Report on the costs of the Australian Government’s
Run-Off Cover Scheme for medical indemnity insurers
2.1.1 Medical indemnity insurance is a form of professional indemnity insurance. It covers doctors for their professional negligence.1
2.1.2 Doctors who undertake private medical practice in Australia generally purchase medical indemnity insurance from private sector underwriters.2 This report considers the five private sector underwriters operating in Australia during 2004-05. Since then, another organisation, Invivo, has entered the market. Figure 1 below illustrates the market shares of the five private underwriters.3 The five private underwriters are Australasian Medical Insurance Limited (AMIL), Health Professional Insurance Australia (HPIA), MDA National Insurance (MDANI), Medical Insurance Australia (MIA) and Professional Indemnity Insurance Company of Australia (PIICA).
Figure 1: Market share of medical indemnity insurers
2.1.3 Medical negligence claims are initiated by, or on behalf of, patients against doctors. Roughly 2,000 claims of negligence might be expected each year in relation to private medical practice in Australia. However, there can be substantial variation from one year to the next. It is difficult to project the number of medical indemnity claims with any precision. A significant number of claims will be successfully defended.
2.1.4 The cost of medical negligence claims is highly variable since the claims relate to bodily injury. The cost of a medical indemnity claim to the insurer is made up of damages which are payable to the plaintiff, any of the plaintiff’s legal costs which the insurer is obliged to pay, and the insurer’s own costs of defending and managing the claim. While most claims are finalised for less than $100,000, a small number of claims are large. Perhaps 5 per cent of claims cost more than $500,000. These large claims have a significant impact on the overall cost of medical indemnity insurance. At least 40 per cent of the cost of all medical indemnity claims relates to claims which are larger than $500,000.
2.1.5 The medical indemnity claim process can be long. Years can elapse between the date of a negligent medical incident and the date that legal action against the doctor is initiated. It is not unusual for claims to take a number of years to finalise after they have been initiated. It is common for the whole process to take more than five years for a single claim. The cost of a claim depends significantly on economic and judicial conditions prevailing at the time the claim is finalised (paid), rather than at the time of the medical incident or the time that the claim is made.
2.1.6 All of these factors make medical indemnity insurance difficult for an insurer to underwrite. It is hard to forecast claim numbers and claim sizes reliably. Moreover, most of the cost is likely to relate to a small minority of the claims, which adds further uncertainty. As a result, it is difficult to know how much premium to charge and how much money to hold in reserve to pay claims. For these reasons a robust private market in medical indemnity insurance requires professional and disciplined underwriting and management.
2.2 Brief history of private medical indemnity insurance in Australia — the lead-up to the ROC Scheme
2.2.1 Historically, medical indemnity cover was provided to Australian doctors in private practice by medical defence organisations (MDOs). MDOs were not licensed insurers and were therefore not subject to prudential regulation.
2.2.2 Medical indemnity cover was originally provided to doctors on a so-called ‘claims-occurring’ basis. Doctors were protected against claims that might be made in relation to the medicine that they had practised while members of the MDO. Thus, doctors who had claims made against them after retirement could seek assistance from their MDO as long they were members at the time of the medical incident. Medical indemnity is very difficult to underwrite on a ‘claims-occurring’ basis, partly due to the often long delay between the date of medical incident and the time at which legal action is initiated.
2.2.3 During the 1990s most MDOs came under financial pressure as a result of increasing levels of claim payments and were forced to make calls on their members for additional funds.
2.2.4 At the same time, most MDOs progressively changed the basis of their cover from ‘claims-occurring’ to ‘claims-made’. In simple terms, claims-made cover provided protection for the doctor against claims that were made during the period of membership. Thus, in order to continue to be covered against claims that might emerge in relation to past medical practice, a doctor had to continue his MDO membership. Professional indemnity insurance is generally provided on a ‘claims-made’ basis.
2.2.5 In 2002, Australia’s largest MDO, United Medical Protection, collapsed. Following this, the Government took steps to stabilise the medical indemnity industry.
2.2.6 Since 1 July 2003, medical indemnity insurance has been required to be provided to Australian doctors by insurers licensed under the Insurance Act 1973 and prudentially supervised by APRA.
2.2.7 This has ensured a more disciplined approach to underwriting and has reduced the risk of failure of a medical indemnity provider.
2.2.8 Consistent with more disciplined underwriting, all medical indemnity insurance is now provided on a ‘claims-made’ basis. Consequently, doctors have to continue to buy insurance in order to remain covered against claims that might emerge, even if they are no longer practising. This form of insurance cover is known as run-off cover. Put simply, run-off cover provides insurance protection for doctors who have ceased medical practice. The potential delay between a medical incident and the commencement of legal action highlights the need for doctors to maintain run-off cover after ceasing practice.
2.2.9 For some doctors the annual cost of medical indemnity insurance runs into the tens of thousands of dollars. In order to address problems associated with the cost of run-off cover, including the potential threat to the provision of medical services, the Government imposed a requirement on medical indemnity insurers that they provide free run-off cover to certain groups of doctors who have ceased private practice. The Government simultaneously established a scheme to facilitate this without threatening the viability of the insurance companies and which was intended to be largely cost neutral to taxpayers. This scheme is known as the Run-Off Cover Scheme or the ROC Scheme.
2.3.1 The ROC Scheme facilitates the provision of free medical indemnity insurance cover to particular groups of doctors who have ceased private medical practice.
2.3.2 The rules for the ROC Scheme appear in the Medical Indemnity (Prudential Supervision and Product Standards) Act 2003 (PSPS Act), the Medical Indemnity (Run-off Cover Support Payment) Act 2004 (ROCSPA) and the Medical Indemnity Act. The principal elements of the ROC Scheme are as follows.
- The PSPS Act imposes an obligation on insurers to provide free run-off cover to particular groups of doctors who have ceased private practice.
- The Medical Indemnity Act provides for the Commonwealth to make payments to the insurers so that they can meet the costs of eligible run-off claims. These payments are known as ROC indemnity payments.
- The Medical Indemnity Act also provides for the Commonwealth to make other payments to insurers to offset the relevant costs of administering the ROC Scheme that are incurred by insurers.
- The Medical Indemnity Act also provides for the insurers to make payments to the Commonwealth to ensure that the ROC Scheme is largely cost-neutral to taxpayers. In practice, these payments are funded by a loading on practising doctors’ medical indemnity insurance premiums. These payments are known as ROC support payments. The ROCSPA sets out the rules for calculating ROC support payments.
2.3.3 An important financial dynamic of the ROC Scheme is the timing mismatch between the payment of ROC support payments by practising doctors and the emergence, payment and reimbursement of medical indemnity claims of eligible doctors who are no longer practising. The first ROC support payments were paid on 30 June 2005. The ROC Scheme applies to medical indemnity claims that are first notified to medical indemnity insurers (MIIs) or MDOs on or after 1 July 2004. As a result of inherent delays in the medical claims process, ROC support payments are made well in advance of ROC indemnity payments.
2.3.4 In a cashflow sense, the ROC Scheme is a very immature arrangement. It will probably take about 20 years to reach maturity when income from ROC support payments and expenditure on ROC indemnity payments are of a similar order of size. To preserve the financial integrity of the ROC Scheme, a system of notional accounting is established in section 4 of this report.
2.3.5 The ROC Scheme provides for ROC support payments to be made by medical indemnity insurers to the Commonwealth and for ROC indemnity payments to be made by the Commonwealth to MIIs and MDOs. Ancillary arrangements provide for claim payments to be made to plaintiffs, ROC support payments to be recovered from practising doctors and other costs such as administrative costs to be incurred and reimbursed.
2.3.6 Each set of payment arrangements requires cohesive governing rules and protocols. Although the primary rules are in place, the development of subordinate protocols is complicated by the variety of practices in the medical indemnity insurance industry. For example, each of the five medical indemnity insurers in the Australian market has its own policy wordings, premium rating structures and claim management practices. As a result, the development of detailed protocols will take some time. Given the financial and administrative immaturity of the ROC Scheme, relevant systems continue to be developed.
1 Medical indemnity insurance can also cover other costs such as those associated with appearing at coronial inquiries.
2 On the other hand, many employed doctors such as doctors practicing solely in a public hospital will be indemnified against negligence by their employer.
3 Based on information provided by the MIIs.