A California consumer group has successfully mounted the first state challenge to a malpractice insurance rate increase, reinforcing its assertion that tough oversight by state regulators-not caps on damages-is the best way to limit rate increases for strug- gling physicians.
State Insurance Commissioner John Garamendi ordered SCPIE Indemnity, California's second-biggest malpractice insurer, to roll back its proposed rate increase for doctors by 36% after conducting an eight-month investigation triggered by a formal objection from the Santa Monica, Calif.-based Foundation for Taxpayer and Consumer Rights (FTCR).
In September 2002 SCPIE, which insures about 9,000 California doctors, asked for a 15.6% rate hike to take effect Jan. 1, 2003. The increase was postponed pending the outcome of the investigation, and instead, the insurance commissioner allowed the company to increase premiums by only 9.9%, effective Sept. 22, a reduction that will save the state's doctors almost $24 million, the consumer group estimated.
"We challenged this proposed rate hike because we believe SCPIE was trying to charge excessive premiums," said Douglas Heller, the FTCR's senior consumer advocate. "They were just out of line."
The insurance commissioner, acting on the recommendations of an administrative law judge, based the recent ruling in part on the fact that SCPIE posted a profit in the quarter ended June 30 despite being forced to postpone any increase during the lengthy investigation, Heller said.
But Donald Zuk, the insurance company's president and chief executive officer, said SCPIE's second-quarter profit was modest-it posted net income of $612,000 compared with a $12 million loss in the year-ago quarter-and was fully justified in its rate request.
"The FTCR alludes to the fact that SCPIE made a profit in the 2003 second quarter without a rate increase," Zuk said. "This profit, if annualized, would represent approximately a 1% return on equity, hardly overwhelming evidence that the requested rate increase was not justified."
Heller called the rollback a tribute to Proposition 103, a 15-year-old initiative that requires insurance companies to justify any premium increases with the state insurance commissioner while providing consumers with the right to challenge rate increases. That law is primarily responsible for California's relatively stable insurance rates, said Heller, who rejected claims by the American Medical Association that doctors' premiums would be far higher if not for a 1975 state law that places a $250,000 limit on noneconomic damages in malpractice rates.
In fact, he noted, James Robertson, SCPIE's actuary and assistant vice president, provided written testimony to the insurance commission that the Medical Injury Compensation Reform Act of 1975 (MICRA) has not played a key role in holding the line on insurance costs.
"While MICRA was the Legislature's attempt at remedying the medical malpractice crisis in California in 1975," Roberston's statement read, "it did not substantially reduce the relative risk of medical malpractice insurance in California."
Said Heller: "Insurance companies tell doctors and lawmakers that caps will reduce rates, but under the spotlight of regulation SCPIE admitted that California's caps do not keep physicians' rates down. This is the big lesson: It's not caps that keep rates down-it's regulations."
Garamendi was not available for comment.
While SCPIE has until Sept. 10 to ask the commissioner to reconsider the rollback, Zuk said he will not appeal the decision.
"We are moving forward to implement the approved rate increase in the fourth quarter of 2003," Zuk said. "We will apply strict but fair underwriting standards to our existing insureds and new applicants for insurance."