A medical malpractice bomb just blew a hole in the wallet of Pennsylvania's hospital association, the Hospital and Healthsystem Association of Pennsylvania.
The bomb in question detonated earlier this month when state insurance regulators seized the association's affiliate PHICO Insurance Co., after they became alarmed by a precipitous slide in PHICO's surplus. PHICO's parent, like that of the association, is the Health Alliance of Pennsylvania.
The Commonwealth Court granted an order of rehabilitation on Aug. 16, which gives the Pennsylvania Insurance Department complete control over the operation-including, ironically, former Pennsylvania Insurance Commissioner Constance Foster, who was appointed interim president and chief executive officer of the insurance carrier in April. The department has an unspecified period to comb through the books and evaluate PHICO's financial situation before making the next move, which could entail recovery or insolvency.
Foster had been on PHICO's board since 1998. She stepped into the top spot after Barry Persofsky resigned after nearly five years because of the company's financial troubles, sources said. HAP President and CEO Carolyn Scanlan serves as chairwoman of PHICO's board of directors.
Scanlan was not available for comment, a HAP spokesperson said. PHICO officials, citing the rehabilitation, deferred all comments to the insurance department.
Runaway malpractice claims and awards are "a national problem, but Pennsylvania at the moment is sort of the poster child," said James Redmond, senior vice president of legislative services for HAP. "We seem to be leading the pack, but what's happening in Pennsylvania, I would maintain, will hit other states just as hard. It's only a matter of time."
PHICO saw its surplus plunge from more than $127 million at the end of 2000 to just $6.8 million during the second quarter ended in June, according to the insurance department. That was enough to spur regulators to action.
Regulators would give no specific explanation for the sudden slide pending their review, but HAP has long been lobbying for major legislative and tort reform in Pennsylvania, complaining of skyrocketing claim costs. Redmond blamed the medical malpractice industry's troubles in part on a costly and inadequate state-run fund that assesses surplus fees on malpractice policyholders as added insurance against extraordinary claims. HAP wants to see the fund abolished.
For now, PHICO claims are being paid, and the malpractice policies for about 60 Pennsylvania hospitals and 2,386 physicians are still in force, said Rosanne Placey, an insurance department spokeswoman. Should PHICO prove insolvent, its debts would trigger the state's insurance guaranty fund, which is funded by the state's licensed insurers.
"We believe that PHICO's medical malpractice business can be placed with another like carrier," Placey added.
In its annual report for 2000, the insurance company reported a net loss of $41.9 million on premium revenue of $205.7 million. In the previous year, PHICO showed a net loss of $47.2 million on premium revenue of $210.8 million.
Windber (Pa.) Medical Center probably won't be waiting long to see how all this plays out. The 67-bed hospital, which has been a PHICO policyholder since the insurer's founding, is already shopping for a new carrier, said Tonia Gordon, the hospital's director of human resources. Gordon said she'd noticed that PHICO's rating had dropped in the past year, but she had no insight as to what went wrong.
"We had a very good relationship with PHICO over the years. We got competitive rates and bids from them, so we didn't see any reason to move (to another insurance company)," Gordon said.
PHICO is the first malpractice insurer taken over by the state since 1998 when regulators declared two insurers insolvent-Physicians Insurance Co. and Physician Insurance Exchange. Ninety-two licensed companies write policies in Pennsylvania, but the top 12 companies capture 81% of the malpractice insurance business, Placey said. Ranking second in the state, PHICO has a 12.6% market share, she said.
Founded in 1976 during the last medical malpractice crisis, when a dearth of insurers in Pennsylvania were willing to take on risk, PHICO was one of the "bedpan mutuals" that hospital and doctor groups created to fill the void, Redmond said. Over the years, the business grew, converting from not-for-profit to for-profit in the early 1980s and expanding to write business in all 50 states, primarily Florida, Indiana, New Jersey, Pennsylvania and Texas.
Over the past decade, as merging healthcare systems found themselves with the financial wherewithal to self-insure, PHICO slipped in market share, primarily writing policies for small rural and community hospitals, Redmond said.
PHICO's profits were plowed back into the company to fund expansion into other markets, Redmond said. The company paid its sole dividend to HAP, which helped to offset member dues, he added. He said he could not be sure how the financial troubles would affect the hospital association and its 250 members.
"Obviously we will be taking a real hard look at the expenses and services that will be provided next year," Redmond said.