It's deja vu for New Jersey physicians. For the second time in 25 years, doctors in vital need of medical malpractice insurance are being asked to capitalize the company that promises to underwrite them.
Stumbling to its feet after a staggering fourth-quarter operating loss of $162.8 million, New Jersey's largest medical malpractice insurer, the MIIX Group, Lawrenceville, has set a plan in motion to run its publicly traded company into oblivion after paying off all debts and claims (March 11, p. 26).
At the same time, the company will re-invent itself into a so-called reciprocal insurance company, similar to a mutual insurance company, in which policyholders also are the owners. MIIX officials said they anticipate they will get the management contract to run the new, privately held company.
Founded by the Medical Society of New Jersey in 1977 during another medical malpractice insurance crisis, MIIX was a mutual owned by its policyholders for 22 years before it went public. Now one of its largest shareholders, the medical society owns a 6% stake in the foundering company.
Officials said it would take $30 million to capitalize a new company with the financial wherewithal to underwrite 50% of MIIX's current book of business. MIIX has about 7,000 New Jersey policies in force, a 37% market share, according to the New Jersey Department of Banking and Insurance.
During a conference call last week, MIIX Chief Executive Officer Patricia Costante estimated that the new company's physician-policyholders will need to come up with a one-time investment equal to about 50% of their annual premiums to buy into it. That is on top of the average 10% increase in premium rates already scheduled to go into effect May 1.
The course of action apparently was taken for lack of suitable buyers or partners willing to pay what MIIX officials felt the company was worth. Costante said perhaps a dozen companies expressed some kind of interest, but in the end there were only two formal written bids.
The news of the business plan coincided with the release of dismal first-quarter results. Blaming losses in large part on the decision to shutter the existing company, MIIX reported a loss for the quarter ended March 31 of $45.4 million, or $3.38 per share (See chart).
Meanwhile, as a result of beefing up reserves in anticipation of the transformation, MIIX has $1.2 billion in the pot, of which $797 million has been set aside for future claims, officials said. Before all claims against the company are filed and settled, the wind-down could take as long as six or seven years.
Shareholders will divvy up whatever is left, although there could be distributions before the company is completely wound down. Concurrently, the new company is expected to be up and running in 90 to 120 days.
Earlier this month, state insurance regulators gave MIIX the green light to begin the voluntary runoff as a way of protecting policyholders and patients (May 6, p. 4). The company immediately stopped writing policies for non-New Jersey doctors, and after 90 days it will stop renewing policies in New Jersey. Regulators still await submission of the new business plan, which is subject to their approval. MIIX officials said it could be filed within the week.
Details as to how the new company would take shape were sketchy last week. Costante said that based on a survey conducted by Norman Hecht Research, officials are hopeful that as many as 50% of its current New Jersey policyholders will be interested in helping capitalize the new company. Policyholders could recoup their investment in a number of ways, one of which could be another stock offering.
"We're evaluating several structures," Costante said during the conference call.
The sketchy details were a cause of great concern to the New Jersey Hospital Association, said Betsy Ryan, its general counsel. If MIIX hopes to attract only half of its policyholders, that could leave roughly 20% of the state's physicians without malpractice insurance, which "will create an access-to-care crisis that is a major concern," she said. Ryan also wondered if doctors who are already struggling under the weight of high premiums could afford to invest half of that amount again to launch the re-invented MIIX.
Noting they went through all this once before in the late 1970s, medical society officials said in a written statement that formation of a reciprocal insurance company "using existing infrastructure is a preferred approach," making the best of a bad situation in New Jersey's malpractice market. The medical society called upon the state "to enact meaningful reform."
"On a personal level I might invest in it because it will be a physician-run, physician-operated company," Robert Rigolosi, M.D., president of the medical society, told Modern Healthcare. A kidney specialist, Rigolosi said he falls at the low end of malpractice insurance, paying about $6,000 a year in premiums. But one day recently, he said, he lunched with an obstetrician who pays $110,000 yearly, up from $40,000 the previous year.
"He's talking about giving up his practice," Rigolosi said.