How the crisis unfolded

The events of the medical indemnity crisis unfolded over many years, slowing coming to a boil in the early 2000s.

Closely tied to the medical indemnity narrative, is the change in Australian society with regard to litigation. According to a discussion paper prepared by the ACT Government Medical Indemnity Cover Proposal, up until the 1960s the number of lawsuits against doctors was very small – averaging only one or two cases a year nationwide.

Since then, however, the frequency of litigation has grown substantially. Not only did the number of lawsuits increase, but so did the amount of damages for claims.

According to Dr Stuart Boland, NSW was regarded as probably the worst medico-legal jurisdiction in the world. “That included New York, Florida and Ireland, which were the other bad ones.”

Doctors grew increasingly concerned by this increase in litigation, warning the Government that it gave rise to the practice of defensive medicine, whereby they made decisions based on potential legal ramifications, rather than their individual skill and knowledge. By 1995, the AMA set up a Medico Legal Committee to press governments for two things: reform of state tort law and amendments to Federal tax law that would allow structured settlements instead of lump sum payments.

Despite Australia undergoing a period of increased litigation, Medical Defence Organisation’s premiums didn’t rise significantly – at least at first. Because MDOs are discretionary mutual organisations, they operate on a ‘not for profit’ basis and offer discretionary (rather than contractually defined) cover. Prior to 2002, this distinction meant they were not insurance companies and therefore they did not come under the Australian Prudential Regulation Authority, by which ordinary insurance companies are regulated. This also meant MDOs weren’t bound by the same prudential requirements. While MDOs offered cover on a ‘claims incurred’ basis, they only collected enough contributions each year to pay out the claims that they had to pay that year – more of a ‘pay-as-you-go’ system.

In the mid-‘90s, the industry went through a period of change and instability. Two large UK-based MDOs left Australia, and a number of smaller MDOs aggregated. Commercial insurers also moved into the market.

The Federal Government’s Professional Indemnity Review (PIR), from 1991-95, estimated that the medical indemnity industry had unfunded liabilities of about $250m. While MDOs were aware of the potential dangers from unfunded Incurred But Not Reported (IBNR) claims, the competition within the sector and fear of losing market share thwarted more defensive actions. 

By the late 1990s, the cracks in this system started to show. Two Victorian MDOs, the Medical Indemnity Protection Society (MIPS) and the Medical Defence Association of Victoria (MDAV), as well as the Medical Defence Association of SA (MDASA) required members to pay an additional premium, also known as a call-up, to cover the costs of claims.

Then in November 2000, United Medical Protection (UMP) issued a call-up equal to a full year’s premium, to be paid either upfront or over five years. The call-up came as a surprise to many members, as did a general increase in its premiums of 8%.

Dr Boland recalls, “Over the next two months 1300 members resigned and they took with them a loss of about $10m in subscription income.”

At the time, UMP insured 90% of NSW doctors, and had a membership of 42,000 Australia wide, 36,000 of whom were in active practice. Across Australia, about 70% of the practising medical professionals were members of UMP.

MDOs largely blamed the call-ups on the litigation ‘explosion’, along with a few extremely large awards for medical negligence. Medical indemnity organisations stated in 1998 that the incidence of malpractice civil suits issues against doctors doubled in the previous five years, while significant components of awards for damages in the NSW and Victoria doubled in the previous three years.

The lack of accounting for IBNRs also contributed to the crisis. It is estimated IBNRs represent about 70-80% of known liabilities, which make them expensive to provide provisions for.

The call-ups and huge increases in premiums had a devastating effect on medical professionals. It was particularly difficult for private specialists in rural areas who provided obstetric services to a very small number of patients. The small amount of money they made from those patients was not enough to cover their indemnity costs. The situation also affected VMOs who threatened to resign, as they were not able to recover premium costs from public patients. The Government resolved the situation by agreeing to carry their insurance costs for their work in public hospitals. The NSW Government also agreed to extend Treasury Managed Fund (TMF) cover for public patients after a long campaign from the AMA (NSW).

It was a period of great anguish for doctors, particularly as response from Government was slow. But in 2001, doctors were heartened by the NSW Government’s decision to amend State tort law and caps on compensation payouts in some areas of practice. The reform legislation also included a proposal that professional indemnity insurance be compulsory for doctors. While AMA was pleased that their issues were finally being heard, there were concerns regarding the compulsory nature of the scheme, which effectively would give insurers greater power to disqualify doctors than the NSW Medical Board. It would also make practice unviable for doctors working part-time or nearing retirement.

This situation took a turn for the worse in March, when HIH Insurance – one of Australia’s largest insurers – sought voluntary liquidation. MDOs exposure to HIH through insurance and reinsurance sharpened the funding crisis. Shortly after that, it was estimated that UMP had not recorded about $455 million of IBNR claims.

The Prime Minister announced a summit to be held in April 2002. The AMA’s plan for that summit included: a commitment by doctors to safety and quality to minimise claims, in exchange for Commonwealth support of MDOs, as well as a Federal commitment for adequate Medicare rebates, and a national community-funded scheme for long-term care and rehabilitation for severely injured patients. AMA also called on legal reforms in all States and Territories to limit the activities of contingency fee lawyers. The Commonwealth agreed to amend tax legislation for structured settlements.

In the wake of the HIH collapse, APRA had ordered all medical indemnity providers to meet the minimum capital requirements. By 2002, the majority of MDOs had taken steps to improve their funding. However, the financial position of the insurance subsidiary of UMP – Australian Medical Insurance Limited (AMIL) – was deteriorating. The Government rejected a request from UMP to assist AMIL. Six days later, UMP announced its intention to seek a provisional liquidator.

Former Federal AMA President Dr Kerryn Phelps warned, “If UMP falls over today, 90 per cent of NSW doctors couldn’t go to work tomorrow. It’s nothing short of a major crisis.”

The following day – after tough negotiations – Senator Helen Coonan and Dr Phelps issued a joint statement incorporating the Government’s guarantee cover for incidents incurred in the period to June 2002, and legislation to back the guarantee.

After constant lobbying by the AMA, the Government also issued a ‘letter of comfort’ to all medical practitioners to provide some guarantees to doctors that it was safe to keep practising despite fears UMP might cease to trade.

On 31 May 2002, the Prime Minister announced an ‘enhanced’ guarantee from 30 June to 31 December 2002. He also called for MDOs to be brought into a new regulatory framework monitored by APRA and for the ACCC to monitor premiums.

The Government’s medical indemnity ‘rescue package’, which was announced in October, included a levy on doctors to fund IBNRs. The AMA had several concerns over the package and lobbied strongly against the levy. In March 2003, the Federal Government extended its guarantee to prop up UMP until the end of 2003 and pledged to pay 50% of costs over $2 million for long-term care. These changes were welcome, but there was still many issues left unresolved. 

The AMA warned that the Medical Indemnity Bill contained no safeguards for retiring doctors and no mechanisms to deal with very high “blue sky” claims exceeding any capped insurance amount. There were also no provisions for run-off cover or portability of cover and no idea how big the Government levy would be. The AMA also sought shorter and more certain statute of limitations and the establishment of a community-funded long term care and rehabilitation scheme for severely injured patients.

Shortly after the Bill passed through Senate, the AMA organised a rally at the Sydney Convention Centre on April 6. Dr Phelps’ message to attendees was: “We have come a long way… but there is still more to do. The Federal Government joined us on the medical indemnity journey a year ago. We helped them to realise they had no choice. To their credit, they have recognised the problem and their part in the solution. They almost produced a workable piece of legislation that could produce a workable long-term solution. But they left out the important bits… the bits we warned them must be included. They didn’t go the final few yards – the hard yards.

“Your job today is to form a scrum and push them those extra few yards. Victory is in sight. Tell them your stories. Tell them how you want to look after your patients in the longer-term. Tell them you want to keep practising medicine. Tell them to fast track the long-term care and rehabilitation scheme. Tell them to help us secure our professional futures and our retirement.”

AMA withdrew support for the rescue package, and doctors started a mass campaign – going to the media, writing to politicians and talking to patients.

In these next pages, Dr William Glasson, who took over as Federal AMA President describes the distress doctors felt about their future and former AMA (NSW) CEO Laurie Pincott, tells us how the crisis was finally resolved.