10.16 Medical Indemnity

Background

Since 2003, the Commonwealth has subsidised indemnity insurance premiums for medical practitioners in Australia and provided financial assistance to indemnity providers and medical practitioners for high-cost claims. This followed the collapse of HIH Insurance in 2001 and United Medical Insurance in 2002.

The Medical Indemnity Insurance Fund (the Fund) includes the following schemes at a cost of around $100 million in 2013-14:

  • Exceptional Claims Scheme;
  • Run-off Cover Scheme;
  • High Cost Claims scheme;
  • Premium Support Scheme; and
  • Incurred-but-not-reported Indemnity Claims scheme

Structure of the programme

Exceptional Claims Scheme

Under the Exceptional Claims Scheme, medical practitioners are protected against personal liability for eligible claims that exceed the level of their insurance cover. Above this level, the government covers 100 per cent of the cost of private practice claims.

The doctor must have medical indemnity insurance cover to at least the nominated threshold.

The threshold is set by the government through legislation. It is currently:

  • $20 million for claims not notified from 1 July 2003; and
  • $15 million for claims notified from 1 January to 30 June 2003.

As at 30 June 2013 no claims have been submitted against this scheme.

Run-off Cover Scheme

The Run-off Cover Scheme (ROCS) (see Table 10.16.1) was developed in response to concerns within the medical profession about the capacity of doctors to pay for run-off cover when they no longer earn an income. The scheme came into effect on 1 July 2004.

Under the Run-off Cover Scheme, the government covers the cost of claims for eligible doctors who have left the private medical workforce. The government uses funds paid into the scheme by medical indemnity insurers to cover incidents that occur in connection with a doctor’s practice. Indemnity cover for eligible doctors will mirror the last claims arrangement they had with their medical indemnity insurer.

Table 10.16.1: Run-off Cover Scheme claims and benefits
 

2010-11

2011-12

2012-13

Number of claims received 25 27 72
Total benefit paid ($ million) 4.6 1.7 2.9

Source: Department of Human Services, 2013.

The increase in claims is consistent with expected variances. There will be a general increase in the number of medical practitioners becoming eligible for the scheme since it began in 2004. Medical practitioners (or their estate) may become eligible for the scheme when they cease private medical practice, for example, through retirement (after a three-year qualifying period), maternity leave, transferring to the public hospital system or death. The number of claims will vary based on the number of medical incidents reported each year.

High Cost Claims Scheme

The High Cost Claims Scheme was established to address upward pressure on medical indemnity premiums by reducing the cost of these large claims to insurers. It does so by reimbursing insurers 50 per cent of the cost of medical indemnity claims above a threshold amount up to the limit of the practitioner’s insurance cover.

This scheme has three threshold levels that depend on the date the claim was first notified to the insurer (see Table 10.16.2). Recent claims and benefits are shown in Table 10.16.3.

Table 10.16.2: High Cost Claims Scheme thresholds

Notification dates (inclusive)

Threshold amount

1 January to 21 October 2003  $2,000,000
22 October to 31 December 2003  $500,000
On or after 1 January 2004  $300,000

Source: Medicare Australia, 2008.

Table 10.16.3: High Cost Claims Scheme claims and benefits
 

2010-11

2011-12

2012-13

Number of claims received 122 124 211
Total benefit paid ($ million) 24.5 20.3 33.4

Source: Department of Human Services, 2013.

The High Costs Claim Scheme is demand-driven. The number of medical negligence claims exceeding the scheme’s threshold amount is only a small proportion of the total number of medical negligence claims occurring each year and can be expected to vary from year to year. The total benefits paid each year are also influenced by the amount of each individual claim, which is highly variable. A small number of claims may significantly affect the overall cost of the scheme.

Premium Support Scheme

The Premium Support Scheme assists eligible privately practising medical practitioners with their medical indemnity premiums (see Table 10.16.4).

Under the Premium Support Scheme, eligible medical practitioners receive a subsidised reduction in their insurance premiums. Insurers are then reimbursed the subsidised amount.

If a medical practitioner’s gross medical indemnity costs exceed 7.5 per cent of their private medical income, the scheme will subsidise 60 per cent of the cost of the premium beyond the threshold. The subsidised amount has decreased from 80 per cent before 1 July 2012, to 70 per cent for 2012-13, to 60 per cent from 1 July 2013.

Actual income is used as part of the formula for determining eligibility for a subsidy.

Table 10.16.4: Premium Support Scheme eligibility and costs
 

2010-11

2011-12

2012-13

Total eligible practitioners  2,191 2,013 1,993
Total amount paid ($ million) 13.1 11.4 9.3
Total administration fees  ($ million) 2.5 2.5 2.4

Source: Department of Human Services, 2013.

Incurred-But-Not-Reported Indemnity Claims Scheme

Under the Incurred-But-Not-Reported Indemnity Claims Scheme, the government covers the costs of claims from medical defence organisations that do not have adequate reserves to cover their liabilities. United Medical Protection (now known as Avant Insurance Limited) is the only medical defence organisation actively participating in the scheme. Ongoing costs associated with the scheme are partly funded through a contribution payment (the United Medical Protection Support Payment) imposed on those people who were members of United Medical Protection on 30 June 2000 (see Table 10.16.5).

In 2012-13 the number of claims decreased. To meet eligibility requirements for the Incurred-But-Not-Reported Indemnity Claims Scheme, incidents that lead to claims must have occurred prior to 30 June 2000. The number of unreported incidents is expected to decrease in future.

Table 10.16.5: Incurred-But-Not-Reported Indemnity Claims Scheme claims and benefits
 

2010-11

2011-12

2012-13

Number of claims received  125 75 34
Total benefits paid ($ million) 13.4 3.9 3.7

Source: Department of Human Services, 2013.

Rationale for government intervention

The package of medical indemnity schemes was introduced following the demise of HIH Insurance in March 2001, which was Australia’s second largest insurance company. The initiatives were a response to a market failure and intended to make the indemnity market more sustainable, giving doctors the certainty they need to continue practicing and making medical indemnity cover more affordable.

Trends

The Medical Indemnity Insurance Fund is forecast to increase over the forward estimates by around 20 per cent as outlined in Table 10.16.6 below.

 

Table 10.16.6: Profile of the fund

2013-14
$ million

2014-15
$ million

2015-16
$ million

2016-17
$ million

2017-18
$ million

98.6 104.5 110.9 118.3 118.3

Source: Department of Finance.

Issues

There is strong evidence that suggests that the market is normalising, including a detailed report by the Australian Competition and Consumer Commission from as far back as the 2007-08 financial year (ACCC, 2009).

Average premiums have fallen since 2003-04, making them more affordable. This indicates that the industry has been able to sustain significant price falls or stagnation while remaining viable and that the market has normalised following the collapse of HIH.

Furthermore, major players in the medical indemnity sector have been making healthy profits. Avant, the single largest provider with approximately 50 per cent of the market, made a pre-tax profit of $159 million from total revenues of $207 million in 2012-13. It also has an asset to liability ratio of 1.89. Table 10.16.7 shows the 2012-13 financial results for major players in the medical indemnity industry (excluding QBE which operates in many insurance markets and reports an aggregated total).

Table 10.16.7: Financial results of the four major players in medical indemnity
2012-13 Annual Report results Premium Revenue
(inc. Subscription income)
$'000
EBIT
$'000
EBIT/Revenue Ratio
per cent
Net Assets
$'000
MDA National Insurance 56,048 18,546 33 144,967
Medical Insurance Group Aust. 30,210 15,107 50 105,829
Medical Indemnity Protection Society 60,912 40,901 67 219,433
Avant Insurance 207,159 159,380 76.9 840,266

Source: Avant Mutual Group Ltd 2013; MDA National Insurance, 2013; Medical Indemnity Protection Society, 2013; Medical Insurance Group Australia 2013.

The Premium Support Scheme

The Premium Support Scheme supports a small and decreasing number of doctors (1,993 in 2012-13). It is expensive to administer and distributes a small amount of funds. In 2012-13 the scheme only paid out $9.3 million, but it cost the Commonwealth $2.4 million to administer.

The need for the Premium Support Scheme has decreased as average premiums have continued to fall and it appears that the market has recovered.

High Cost Claims

It is worth considering whether the market can now assume the risk for high cost claims given the profit ratios for insurers represented above.

Exceptional Claims Scheme

As at 30 June 2013 no claims have been submitted against the Exceptional Claims Scheme.

Areas for reform

The Premium Support Scheme supports a very limited number of general practitioners (albeit many rural based) and its closure would be expected to have only a minimal impact on overall premiums and save the Commonwealth several million dollars in administration fees.

The Premium Support Scheme should be ceased, potentially with grandfathering arrangements for a short time. The impact on doctors in rural areas or on low incomes could be monitored.

Other schemes in the Fund, including the High Cost Claims Scheme and Exceptional Claims Scheme, could also be ceased and any impact on the market monitored.

References

Australian Competition and Consumer Commission (ACCC) 2009, Medical Indemnity Insurance April 2009 – Sixth Monitoring Report, Canberra.

Avant Mutual Group Ltd 2013, Annual Report 2012-13, Sydney.

Department of Human Services 2013, Annual Report 2012-13, Canberra.

MDA National Insurance Pty Ltd 2013, Annual Report 2012-13, Sydney.

Medical Indemnity Protection Society 2013, Annual Report 2012-13, Melbourne.

Medical Insurance Group Australia 2013, Annual Report 2012-13, Sydney.

Medicare Australia 2008, Guidelines, Medical Indemnity High Cost Claim Indemnity Scheme, Canberra.