Fifth 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 during late 2009 including:
- details of practitioners who were identified as having become eligible for membership of the Scheme before 30 June 2009;
- details of claims (including incidents) notified to MIIs and MDOs by 30 June 2009 which might eventually become eligible for reimbursement under the Scheme;
- details of ROC support payments;3
- actuarial estimates of that part of the future claims cost of medical incidents projected to be notified during the 2009-10 to 2012-13 financial years which is expected to be reimbursed under the Scheme; and
- actuarial estimates of that part of the future claims cost of medical incidents occurring during 2009-10 which is expected to be reimbursed under the Scheme.
3.1.2 This report also utilises other data and information including that which was previously provided to Medicare Australia for the purpose of section 34ZW of the Medical Indemnity Act.
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. The information was not independently audited. As was the case in previous years, there were some notable disparities in the data provided, some of which could not be readily explained. Moreover, there were some inconsistencies between data provided for this review and that provided for the previous review. All of this means that figures and estimates provided in this report need to be treated with some caution.
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 Scheme on 1 July 2004. 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 Run-Off Cover Scheme in mind. However, in order to monitor the operation of the Scheme effectively, accurate and timely data is clearly important.
3.2.4 Certain information was sought from industry actuaries. Guidance was provided as to the nature of the data, calculations and information required. Discussions with industry actuaries were held to supplement the data provided.
3.2.5 As was the case last year, a range of assumptions was used by industry actuaries. Although some significant assumptions differ by only a few percentage points between actuaries, substantially different estimates of Scheme costs are produced. This is indicative of the highly uncertain nature of estimates of the costs of the Scheme.
3.2.6 It is to be expected that many of the data issues encountered will diminish in time. This is likely to take a few years. Until data issues 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.
3.2.7 In general, the results in this report blend estimates provided by industry actuaries with other actuarial estimates based on data provided by the MIIs and assumptions and models developed within this office.
3.3.1 Practitioners performing private practice become eligible for the Scheme by means of permanent retirement at age 65 years or older, cessation of private practice for three years, death, permanent disability or maternity leave. In addition, practitioners who have worked under a subclass 422 (Medical Practitioner) or 457 (Business (Long Stay)) visa under the Migration Regulations 1994 become eligible for the Scheme when they have permanently ceased medical practice in Australia and ceased to reside in Australia.
3.3.2 Appendix 2 describes the test of eligibility for the Scheme and the process of issuing and notifying compulsory run-off cover to eligible practitioners. Eligible practitioners are entitled to receive notification of the terms and conditions of compulsory run-off cover from their MII. MIIs are also required to notify Medicare Australia of the details of the compulsory run-off cover provided.
3.3.3 There are inherent lags involved in notification of the details of eligible practitioners to Medicare Australia. As a result, it will be possible only to estimate the number of practitioners who have become eligible for the Scheme at any time. For example, there will often be a delay between the time that a practitioner becomes eligible for the Scheme and the time when the insurer becomes aware of this. More generally, it is also very possible that there will be circumstances where an insurer is unsure of the eligibility status of a practitioner indefinitely; for example, where a practitioner has not renewed their insurance for, say, three years. For all of these reasons, the numbers of eligible practitioners reported by insurers need to be treated with caution.
3.3.4 The number of practitioners eligible for the Scheme in this report is based on:
- data provided to Medicare Australia by the medical indemnity industry relating to practitioners identified as having become eligible between 1 July 2004 and 30 June 2009; and
- industry estimates of practitioners eligible for the Scheme as at 1 July 2004, provided for the purpose of the 2004-05 report.
3.3.5 Table 1 summarises the data provided by the industry.
Table 1: Run-Off Cover Scheme eligible practitioners
|This year's data(a)||Last year's data|
|Practitioners eligible for the Scheme as at 1 July 2004||2,112||2,112|
|Practitioners who became eligible for the Scheme during the 2004-05 financial year||452||440|
|Practitioners who became eligible for the Scheme during the 2005-06 financial year||601||585|
|Practitioners who became eligible for the Scheme during the 2006-07 financial year||742||729|
|Practitioners who became eligible for the Scheme during the 2007-08 financial year||821||754|
|Practitioners who became eligible for the Scheme during the 2008-09 financial year||532||NA|
|Total number of practitioners who had become eligible for the Scheme by 30 June 2009||5,260||4,620|
(a) Note that these numbers have not been reduced in relation to practitioners whose eligibility has subsequently ceased.
3.3.6 According to the data provided by the industry, 532 practitioners became eligible for cover under the Scheme during 2008-09. This is lower than the number of practitioners that would be expected to have become eligible based on our projection models.
3.3.7 There was some apparent inconsistency in the industry data provided for this report. Reported rates of eligibility varied substantially between insurers when considered in aggregate and by reason for eligibility. The data reported here has not been adjusted to take account of this. As well, we have based our estimate of the number of doctors eligible at 1 July 2004 in Table 1 on previous industry estimates, as noted above. As a result of the inconsistencies mentioned above, the estimates are subject to considerable uncertainty.
3.3.8 Table 2 below illustrates the break up of the 2004-05 to 2008-09 new entrants by reason of eligibility, based on the data provided by the underwriters. Also shown are the projected new entrants during 2009-10 from the population of practising at-risk doctors (see paragraph A.4.46) produced by our model.
Table 2: Run-Off Cover Scheme new entrants by reason of eligibility
(a) Overseas trained doctors who had permanently ceased practice under a 422 or 457 visa.
3.3.9 We have not projected any new entrants in the 'other' category. Historically, practitioners in this category have paid very low premiums. Accordingly, we have assumed that medical negligence claims against them are likely to make an immaterial contribution to the Scheme costs.
3.3.10 The table above shows that our valuation model is projecting somewhat higher numbers of new entrants than have been reported by the insurers. However, as noted above, the insurer data varies quite significantly between insurers and between reasons for eligibility. We have, on balance, decided to leave our assumed decrement rates unaltered.
3.4.1 MIIs and MDOs are entitled to reimbursement from the Australian Government for the costs of claims which:
- are first notified to the MII or MDO on or after 1 July 2004;
- relate to a practitioner who is eligible under the Scheme at the date of notification (see Section 3.3); and
- meet the other requirements for 'payable claims' (see Appendix 3).
3.4.2 MIIs provided details of individual medical incidents which they have identified as potentially being eligible for the Scheme. The data provided was not wholly consistent with that provided for last year's report. Moreover, there were some apparent internal inconsistencies within the data. It is quite possible that other medical incidents have been notified to MIIs since 1 July 2004 which were not included in the data but which will be eligible for the Scheme. It is also possible that some of the incidents notified will not be eligible for the Scheme. Accordingly, these numbers should be treated with caution.
3.4.3 As at 30 June 2009, MIIs and MDOs reported 165 medical incidents relating to eligible medical practitioners since the commencement of the Scheme and 86 of those have either led to a payment or have a case estimate4 attached to them.
3.4.4 Of the 165 incidents, 17 relate to the 2004-05 new entrants to the Scheme, 22 relate to 2005-06 new entrants, 23 relate to 2006-07 new entrants, 19 relate to 2007-08 new entrants and 13 to 2008-09 new entrants. Twenty-eight incidents relate to those practitioners who were eligible at the commencement of the Scheme on 1 July 2004. The doctor's ROCS eligibility date was missing for the remaining 43 incidents.
3.4.5 Ninety of the incidents were present in last year's data, and the total estimated incurred cost of these incidents was approximately 25 per cent higher than the corresponding amount last year. Of the remainder, 50 were notified in 2008-09, and 25 in prior periods.
3.4.6 Fourteen incidents which were reported in last year's data were not included by insurers this year. Last year we checked the reasons for this with the insurers and were advised that some claims had previously been incorrectly assumed to be ROCS-eligible claims and subsequently corrected.
3.4.7 The number of medical incidents notified to MIIs and MDOs which could potentially give rise to a future ROC indemnity payment is lower than perhaps might have been expected. At this point we are not assigning full credibility to the data, given the inconsistencies in it and its relatively small volume.
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 The Scheme also provides for payments in respect of compliance costs and indirect claims handling expenses under the ROC Claims and Administration Protocol (section 34ZN of the Medical Indemnity Act).
3.5.3 $2.5 million of ROC indemnity payments (including indirect claims handling expenses) had been made up to 30 June 2009, all of them during 2007-08 and 2008-09. Specifically during 2008-09, $1.5 million in ROC indemnity payments were made.
3.5.4 $3.9 million compliance cost payments have been made to MIIs up to 30 June 2009, while we have estimated that a further $2 million relating to periods prior to 30 June 2009 is yet to be paid.
3.5.5 The Commonwealth's own administration costs are Budget-funded and so are not considered in this report.
3.6.1 ROC support payments are paid to Medicare Australia in the form of an annual lump sum imposed as a tax on each MII from 1 July 2004 under the MI ROCSPA.
3.6.2 The amount of ROC support payments is calculated using a method set out in the MI ROCSPA. Appendix 1 describes the calculation in detail. Very briefly, it is based on:
Applicable rate × (premium income less taxes and charges) ÷ (1 + applicable rate).
3.6.3 In 2008-09, the applicable rate was 5 per cent for all insurers.
3.6.4 Table 3 below summarises the ROC support payments received during the 2008-09 financial year.
Table 3: Run-Off Cover support payments
|ROC support payments ($'m)|
|Paid 30 June 2009||Avant ex-AMIL||4.772|
3.6.5 In order to provide full transparency for practitioners, 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 practitioner's total run-off cover credit. Interest is applied to this balance annually at the short term bond rate in accordance with section 34ZS of the Medical Indemnity Act.
3.6.6 Part 2, Division 2B, Subdivision E of the Medical Indemnity Act provides for certain payments, should the Scheme ever be wound up without alternative arrangements being put in place. Thus, doctors who were still practising at the time of the windup of the Scheme would be entitled to have an amount not exceeding their total run-off cover credit paid to their nominated medical indemnity provider. Practitioners who were eligible for the 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.
3.6.7 Figure 2 below summarises the contribution to ROC support payments by age of practitioner. Note that age and gender were not available for a minority of doctors. However, the shape of the graph is similar to that produced in last year's report. The proportion of ROC support payments is greater than the proportion of practitioners for doctors aged between 40 and 70. This reflects the low level of premiums for interns, trainees and hospital indemnified doctors aged in their 20s and 30s and for doctors over age 70 who may tend to wind down their practice hours and possibly perform fewer risky medical procedures (for example, surgery) as they reach more advanced ages.
Figure 2: Contribution to Run-Off Cover support payments by age
3.6.8 Figure 3 below summarises the contribution to ROC support payments by area of specialty. Specialty codes were not available in relation to a small minority of doctors. However, the profile of contributions is similar to that produced in last year's report.
3.6.9 Medical indemnity insurance premiums tend to be risk-based. Thus, practitioners operating in higher risk areas of specialty are likely to incur the highest premiums and, accordingly, the highest ROC support payment liabilities. The largest ROC support payments are for obstetricians, gynaecologists, neurosurgeons, cosmetic/plastic/reconstructive surgeons, orthopaedic surgeons, and general surgeons. Medical practitioners not otherwise classified (including interns, trainees and hospital indemnified doctors) have the smallest ROC support payments.
Figure 3: Contribution to Run-Off Cover support payments
3 A database of ROC support payments is maintained by Medicare Australia.
4 Estimate of likely cost to the insurer.