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From here to indemnity. Address to the Australian Financial Review 5th Annual Health Congress, Sydney, 26 February 2003



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AMA President, Dr Kerryn Phelps - to the Australian Financial Review 5th Annual Health Congress, Sydney - "From here to indemnity"

Date released: 26 February 2003

Good afternoon.

I will talk today about the important issue of medical indemnity - an issue covered extensively in the media over the last 12 to 18 months, especially by the Australian Financial Review.

While the focus has been on indemnity and doctors, the problems I cover today have relevance to all the professions.

But I bet the premiums for others do not match those for obstetricians, neurosurgeons and other high-risk medical professionals.

Paying more than $100,000 a year to your insurance company before seeing a single patient is not exactly a great incentive to enter or stay in medicine.

And that’s the nub of this crisis - a sustainable medical workforce to provide care for Australians into the future.

That’s why we need agreed solutions for the long-term. While the Federal and some State Governments have come a long way over the last year, we’re not there yet.

With the Government planning to introduce its medical indemnity legislation as soon as next week, the AMA is still lobbying for changes.

We see some huge gaps in the Bill that will inevitably detract from the good that is contained elsewhere in the legislation.

The biggest concerns relate to retiring doctors and those nearing retirement.

As things stand, these doctors face a huge indemnity bill to go with the gold watch and chain they don't get.

While society seeks to reward other workers when they reach retirement, the Government’s legislation will punish retiring doctors...or even make it impossible for them to afford to retire.

This anomaly must be fixed. Otherwise, medical services to the community will be threatened.

The Government has been warned. So far, they don't seem to comprehend the seriousness of this problem.

To understand the contemporary concerns, we must first examine the history of this crisis.

As the AMA has been saying often and for some time, medical indemnity reform is critical to maintain adequate health services for the community.

The medical system is breaking under the strain of soaring professional indemnity premiums.

It is a national crisis that is affecting patients and the whole community.

Patients are having more trouble accessing the services they require at an affordable cost, or at all. It is, therefore, a political problem.

The Government had to step in. It did. We have all heard about its ‘rescue package’.

Let me remind you of the ‘package’.

The Government extended its ‘claims made’ guarantee to members of United Medical Protection - UMP - to 31 December of this year - to provide some extra breathing space.

It has guaranteed unfunded Medical Defence Organisations "IBNR" liability - to be funded by a levy on doctors who contributed to the liability.

It provides a premium subsidy to some ‘high risk’ specialists such as obstetricians and neurosurgeons and procedural GPs.

There is a limited subsidy to insurers of high claims costs. But the subsidies are conditional upon doctors participating in risk management programs.

Medical indemnity insurance providers will be brought into the regulatory framework of general insurers. This means that doctors will only be able to purchase ‘capped’ cover, and leaves them exposed to amounts above this that courts will inevitably continue to award in the large cases. These are the so-called ‘blue sky’ amounts.

However, the ‘package’ fails to provide for portability of cover, or death, disability and retirement cover, the latter being particularly important given the time it takes for a court to finalise a case.

This "rescue package" is a partial and flawed step forward to get health professionals back to work. But for how long - if at all?

The AMA warned that medical indemnity premiums were getting out of hand well before the community had any idea what medical indemnity was.

I remember four years ago when the crisis was building up, I was told there was no way any media would ever be interested in running a story on doctors' medical indemnity premiums.

The point is, and always was, this is not about doctors' premiums.

This is about the costs to the community...the cost of losing highly trained and experienced medical practitioners, and the cost that must inevitably be passed on to the health consumers...the patients.

Three years ago the State governments had neither the will nor the capacity to effectively deal with the issue.

Then Federal Health Minister Dr Wooldridge dismissed it as ‘the States’ problem’.

After his resignation, the Federal Government met the AMA’s request to intervene, with the Prime Minister’s announcement that a medical indemnity summit would be held early in 2002.

The national summit took place on 23 April 2002. It was jointly chaired by Senators Coonan and Patterson.

There was universal support for the need for fair and effective tort and procedural law reform and, in particular, for the concept of a national or nationally coordinated long term care and rehabilitation scheme for those severely disabled from medical accidents.

What we had pushed for years earlier had been accepted.

But by then it was apparent that without direct government support the collapse of UMP - the major medical insurer - was inevitable...and imminent, and what we achieved was too late and not enough.

We warned of this. The Assistant Treasurer, Senator Coonan, responded with only a promise that medical practice would not be disrupted. Famous last words.

The AMA warned Ministers Patterson and Coonan that the Government’s failure to extend its $35 million guarantee to UMP would itself bring this crisis about as UMP could not meet new increased capital reserves required by the Australian Prudential Regulation Authority (APRA) after the HIH collapse.

That, in fact, occurred only days later and UMP announced its intention to seek the appointment of a provisional liquidator.

The Federal government had no choice then but to work hard and fast.

In response to constant lobbying by the AMA and others, the Government was forced to provide some guarantees to doctors that it was safe to keep practising despite the fear that UMP might cease to trade.

The Federal Government was then ‘in the cart’, so to speak, as a major player - a major participant - in resolving the medical indemnity crisis. This was a significant moment.

On 30 April 2002, Senator Coonan and the AMA, after tough negotiations, and a near AMA walkout, issued a joint statement incorporating the Government’s guarantee to cover UMP members for incidents incurred from 29 April to 30 June.

Legislation was to back the guarantee, and a commitment was given to give priority to the development of a national scheme for the long term care costs of the severely disabled - that cost accounting for the ‘blow-out’ in the amount of large claims.

Strangely, at the press conference following that meeting, Senator Coonan announced that there was "interest" by "several" commercial insurers in taking over UMP.

My colleagues and I were stunned by this news, given that we thought it was unlikely that any serious insurer would touch UMP with a barge pole.

The world's biggest indemnity provider, St Paul's, had arrived in Australia to great fanfare, to retreat back from whence they came just months later, after they had sniffed the breeze and worked out the land was hostile.A month later, the Prime Minister announced his ‘enhanced’ guarantee that was extended from 30 June to 31 December 2002.

The Government set up the Prime Minister’s Medical Indemnity Task Force, initially involving the Departmental Secretaries from PM&C, Treasury, Health and the Ageing, Finance and Attorney-General’s to work out solutions.

This was a rare grouping of senior bureaucrats established to work with an industry body like the AMA, and ensured that the issue stayed high on the Government’s agenda.

Then, on 23 October 2002, exactly six months after the summit, the Prime Minister announced his medical indemnity ‘rescue package’. As pointed out earlier, this included extending the previous guarantees for a further 12 months.

The AMA cautiously welcomed the package. There would be ‘winners’ and ‘losers’ from it, and the AMA has been guarded in its response.

There were some winners because some premiums are likely to come down.

Some UMP members will benefit from the Government’s guarantees and subsidies.

Others will see increased premiums and not benefit from the package.

The smaller MDOs are facing prudential requirements that they may not be able to afford.

Some recent retirees will be subject to a government levy. Others who retired earlier will not, and yet will benefit from the Government’s guarantee.

The Government says that this is "rough justice" and the best that can be done.

But, having finally secured Federal Government involvement in the rescue effort, you take what you can and then build on it to achieve the best possible outcome.

That has been and will continue to be our strategy. We are not finished yet.

The package, to be honest, provides only short-term relief. Overall, its goals are very limited in relation to the problem of escalating claims and costs.

Until the tort law reform initiatives of the States kick in, awards will continue to rise.

Indemnity costs might be contained, but for inadequate cover, and doctors will be left with the ‘blue sky’ liability and remain exposed to claims in their retirement.

The effectiveness of the legislation and the package is still dependent upon a real commitment being made by all States and Territories to workable tort law reform measures. This is risky business.

It is generally agreed that unless a joint commitment is made by the Federal and State governments to establish a community funded national long-term care and rehabilitation scheme for the severely disabled, other reforms such as some caps on damages to be awarded will help neither the doctors nor their patients.

The Statutes of Limitations have to be made shorter and more certain if doctors are not going to be exposed to liability years after they retire.

The cost of cover into their future will be prohibitive. The courts’ discretion to allow claims to proceed some 12 or 20 years after the event has to be removed for medical indemnity cover to be affordable.

Meanwhile, the AMA has continued to work closely with the Government’s Task Force - and participated in the Australian Health Ministers Advisory Council (AHMAC) processes at the State level.

Communication between the Federal Government and Heads of State Health Departments, you will appreciate, left a lot to be desired.

With a Federal Coalition Government and all Labor State Governments, differences are inevitable and unavoidable.

However, once the Heads of Treasury (HoTs) became active in the process, soft solution options were abandoned for more hard hitting ones.

The Government and the Task Force consulted the AMA on a regular basis about the contents of the reform package. The biggest issue that remained was the IBNR - ‘the tail’.

Without clearing that, the indemnity industry was not going to be viable.

The Government indicated that it would guarantee covering the unfunded IBNR, but subject to those who contributed to it funding the guarantee by a levy payment.

The AMA and most doctors will not entertain a levy to fund the guarantee until and unless effective tort law reform is in place and that doctors can be assured that premiums will be affordable into the future.

The levy is a tax on doctors. It has to be passed on to their patients. The sickest of the taxpayers will therefore bear its burden.

A levy would be money poured into a black hole unless there is downward pressure on claims and premiums.

This adds further weight to our view that a national or nationally coordinated long-term care and rehabilitation scheme for the severely impaired must be developed.

Then the future care cost lump sum ‘head of damages’ can be removed from court awards.

This would allow for a more economic and equitable distribution of the services the severely disabled require as they require it.

It would also remove the ‘lottery’ aspect of the court system, which operates to reward or under-award the few who persevere through the system.

Despite the scarcity of those awards, their size and frequency is sufficient to break the medical indemnity system.

The case of Calandre Simpson in NSW of over $15 million was the last straw for UMP, because it had to revise its estimates accordingly for other such claims in its system.

Then take, for example, the neurosurgeons, of whom there are approximately 150 in Australia.

One $15 million award in any one year adds $100,000 to their premium.

There must be changes.

We are still to see evidence of the Federal Government applying pressure those slow-moving State and Territory Governments to initiate their tort law reform.

This is needed to contain damages awards and, in particular, legal and administrative costs that are excessive in an adversarial legal system.

The ‘blame-driven’ adversarial legal system is responsible for expensive drawn out proceedings. Quick and more effective ways of resolving disputes need to be devised. Lawyers have a vested interest in retaining the existing ‘fault-based’ system because it means more of the indemnity money goes into legal fees.

Without support and long-term sustainable solutions, the medical system will collapse as more and more medical services, and particularly those in rural Australia, will disappear.

This will happen because GPs who do occasional procedural or emergency work cannot afford to purchase cover for the higher risks associated with that work.

They cannot afford to pay the premiums charged to obstetricians. So who’s going to deliver the babies in the towns and suburbs where GP proceduralists traditionally do that work?

The Government’s package does not achieve the long-term reforms that will be needed to put medical indemnity on a sound footing over the medium to longer term.

In the complexities of the politics, policy is wanting.

Sound and sustainable solutions are necessary for the development of an affordable, workable, viable medical indemnity industry and for the maintenance of affordable quality medical services Australia wide.

The next step in the Government response was the appointment of an "eminent persons’ panel’ to recommend a package of national tort law reform that might provide the States with a template.

The AMA welcomes most of the recommended reforms from this group - the Ipp group.

All States and Territories have initiated some, at least, of those tort law reforms.

They have redefined the concept of negligence, capped some heads of damages, and they have made provision for structured settlements in place of lump sums.

However, the ‘big ticket’ item is the court awards for future care costs of the severely disabled. I’ll say this again and again - still no action has been taken at the Federal or State level to set up a statutory long-term care scheme and to remove this head of lump sum damages from awards.

I repeat - without the development of a national scheme for the long-term care and rehabilitation of the severely disabled, that head of damages still has the potential to cripple the medical indemnity industry.

The problem with the long-term care scheme is that everyone wants it, but no-one wants to take responsibility for it.

It is good for the patients, good for the community. It provides people with the care they need and the certainty of being cared for as soon and as long as it is required. It removes the ‘hit and miss’ court lottery system.

The Prime Minister in his accompanying announcement to the Ipp group’s findings stated that:

‘The Commonwealth will continue to participate in State and Territory processes to examine the current, and possible alternative, arrangements for providing long-term care to those who have suffered catastrophic injury’.

The Federal Government is saying that it cannot move on that matter without the States.

The States cannot remove future care costs from common law awards of damages until a statutory scheme is in place, but they don’t want to be forced to fund it.

The States are already funding the indemnity costs for the public hospital system and argue that the private sector - GPs, other private specialists and private health insurance are a Commonwealth responsibility.

That stalemate has to be overcome. Both Federal and State governments commit to pursuing the matter in the long term, but say that it could not be achieved within 18 months to 2 years. They must do better than that.

We say that it could be achieved sooner. Certainly sooner than the impact of tort law reform that is likely to apply only to medical accidents of the future.

The time lag there is likely to be years - many years in many cases - and incidents prior to the tort law reform will not all be covered. Senator Coonan has publicly poured cold water on the idea. The doubts she raises about it can easily be addressed.

And she seems to fail to fully appreciate that its introduction, apart from cost saving and equity benefits, will bring certainty to the reinsurance market and substantial saving to premiums from that alone.

If the government does not do something to stabilise the medical indemnity scene, and the long-term care scheme is one that has won support from all interested groups, it might find itself forced to establish a no-fault type of national compensation system.

The Federal Government has promised that it would work on this issue but as you know we have seen no activity on that at this stage.

The Federal Government says that data collection and analysis will take place but it seems this essential reform is being given a low priority.

The Government’s package involves Four Acts, namely,

Medical Indemnity Act 2002

Medical Indemnity (Consequential Amendments) Act 2002

Medical Indemnity (Enhanced UMP Indemnity) Contribution Act 2002

Medical Indemnity (IBNR Indemnity) Contribution Act 2002.

The Medical Indemnity (Prudential Supervision and Product Standards) Bill is yet to be debated. It is aimed at providing long-term solutions to stabilise the medical indemnity industry.

According to the Explanatory Memorandum, the purpose of the prudential regulation legislation is to ensure that:

Health care professionals have access to medical indemnity cover that is provided by properly regulated insurers, and to specify minimum standards for medical indemnity cover.

The Bill provides that medical indemnity cover is only to be provided by general insurers and only under contracts of insurance. This is to ensure that providers of cover are subject to prudential supervision by APRA.

Several of the MDOs are arguing to be allowed to continue to offer uncapped claims incurred discretionary cover. This would be attractive to some doctors but the AMA could not recommend it unless the Government and independent actuaries are satisfied that it did not carry serious financial risks.

The Bill provides for minimum product standards, a minimum cover amount of $5 million (or as otherwise prescribed by regulation) and, in the case of claims made cover, an offer of retroactive cover or run-off cover to ensure continuous cover.

The AMA welcomes prudential regulation in the medical indemnity industry.

The AMA welcomes any move to ensure affordable insurance especially for the high-risk groups. The Government has attempted to address this for some high-risk groups.

There is a need for certainty of cover without ‘gaps’ to enable doctors to change indemnity insurers and when they retire. The Government intends that there be legislative minimum product standards, including one-off cover for those members switching between insurers, and run-off tail cover for retirees.

Ideally, this requires ‘claims incurred’ cover because of the long tail nature of medical negligence suits, and the potential high cost of claims into the future. However, the insurance market will not accept this for the same reason of the ‘long tail’.

There is concern about insurance that provides a specified maximum cover. What is that cover to be? What of those awards that exceed the cover?

Given the delay between the incident that is the subject of a claim or the notification of a claim and the time a court award is made, the payout is likely to be higher than anticipated at the time the cover is taken out.

Indexed products are unlikely to be offered.

Further, though the Government will directly subsidise 50 per cent of the amount of an award over $2 million, that subsidy applies to the difference between $2 million and the indemnity cover.

Thus, if a doctor is covered up to $15 million, and in six years time an award is brought in at $20 million, the doctor will be liable for the $5 million.

This problem highlights the importance, not only of effective tort law reform, but also of procedural reforms that ensure better court case management of claims.

Contracts of insurance are for specific capped amounts. It is unlikely that cover above $15 million will be available now or in the near future.

This leaves practitioners exposed in the future to damages awarded above this amount - the so-called "blue sky" problem.

The insurance contract covers doctors for claims made in the period in which they have paid for cover.

This leaves doctors personally liable for awards made against them after they retire, or after the expiration of the ‘run-off’ cover they can purchase.

Doctors who retire today are at less risk of being sued for events that have taken place in the last 18 months, than doctors who retire in 10 years time and who have accumulated exposure to being sued for events of some eleven-and-a-half years.

So every day a doctor works, they incur an additional expense in covering themselves in their retirement.

Even so, they can only cover themselves for $15 million and for a limited period of time.

But State laws currently allow people to commence proceedings 24 or more years down the track.

In these circumstances how can we get health professionals back to work? How can we keep them there? How can we expect new graduates to work in the private sector?

Capped insurance on a ‘claims made’ basis shifts liability from the MDOs to the doctor. The doctor inevitably must pass it on to the patient if the doctor is to continue to practise. So the sickest of the taxpayers will pay. The system has broken. But who’s going to fix it....properly?

Provision for a limited run-off period - say five years - leaves retired doctors liable for amounts awarded above the insured amount, and where claims are made outside the cover period, for the total amount of the award.

The cost of retirement cover is likely to be unaffordable for retiring doctors no longer earning an income. The alternative is asset stripping to protect the earnings of their lifetime.

Prudential regulation and proper capital provisioning may cause problems for smaller MDOs such as MPS Tasmania, because they will have to fund greater capital reserves from a relatively small membership base.

The tort-law reform put in place to date is not enough - which brings me back to a familiar theme.

If the long-term care scheme is not put in place to take control of the future care costs of those severely impaired, medical indemnity costs will continue to spiral and services will diminish.

Such a scheme could be easily funded from the funds spent on legal and administrative costs incurred in the current adversarial litigation scheme.

Already medical students and trainees in obstetrics and gynaecology are opting not to go into obstetrics. The obstetrics workforce has already shrunk, and unless things change dramatically, the situation is unlikely to be reversed.

In June 2001 a survey by the Royal Australian and New Zealand College of Obstetricians and Gynaecologists showed that one in four trainees do not intend to do any obstetric work at all, and we believe the situation has worsened since then.

Looking ahead, a Community Funded Statutory Scheme system may come, not by design, but by default, if the Federal/State cooperation required to establish a long-term care scheme does not eventuate.

If uniform shortened and more certain Statutes of Limitations are not enacted - that is, if claims are still allowed to come forward over 20 years after the event - doctors will be exposed to actions right through their retirement.

Fear of that will encourage those who can to retire now, cease ‘high risk’ procedural work, or remain in the public system if they can afford to - all of which tend to further deteriorate the medical workforce.

Otherwise they will ‘go bare’, putting all of their assets into their partner's name or family trusts, leaving injured patients with no access to the financial and care support they need. Moreover, trainees will avoid ‘high risk’ specialised areas.

We do not believe that the prudential regulation currently in the pipeline will stabilise the industry.

Doctors are left with the "blue sky" problem, and without adequate Death, Disability and Retirement cover.

Tort law reform and industry regulation go hand in hand.

Statute of Limitation reforms can end the fear of doctors being sued well after they retire for incidents that occurred after the reforms were put in place. But unless the reforms are retrospective they will not cover earlier incidents.

The establishment of a statutory fund to which doctors can contribute during their working life, and from which retirement indemnity cover can be for the rest of their life is a possible solution.

The development of a long-term care scheme and the removal of future care costs from the court system will remove the ‘blue sky’ problem.

What will doctors do if these flaws are not addressed and these solutions not put in place?

Let me go over the options one more time, so you can understand the magnitude of the social impact should medical indemnity be resolved properly for the long-term.

Some doctors will move to the public sector if they can. Those who are unable to obtain "run-off" cover will not be able to afford to do that.

Doctors will cease practising medicine, or at least doing "high-risk" procedures, or retire early, further diminishing the medical workforce - that is happening already and would accelerate by 30 June this year.

Again, doctors who can’t afford the "run-off" cover may be forced to extend their working life beyond reasonable or desirable retiring age.

Quality and safety programs will be undermined where genuine retirees for reason of age or disablement are forced to continue practice because they cannot afford tail cover in their retirement.

Doctors will divest themselves of their assets and take minimal insurance coverage or "go bare".

They don’t want to do this, as this leaves their injured patients out in the cold and the reason medical indemnity was initially set up was to ensure patients could be adequately provided for if they were injured by negligence.

But doctors must protect themselves and their families and, with fixed sum insurances, doctors will have no choice but to do this.

The community is asking for open disclosure of medical accidents and an Open Disclosure Standard has been drafted by Standards Australia for ACSQHC.

Doctors will be reluctant to report mistakes or explain to patients what went wrong if they think they will be sued.

The effectiveness of this will be undermined by the current blame-driven adversarial court system of determining medical accident claims.

Quicker and better methods of resolving medical accident claims and complaints have to be devised with the adversarial court system being the last resort.

Open disclosure standards can only be really effective in a non-adversarial environment.

If there is to be a cultural change it must first come from within the legal profession.

The system will continue to haemorrhage unless this window of opportunity is taken up to fix the problem - not for a few years but into the future.

Is public medicine the answer?

If trainees remain in the public sector, the availability of private services will shrink and become extremely expensive, driving up the cost of private health insurance.

Why would people take out private insurance if the private medical facilities were not there?

From a government point of view the health care costs would be unaffordable.

The availability of private medicine is a public right, and no government is willing to cover the total community health bill.

The history of the Medicare rebate and public hospital funding shows how "stuck" governments have got when it gets to caring for the community’s health.

Most importantly, the Government, the community and the doctors want to keep doctors working.

To do that, doctors have to be convinced that the Federal Government was truly intent on fixing the problem. I believe they are, but they need to focus on reality. The reality of doctors' experience at the coalface and the decisions they are now making for their futures.

It’s not that doctors would strike or even threaten to. It is the doctors who are the threatened species. Without full indemnity cover and with their assets exposed it is unsafe for them to practise.To secure a safe and affordable medical system into the future, retain medical services across Australia in all specialties, keep the current medical workforce working, and provide injured patients with their ongoing care needs, action is needed. Now.

Doctors will play their part, but so must the Federal and State governments and the legal profession.

The Federal Government may be ‘in the cart’, but is the cart a tumbrel?

Thank you.