Senate bill phases out, replaces CAT fund

Proposed legislation that would overhaul the way Pennsylvania physicians purchase medical malpractice insurance is being hailed by the medical community as a way to curb escalating insurance rates.

But some critics are comparing the proposed legislation to a 'Ponzi scheme' that will increase - rather than lower - insurance costs for a future generation of physicians.

Senate Bill 556, approved two weeks ago by the Banking and Insurance Committee, would replace the Medical Professional Liability Catastrophe Loss Fund with an independent authority, pay off the CAT Fund's estimated $2.1 billion unfunded liability, and cap future surcharges levied on physicians. It also would phase out the CAT Fund. The bill is pending before the Senate Appropriations Committee.

Instead of being known as the CAT fund, the new entity would be called the Medical Professional Liability Catastrophe Loss Authority.

Authorities have the power to sell tax-exempt revenue bonds as a way of raising money to pay for capital projects. In this case, the money generated by the sale of bonds would help subsidize the surcharge costs and pay off insurance settlements.

When a government entity creates an authority to sell tax-exempt bonds, the debt is guaranteed by government's power to earmark tax revenue to pay the debt. In this case, the bond debt would be paid by the physician surcharges.

'Passage of this bill would help physicians begin to see the light at the end of the CAT Fund tunnel,' said Dr. Carol E. Rose of Pittsburgh, president of the Pennsylvania Medical Society.

But John Reed, executive director of the CAT Fund, compared the legislation to a 'Ponzi scheme,' an investment scam in which funds paid by later investors are used to pay artificially high rates of return to the original investors.

'I'm not saying it's a Ponzi scheme but others are calling it that,' Reed said. 'These bonds will never be able to be paid off. The bill is designed to fail. Each year, there will be a need to borrow more money to pay for existing claims. It's a quick painkiller which hasn't been given much careful thought.

'All this would do is transfer the existing debt of the current generation of health care providers to a future generation and perhaps the public,' he added. 'Are hospitals and doctors creating a future situation in which the public will have to pay the debt• It looks like it was drafted by someone who wants it to fail.'

Dr. Louis Meier of Norristown is president of the Physicians' Cincinnatus Society, which is at odds with the Pennsylvania Medical Society. Meier said the proposed bill will not ease the financial burden on physicians.

'This was an agreement that the hospital association and medical society reached,' Meier said. 'To me, it does not address the underlying problem that is facing practitioners and that's the high cost of malpractice insurance that is forcing people out of medicine.

'I see the same crisis, if not worse, in a year or two.'

Meier said the solution to the problem is to allow doctors to purchase the amount of insurance coverage they can afford.

Doctors are required to obtain private liability insurance. But they also must buy additional coverage to pay for claims that exceed their primary coverage.

Payment for the extra coverage is called a surcharge. The amount a doctor pays for the additional insurance is based on a percentage of their primary coverage.

Physicians who practice in high-risk specialties, such as neurosurgery or obstetrics, pay high insurance rates and corresponding large surcharges. If doctors fail to obtain the added coverage, the state revokes their medical license.

The 2001 surcharge of 61 percent of a physician's basic insurance premium has sent rates skyrocketing.

While the state's average physician pays about $35,000, doctors in Philadelphia and specialists across the state are paying as much as $100,000, according to the American Medical Association.

Last year, the CAT Fund paid $341 million of the $602 million in malpractice claims paid across the state, according to Reed.

Physicians are required to carry a minimum of $500,000 primary coverage from private malpractice insurance carriers.

The proposed legislation raises the required minimum for primary coverage to $700,000 in 2003 and 2004, to $900,000 in 2005 and 2006 and to $1.2 million in 2007 and beyond.

Although the authority would have the power to levy annual surcharges, the amount assessed from 2002 to 2011 would not exceed 50 percent of the surcharge imposed for 2000.

The medical society claims the surcharges force physicians to practice preventive medicine, which increases health care costs, or forces them to retire early or stop practicing their specialties.

The current unfunded liability of the CAT fund is about $2.1 billion. Reed estimates the future unfunded liability for claims could reach $4 billion by 2007 under an authority.

Reed compared the bill to giving physicians a credit card and telling them to spend but don't worry about paying the balance because someone else will be responsible for the debt.

The CAT fund was created in 1975 to provide reasonably priced malpractice insurance to pay claims against physicians when damage awards exceeded their minimum basic insurance coverage.