Report on the costs of the Australian Government’s
Run-Off Cover Scheme for medical indemnity insurers
3.1.1 For the purpose of preparing this report, certain data were collected from the MIIs and MDOs by Medicare Australia including:
- details of practitioners eligible for membership of the ROC Scheme;
- details of claims notified to MIIs and MDOs by 30 June 2005 which might lead to recoveries under the ROC Scheme;
- details of ROC support payments;
- an estimate of that part of the cost of claims which were notified to MIIs and MDOs by 30 June 2005 which is expected to be recoverable under the ROC Scheme;
- an estimate of the part of the cost of claims which were incurred but not reported to MIIs and MDOs as at 30 June 2005 which is expected to be recoverable under the ROC Scheme; and
- an estimate of that part of the future claims cost of medical incidents during 2005-06 which is expected to be recoverable under the ROC Scheme.
3.2.1 The results in this report rely on information provided by MIIs and MDOs. This information is regarded as the most suitable information available for the current purpose.
3.2.2 Steps were taken to ensure, as far as practicable, that the information provided was prepared on a basis suitable for the purpose. Despite this, it is not possible to guarantee that the information provided is free from material error. It is important to note that there was a deal of inconsistency in the information provided, some of which could not be readily explained.
3.2.3 Historically, MDOs have not maintained data in a form which is directly amenable to ROC analysis. For example, it has not been possible to establish a comprehensive list of doctors who were eligible for the ROC Scheme on 1áJulyá2004. This is not a criticism of the MDOs. It simply reflects that their business and information systems were not developed with a scheme like the ROC Scheme in mind.
3.2.4 Certain information was also sought from industry actuaries. Guidance was provided as to the nature of the data, calculations and information required. Follow up discussions with industry actuaries were held to try to understand the reasons for a number of apparent inconsistencies in the data provided.
3.2.5 It is to be expected that many of the data problems encountered will diminish in time. This is likely to take a few years. Until data problems subside, scheme projections will be subject not only to the considerable inherent uncertainty which surrounds medical indemnity insurance business, but also to additional uncertainty associated with the amount and quality of the available data.
3.2.6 In general, the results in this report blend estimates provided by industry actuaries with other estimates based on data provided by the MIIs and assumptions and models developed within this office.
3.3.1 Doctors can become eligible for the ROC Scheme by means of retirement at age 65 years or older, cessation of private medical practice for three years, death, permanent disability, maternity leave or satisfaction of other eligibility criteria specified in the regulations. Practitioners who hold a subclass 422 (Medical Practitioner) or 457á(Business (Long Stay)) visa under the Migration Regulations 1994 become eligible for the ROC Scheme when they cease to reside in Australia.
3.3.2 Eligible practitioners are entitled to receive notification of the terms and conditions of compulsory run-off cover from their MII.
3.3.3 Appendix 2 describes the test of eligibility for the ROC Scheme and the process of issuing and notifying compulsory run-off cover to eligible practitioners.
3.3.4 Individual records of eligible practitioners were provided by two MIIs, with the remaining MIIs providing estimated numbers of eligible practitioners in each specialty.
3.3.5 Table 1 below divides eligible ROC Scheme members into those eligible at the commencement of the scheme on 1 July 2004 and those who became eligible for membership of the ROC Scheme during the 2004-05 financial year. The numbers specified are the sum of the numbers of eligible practitioners provided by the each of the MIIs, some of which are estimates.
Table 1: ROC Scheme eligible practitioners
|Practitioners eligible for the ROC Scheme as at 1 July 2004||2,112|
|Practitioners who became eligible for the ROC Scheme during the
2004-05 financial year
|Total number of practitioners eligible for the ROC Scheme at 30 June 2005||3,088|
3.3.6 Based on data provided by the medical indemnity industry, just over 3,000 doctors were eligible for cover under the ROC Scheme as at 30áJune 2005. Over 2,000 of these were estimated to have been eligible for the ROC Scheme at its commencement. This estimate is subject to considerable uncertainty, and may not represent the entire group of eligible practitioners at that date. According to data provided by the industry, almost 1,000 doctors became eligible for cover under the ROC Scheme during 2004-05.
3.3.7 Figure 2 below illustrates the break-up of the 2004-05 new entrants by reason of eligibility.
Figure 2: ROC Scheme new entrants by reason of eligibility
3.3.8 According to the data provided, 26áperácent of new entrants were age retirements, while 22áperácent were practitioners on maternity leave and 12áperácent were practitioners who died or became permanently disabled. The number of age retirement new entrants reported by MIIs is lower than we would have expected. This may be due to some under-reporting and/or it may point to some lack of clarity around the definition and concept of retirement for private medical practitioners. The number of maternity leave new entrants is also lower than we would have expected. This may be due to under-reporting or may reflect relatively low fertility levels among doctors or that relatively few doctors tend to take maternity leave.
3.3.9 Based on the data provided, 32áperácent of new entrants were practitioners who became eligible for the ROC Scheme three years after permanently ceasing private practice (resigning). The distribution of the number of resignations observed across the five insurers was very uneven. This suggests that the number should be treated with some caution.
3.4.1 MIIs and MDOs are entitled to reimbursement from the Australian Government for the costs of eligible claims. An eligible claim is one which:
- is first notified to the MII or MDO on or after 1 July 2004; and which
- relates to a doctor who is eligible for cover under the ROC Scheme at the time the claim is notified.
3.4.2 As at 30 June 2005, 75 medical incidents had been notified to MIIs and MDOs, some of which may convert into formal medical indemnity claims which will be eligible for reimbursement under the ROC Scheme. Of these, 16 incidents relate to the 2004-05 new entrants to the ROC Scheme. The other 59 incidents relate to those doctors who were eligible for the ROC Scheme at the commencement of the scheme on 1 July 2004.
3.4.3 The number of medical incidents notified to MIIs and MDOs which appear eligible for a ROC indemnity payment is lower than perhaps might have been expected. There are a number of possible reasons for this:
- The medical indemnity insurance industry experienced high levels of claim activity prior to the commencement of the ROC Scheme. High levels of claim activity prior to the commencement of the ROC Scheme may have included claims that were ‘brought forward’ (that is, made earlier than they otherwise would have been), resulting in a lower than normal level of general claim activity during 2004-05.
- It is possible that not all ROC Scheme eligible claims have been identified. MIIs are likely to pursue ROC Scheme recoveries diligently at a late stage in the claim process. Thus at this early stage (first twelve months) some claims which will actually turn out to be eligible ROC claims may not yet have been identified as such. Similarly, MIIs might have adopted a cautious approach to identifying as eligible claims which were not clearly eligible at the time that the data was provided.
- It is possible that doctors approaching retirement might cut down on their practice hours and possibly engage in less ‘risky’ practice (for example, less surgery). This would be expected to lead to a lower level of claim activity among retired ROC Scheme members.
- Only a small number of claims is expected in any one year. Random variation in the actual number of claims from year to year could be substantial.
3.5.1 ROC indemnity payments are the payments made by the Australian Government to MDOs and MIIs as reimbursement of the costs of eligible claims.
3.5.2 No ROC indemnity payments had been made by 30 June 2005. This is not surprising because of the length of time involved in the claim process. ROC indemnity payments will generally be made close to or after the time when an MDO/MII has finalised a claim.
3.5.3 The ROC scheme also provides for reimbursement of administrative and internal claims handling costs under the ROC Claims and Administration Protocol (section 34ZN of the Medical Indemnity Act). No payments had been made to MIIs by 30 June 2005 in reimbursement of administrative costs. These payments may begin to emerge during 2005-06 as administrative arrangements are bedded down.
3.5.4 The Commonwealth’s own administrative costs are Budget-funded and so are not considered in this report.
3.6.1 ROC support payments are paid to Medicare Australia (formerly the Health Insurance Commission) in the form of an annual lump sum imposed as a tax on each MII from 1 July 2004 under the Medical Indemnity (Run-Off Cover Support Payment) Act 2004 (MI ROCSPA).
3.6.2 The amount of ROC support payments is calculated using a method set out in the MI ROCSPA. Appendix 1 describes the calculation in detail. Very briefly, it is based on:
Applicable rate Î (premium income less taxes and charges) ¸ (1 + applicable rate).
3.6.3 For most MIIs the applicable rate is currently 8.5áperácent. A slightly higher percentage applies to one insurer, Australasian Medical Insurance Limited, whose policy year is a calendar year and which remits its ROC support payment six months after the other MIIs. Since AMIL pays its ROC support payment six months later than the other MIIS, a slightly higher applicable rate is required in order to provide equivalence on a present value basis.
3.6.4 In order to provide full transparency for doctors, MIIs are required to attribute ROC support payments to individual policyholders. Each premium notice specifies the amount that has been included in the policyholder’s invoice to meet the MII’s ROC support payment obligations. All amounts are reported to Medicare Australia, which maintains a record of each doctor’s individual run-off cover credit balance. Interest is applied to this balance annually at the short-term bond rate.
3.6.5 Subdivision E of Part 2 of the Medical Indemnity Act provides for repayment of each doctor’s run-off cover credit balance, should the ROC Scheme ever be wound up without alternative arrangements being put in place. Thus, doctors who were still practising at the time of the wind-up of the ROC Scheme would be entitled to have this amount paid to their nominated medical indemnity provider. Doctors who were eligible for the ROC Scheme at the time of its wind-up would not be entitled to any refund but would continue to be covered for any future claims that might emerge.
3.6.6 Table 2 below summarises the first round of ROC support payments.
Table 2: ROC support payments
|ROC support payments ($million)|
|Payable 31 December 2005||AMIL||9.6304|
|Payable 30 June 2005||MIA||2.770|
* Numbers do not add exactly due to rounding.
3.6.7 Figure 3 below summarises the contribution to ROC support payments by age. The proportion of ROC support payments is greater than the proportion of practitioners for ages 37 to 68. This reflects the low level of premiums for student, intern, trainee and hospital indemnified doctors aged in their 20s and 30s. The proportion of ROC support payments tends to diminish at higher ages. This provides some support for the suggestion that doctors tend to wind down their practice hours and possibly perform fewer risky medical procedures (for example, surgery) as they approach retirement, resulting in lower premiums.
Figure 3: Contribution to ROC support payments by age
3.6.8 Figure 4 below summarises the contribution to ROC support payments by area of specialisation for all MIIs except AMIL. The specialty classifications provided by AMIL were not compatible with the standard ISA specialty codes.
3.6.9 Medical indemnity insurance premiums tend to be risk-based. Thus, doctors operating in risky areas of specialisation are likely to incur the highest premiums and, accordingly, the highest ROC support payment liabilities. Obstetricians (including gynaecology), cosmetic/plastic/ reconstructive surgeons, general surgeons, neurosurgeons and orthopaedic surgeons contribute the largest ROC support payments. Medical practitioners not otherwise classified include students, interns, trainees and hospital indemnified doctors who contribute the smallest ROC support payments.
Figure 4: Contribution to ROC support payments by specialization
Note: The specialty classifications used by AMIL are not the standard ISA specialty codes.
4 Or $9.389 million discounted to 30 June 2005.