Statement by ISMIE Mutual Insurance Company
Medical Insurance Summit sponsored by Sen. Frank Watson

Phillip W. Johnson, M.D.
December 16, 2003

My name is Phil Johnson. I am a family doctor from Litchfield, just north of here. I am a member of the ISMIE Mutual Insurance Company Board of Directors, and would like to thank Senator Watson for inviting us.

I work full-time as a doctor and, along with the 14,000 other ISMIE policyholders, own the company. There are no private investors. There are no dividends paid. This company exists to provide medical liability coverage and risk management services to doctors.

My testimony tonight will be broken into three sections. First, I’ll talk about the history of ISMIE and give some background on the insurance market in Illinois. Next, I’ll explain ISMIE’s experience in Madison and St. Clair Counties and present to you figures to explain our premiums and practices. Finally, I will address current reform efforts to protect access to health care for patients throughout the state.

ISMIE was born in the mid 1970’s during another insurance crisis. The commercial carriers were losing money and wanted out of the Illinois market. A large group of doctors were about to be left without insurance. The Illinois State Medical Society responded to this crisis and in July of 1976 launched ISMIE. The goal of ISMIE was, and remains today, to provide a stable and reliable source of insurance for Illinois physicians.

From the beginning, the doctors who started ISMIE wanted the rates to be fair. They wanted the rates doctors paid to reflect where a doctor worked, and the specialty or the amount of risk that a doctor had. Doctors in one part of the state should not subsidize doctors in another part, and primary care doctors should not pay for neurosurgeons, or vice versa.

There are currently 6 territories that identify different geographical areas of financial risk. For example, St. Clair and Madison Counties are grouped with Cook and Will Counties because their loss experience is similar. ISMIE has always worked to ensure that our policyholders are treated fairly. The territories and risk categories used to assign premium payments are not theoretical – they are based on almost 30 years of ISMIE underwriting and claims experience.

Several years ago in the Metro East area, physicians were offered lower liability insurance rates with a group formed by area hospitals, and underwritten by CNA, called Unity. Unity’s rates were lower than those ISMIE charged. Many physicians in this region decided to buy their insurance with Unity and take advantage of these lower rates. ISMIE believed the rates charged by Unity were too low, and would doom the effort to failure. As predicted, Unity’s insurance product failed, and the insurer left the Illinois market.

Across the state there have been over 30 other insurance carriers that have left the state or gone bankrupt. It was the failure of Unity that left many physicians in this region looking for new insurance. While other companies had charged unrealistically low rates, ISMIE had continued to charge what we felt were responsible rates for our policyholders. When some of the doctors returned to ISMIE they were met with rates significantly higher than the supposedly bargain rates of now defunct Unity. The increased rates for physicians returning to ISMIE were further magnified by the 35% base rate premium increase that occurred on July 1, 2003.

With the flight of insurance companies from Illinois, ISMIE has done what it could to provide coverage. In 2001 ISMIE took in almost 1,000 new policyholders, and in 2002 we took in close to 1,800 more from across the state. In the Metro East in the year 2000 ISMIE insured 265 in Madison and St. Clair Counties. Since then, the number ISMIE insures in this two-county area has almost doubled – to 461 policyholders.

ISMIE Mutual declared a statewide new business moratorium on January 1, 2003. We had taken in so many new physicians that we had to stop, to rebuild our financial reserves, and protect the current group of policyholders. The situation is similar for most of the other remaining insurance companies. Much like a lifeboat, ISMIE can only absorb so many new policyholders, and so much additional risk. To continue to take in new policyholders at this clip would have threatened the financial stability of the entire company, and our current policyholders. Specific to Madison and St. Clair counties, ISMIE’s understanding is that only one company has publicly expressed a willingness to continue to write new business in this region.

Now let me turn to ISMIE’s experience in this two-county region. ISMIE’s physician board members have heard questions from people about why the rates are so high here. Over the last five years, in Madison and St. Clair Counties, ISMIE has taken in $29.6 million dollars in premium payments. During this same period, the company has paid out $33.5 million dollars in verdicts, settlements, and accompanying legal expenses in these two counties. Clearly, ISMIE is not "making money" here, or subsidizing doctors in other parts of the state.

Nor is ISMIE able to stop the upward spiral of the number of claims, or the rapid escalation in the dollar value of payouts. In 2001, the average indemnity payment in the Metro East for an award or settlement was $276,000. As of September 2003 that average had jumped to more than $495,000, almost doubling.

The frequency of claims in the Metro East is also a significant factor for premium cost increases. Lawsuits against ISMIE policyholders in Madison and St. Clair counties are filed with 25 percent greater frequency than in other parts of Illinois, including the Chicago area. Policyholders in the Metro East account for only 3% of ISMIE’s business, but due to the legal climate, experience more than 4% of claims statewide. Eight out of every ten claims filed are closed without any payment to the plaintiff. Yet, such non-meritorious suits are expensive to manage and defend.

The only way to pay for this is to increase premiums. In sum, the reason doctors in Madison and St. Clair Counties are paying such high premiums is higher payments for judgments, settlements and defense costs, coupled with a high incidence of lawsuits. Companies that were under-pricing their insurance products are now gone, precisely because they priced themselves out of business. ISMIE is one of a handful of insurers remaining, despite the deteriorating climate.

For the year 2003, ISMIE will have an administrative expense ratio of less than 12%, meaning less than 12 cents of every dollar of written premium goes to the company’s administrative expenses. The national average for other physician-owned companies is 16%. ISMIE is four points, or 25%, less.

I would like specifically to address the allegation that investment losses by insurance companies are a significant reason for increased insurance premiums. At least with ISMIE, this is not the case. Less than three percent of ISMIE’s investments are in stocks. Last year, ISMIE achieved a five percent overall return on investments, all of which was plowed back into keeping premiums as reasonable as possible. Simply stated, neither investment income nor losses have had a significant impact on ISMIE rates.

Certain parties blame "bad doctors" for the medical liability crisis. The truth, though, is that all doctors are at high risk for being sued, even the very best of our profession. ISMIE closely reviews the case of a doctor when payments are made because of a malpractice claim. This review process includes a panel of physicians. The process of physician review and non-renewal is taken very seriously. We believe in loyalty to an existing individual policyholder, but our first obligation is to our larger group of doctors and their patients. And sometimes it is necessary to not renew a physician’s insurance.

Finally, I would like to address ISMIE’s perspective on a solution to this crisis. ISMIE feels strongly that the legal system should fairly compensate patients injured by medical negligence. But huge non-economic damage awards play a significant part in driving up the costs of insurance, and in forcing more doctors to leave. Large awards become an expense for everyone. The law firms that make a tremendous amount of money from the medical malpractice industry have worked hard to prevent any caps, and to try and promote public confusion on this issue to hide the facts.

Because of the failure to sustain meaningful critical legal reform within the state of Illinois, ISMIE and the Illinois State Medical Society have turned their attention to the federal level. Illinois is not alone; other states have similar problems and are also seeking federal tort reform.

Those who oppose caps in the US Congress claim they hold this position in order to help the children and elderly who need insurance money the most. But this is a misleading claim. The caps that the medical insurance companies and doctors groups are working for are only for that extra part of a payment we refer to as non-economic damages. Caps would not limit money for the cost of medical care, or for loss of income. The lack of caps and other meaningful tort reform is preventing efforts to stabilize the insurance situation. This leads to the ongoing exodus of doctors from this area, and our state. It is a major barrier to recruiting new doctors. And it is the children, the elderly, the poor, and those on the fringes of our society who will have the hardest time finding a doctor where they live.

The problems I have described won’t be fixed by more regulation placed on insurance companies. We need the help of plaintiff law firms to bring some restraint to their industry, we need people who serve on juries, and judges, to be reasonable about awards, and recognize that in some way everyone pays for them, not just doctors and the insurance company. And we need community leaders and politicians to respond to this crisis with substantive tort reform, which will need to include caps.

Without substantial changes, insurance will become increasingly unaffordable and unavailable. More doctors will give up high-risk activity like delivering babies or performing surgery. Doctors will continue to leave not only Madison and St. Clair counties for other territories, but they will leave Illinois for places like Indiana, Iowa, Wisconsin, and Missouri.

We, the board and policyholders of ISMIE, want to keep physicians here. We want to see the conditions improve so that other reputable insurance providers will to return to Illinois. And when some of the young people from our hometowns and cities decide to pursue a career in medicine, we want them to stay in Illinois.

Thank you very much for allowing me to speak tonight.