September 4, 2013
Insurance Is Not a Government Function
by Barry Zalma
The MCARE law in Pennsylvania is an example of why a governmental entity should never get involved in insurance because they do not understand what insurance is or how it works in the real world.
The Commonwealth Court of Pennsylvania, in Hospital & Healthsystem Association of Pennsylvania v. Ins. Commissioner, 939 C.D. 2011 (Pa.Commw. 08/09/2013) was called upon to decide whether a governmental entity – acting like an excess insurer – overcharged health care providers and appropriated funds belonging to the providers. The health care providers and trade associations petitioned for review of an adjudication of the Insurance Commissioner that denied their challenge to the assessments imposed upon them by the Medical Care Availability and Reduction of Error (MCARE) Fund for the years 2009, 2010 and 2011. These assessments provide the monies used by the MCARE Fund to pay medical malpractice claims in excess of what the health care provider’s primary insurer pays. Petitioners assert that their assessments were excessive because they resulted in a collection of more monies than were needed by the MCARE Fund to pay claims for one year and provide a 10% reserve.
Since 1975, the Commonwealth of Pennsylvania has been directly involved in providing medical malpractice insurance to health care providers. The General Assembly addressed the medical malpractice crisis by establishing a mandatory medical malpractice insurance system. A health care provider’s refusal to purchase malpractice insurance coverage in 1975 was, and continues to be, sanctioned by the provider’s loss of his professional license.
In 2002, the General Assembly enacted the Medical Care Availability and Reduction of Error (MCARE) Act. The MCARE Act addressed a newly perceived crisis, i.e., the cost of medical malpractice insurance. There was concern that the cost of medical malpractice insurance in Pennsylvania had increased to the point that physicians educated and trained in Pennsylvania were leaving to set up practice in other states where the costs of this insurance were lower.
Relevant to this case, the MCARE Act established the MCARE Fund. The MCARE Fund was set up to provide insurance coverage in excess of the mandatory levels of primary medical malpractice coverage. The MCARE Fund is scheduled for termination. To that end, the MCARE Act has established a schedule for continued increases in the amount of primary coverage that must be purchased by health care providers and continued decreases in the amount of excess coverage that will be available from the MCARE Fund.
The MCARE Fund is a “pay-as-you-go” program of what the general assembly called “insurance.” Unlike a private insurance company, it does not establish reserves to cover injuries that occur in the assessment year but do not become adjudicated awards for several years thereafter. Instead, the MCARE Fund is set up to raise only those funds necessary to “cover claims and expenses for the assessment year.” The MCARE Fund projects its annual expected claim payments on the basis of the prior year’s payments. This means that the amount collected from health care providers in a given year may be more, or less, than what is actually needed to pay the MCARE Fund’s claims and expenses for that year.
In making its calculation for 2009, the MCARE Fund ignored its 2008 accrued unspent balance of approximately $104 million. Instead, in 2009, $100 million was transferred out of the MCARE Fund into the Commonwealth’s General Fund for the purpose of funding the operations of state government. The Court held that this transfer of funds was illegal. Petitioners appealed their 2009, 2010 and 2011 assessments on the theory that the MCARE Fund’s year-end balance should have been included in the aggregate assessment calculation for 2009 and the following years. Simply, the aggregate assessment must be “sufficient” to produce a balance sheet that replaces what was spent in the prior year and provides a reserve of 10%.
The MCARE Fund has the statute to mean that 110% of the prior year’s expenditures must be collected each year from health care providers, regardless of the starting balance. This exercise means that unspent balances will accumulate even as claims decline, consistent with the MCARE Fund’s scheduled termination, or as earnings on the 10% reserve increase.
Construing statutes, courts must be mindful of what the legislature did not say as well as what it did say. Most importantly, the MCARE Act says nothing about the accumulation of unspent balances in excess of the 10% reserve. It does not authorize them. The MCARE Act provides no guidance on the income generated by an accumulation of unspent balances, which can be considerable given the present unspent balance of $104 million. The MCARE Act’s silence on these matters makes perfect sense only if the legislature never intended that such an accumulation would develop.
The legislature has addressed the possibility of an unspent balance in only one place in the statute. The MCARE Act provides that upon termination of the MCARE Fund, “[a]ny balance remaining in the fund” shall be returned to the healthcare providers who paid “assessments in the preceding calendar year.” This presumes a small, if “any,” balance and suggests that there should not be an unspent balance in any other year.
The MCARE Act states that the MCARE Fund’s reserve “shall be” 10% of the prior year’s claims and expenses. Instead, after the 2009 assessment, the MCARE Fund had a reserve of 64%. Such a reserve cannot fit any reasonable interpretation of the stated purposes of the MCARE Act or the precise wording of the statute.
The aggregate assessment must raise funds “sufficient” to meet the specified purposes in the statute. This means that the MCARE Fund must begin its annual aggregate assessment calculation with its unspent balance and add to it the amounts “sufficient” to cover the prior year’s claims and expenses and to “provide a 10% reserve” not a 64% reserve.
The fact that the General Assembly chose to limit distribution of any balance in the MCARE Fund at termination to those that participated in the Fund in the preceding calendar year indicates that the legislature intended a direct correlation between the actual MCARE Fund balance at termination and the population of providers assessed in the prior year.
Requiring health care providers to fund a new 10% reserve every assessment year, without regard to the monies already held by the MCARE Fund, defeats the stated goal of the statute to provide affordable excess insurance. Such an approach repeatedly and needlessly charges participating providers an assessment in excess of what is necessary to fund the statutorily-required 10% reserve. Because the population of providers changes over time, the providers who enter such a system in the earlier years will end up subsidizing the participating providers in the later years. This is unfairly discriminatory.
For all of the foregoing reasons, the court reversed the order of the Insurance Commissioner and remanded this matter to the Commissioner to recalculate the MCARE assessments for 2009, 2010 and 2011.
The MCARE law was designed to die over time. It, and its predecessor, is an example of why a governmental entity should never get involved in insurance because they do not understand what insurance is or how it works in the real world.
Medical Malpractice Insurance is a risk-sharing device where many health care providers pay into a fund so that there is sufficient money available to indemnify those who are sued for malpractice. The “crisis” laws like the MCARE law arose because doctors who erred were sued regularly and successfully until insurers found a need to raise premiums to a level necessary to cover the payments and make a profit. To solve the “crisis,” the government decided to provide a form of insurance rather than resolve the problem caused by its tort system.
Governments should not make profits and do not know what to do with a profit if it was made by accident or by a poorly-designed system that has no relationship to the long-term thinking of an insurer. The law here was made specifically to protect those who paid into the fund and to return excess, unspent monies to the providers who paid into the fund. It is not a premium but a tax where health care providers are compelled to buy both primary insurance in the market and excess from MCARE.
This case is instructive as government continues to place itself into the business of insurance where whatever the government calls insurance is, in fact, a method of government largess. For example, the National Flood Insurance Program, FAIR Plans, and the Affordable Care Act have nothing to do with insurance since they are not risk-sharing devises but are rather devices that take tax money from the country or state as a whole to provide insurance-like benefits to a special category of people like those who live near a river that regularly floods, people who live in high fire risk areas, or people who are ill but decided not to buy insurance. The Commonwealth of Pennsylvania, until slapped down by this court, took money intended to protect medical providers for its own use without legal authority.