COVERAGE OF THE MEDICAL INDEMNITY (PRUDENTIAL SUPERVISION AND PRODUCT STANDARDS) ACT 2003

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1 27 January 2006 Treasury, Insurance Access and Pricing Unit, Attention: Medical Indemnity, Langdon Crescent, CANBERRA, ACT By to: Dear Ms. Wilkinson, RE: COVERAGE OF THE MEDICAL INDEMNITY (PRUDENTIAL SUPERVISION AND PRODUCT STANDARDS) ACT 2003 The Medical Indemnity Protection Society Ltd (MIPS) welcomes the opportunity to provide comment to the Department of Treasury in response to its discussion paper Coverage of the Medical Indemnity (Prudential Supervision and Product Standards) Act MIPS is a discretionary mutual and represents approximately 18,000 medical and dental practitioners and student members who have access to medical indemnity cover through policies of insurance issued by MIPS s General Insurance subsidiary, Health Professionals Insurance Australia Pty Ltd. MIPS objective is to ensure that members (and through them, their patients) are protected through access to stable, sustainable, appropriate and cost efficient medical indemnity cover. We believe that diversity, efficiency, competition, equity, transparency and simplicity are all important elements in ensuring that objective can be achieved. MIPS believes that its contribution to the Department of Treasury Medical Indemnity review will help ensure the best possible outcome for Australia. Yours sincerely, Dr. Troy Browning, MB BS, MBA, Grad. Dip.Ins., ANZIIF (Fellow) CIP, AFAIM., Group Chief Executive. Attachment: 1

2 SUBMISSION TO FEDERAL TREASURY WITH COMMENTS ON ITS DISCUSSION PAPER, COVERAGE OF THE MEDICAL INDEMNITY (PRUDENTIAL SUPERVISION AND PRODUCT STANDARDS) ACT 2003 GENERAL COMMENT ON KEY ISSUES Prudential supervision of insurers of health care professionals. By requiring any insurer that indemnifies a health care professional to be regulated by APRA, there are concerns that the Act unnecessarily limits the availability and affordability of insurance for some health care professionals, such as dentists and nurses. While there are sound reasons for requiring the prudential supervision of medical indemnity providers, it is also important to take into account the differences in risk profiles between insurers of medical practitioners and insurers of other health care professionals and the different impact on essential health services should an insurer fail. Regulation is an important feature in ensuring that consumers of medical indemnity services and their patients are protected. We believe the balance that needs to be achieved is between the costs of a prescriptive one size fits all approach that decreases diversity and competition and ensuring that at the end of the day there are funds available to compensate patients. Diversity and competition are important corner-stones for the long term ability of an industry to weather future changes. Although regulation can never guarantee that there will not be failures, there is an expectation that it reduces the severity and frequency of such events. The means used to achieve that objective, however, will normally produce a narrowing of spectrum and more uniform approach. The danger is, we believe, that too prescriptive regulation may lead to systemic risk propagation so that if there is a latent flaw in the methodology employed or alternatively events occur that are totally unforseen then the ability to respond may be greatly reduced. As tighter regulatory control of the medical indemnity sector is a relatively recent phenomenon any potential problems associated with decreased diversity will emerge with time. An appropriate analogy may be the risk associated with monoculture in agriculture. World-wide concentration through continuing mergers and acquisitions of insurers and reinsurers and the complex and relatively opaque, reinsurance and retrocession arrangements between parties makes it difficult to anticipate the effect of, or quarantine, the effects of risk contagions. What are the implications of requiring APRA authorisation of entities indemnifying medical practitioners, but not requiring this for entities indemnifying other health care professionals? Certainly there are issues of equity and it must be expected that the cost of health services provided by medical practitioners will need to include the increased (over other health care providers) marginal costs of such an approach. MIPS believes it is also likely that there will be greater volatility of such costs for those groups of health practitioners that cannot control the availability, content or price of their medical indemnity. That problem is also likely to occur if the range of methodologies for risk transfer is restricted. There is always a risk that patients will not be compensated due to (most frequently) inability to prove negligence or damage; less frequently if the matter is outside the terms or conditions of the contract; or, rarely but potentially through financial failure of an indemnity provider. In our view, 1.

3 there may be an increased risk that patients of health providers, who have sourced indemnity through non-apra authorised entities, may not have a claim met through failure of an entity. It should be remembered, however, that the significant causes of distress in this sector in recent times have involved insurance entities for example HIH and AMIL (in AMIL s case due to a shortfall in capital required by it as the insurance subsidiary of UMP subsequent to the failure of HIH and the medical indemnity claims-spike triggered by Tort reforms). As a right of action of an injured patient alleging negligence is against the health service provider (who in turn may seek indemnity from their indemnity provider) it is our view that it is the responsibility of the health service provider (like it is every other professional) to ensure they are comfortable with the arrangements they have made. Minimum contract cover amount One of the product standards established by the Act requires a minimum cover amount of $5 million per practitioner. In practice, the minimum level appears to serve a limited purpose, given that most individual contracts of insurance far exceed the legislated minimum. For most health practitioners the medical indemnity cover they have in place far exceeds the minimum cover amount specified under the Act. Additionally some groups of health service providers are unlikely to generate serious claims or claims of significant value. For instance it is difficult to reasonably anticipate a scenario where a podiatrist might be responsible for a $5million claim. Alternatively it could be argued that a $5million threshold is too low for an independent midwife. In other jurisdictions the means often employed by plaintiffs to in effect increase the available indemnity pool is to name in their action all those who were involved in the provision of the alleged negligent health services. The cost of insurance is driven primarily by the characteristics of the risk insured. The marginal cost of additional cover above the anticipated exposure usually decreases rapidly as the level of cover is increased above that point. Competition, even if there were no legislated requirements, will usually ensure that the product feature of a policy limit is well advertised so that consumers are aware, and can compare cover amounts. Is there any strong rationale for maintaining the Government role in setting the minimum level of cover? As we understand it, Governments underlying rationale for setting a minimum level of cover is to protect the public. If that principle is maintained it would be anticipated that such an approach should be extended to other more frequent and therefore more significant examples of inadequate levels of cover for insurable risks. The ability for natural events to significantly effect large numbers of under-insured policyholders compared with the relatively rare event involving an individual unable to access the full entitlement of medical indemnity compensation is such a consideration. Product standards for employed medical practitioners A temporary regulation currently exempts from the application of the Act insurance offered to employers of medical practitioners by general insurers or Lloyd s underwriters. The effect of this is to exempt such arrangements from the product standards of the Act, but not from its prudential supervision. 2.

4 If Government believes that it is important to protect parties from the risks of inadequate indemnity (see comments above) then we believe appropriate product standards for employers of health service providers should be introduced. Such standards could be enforced through the licensing process of health businesses (at a State level), access to Medicare benefits or a combination of these and other mechanisms. It is important that such protection is at the health service entity/employer level to ensure that non-medical practitioner/health professional employees and therefore patients are also protected. Anecdotal evidence provided to Treasury suggests that the product standards for medical practitioners make insurance for large groups of employed practitioners (as opposed to individual practitioners in private practice) unaffordable or unavailable. Insurance may be unavailable if it is perceived that there is volatility or instability within a market. Insurers and reinsurers do not like rapid changes. It is not surprising that the very short time frame for consultation and discussion before introduction of the initial medical indemnity legislation, the claims spikes triggered by tort reform in various states, the subsequent changes and amendments to the legislation, the linking of medical indemnity for medical practitioners as a retail product, the anticipation of further changes etc. have in MIPS s view all had a negative impact on the cost and availability of cover for some groups. Most health professionals have been protected from such negative effects because they had control of their indemnifier as members of medical mutuals and because of the other supportive measures that were introduced by Government. Medical indemnity providers will expand their offerings, return to the market, or start-up new operations, if there is stability and in particular where there is reassurance that government does not intend to introduce further changes or if it were to contemplate further changes, would anticipate significant prior stakeholder involvement and appropriate time-frames prior to implementation of agreed changes. It is also likely that the ramping up of regulation and associated added cost and complexity of operation also reduced available capacity, and competition, occurring as it did at the same time as prohibition of Mutuals offering medical indemnity and the other events listed above. With appropriate levels of competition it is anticipated that any availability and affordability issues would be largely resolved. Submissions to Treasury suggest that the minimum cover amount of $5 million per practitioner makes insurance unaffordable for medical practitioners indemnified as part of a group and is unnecessary. It is the expected claims of the entity as a whole rather than a per practitioner minimum level of cover that should determine the cost of cover. Furthermore, insurers and employers are unwilling to provide retroactive cover to employees for claims relating to a previous employer. In some circumstances, this led to medical practitioners being specifically excluded from their employers insurance cover. One implication may be that employed medical practitioners, whose insurance has traditionally been procured by their employer, may be required to purchase insurance individually, thereby potentially increasing costs overall and complicating claims settlement. 3.

5 We are not aware that this is a widespread problem, nor are we aware that an employer can avoid their vicarious liability just because they do not have cover for that liability. In our opinion any potential concern is best addressed through appropriate product standards for the employer. It appears that the product standards as currently written are both unworkable and, in some cases, unnecessary for employed medical practitioners. In situations where product standards for employed practitioners appear to be desirable, they may not provide the most targeted solution to an issue. We recommend that product standards should not apply to employees but rather to the employer. Are the product standards, or similar standards targeted at employed medical practitioners, necessary?.what are the implications for the insurance of employed medical practitioners in terms of availability, affordability and adequacy if the product standards of the Act are restricted to contracts of insurance purchased by and indemnifying individual practitioners?.if product standards are applied to employed medical practitioners, how should the run-off cover scheme (ROCS) apply to medical practitioners who are indemnified as part of a group for some or all of the time that they are practising and who therefore do not have individual contract limits nor direct relationships with an insurer? With appropriate product standards in place for employers of health professionals, we believe the issues of appropriate level of cover and run-off cover are addressed. It would be unreasonable, in our view, to expect that when such a person ceases practice that other still working practitioners should fund, in effect, the claims that should be made against the previous employer of that person, such as would occur if previously employed practitioners were included in the Run-Off cover scheme. It is our opinion that it would likewise be unreasonable to expect an employee to pay for Run-Off cover, for a risk that should reside with their previous employer, from non-tax deductible annual premiums after ceasing employed practice. Additionally it would be difficult for medical indemnity insurers and Government to calculate the risk that an employed practitioner would bring with them, requiring as it would, a significant understanding of the entire business of the various employers of such doctors. An additional issue is the mechanism by which an employee leaving their employer would fund or alternatively be reimbursed for the costs of annual run-off premiums or access into ROCS. Training institutions A temporary regulation currently exempts from the application of the Act training institutions such as universities, their students and staff members who provide health care services to the public, through clinics, work at hospitals and by way of clinical trials or research activities. The temporary exemption was to ensure a smooth transition to complying insurance arrangements. In general, the same product and prudential standards should apply for medical indemnity arrangements of health care professionals who provide health care services to the public irrespective of whether or not they are employed by a training institution. We recommend that appropriate product standards should be developed for training institutions. What would be the implications of removing the exemption for training institutions providing health care services to the public? 4.

6 We believe greater cost and decreased availability of health services would result. Clinical trials In addition to providing a temporary exemption to training institutions, students and staff members who provide health care services to the public, regulation 4(1)(d) extended to the provision of health care services by way of clinical trials or research activities. As a general principle, clinical trials and research activities conducted by universities and other organisations should face the same insurance costs as those conducted by other business enterprises; that is, the cost of insurance provided by an APRA-regulated entity and the cost of meeting the product standards. Treasury has been advised that insurance for clinical trials that complies with the requirements of the Act has proven impossible to purchase. However, it may be possible for insurance arrangements to evolve to address these difficulties. For example, that portion of the insurance indemnifying the medical practitioner s provision of health care (and therefore subject to the Act) could be separated from the remainder of the clinical trial insurance. What are the implications of continuing to apply the product standards to medical practitioners who provide health care services to the public by way of clinical trials or research activities? We suggest appropriate uniform standards for clinical trials should form the basis for indemnity product development. Ideally there should be no possibility of a gap between the medical practitioner provision of health care in the trial and the clinical trial insurance. Appropriate uniform standards would help that process. A product that provided umbrella cover for all stakeholders would prevent possible gaps in cover. The complicating factor is the nature of claims-made insurance and the need for annual run-off cover after cessation of the trial. Issues of who will pay for that cover, disclosure to subsequent insurers, availability of cover in subsequent years etc, however that is much easier under a standard umbrella product. Previously occurrence based cover was available that dealt with such issues by collecting payment for the risk in advance and avoiding the necessity for run-off cover. If affordability remains a significant issue then alternate sources of funding for the cost of such should be found. Currently the Premium Support Scheme (PSS) provides assistance to medical practitioners to ensure affordability of indemnity. The PSS model may form the basis for a new mechanism to address the issue in relation to clinical trials. Volunteer health care professionals While medical practitioners who purchase their own medical indemnity cover are generally indemnified for volunteer work, insurance provided to employed medical practitioners may not cover them for their volunteer services. Volunteer and community organisations usually obtain separate insurance for the organisation and its volunteers. As noted above, the product standards of the Act do not readily accommodate the collective insurance of groups that include medical practitioners. A temporary regulation excludes from the Act arrangements where medical indemnity cover is provided to volunteer organisations. Should the exemption for volunteer organisations be maintained?.if the product standards applied only to medical practitioners purchasing cover for themselves, this would address the main difficulty for volunteer groups in obtaining insurance. If not, volunteer organisations would still face problems in obtaining affordable insurance. 5.

7 We suggest appropriate product standards should be developed for Volunteer organisations. If affordability then remains a significant issue then alternate sources of funding for the cost of such should be found. Please see previous comments re PSS relating to clinical trials. Policy rationale of the Act Not all state and territory jurisdictions require the health care professionals that they regulate (such as medical practitioners, nurses, or dentists) to have medical indemnity insurance in order to practice, or specify who can provide their insurance. Without a statutory requirement for insurance (as exists for workers compensation or motor vehicle insurance), health care professionals can choose how they will manage their business risks. Options range from doing nothing (that is, no form of insurance), through to purchasing commercially available medical indemnity insurance as individuals. For some, their employer may purchase insurance for the organisation that also covers its employees, such as medical practitioners and nurses. Where medical indemnity cover is purchased, the prudential supervision of medical indemnity insurers reduces the likelihood of an insurer being unable to meet its obligations to those who rely on it. If a medical indemnity insurer does not adequately provision and account for the variety of risks it takes on, its failure may leave those insured with it (for example, employers such as private hospitals, nurses and medical practitioners) exposed to liability and injured patients with insufficient compensation. Medical indemnity claims are potentially higher than other professional indemnity claims due to long-term care costs, in addition to any damages for economic loss. We observe that there are many other classes of professional indemnity risk other than medical indemnity with potential high value, long tail claims. Such groups include engineers, architects, solicitors and accountants. Unlike the safety net available through health and social services support, there is often no appropriate safety-net for inadequate loss recovery relating to such groups. We note that medical indemnity cases involving significant long-term care costs form a very small percentage of the entire data set of long term care costs associated with personal injury. The failure of a medical indemnity insurer could also cause systemic instability (with higher premium costs, reduced supply of insurance in the market and loss of confidence in other medical indemnity insurers), resulting in severe disruption to the provision of essential medical services. An example of this is the instability occurring during the provisional liquidation of United Medical Protection in Primarily for this reason, the Act introduced strict prudential regulation specific to the medical indemnity industry. Apart from the direct effect on policyholders any wider effect, we suggest, is very much determined by the reason for the failure and the size of the insurer that fails. Systemic instability is likely only if the cause for failure is in common with other insurers. Examples might be collapse of financial markets, natural disaster, failure of reinsurers/cedents in common etc. It is understood that the instability associated with UMP was in relation to capital required by its authorised insurance subsidiary AMIL following the failure of HIH (which as a very large insurer/reinsurer adversely affected a large number of policyholders other than those of AMIL) combined with the accelerated notification of claims due to the announced introduction of Tort reform. 6.

8 Medical indemnity providers are relatively small insurers. Although a failure would be significant for policyholders and possibly those making claims against the policyholders of the failed insurer, the total number of individuals affected would be relatively small as claims frequency per policy holder is comparatively low. In addition, the health and social services support safety net is available to those who may be unfortunate enough not to receive any compensation or adequate compensation from the health care provider they have made a claim against. Issues for consideration Prudential supervision of insurers of health care professionals Part 2 of the Act currently allows only APRA-regulated insurers to insure health care professionals, under a contract of insurance. That is, no one other than an authorised insurer may provide medical indemnity cover. It is arguable that this unnecessarily restricts the risk management choices of health care professionals other than medical practitioners (such as dentists, nurses, physiotherapists, midwives or pharmacists). In our view the common need is for protection of stakeholders through appropriate oversight. General insurance is the usual vehicle for providing indemnity cover however experience shows that sustained support for long tail risk classes, or development of cover for new risks, has been best achieved through buy-in of those seeking cover (especially such as is achieved through discretionary or insurance Mutuals ). The great advantages of a Mutual are that it is an immortal that must respond to its current policyholder-owners needs that, in the main, reflect earlier policyholder needs. Mutuals are also, in the main, not for profit. In that way Mutuals are, perhaps, a more appropriate vehicle for risks associated with the provision of health care including that provided by medical practitioners. Appropriate regulation of Building Societies and other like financial sector Mutuals has been achieved in the past. We suggest that a similar approach could be taken to non-insurance medical indemnity providers. Much of the machinery currently in use to supervise insurers would, we believe, require very little modification to be applied to non-insurance bodies if supervision was indeed thought necessary. A medical indemnity claim results from a patient s suffering, illness, injury or death. A key feature of medical indemnity insurance is that the health care professionals purchasing the cover are not its ultimate beneficiaries. The ultimate beneficiaries, patients, generally have little scope to shop around on the basis of their health care professionals insurance cover, or to influence professionals insurance decisions. As noted above, one rationale for the prudential supervision of medical indemnity insurance is to provide greater certainty of adequate insurance to practitioners and their patients. Health care professionals are arguably no less able than other policyholders (such as holders of other forms of professional indemnity insurance) to seek information and exercise their own informed choices when deciding whether to purchase insurance, the type of cover to buy and the provider from whom to buy it. Furthermore, other forms of insurance that primarily benefit third parties (such as public or product liability and professional indemnity) are generally less stringently regulated (some obvious examples aside, including motor vehicle compulsory third party insurance). However, in regulating the provision of medical indemnity insurance in 2003, the Government determined that the particular potential injuries that can result from the nature of work indemnified required special treatment for medical indemnity insurance. 7.

9 We believe that position is no different from that of other client/professional advisor relationships such as occurs with engineers, accountants, solicitors, architects etc. While there are sound reasons for requiring the prudential supervision of medical indemnity providers, it is important to take into account the differences in risk profiles of medical practitioners and other health care professionals. In terms of size of claims, frequency of claims and time period over which claims arise, health care professionals other than medical practitioners (for example, dentists, nurses, pharmacists and physiotherapists) would appear to have, on average, a lower risk profile. (Although obviously there are exceptions: high-risk health care professionals and low-risk medical practitioners.) In general the observation seems appropriate based on our understanding of the risks associated with various health service providers. Therefore, in balancing the need to ensure adequate protection of patients with the realities of maintaining adequate availability of insurance for health care professionals, one approach would be to narrow the scope of the prudential supervision requirement from the indemnification of health care professionals to that of medical practitioners. This would take into account the different types of risks involved and the demonstrated implications for the availability of insurance products. Other relevant Commonwealth or state and territory legislation would continue to regulate the insurance arrangements for these other health care professionals. We believe the common need is for protection of stakeholders through appropriate regulation. Flexibility of approach by the regulator might be required to ensure that such oversight is appropriate for the various structures. Such an approach would not prevent health care professionals from securing insurance from APRA-regulated entities. However, it would introduce greater flexibility to allow health care professionals (or those who insure them, such as employers) to look more broadly for insurance and insurance-like cover, should they have difficulty obtaining it from the domestic insurance market. In effect, the proposed amendment would place the prudential treatment of insurance arrangements for health care professionals other than medical practitioners on par with the treatment of other insurance arrangements, including other professional indemnity insurance. That is, individuals and organisations would be able to seek indemnification from discretionary mutuals funds (DMFs) and direct offshore insurers (DOFIs) as well as from APRA-regulated entities. As stated earlier general insurance is the usual vehicle for providing indemnity cover. We believe however experience shows that, sustained support for long tail risk classes or development of cover for new risks has been best achieved through buy-in of those seeking cover (especially such as is achieved through discretionary or insurance Mutuals ). The great advantages of a Mutual are that it is an immortal that must respond to its policyholder-owners needs, that in the main reflect earlier policyholder needs. In addition Mutuals are, in the main, not for profit. Mutuals, we believe, are also better able to combat moral hazard and mould the professional behaviour of their members to the benefit of patients. In that way Mutuals are, in our view, the most appropriate vehicle for risks associated with the provision of health care. Appropriate regulation of Building Societies and other like financial sector Mutuals has been achieved in the past. It would seem that a similar approach could be taken to non-insurance 8.

10 medical indemnity providers. Much of the machinery currently in use to supervise insurers would seem to require very little modification to be applied to non-insurance bodies. Discretionary mutuals also have the advantage over insurers of being able to access the contingent asset of a call on members, in any year, of up to a years additional subscription. That is a source of capital that is not available to insurers and provides protection from sudden and unexpected assaults on capital. Non-insurance mutuals are the primary providers of medical indemnity cover in Canada and the UK, as well as many other countries. Mutuals have traditionally been associated with Commonwealth countries while in the USA, insurance was the vehicle. Doctor Mutuals, however, had to be established throughout the USA following withdrawal and restriction of commercial insurer support over 20 years ago. Doctor Mutuals (many of whom are members of the Physicians Insurance Association of America) remain the principal providers of medical indemnity for medical practitioners. Minimum contract cover amount In developing the product standards, it was recognised that setting a minimum cover amount of $5 million for each practitioner ran the risk of overinsurance. However, it was difficult to identify specialities for which the minimum cover amount could be reduced. It was also considered that not specifying the level of cover required for past incidents could jeopardise the effectiveness of run-off cover where a practitioner ceased practice or changed insurers. Treasury is considering whether the minimum cover amount should remain in the product standards for any medical practitioner. The minimum cover amount was instituted to ensure that cover provided to medical practitioners met their needs. As a general principle, the Government should not set the level of cover required for an industry, unless there is good cause. Recent experience suggests that it is not necessary for the Government to determine the minimum amount of medical indemnity cover to be sold or purchased in the commercial market. For example, most indemnity cover available for individual medical practitioners has a market-determined $20 million contract limit. It appears that demand pressures in the market are adequate to ensure appropriate levels of coverage are available for purchase. In particular, run-off cover would still be effective without any requirement for minimum amount of cover, given the existing requirement for the offer of run-off cover to match the terms and conditions of insurance obtained while practising. Therefore, with the medical indemnity market stabilising and the emerging evidence of the impact of product standards, a possible approach would be to remove the $5 million minimum cover requirement for all contracts of medical indemnity insurance for medical practitioners. Prior to legislation no minimum amount of cover was specified for those providing medical indemnity through an insurance policy and although discretionary Mutuals can refuse to provide assistance I am not aware any difference between either the insurance of mutual model in the likelihood of patients receiving compensation. We believe that, in practice, removal of a minimum cover amount will have little real effect. 9.

11 Product standard for employed medical practitioners There are a number of ways of addressing these practical difficulties with the product standards for the insurance arrangements of employer medical institutions, with four options discussed below: - Option A involves removing the product standards for employed medical practitioners (reducing the regulatory burden by limiting the scope of the product standards and with the potential risk of practitioners being left without adequate cover). - Option B involves extending the product standards to all medical practitioners (and significantly limiting the availability and affordability of cover for certain practitioners). - Option C involves extending only the run-off cover scheme to employed medical practitioners (with significant implementation hurdles and without a demonstrated need to do so). - Option D involves altering the structure of the run-off cover scheme so any and all medical practitioners may choose to opt-in to the scheme, resulting in run-off cover arrangements that are less prescriptive (again with the potential risk of practitioners failing to secure adequate cover). Of the alternatives presented, A is appropriate. If there are realistic concerns then A should be combined with minimum product requirements for employers that addresses run-off cover or any other issues facing employees. Additional changes to regulations It may be desirable to maintain some of the regulations exempting certain arrangements from the Act, or it may also be appropriate to incorporate the effect of some of the regulations into the Act itself. Regulations 4(1)(a) and (b) were put in place as oral and maxillo-facial surgeons are formally registered medical practitioners. However, the Government considers that, for the purposes of medical indemnity insurance, they should be treated as dental health care professionals. Maintaining these exemptions would ensure continued parity of treatment with other dental professionals. We agree that this is a sensible approach as most maxillo-facial surgeons have traditionally sourced indemnity from those entities ensuring dental practitioners. Regulation 4(1)(f) exempts those arrangements that provide an indirect indemnification by the Commonwealth, a state or territory. In effect, this exempts public health care providers, consistent with the original intention that the public sector health care providers not be covered by the Act. Direct indemnification by the public sector is exempted within the Act itself. Commonwealth regulation of prudential supervision or product standards is not appropriate for these situations. We support the status quo. Regulation 4(1)(e) exempts from the application of the Act those health care professionals not required to be registered. This would be unnecessary if the Act exempted from its application all health care professionals other than medical practitioners (subject to any future regulations). 10.

12 We agree. Regulations 4(1)(h) exempts arrangements indemnifying employees, where the insurer is prudentially regulated. Limiting the application of the product standards would make this regulation unnecessary. As long as there is no conflict or confusing overlap we suggest it might be preferable to consider keeping the exemption in case there are scenarios that have not been considered. Regulation 4(1)(i) temporarily exempts from the application of the Act arrangements to indemnify the employees of a subsidiary in a group. This temporary regulation was put in place to allow organisations time to restructure their affairs to ensure that they comply with Act. We suggest that with appropriate definition of product standards for employers that this exemption would not be required. 11.

13 SPECIFIC QUESTIONS POSED IN THE DISCUSSION PAPER Prudential supervision of insurers of health care providers Question 1. What would be the implications of removing the requirement for prudential supervision of insurance provided to health care professionals other than medical practitioners, thus limiting the scope of the Act to medical practitioners? If the past is an indicator of the future then we believe there is likely to be very little adverse effect. As previously stated, UMP have indicated that their distress (that in turn led to Government support and the introduction of product standards and prudential supervision) was due to capital depletion of their authorised insurance subsidiary AMIL subsequent to the failure of HIH and the claims spike triggered by Tort reform. Although insurance companies involved in Medical Indemnity have come and gone, Mutuals that remain Mutuals have been shown to be robust, resilient and responsive. Mutuals in our view will survive where insurers cannot because of the buy-in by policyholder-owner members and ability to access additional capital through a Call on members. Question 2. Would such an amendment significantly threaten the safety of indemnities provided to health care professionals other than medical practitioners? Please see above. Question 3. Is regulatory flexibility in prudential supervision necessary to allow the Government to respond to the market as it evolves, or would it introduce uncertainty for medical indemnity providers? Flexibility does introduce uncertainty however is an important feature to maintain if an ability to respond quickly to challenges is desired. Decreasing product or supervisory requirements take less time to address than the reverse. In other words we recommend that any firming up of regulatory arrangements should have a significant transitional time for due consultation, consideration and implementation. Minimum contract cover amount Question 4. Is there any strong rationale for maintaining the Government role in setting the minimum level of cover available? If the desire is to protect policyholders and their clients then it would seem rational to extend that principle to all other professions. We believe however, that experience prior to the introduction of the MI (PS and PS) Act shows, that the absence of a specified minimum level of medical indemnity cover for individual health care professionals does not have any practical effect on injured patients receiving compensation. Question 5. Given that medical practitioners are currently choosing to purchase $20 million cover, is a legislatively-imposed minimum an unnecessary intervention in the market? See above. 12.

14 Product standards for employed medical practitioners Question 6. Should access to the Government s medical indemnity assistance measures be limited to those contracts of insurance that meet the product standards set out in the Act? It is our view that all financial assistance should be provided in its entirety directly to practitioners through premium support. Government, if it wished, would then only need to ensure there is a link between those practitioners receiving such assistance and its desired product standards. The simplest means would be to provide a flat rebate amount (that varied dependent on health professional craft type evidenced by billed item numbers, Medicare provider numbers indicating geographic location of service provision and total Medicare billings) upon provision of proof of purchase of a medical indemnity policy that met the required product standards. Question 7. What would be the implications for employed practitioners of not applying the product standards to insurance offered them? As stated elsewhere we do not expect any significant impact. Question 8. If the product standards are removed for employed practitioners, are there ways to provide certainty of cover to employed practitioners who want it (for example, new insurance products)? We believe demand will stimulate wider supply of appropriate products. Question 9. Does the insurance cover for employed practitioners require product standards? No. Product standards should be applied to cover obtained by employers. Question 10. Would product standards for the insurance of employed practitioners be required in all situations, or just some? See Question 9. Question 11. What are the implications for employed medical practitioners and their insurance (either purchased directly or by their employer) if the product standards were to apply to them? Although Option B is not supported the following comments are offered. We believe such an arrangement may be more expensive primarily due to the anticipated complexity of claims management due to increased number of parties involved. Although a vicariously liable employer of non medical practitioner staff might still be covered by a contract of insurance other employed medical practitioners involved in a particular incident might each have a policy with a different insurer. Such a move would greatly increase the complexity and difficulty resolving such claims. Greater complexity would be reflected in resolving claims qualifying for ROCS. The issues of how annual run-off premiums or ROCS would be calculated, who would pay them etc also greatly complicate that suggested approach. Question 12. If the run-off cover scheme were to apply to employed medical practitioners covered by a group policy (and therefore group limit) when practising, how would the run-off 13.

15 cover limit be set: up to the amount of the group contract limit and subject to the excess applicable to the group policy, or at an arbitrary limit? Option C is not supported. Question 13. If the run-off cover scheme were to apply to employed medical practitioners, what arrangements would be necessary to ensure that an insurer could issue a run-off cover contract to a practitioner for the period of employment? Option C is not supported. Question 14. If the run-off cover scheme were to apply to employed medical practitioners, what would be the most effective and fair way of ensuring that an appropriate amount is paid to fund the run-off cover? Option C is not supported. Question 15. Rather than restricting the product standards to medical practitioners in private practice or attempting to fit the run-off cover scheme to employed medical practitioners, would it be preferable to allow medical practitioners to choose a level of cover appropriate to their risk profile and insurance needs while practicing and in retirement? In our view, yes. Question 16. Is the flexibility to prescribe certain classes of health care professional or insurance contracts to which the retroactive or run-off cover obligations should apply offered by regulations necessary or desirable? Flexibility does introduce uncertainty however is an important feature to maintain if an ability to respond quickly to challenges is desired. Reduced product or supervisory requirements naturally take less time to address than the reverse. In other words any firming up of regulatory arrangements should have a significant transitional time including stakeholder consultation. Training institutions Question 17. What are the implications of removing regulation 4(1)(d) exempting training institutions, students and staff members who provide health care services to the public, through clinics and work at hospitals unrelated to training activity? Ignoring cover availability issues we would anticipate increased complexity and cost thereby reducing the resources available for more productive core activities. Most training institutions are stable and control considerable assets and would therefore seem to be a secure risk even if the exemptions were not lifted. Clinical trials Question 18. What are the implications of continuing to apply the product standards to medical practitioners who provide health care services to the public by way of clinical trials or research activities? 14.

16 We suggest appropriate uniform standards for clinical trials should form the basis for indemnity product development. If the current product standards are inappropriate or if significantly limiting clinical trials, (the purpose of which being to assess the safety and efficacy of treatment developed to improve patient health and wellbeing), then variation of the current product standards is desirable. If affordability is or remains a significant issue then alternate sources of funding for the cost of such indemnity (that meets the required product standards) needs to be sourced. Currently the Premium Support Scheme provides assistance to medical practitioners. A similar process might be introduced for clinical trials that are covered by a policy that meets the required product standard. Question 19. Alternatively, what would be the consequences if the Government exempted the insurance of medical practitioners during clinical trials from the prudential supervision or product standards of the Act, or both? Based on past experience, we suggest that in a practical sense there may be very little effect. Ensuring participants (including patients) were advised prior to participation of potentially limited access to compensation (perhaps as part of extensive advice and consent) would in our view be an appropriate means of ensuring stakeholders were protected. Volunteer health care professionals Question 20. Should the exemption for volunteer organisations be maintained? Removal of the exemption would be expected to increase the cost to and reduce the range and type of services provided by volunteer organisations. On a cost/benefit basis we believe that volunteer organisations offer much to society. We are also not aware of any significant issues that have arisen in relation to compensation as a result of the current exemption. If the current exemption was removed and that resulted in increased cost and/or decreased availability of indemnity then premium support similar to that offered to medical practitioners would be a means by which Government could ensure uniform standards but ensure no loss of social utility. Question 21. Are the circumstances of volunteer organisations sufficiently different to warrant special treatment under the Act? Please see previous response. Additional changes to regulations Question 22.. Treasury would appreciate views of the possible additional changes to regulations discussed and any alternative approaches. No comment. Additional changes to the Act Question 23. Treasury invites comment on whether there are any other issues with the Act not addressed by this paper. If there are additional issues, what would be possible solutions? 15.

17 ROCS MIPS Recommends that the principle of ROCS be extended to any group of health professionals whose indemnity is captured under the Product Standards and Prudential Supervision legislation. Prior to the introduction of the medical indemnity legislation most health professionals on cessation of practice were able to obtain free run-off on retirement in their own right. Since the introduction of legislation many professionals who because they are not medical professionals (and so cannot access ROCS), must now either purchase annual run-off insurance policies through paying non-tax deductible premiums from savings, or if more fortunate, can rely on the cover provided under the annual insurance policy purchased by the industry association to which they belonged prior to cessation of practice. Usually such a master policy is paid for by the continuing members of that association. Membership of the association is naturally not compulsory, and it is logical to assume that another insurer offering cover to individual practitioners might be able to do so at a lower premium than that offered through the association (because the insurer would not be taking on the claims tail of all those practitioners who were previously members of the associate that have ceased practice). Funding of ROCS for such groups would be anticipated to be less complicated than for medical practitioners as in the main could be a percentage of the premium of the single master policy issued to the relevant association. HCCS MIPS recommends that the Government remove the distorting effects of the HCCS. In particular, we believe that this could be done by removing the HCCS completely for unreported incidents that occurred after 30 June 2003 (the date of introduction of the Medical Indemnity (PS & PS) Act, and redirecting all the HCCS savings directly to doctors through additional (to current) premium subsidies. We also recommend that the Government should consider ways to provide the premium subsidy scheme to doctors that results in minimal competitive and risk management distortions. Such a mechanism could include a modification of the current PSS methodology by which Government would pay direct to practitioners a premium support payment determined by practice category (Medicare item numbers submitted), geographic location of practice (based on Medicare provider number information) and (Medicare) billings over the previous 12 months. This sort of subsidy scheme would not lower the incentives for risk management to the extent of the current schemes and would not distort competition between doctors and insurers. It is important that the current level of financial assistance to the medical profession is maintained. More efficient and direct delivery of premium support would allow such savings to also be added to the premium support received by doctors. Providing medical indemnity insurance as a wholesale service The reforms aimed at stabilising the medical indemnity insurance industry legislated for insurance to be provided only on a contractual basis, and therefore regulated through APRA. As part of this, the Government defined medical indemnity insurance in Regulation A of the Corporations Act 2001 so it would be a service provided to retail clients instead of wholesale clients. If a 16.

18 service is provided to retail clients, the Financial Services Reform Act 2001 specifies a number of additional activities that the insurer must do. Presumably, the retail rule was meant to provide doctors with as much information as possible due to the significant changes that were occurring in the industry and to assist medical practitioners to better understand the nature of their cover. Those same changes in medical indemnity were, however, also affecting health service providers other than medical practitioners however those groups were not brought under such a requirement. In any event, now that the industry has successfully transitioned to its new regulatory environment, it appears sensible to align the provisions for medical indemnity insurance with those of other types of professional indemnity insurance. In particular, the provisions that make medical indemnity insurance a service provided to retail clients should be removed, Medical Practitioners being the only health service providers thus affected. Providing a service to retail clients imposes regulatory costs on medical indemnity insurers that naturally must be passed on to doctors and subsequently to patients. There is also the potential for information overload for doctors. For instance, the Medical Insurance Australia Group notes, We do not underestimate how increasingly complex medical indemnity has become for them [members]. The aims of the new Federal arrangements are essentially to ensure that medical indemnity for doctors in Australia is affordable and secure. Unfortunately this has come at a price in terms of complexity of administration and the forms and processes doctors now need to complete. The MIPS Group has not conducted a full benefit-cost analysis of removing the retail rule. However, the indicative costs to doctors and the MIPS Group have been assessed to show the weight of the regulatory requirements. The removal of these costs would lower premiums for doctors and potentially lower costs for patients. The types of insurance that are considered as wholesale or retail for the purposes of the regulations are also outlined below. Current classification of insurance products For general insurance products, such as medical indemnity insurance, a client is considered to be retail if: they are an individual or small business; and the type of insurance is specifically listed in the regulations. The types of general insurance products specifically listed in the regulations are: i. a motor vehicle insurance product ii. a home building insurance product iii. a home contents insurance product iv. a sickness and accident insurance product 17.

19 v. a consumer credit insurance product vi. vii. viii. a travel insurance product a personal and domestic property insurance product a kind of general insurance product prescribed by regulations made for the purposes of this subparagraph. Medical indemnity insurance is specified through the mechanism in clause viii, as set out in Regulation A of the Corporations Amendment Act 2003 (no. 5). Any insurance that is not in the list above, or otherwise prescribed by the regulations, is not a service provided to retail clients. Such types of insurance would include: a professional indemnity product provided to dentists, optometrists and other non-doctor health professionals a professional indemnity insurance product a public liability insurance product a business building and property insurance product a business credit insurance product a product liability insurance product a third-party insurance product a workers compensation insurance product a legal expenses insurance product The list of insurance types that are provided to retail clients consists of products that are typically aimed at financial compensation of an individual for the loss of property or health. On the other hand, those types of insurance not listed are typically aimed at covering financial losses more likely to be incurred in a work environment. Medical indemnity insurance is in the wrong list. In particular, many health professionals are not classified as medical practitioners. These people are still insured by medical indemnity insurers but are not treated as retail clients. It is inconsistent to treat medical practitioners and other health professionals differently. Similarly, professional indemnity insurance provided to accountants, architects, economists, builders and lawyers are not provided as a service to retail clients. It is difficult to see why doctors, now that the new regulatory system is in place, should not also be considered as wholesale clients. Costs and benefits of retail status The requirement that medical indemnity insurance is provided as a retail service has significant time costs for doctors and financial costs for insurers. The benefits to doctors are likely to be much smaller than for other financial services that are provided as a retail service. 18.

20 Costs to doctors There are direct costs to doctors from being treated as retail clients. These include: time costs of listening to disclaimers and requirements for retail clients on the phone; difficulty in getting the information they require because of regulatory rigmarole; time costs of finding and contacting the person with appropriate certification; and time costs of sorting through irrelevant information. Medical practitioners are very busy people. Increasing the time requirements for them to access the information they require will often mean that such information does not get read by the doctor. Treating doctors as retail clients means that the insurer must provide them with a lot of information that they are not interested in, reducing the amount of time doctors allocate to considering information that is important to them. An indication of the potential time costs can be gathered from United s reported phone inquiries and correspondence. United had about 2.5 phone inquiries per member and 1.4 pieces of correspondence per member. MIPS has found that retail requirements increase the time of each phone call by about 10 minutes and the time necessary to read and write a piece of correspondence by 20 minutes. A doctor s charge out rate is likely to be in the order of $200 per hour and the insurer s $60 per hour. Putting this information together suggests that the time cost to each doctor from the retail requirement could be well over $150 per member and the cost to the insurer could be in the order of $50 per member, each year. This amounts to $11 million worth of costs across all doctors and insurers per year. These are substantial costs that come with no commensurate benefits. These estimates only account for a doctor s time when they are in contact with the insurer. There may be other substantial costs involved in making contact with the person with the correct certification or if doctors give up and do not get the information they required. Costs to insurers Administration expenses make up a significant proportion of the costs to an insurer. For some insurers, who adopt a broad definition of administration, these expenses can be over $1,000 per member. It is likely that the obligation to treat doctors as retail clients is contributing a significant mount to this. MIPS has not collected comprehensive statistics that would allow these costs to be quantified. Table following shows the types of costs that have been incurred. 19.