interest in the Fund, and that the legislature must have the "necessary latitude to adapt its interventions to pressing public policy challenges in the face of changed circumstances."5 In other words, the state was asking the court to protect the legislature's ability to respond to pressing public policy concerns, and to change its laws as situations change. This was despite the fact that the statute that created the Fund explicitly stated:
1. "Moneys in the Fund may not be used for any other purpose of the state"; and that
2. "The Fund is held in irrevocable trust for the sole benefit of the healthcare providers participating in the Funds and proper claimants."3
The trial court agreed with the state that the Wisconsin physicians did not have a property interest in the state's patient compensation fund, and concluded they had no right to excess money in the Fund because they already received the benefit of the insurance coverage they purchased through the pool.5
The case is now on appeal, and the American Medical Association (AMA) and various state medical societies have filed friend-of-the-court briefs supporting the Wisconsin physicians, arguing that the fund was meant to keep insurance rates affordable and protect injured patients, not provide funding for the state's Medicaid programs. The AMA is particularly miffed by the transfer because it acts as a selective tax on physicians for general revenue use.6
The $200 million removed from the Fund constituted approximately 25% of the Fund's net assets, and now the fund is in some difficulty, resulting in an assessment against the physicians of a 25% fee increase over five years, with a jump of 10% already in 2009. In its complaint, the medical society had alleged the withdrawal would put the Fund in a serious deficit accounting position, hurt its investment earnings, result in insufficient funds to cover claims that have occurred but have not yet been paid, and force increased assessments on the physicians to bring the fund back into balance.7
The trustees of the Fund are left to wonder: Why rebuild the reserves or surplus, if in the future the state can just appropriate the money for its own use?
The Pennsylvania Medical Society and the Hospital Associations of the state are in a real dogfight with the legislature and administration of Gov. Ed Rendell regarding the state-run medical liability coverage funds.
Since the mid-1970s, Pennsylvania has assessed physicians and other health care providers annual fees to finance its MCARE Fund (Medical Care Availability and Reduction of Error Fund).8 Physicians must carry $1 million in liability coverage. The first $500,000 must be obtained from private insurers (or the state's Joint Underwriting Association, the liability insurer of last resort for physicians who can't obtain coverage elsewhere). The MCARE fund provides the second $500,000 of coverage.8
However, unlike a traditional insurer, MCARE is a pay-as-you-go plan; it sets aside absolutely no reserves to pay future claims. It simply charges physicians, hospitals, and other health care providers an annual assessment to pay current claims and operating expenses. In 2008, the fund paid out claims totaling $174 million on claims that exceeded the $500,000 primary level of coverage.9 In 2009, the assessment was 19% of the primary premium paid by the providers, and the 2010 assessment, which was announced a couple of weeks ago, will be 21% of the primary premium amount.10
The Pennsylvania Medical Society and the hospitals sued the state because the state allowed the MCARE surplus to accumulate in the Fund instead of using the money to reduce the annual assessments, causing the assessments to increase each year.11
Back in 2003, at the height of the most recent malpractice crisis in Pennsylvania, the state created a second fund called the Healthcare Provider Retention Account. It was financed by cigarette taxes with the intent to keep doctors practicing in the state by subsidizing the fees they had to pay into the MCARE Fund. In 2007, the medical society and the hospitals learned that state officials had stopped transferring the money into the MCARE Fund in 2005, a total amount of around $615 million.11
When the state asserted that it was not required to make the transfer into the MCARE Fund, the Medical Society and the hospital sued the state again, and a few months ago the Pennsylvania trial court denied the state's 2009 motion to dismiss the lawsuit, allowing the suit to proceed to trial, though a trial date hasn't been set yet.11,12
The case made national news because of the stalemate between the legislature and Gov. Rendell over his proposal to use the money to cover the uninsured, while the lawmakers wanted to tap the funds to cover other budget shortfalls.
Now the legislature intends to transfer money out of the MCARE Fund itself into the state's general fund to help shore up a $3.2 billion budget deficit, to the tune of $100 million roughly two-thirds of the entire balance in the MCARE Fund. The physicians and hospitals see this as an unfair and illegal raid on money they paid to provide malpractice insurance coverage, and may now have to file a third lawsuit against the state, for what is effectively placing a special tax on physicians to cover the state's budget shortfall.11
Worse yet, is the possibility that the state insurance commissioner may begin phasing out MCARE entirely, since the availability of med-mal insurance is no longer an acute issue in the state. If that happens, the Fund will be left with outstanding claims that still need to be settled or litigated, but no reserves to actually pay the claims since it is a pay-as-you-go system. The estimated outstanding liability is $1.7 billion, and there currently is no set plan to pay off the unfunded liability.11 The annual assessments for MCARE could continue long after physicians no longer obtain coverage from the Fund, and even physicians, such as those just coming out of residencies, who never obtained coverage via the Fund would be stuck paying the assessments ad infinitum. Why would any new residency graduate start practice in Pennsylvania?13
Health care providers have had better luck in the Granite state. In the recent case of Tuttle v. New Hampshire Medical Malpractice Joint Underwriting Association, the court ruled that surplus funds in a medical malpractice fund belonged to the policyholders, and therefore the state of New Hampshire did not have the right to direct those funds to other state purposes.14
New Hampshire has a Medical Malpractice Joint Underwriting Association (JUA), and all insurers authorized to write medical liability insurance in the state are required to participate in the JUA, paying an assessment based on their portion of the net direct premiums written in the state.15 The JUA issues individual policies to its policyholders, which are both "assessable" and "participating." Assessable means that the JUA can assess the policyholder to cover any deficits in the Fund; and participating means the insured participates in the earnings and surplus of the Fund.
The Fund gradually accumulated a surplus estimated at somewhere between $145 million and $160 million.16 The legislature, again because of budget deficits, in June of 2009 enacted a statute requiring the JUA to transfer $110 million of its surplus into the state's general fund.17
The policyholders mostly physicians, but also nurses, physician assistants, nursing homes, and hospitals first sued to disqualify the state attorney general from simultaneously representing the governor/ Department of Insurance and the JUA, which would have been akin to the proverbial fox guarding the chicken coop. The court had no trouble determining that a conflict of interest existed under the state Rules of Professional Conduct,18 and granted the policyholders motion to bar the attorney general from representing the JUA.19 The court also determined that the JUA was a separate entity from the state insurance department and not a part of the executive branch, and therefore was entitled to its own counsel. Interestingly, the attorney general had never represented the JUA previously, in any of its prior litigations.14
Next the JUA won the case on the merits at the trial court level, though the state has appealed the issues to the state supreme court.14
The state argued in favor of the statute, claiming that the JUA was a state agency and therefore the funds belong to the state and that the policyholders have no vested property right in the excess surplus.14 However, the court determined that the JUA was a quasi public/ private entity, not a state agency, and that the statute was unconstitutional by violating the Takings Clause of the United States Constitution, and a similar clause in the New Hampshire Constitution.20,21 These clauses guarantee that the government shall not take private property "for public use without just compensation."
The Court found that the surplus funds were indeed owned by the policyholders of the JUA, and that the "specific property interest the policyholders claim in this case is a contractual and statutory/regulatory right to the beneficial interest in surplus JUA funds."14 It came to this conclusion by looking at both the organization of the JUA, and the manner by which it was funded. The JUA board has broad powers and authority that does not require government oversight a strong argument in favor of its sovereignty from the state government. In addition, the State neither provided start-up capital nor contributed financially in any way to the JUA.14 Any losses or expenses in excess of the premiums paid to the JUA are covered by insured members, and per statute any surplus shall be distributed by the JUA's board to the health care providers (or saved to "reduce future assessments of the association").14 Other factors considered by the court included: employees and board members were not state employees; the JUA does not have sovereign immunity and can be sued; and the JUA has its own legal counsel and has not been represented by the attorney general.14
Moreover, the court continued, "taking JUA funds would decrease investment earnings which are important to the JUA's ability to meet operating costs and malpractice claims"; and "Not only is the likelihood that the policyholders will receive a dividend decreased, but the likelihood that members and policyholders may be assessed to cover future liability is increased."14
The court also found that the statute interfered with the policyholders' freedom to contract. The policyholders' agreements with the JUA are governed by contract, and the Court found that these contracts are clear as to the rights of the policyholders to dividends if indeed a surplus is found to exist.14
The legislature had reasoned that "the purpose of promoting access to needed health care would be better served through a transfer of the excess surplus...to the general fund."14 Again, a state legislature wanted the latitude to change course to address "pressing public policy challenges in the face of changed circumstances." But the court said the state's rationale that the transfer served an important public interest in promoting access to care did not justify the government's action. The judge noted it was up to the JUA to determine if a surplus existed, which it had not done.14
In light of the economic depression and dismal status of state budget deficits, the states may continue attempts to siphon off medical malpractice fund surpluses into their general funds. Continued diligence and persistent litigation is necessary to ensure that creative legislatures do not find loopholes or other mechanisms in which to seize these funds, which would only jeopardize access to physician services in those states.
1. Sloan FA, Matthews CA, Conover CJ, et al. Public medical malpractice insurance: An analysis of state-operated patient compensation funds. DePaul Law Review 2005;54:247-276.
2. E.g. The New Jersey Medical Care Access and Responsibility and Patients First Act (Act), P.L. 2004, c.17, June 7, 2004, established the New Jersey Medical Malpractice Liability Insurance Premium Assistance Fund; The Louisiana Medical Malpractice Act established a Patient's Compensation Fund. La. Rev. Stat. Ann. § 40:1299.44 (West 1992 & Supp. 1997).
3. Wisc. Statutes Section 665.27(6).
4. 2007 Wisconsin Act 20, Section 9225(2). The Act transferred $2M from the Patient Compensation Fund to the Medical Assistance trust fund 'notwithstanding Section 655.27(6)' of the Wisconsin statutes.
5. Wisconsin Medical Society, Inc. v. Morgan, Circuit Court of Dane County, No. 07-CV-4035, (Dec. 19, 2008).]
6. The Litigation Center of the American Medical Association at http://www.ama-assn.org/ama/no-index/physician-resources/legal-cases.shtml.
7. Wisconsin Medical Society, Inc. v. Morgan, No. 07-CV-4035, Complaint filed in the Circuit Court of Dane County on October 29, 2007.
8. Pennsylvania Medical Care Availability and Reduction of Error (MCARE) Act 1303.712.
9. Pennsylvania Medical Society. What Is Mcare and Why Should You Care? Available at www.pamedsoc.org/AudienceNavigation/Students/Mcare.aspx.
11. Twedt S. Medical malpractice funds headed for Pennsylvania budget. Pittsburgh Post-Gazette, Thursday, October 08, 2009. Available at http://www.post-gazette.com/pg/09281/1003828-28.stm.
12. Sorrel AL. Physicians stop states from raiding liability funds. American Medical News, Posted August 17, 2009. Available at www.ama-assn.org/amednews/2009/08/17/gvsa0817.htm.
13. Ken Kilpatrick K. A Tale of Two States. April 29, 2008, AdvanceWeb.com. Pennsylvania already has a medical student retention rate of less than 8 percent.
14. Tuttle v. New Hampshire Med. Malpractice Joint Underwriting Ass'n, Nos. 09-E-0148, 09-E-0151 (N.H. Super. Ct. July 29, 2009).
15. New Hampshire Insur. Code 1702.03.
16. Legal Memorandum Analyzing the Proposal to Transfer Excess Funds Held by the Medical Malpractice JUA, dated February 6, 2009, of NH Assistant Attorney General Glenn A. Perlow to the Insurance Department Commissioner and the Attorney for Governor Lynch.
17. New Hampshire Laws c. 144:1. See also, Sorrel AL. New Hampshire doctors sue to stop state raid on medical liability fund. American Medical News, Posted July 13, 2009. Available at www.ama-assn.org/amednews/2009/07/13/gvsb0713.htm.
18. New Hampshire Rule of Professional Conduct 1.7(a).]
19. Court's order dated 6/25/2009 relative to Plaintiff's Motion to Disqualify.
20. U.S. Constitution, 5th Amendment.
21. New Hampshire Constitution, Part 1, Article 12.