Last month Governor Tom Corbett’s office announced a settlement to a years long dispute between groups representing doctors and hospitals and the Pennsylvania state government. In 2008 the Pennsylvania legislature, under then governor Ed Rendell, appropriated $100M from the state’s Medical Care Availability and Reduction of Error (Mcare) fund to the general fund to balance the state budget. This in turn led to litigation, which challenged not just the action of the state in this one instance, but the nature of the formula used to calculate the assessments that doctors in the state are required to pay into the fund.
Pennsylvania, like several states, has a fund that doctors pay into which covers medical malpractice liability beyond a certain threshold. Doctors in the state are required to carry $1M in malpractice coverage with the added stipulation that $500,000 of that is purchased in the private market, while the other $500,000 is covered by the Mcare fund, into which assessments are paid annually. The idea behind this system is, of course, to reduce the cost to doctors of maintaining adequate malpractice coverage. It was put in place as a reform effort to promote doctor retention and ease the burden on healthcare providers at a time when malpractice rates in Pennsylvania were quite high.
So, understandably, doctors were upset when the Mcare coverage they were paying for did not seem to be especially affordable, and the fund was so bloated that the government felt it could be raided to balance the budget. At issue was the way the assessment payments were being calculated. Each year, the assessments paid are set at 110% of the previous year’s claims and expenses; however, prior to the settlement the amount of money leftover in the fund from previous years was not factored into the calculation. So, over time the fund grew, given that the previous years’ funds were not fully exhausted.
Under the provisions of this new settlement, however, the fund will work on a pay-as-you-go basis. This is achieved by simply tweaking the formula such that the assessment amount is set at 110% of the previous year’s claims and expenses… less any amount leftover in the fund from the previous year. Sort of seems like common sense, doesn’t it? That’s pretty much what the doctors’ attorneys argued, making the case that that was the way the fund was intended to work from the beginning.
And the state has implicitly acknowledged as much, after a ruling from the Commonwealth Court in favor of the doctors. So, in addition to modifying the formula they are giving Pennsylvania doctors $200M back as compensation for having overcharged them previously. $139M will be issued in direct refunds, calculated based upon the amount paid in, while the other $61M will come in the form of dramatically reduced assessment rates—down 48% for the year 2015.
One odd feature of the settlement is that the state will not repay the $100M that was transferred from the Mcare fund to the general fund to balance the budget in 2008. The $200M doctors are getting back only accounts for past overpayments, but does not include the money that was reappropriated. It’s hard to know why the legal team representing the doctors and hospitals agreed to this, but one guesses that they simply determined that what they got was the best offer they could expect. And, in truth, most will probably be happy to be getting anything after the better part of six years of litigation.
Another question raised by the settlement is: what will rates look like going forward? Governor Tom Corbett is taking full advantage of the situation to draw a contrast between his own administration (giving money back to doctors) and that of his predecessor, Ed Rendell (under whose administration the overcharging and reappropriation occurred). But will it last? Why drop rates by 48% overnight only to, presumably, have to raise them again when the $61M from the overcharging is spent? Why not either issue all of the overpaid funds as refunds or spread the reduction in rates out over several years? It seems unlikely that anyone is going to be happy if their assessment rates go down 48% one year but then go back up 30% or 40% the next. Whether this will happen remains to be seen, but it’s hard to imagine how such a dramatic reduction can be sustained when the previously overpaid funds are exhausted.
This situation in Pennsylvania offers a good look at both the pros and cons of a state run compensation fund as a malpractice liability reform model. On the one hand, there is always the possibility for abuse. Lack of accountability and corruption are always a threat to a fund that is allegedly set aside for a specific use by government. When things get tight in one area money has a way of finding it’s way from one place to another. Likewise, Pennsylvania is not the first state to see a compensation fund grow to massive proportions, raising questions about why doctors are continuing to pay the same or higher rates year after year. It was reported earlier this year that Wisconsin’s Injured Patients and Families Compensation Fund, which has also been the subject of appropriations disputes, has grown to over one billion dollars.
On the other hand, when it works the way it should a patient compensation fund really can reduce the cost of malpractice coverage. In this case when abuse of the fund became obvious it prompted litigation, which (slowly) led to action and a better implementation of the fund’s original purpose. But even so, that $100M that was transferred to the general fund will never be returned, and nobody will be punished for taking it. There will be no real consequences for simply taking a hundred million dollars of doctors’ money. So what’s lacking in deterrence will have to be made up for by measures like the pay-as-you-go model that reduce opportunity by keeping the fund small and dedicated. If it ever falls short the state is authorized to borrow whatever funds are needed to cover the remainder of the year and fold payment of that loan into future assessments. It seems clear that for the fund to work it has to be actively used and restocked on an as needed basis.
So what do you think? Are patient compensation funds a good reform measure, or do they put too much control over your insurance needs in the hands of bureaucrats and politicians?