As investor-owned insurers flee the medical malpractice market in some states or pull out of it entirely, many physician-owned insurers are growing so fast they are bumping up against limits to growth. "We are approaching a situation where we'll be unable to book more policyholders," says Harold Jensen, M.D., chairman of the Chicago-based Illinois State Medical Inter-Insurance Exchange, which insures more than 12,000 policyholders.
Jensen cites reserve requirements, self-imposed by his company, as a looming constraint. Other physician-owned firms may face similar limits from reserve requirements imposed by state regulators.
For these 40 so-called bedpan mutuals, which are supposed to be physicians' friends, rejecting customers is bittersweet but represents a turn for the better.
Doctors founded the mutuals during the last major malpractice crisis in the 1970s. They grew to control more than 60% of a medical malpractice market of nearly $6.1 billion in net premiums written in 2001.
Yet by the 1990s, despite their growth and deep market penetration, bedpan mutuals were being criticized as inefficient and out-of-date, says Elizabeth Malone, an insurance analyst with Advest, an investment banking firm based in New York.
Commercial carriers at the time were dropping premiums far below those of the bedpans, invading their home states and stealing policyholders away, she says. Bedpans could not join the cost-cutting frenzy because, as mutual insurance companies, they lacked the outside investment capital to quickly expand, according to Malone.
Some bedpans, such as the MIIX Group in New Jersey, converted to investor-owned companies to take part, she says. But as claims payouts rose, some overly aggressive carriers that had cut rates and expanded quickly were left with depleted reserves, forcing many to exit markets or go out of business, Malone says.
One victim was MIIX, which ceased operations under its old name and was reconstituted in August as a bedpan mutual once again. The new company, MIIX Advantage Insurance Co., reports it has exceeded expectations by raising $25 million in capital from New Jersey doctors, desperate for a friendly company in an area where premium increases run into double digits.
But bedpan executives say they, too, can't avoid imposing double-digit rate increases, barring doctors who are poor risks and, if things get worse, perhaps even rejecting requests for new policies.
The Physician Insurers Association of America, Rockville, Md., which represents the bedpans, reports members' combined ratio-a measurement of a company's viability that compares premium income to reserves-is 141, compared to the industry average of 154. But PIAA adds that actuaries agree that the figure should be below 125.
51 specific markets
Although no exact numbers are available, some commercial carriers like St. Paul Cos. in Minnesota are exiting the market, while others like Phico in Pennsylvania have failed outright. This suggests that market share for bedpan mutuals will rise this year.
Blair Sanford, a malpractice expert with Cochran Caronia, an investment banking firm in San Francisco, says while St. Paul operated in 30 states, a bedpan's concentration in one state works well in an industry with different state regulations and locally idiosyncratic juries and court systems.
"Medical malpractice in the U.S. is made up of 51 separate submarkets, including D.C., each of which has its own specific market and legal dynamics," Sanford says.
Bedpan officials also say they are less likely than commercial carriers to settle lawsuits. Jimmie Gleason, M.D., president and chairman of Kansas Medical Mutual Insurance Co., says his company sometimes spends $50,000 in legal fees to avoid a $5,000 settlement to send a message to plaintiff's attorneys.
Also unlike the commercial carriers, the bedpan mutuals provide extra services, such as risk management and practice management consultation, all of which can prevent malpractice cases and give policyholders more value for their money.
But the bedpans have to be careful about adding new services at a time when premiums are already rising and doctors' reimbursements are tight. "We can't be a Four Seasons," Jensen says. "We've got to be a Red Roof Inn in many ways."