Ladies and Gentlemen.
In years gone by, it may have been unusual for a Treasury Minister to address the AMA National Conference. However, the significant and absolutely critical reforms to medical indemnity undertaken over the past year perhaps make my address today both timely and relevant.
Health care is an issue of foremost importance to the Australian community, and medical indemnity is an issue of great consequence to health care professionals and consumers alike.
The Government's decision to intervene in medical indemnity was not taken lightly. It was taken because it was clear that reform was absolutely essential to ensure that doctors have access to safe and affordable medical indemnity insurance into the future.
I readily appreciate that some confusion in the move to the new system is inevitable and that some of the reforms may not yet be fully understood.
In the time I have with you today, I would like to touch on the conditions in the medical indemnity market that made structural reform necessary, and then talk you briefly through the comprehensive responses put in place by the Government.
The road to reform
Bill Gates may have been speaking of medical defence organisations when he said, "Success is a lousy teacher. It seduces smart people into thinking they can't lose."
Medical indemnity has, for at least the past 100 years, been provided on a discretionary basis by doctor owned and operated mutual organisations.
However, in recent years, it has become increasingly clear that this structure is not sustainable.
The collapse of United Medical Protection a little over a year ago exposed thousands of doctors to the prospect of personal liability for medical malpractice and exposed severely injured patients to inadequate compensation.
This, in part, sparked a chain of events leading to the reform of the medical indemnity sector.
But there were already other indications that structural problems in medical indemnity were not confined to UMP.
Doctors across Australia were concerned about rapidly rising premiums and these concerns were compounded by calls on MDOs' members for additional funds to prop up inadequate reserves.
These factors indicated weaknesses across the entire market for medical indemnity and posed a suitable case for treatment.
Problems in medical indemnity
The problems experienced in the medical indemnity market over recent years are reflective of those found more broadly within the general insurance sector.
These problems have stemmed in part from poor industry practices in the areas of pricing and provisioning for risk.
Many MDOs, like some other providers of long tail indemnity insurance, recently found that they had not charged sufficient premiums or accumulated sufficient reserves to fund the cost of claims.
Under provisioning for claims costs was, according to Royal Commissioner Justice Owen, a key reason behind the failure of Australia's second largest insurance group - HIH.
But the realisation that cover has been underpriced in the past has also led to a severe market correction more generally.
This has manifested itself in a dramatic increase in the cost of liability classes of insurance - such as public liability and professional indemnity.
In the case of medical indemnity, underpricing and under reserving was a key reason for increasing premiums and for MDOs making calls on their members for additional funds.
Long-tails
You might well ask how insurance companies and MDOs got things so wrong in the past.
The answer lies partly in the difficulty in pricing long tail policies.
In insurance terms, where it is likely that a long time may elapse between an insured event occurring and the subsequent payment of a claim, an insurance policy is characterised as having a `long-tail'.
Medical indemnity is by its nature long-tail. Most medical indemnity claims require litigation, which can take several years to resolve.
However, where MDOs offer `claims incurred cover' the tail attaching to the policy grows.
Claims incurred cover indemnifies a doctor against adverse incidents occurring in the year of cover regardless of when a claim for compensation might ultimately be brought.
A claim may not arise for many years after an initial incident takes place. At the extreme, the current statute of limitations in some States would allow a claim for compensation for an injury sustained at birth to be brought against a doctor for up to 24 years after the initial incident.
In theory, the premium set for insurance should be sufficient to meet any future claims that arise.
In circumstances where awards for damages are rising at a much faster rate than inflation, it's extremely difficult to make an assessment of the premium that should be charged for claims that may arise for up to 24 years after the cover is sold to a doctor.
The difficulty involved in this process can be demonstrated in fairly simple terms by comparing the increase in consumer prices with the increase in court awards over the same period.
Over the past ten years, inflation has averaged 2.5 per cent per annum. In contrast, a study undertaken by Trowbridge consulting and commissioned by the Government as part of the Ministerial Meetings on Insurance Issues which I chair, found that awards for personal injury have been increasing at an average rate of 10 per cent per annum.
When looking at large claims, the comparison is even more startling. Between 1979 and 2001, the CPI increased by 212 per cent. In contrast, over the same period the highest award for personal injury in Australia increased from $270,000 to $14.2 million, an increase of over 5,000 per cent.
It is unlikely that anyone calculating the premium to be charged to a doctor delivering a baby under a claims incurred policy in 1979 could have foreseen such an outcome and charged an appropriate premium.
Lack of Regulation
While the difficulty of pricing long tail medical indemnity products has been exacerbated by the widespread use of claims incurred policies; the lack of regulation applying to MDOs has also allowed these policies to be provided to doctors on an unfunded basis.
This has led to significant inter-generational cross subsidisation in medical indemnity, or put simply, practicing doctors are increasingly paying for the under priced cover provided to their predecessors.
By contrast, Australian insurance companies are required to be prudentially regulated. Over recent years these prudential requirements have been substantially overhauled and upgraded.
The purpose of prudential regulation is to ensure that financial institutions appropriately set aside provisions for their liabilities and operate with sufficient levels of capital, reinsurance and systems of risk management to meet the demands of their business.
Up until now MDOs have not been subject to prudential regulation because, notwithstanding close similarities to insurance, discretionary cover falls outside of the technical definitions of the Insurance Act.
Instead of holding capital against the risk of claims, MDOs have relied on the capacity to make calls on doctors to cover any funding shortfalls.
In addition to this, the lack of contractual cover and uncertainty about the rules applying to MDOs, has provided scope for arguments to be mounted on why MDOs should not be required to set aside money for likely claims.
In practice, while MDOs have been quick to point out that they rarely exercise their discretion to deny cover, some have also argued to accounting authorities and the Government that the funding of likely future claims costs is unnecessary because of the ability to refuse indemnification to a doctor.
These two positions are somewhat at odds and neither provides the protection and peace of mind that doctors require.
Policy Responses
The problems evident in the medical indemnity market have required a range of policy responses. These responses have been staged to meet evolving conditions in the medical indemnity market.
The issue requiring most immediate attention was the imminent failure of United Medical Protection.
The potential demise of UMP would have placed over 60 per cent of Australia's doctors in a position where they would have had no protection against past adverse incidents.
Advice to the Government was that other Australian MDOs could not have easily absorbed the entire membership of UMP, and certainly not the high-risk members, without seriously undermining their financial stability.
The UMP Group Guarantee
In order to ensure the ongoing availability of critical medical services to the Australian community, the Government stepped in to provide a guarantee to the UMP Group.
This guarantee will be in place until the end of this year and has allowed UMP to continue operating in provisional liquidation.
Without the guarantee, the UMP Group would likely have been placed in full liquidation or alternatively, doctors would have been called upon to immediately provide the Group with additional funds.
To date the Government's guarantee has not been called upon and there are indications that UMP may resume normal trading later this year.
A primary reason for the likely success of the guarantee has been the implementation of the Government's IBNR scheme.
The IBNR Scheme
A major contributor to UMP's problems was the failure of the company to set aside provisions to cover `incurred but not reported' claims. The failure to provide for these liabilities was, as I have already indicated, based on an interpretation of the accounting standards that largely placed legal form over substance.
On entering provisional liquidation, UMP had in the order of $400 to $500 million in unfunded IBNR liabilities. UMP's future was bleak.
The options available to UMP's members to address this problem were similarly grim.
In the normal course of events, shortfalls in funds on liquidation are borne by the unsecured creditors of a company.
In the case of UMP, that would have meant that doctors who had claims against them would have had to meet the shortfalls in UMP funding through their personal assets.
An alternative option would have been for UMP to exercise its contractual right to require its members to fund the shortfall through the immediate imposition of a call and further calls in subsequent years.
Such options would have imposed a heavy burden on Australian doctors.
As a result, the Commonwealth stepped in to effectively provide a line of credit to UMP's members.
Under the arrangements, the Commonwealth has assumed UMP's unfunded liabilities and is allowing doctors to pay for this facility over time. This option has significantly reduced the burden that would otherwise have been felt by UMP's members without imposing an unfair charge on taxpayers.
Other MDOs also have unfunded liabilities, so the Government's IBNR scheme may potentially apply more widely. These measures will significantly strengthen the financial position of all affected MDOs into the future.
Prudential Regulation
Whilst providing these necessary fixes, the Government was very concerned to reduce the likelihood that further intervention in the market would be required. The Government wanted to ensure that the medical indemnity industry was placed on a sound and sustainable basis into the future and that MDOs actually hold the financial resources to back up their promises to doctors.
While the business of MDOs is almost indistinguishable from that of insurance companies, doctors do not get the protection provided to other consumers of insurance, in the form of prudential regulation or contractual certainty of cover.
It was the Government's view that ongoing stability of the medical indemnity industry could be best achieved by requiring medical indemnity to be offered to doctors by way of contract in a prudentially regulated environment.
Prudential supervision provides the highest level of certainty that promises made by financial institutions to their customers will be met.
From 1 July, all providers of medical indemnity will need to be prudentially regulated and will be required to offer cover through legally enforceable contracts of insurance.
Under transitional arrangements, medical indemnity providers will have up to 5 years to meet the minimum capital requirements of the prudential regime.
The mutual ownership, status and character of the industry is expected to continue into the future.
For doctors, these changes carry significant benefits. Doctors should feel more secure that their cover will now be provided by properly funded and supervised entities. More secure that their cover will now be supported by a legal entitlement to be indemnified and more secure that the likelihood of further calls on doctors will be substantially diminished.
Misconceptions about prudential regulation
Unfortunately, in moving to this more secure world, some misconceptions have arisen.
At least some doctors have mistaken the move to prudential regulation and contractual cover as reducing the level of security available.
I think it is useful that doctors are aware of the facts about the move to prudential regulation and its impact on the type of cover offered.
FACT: Prudential regulation does not prevent claims incurred cover.
MDOs switching from claims incurred cover to claims made cover from 1 July are doing so because there is insufficient reinsurance, capital, reserves or ability to make further calls on doctors to support the very long tail nature of claims made cover.
FACT: Most doctors already need to buy retirement cover.
Doctors who have claims made cover need to take out cover to protect them in retirement. To date, that cover has been provided free of charge. However, this cover is not without cost. The security of this cover has depended on the willingness of practicing doctors to pay for retired doctors claims with increased premiums or calls.
FACT: MDOs do not currently have access to sufficient capital to pay unlimited claims.
While MDOs have previously marketed their products as unlimited, in reality MDOs can only provide unlimited cover if they have unlimited access to capital. Doctors have indicated that they are simply not prepared to provide unlimited capital through calls.
Future Certainty for Doctors
Notwithstanding these observations, the Government recognises that doctors have had very real concerns about moving from the existing system of medical indemnity (whatever its risks) to a system of prudentially regulated contracts of insurance.
As a result, the Government has stepped in to provide some additional comfort.
Run-off Cover
In terms of retirement cover, the Government has recognised that doctors have been most concerned about the cost of that cover in the future.
The Government has announced a two-stage response to this issue to provide doctors with greater certainty.
In the first stage, a regulation will be made before 1 July requiring retirement cover of a minimum standard to be offered to practitioners ceasing practice in 2003-04.
This cover will need to be offered on an annually renewable basis for at least 6 years after a doctor ceases practice on similar terms and conditions to that available to practising doctors in the year of renewal. Most MDOs have indicated that this cover will be provided at nominal cost.
The Government will continue to examine options for delivering retirement cover on an ongoing basis. A permanent scheme will be in place by 1 July 2004 and will ensure that doctors have access to appropriate and affordable coverage in retirement. The Government is committed to doctors not having to pay material premiums after retirement.
Blue Sky
The Government has also stepped in to eliminate the worry of doctors that the move to legally enforceable contracts of insurance will expose their personal assets to awards for damages in excess of the contract limit.
The Government has announced that it will assume liability for amounts above the insured limit with any payments made under this arrangement funded on an ex-post basis by the doctor's insurer.
The risk that such an arrangement will be called upon is very low.
Medical indemnity cover of $20 million is currently available, and higher cover limits will be offered in the future. The highest ever award for damages in Australia was made in New South Wales for less than $15 million. In addition, recent State and Territory reforms to the law of negligence will have the effect of placing downward pressure on compensation payouts.
The Government will review the Blue Sky Scheme after three years, to determine whether it remains necessary in light of State and Territory tort law reform and claims trends.
A more permanent solution to Blue Sky might lie in States and Territories extending the operation of professional standards legislation to cover medical malpractice.
Under professional standards legislation, in return for appropriate caps on liability, professionals are required to develop and adhere to rigorous risk management, compulsory insurance cover and complaints and disciplinary measures, administered by professional organisations.
It is worth mentioning in this context that work is still ongoing between the Commonwealth and the States to establish the feasibility of putting in place a scheme for the treatment of catastrophically injured people requiring long-term care.
Without pre-empting the outcome of that study, I would say that no one should underestimate the complexity or likely costs of putting such a scheme in place. It would need to encompass a far greater set of circumstances than just medical negligence and would cross over a vast range of Commonwealth and State responsibilities including, health, compulsory third party motor vehicle insurance, workers compensation and disability support.
Premium Affordability
I trust that these remarks will have provided you with a better appreciation of the increased certainty and security that will flow from the Government's reform package. However the Government is also taking steps to improve the affordability of medical indemnity premiums for doctors.
Subsidies
In particular, the Commonwealth is providing subsidies to obstetricians, neurosurgeons and procedural GPs to make their premiums more affordable. These particular groups of doctors have low incomes relative to premium costs. That is, they are subject to the likelihood of high cost, long-tail claims that make appropriate cover expensive.
High Cost Claims Scheme
The Government is also providing reinsurance to medical indemnity providers through the High Cost Claims Scheme. Under this scheme, the Government will fund 50 per cent of all claims in excess of $2 million up to the level of the insured limit.
State and Territory Law Reform
However, placing downward pressure on premiums in the longer term critically depends on State and Territory Governments implementing reforms to the law of negligence. In particular, reforms are necessary to make the test for the standard of care applied to doctors more reasonable, reducing limitations periods and putting in place appropriate caps and thresholds on particular heads of damage.
Action must be taken to address the rapid escalation in the number and cost of claims as the best long-term solution to securing stability in premium pricing.
An actuarial report by PricewaterhouseCoopers presented to a Ministerial meeting on Insurance Issues found that the package of reforms recommended by the Ipp Report could deliver a reduction in medical indemnity insurance premiums of between 15 and 18 per cent for most jurisdictions.
Interestingly, for those proponents of long term care schemes for the catastrophically injured, the report found that the majority of these savings would be delivered through the introductions of appropriate thresholds under which it would not be possible to bring an action for damages. This reflects that it is in fact that it is the small, high frequency claims that tend to drive premiums rather than large claims.
I will be closely monitoring State and Territory progress in delivering on tort law reform, and I encourage you to engage State and Territory governments to keep up the momentum for reform.
Lessons to be learnt
Lee Iacooca, the former president of Ford and Chrysler in the US, once said, "We are continuously faced by great opportunities brilliantly disguised as insoluble problems."
The message here is that the medical indemnity crisis presented a great opportunity to stabilise and restructure an industry with serious problems.
It has required creative thinking and a year's work to achieve a comprehensive response and a solid underpinning to sustain medical indemnity into the future.
It has also provided an opportunity for Government and the medical profession to work together to get a good outcome.
I believe that we now have a sustainable package that secures the industry and promotes safety and certainty for doctors and more broadly, for the Australian community.
I am proud to say that there is no longer any compelling reason for doctors or their patients to feel anxious about medical indemnity from the 1st of July onwards.
May I extend my best wishes to all of you. Many safe deliveries, procedures and consultations into the future!
Thank you.