What is the Future of the M-Care Fund?

Some important decisions are going to be made in the next few months concerning the future of the M-Care Fund. These are the possibilities: It could be eliminated as soon as 2012; it could be phased out over a much longer period of time; or it might not be changed at all.

As you know, doctors and hospitals are currently required to obtain $500,000 of primary coverage in the private insurance market, and they are provided with an additional $500,000 in coverage through the M-Care Fund. Pursuant section 711of the M-Care Act passed in 2002, the Insurance Commissioner of Pennsylvania must determine in June of this year whether the market can tolerate an increase in primary limits to $750,000, in which event the M-Care Fund would reduce its layer of coverage to $250,000. If the Commissioner answers that question in the affirmative, the M-Care Act provides that primary coverage automatically increases to $1,000,000 three years thereafter, at which point the M-Care Fund ceases to exist.

The decision to be made by the Commissioner is a difficult one which involves economic, practical and political considerations. From a purely economic standpoint, there are many in the insurance industry who would acknowledge that the insurance market in Pennsylvania, (and nationwide) has improved significantly in the past ten years to the point that private carriers probably can provide $750,000 in basic coverage. From a practical standpoint, however, the Commissioner may be inclined to find otherwise and thereby forestall the demise of the Fund. Here is why. The Fund is presently carrying an unfunded liability of approximately $1,500,000,000 ($1.5 billion) and from a practical/political standpoint, there is no way the Commissioner will make any decision which, in effect, eliminates the M-Care Fund until there is a solution to that problem. It has been well known for sometime that this issue would have to be dealt with eventually. Indeed, the unfunded liability has been an albatross around the Fund’s neck for years.

What exactly is the unfunded liability? In simplest terms, it is the projected value of claims that are presently percolating through the legal system but which have not yet been settled or tried. Unlike a traditional insurance company, the Fund is not required to set reserves to match existing but unresolved claims. Instead, the Fund operates on a “pay-as-you-go” system, i.e., they only collect enough money in a given year to pay the claims that were settled or tried the previous year.

Naturally, private insurance carriers will never be willing to agree to a plan that leaves them “holding the bag” for these unresolved claims. Hence, for them to ever support an increase in primary limits to $1,000,000 with a corresponding elimination of the Fund, there is going to have to be some separate plan to take care of the unfunded liability, a plan that is not balanced on the backs of their policy holders.

One of the ideas that has been circulating is to use cigarette tax money that previously funded the abatement program to gradually whittle away at the unfunded liability. As you may recall, when we were in the midst of the so-called malpractice “crisis” some years ago, Governor Ed Rendell came up with a plan whereby a 25¢ increase in the cigarette tax was used to underwrite or “abate” all or some of the M-Care premium for certain high-risk doctors. The abatement program had to be re-approved on an annual basis, but several months ago the state legislature failed to renew it for 2009 and the conventional wisdom is that the program is gone forever. Interestingly, the 25¢ cigarette tax generated more money than was needed to pay the premiums of the high-risk folks because M-Care payments turned out to be less than anticipated, and as a result, the abatement fund currently has a surplus of $640 million. Not surprisingly everyone wants a piece of the “extra” money. The Governor wants some of it to be used to provide health coverage for the uninsured and also to off-set general operating expenses in the state budget. Those favoring elimination of the Fund want to use some of the surplus, combined with future revenue from the 25¢ cigarette tax, to pay down the unfunded liability. Projections as to how long that might take vary, but it is probably in the range of 10-15 years.

Thus, we may get to the point in the next few months where the Governor and the Commissioner conclude that although the private market can tolerate $750,000 in primary coverage, we cannot afford to have the Fund disappear within a matter of three years as is mandated under the present statute. If that were the case, changes would have to be made to the M-Care statute to lengthen the phase out of the Fund. Obviously, however, if no solution is reached on the unfunded liability, there will be no phase out of the Fund, long or short, and the Commissioner will simply render a finding that the private market cannot tolerate $750,000 in primary coverage, in which event the status quo remains in place, i.e, the private limits are $500,000; M-Care limits are $500,000; and the Fund continues to exist indefinitely.

As the debate and discussion unfolds in Harrisburg over the next few months, certainly we as an organization will have a seat at the table so to speak. Arguments pro and con can be raised on behalf of claimants as to whether, apart from the issues identified above, we should favor a continuation or elimination of the Fund. Some say that the Fund provides a “safety net” for the vagaries of the insurance market and at least guarantees that a state-backed layer of coverage remains in place. Others say that the claims system would run more efficiently if a single private carrier – – -one which, by the way, would be subject to bad faith liability – – – were in charge of claims from the first dollar up through the $1,000,000 coverage limit. We as an organization will have to come to some consensus on the issue as we enter those discussions.

Stayed tuned. The next few months will be very interesting with the fate of the M-Care Fund being discussed more intensely than at any time in recent years.