Testimony of Harold Jensen, M.D.
Illinois State Health and Human Services
Subcommittee Hearing
February 14, 2004

Harold L. Jensen, M.D. Chairman, ISMIE Mutual Board of Directors

Good afternoon. I’m Doctor Harold Jensen, an internal medicine physician, and chairman of the ISMIE Mutual Insurance Company. I’m here today to represent ISMIE, the state’s largest insurer of physicians for medical liability. ISMIE is owned and operated by physicians and insures more than 14,000 doctors across the state.

I would like to take this opportunity to thank Senator Garrett for inviting me to this hearing today. My testimony will be broken into five parts. First, I’ll talk about the history of ISMIE and recent developments in the Illinois insurance market. Second, I’ll present figures on our rates and underwriting practices. Third, I’ll address the misconceptions that bad doctors and stock market losses are the reasons behind rate increases. Fourth, I’ll delve into why further regulation of the insurance industry is counterproductive to the solutions we need. And finally, I will explain how caps on non-economic damage awards can lead to an improved medical liability climate.

ISMIE was born in the mid 1970s when commercial carriers were losing money and wanted to depart the state. Many doctors were about to be left without insurance. The Illinois State Medical Society responded by launching ISMIE in July of 1976.

From day one, ISMIE’s mission has been to provide a strong and reliable source of coverage for doctors. Our philosophy is conservative, matched by our determination to remain in the market – and afford our policyholders a stable, ongoing source of protection.

The doctors who established ISMIE wanted rates to be fair. As a result, ISMIE takes a very methodical approach to ensure that rates are consistent with risk exposure. Premiums are based on several factors, including where physicians practice, their specialty, and their amount of risk. Doctors in one part of the state do not subsidize doctors in another part; primary care doctors do not subsidize neurosurgeons, and so on.

Yet, the most important trend affecting insurance rates is the frequency and severity of claims. Here are some facts to consider:

• The number of claims reported against ISMIE policyholders climbed an alarming 45 percent between 2001 and 2003.
• In those same two years, ISMIE’s average indemnity payment per claim rose almost 30 percent . . . from $460,000 in 2001 to $592,000 as of year-end 2003. Not only a skyrocketing increase in the number of suits, but a staggering increase in payments.
• ISMIE paid out $1.19 for every $1 in premium income in 2002. That extra 19 cents was paid from ISMIE’s financial surplus.

There are currently six categories of Illinois counties we refer to as “rating territories.” They identify different geographical areas of financial risk. For example, Cook and Will counties are grouped with St. Clair and Madison counties because their loss experience is similar. The territories and risk categories used to assign rates are not theoretical – they are based on almost 30 years of ISMIE underwriting and claims experience.

To see how the number and severity of claims are affecting Illinois physicians, let’s look at just one example. We’ll compare rates for a doctor in East Moline with those of a doctor living across the river in Iowa. Both are insured by ISMIE. The family practice physician in East Moline pays $16,300; in Iowa, the premium is $8,300, meaning Illinois physicians pay 100% more. In fact, the story repeats itself for every specialty. Illinois physicians pay, on average, about 90% more than their counterparts in Iowa. Why such a huge difference? Because ISMIE pays out far more for settlements and verdicts in Illinois than we do in Iowa.

Another physician-owned insurer that does business in Iowa, MMIC, reports that in the company’s territory which includes Iowa, insureds are sued at a rate of six claims per 100 physicians. ISMIE’s Illinois insureds are sued more than twice as often at 13 claims per 100 physicians. In 2002, MMIC’s average indemnity payment was only $212,000. ISMIE’s average indemnity payment in Illinois for the same year was $559,000. This is why ISMIE can insure Iowa physicians and charge them half as much as Illinois physicians.

The liability crisis has led to a mass exodus of insurance companies from Illinois. In the past few years the market has dwindled to a handful of carriers, many of whom are insuring only select specialties or doing business in limited parts of the state. As companies withdrew from Illinois, ISMIE came to the rescue by providing coverage to many stranded physicians. For instance, in 2001 ISMIE took in almost 1,000 new policyholders, and in 2002 we added close to 1,800 more. Last year, however, ISMIE had no choice but to declare a statewide moratorium on new business. While the company is financially secure, we stopped accepting new physicians in order to preserve our surplus and protect our current group of policyholders.

The decision not to accept new policyholders was a difficult one, but it was even more painful to announce an across-the-board rate increase of 35 percent last year. This action was necessary to preserve adequate financial strength, long-term viability and continuing obligation to our policyholders.

Now I’d like to address some myths about medical liability insurance. Certain parties claim, it’s only a “few bad doctors” raising costs for everyone. According to ISMIE’s estimates, an “average” physician in an “average” risk specialty can expect to be sued about once every 10 years. For high-risk physicians, that ratio increases dramatically. In the case of OBGYNs, ISMIE data show that a lawsuit is filed against them almost every 18 months. Simply put, doctors are sued all too often. In fact, it’s often the most highly-skilled physicians – those who accept the most difficult, high-risk cases – who are more likely to get slapped with a lawsuit.

Over 80% of all medical liability claims are closed without any payment to the plaintiff. Yet, all of these cases cost ISMIE and its physician policyholders a significant amount of money in defense costs. Over the past five years, ISMIE has spent more than $150 million on claims with no indemnity paid to the plaintiff; this averages out to more than $23,000 per non-meritorious claim. These costs contribute significantly to the premiums our policyholders must pay.

Let me take a moment to address a misconception that I’ve often heard about medical liability insurers – that our rates follow the stock market. Nothing could be further from the truth! ISMIE provides sound stewardship of policyholder premium dollars. Less than three percent of the company’s portfolio is in stocks. The vast majority of ISMIE’s investments are in high quality, fixed income securities, i.e., bonds. Last year, ISMIE achieved a five percent overall return on investments, all of which was plowed back into keeping premiums as reasonable as possible.

Another misconception concerns the costs associated with the management of ISMIE. For the year 2003, ISMIE had 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 4 points, or 25%, less.

Let me now address the calls for further regulation of the insurance industry. ISMIE is currently heavily regulated by the Illinois Department of Insurance, the state government agency charged with making sure insurance companies have enough money on hand to protect policyholders and the public. ISMIE files exhaustive financial statements annually with the Department, where they are open to public scrutiny. Increased regulation will only further discourage insurers from entering the Illinois market. I appear before you saying that ISMIE wants competition, but more regulation is not the answer.

One regulation frequently suggested is “prior approval” of rates by the Department of Insurance. Prior approval introduces politics into the rate making process. Political pandering may hold rates artificially low over the course of a few years, but then the market will have to catch up with reality. There is no free lunch. Volatile rate swings will pose even greater problems for physicians trying to cover practice expenses. Ideally, ISMIE would like to see rates go down, but because of the hostile legal environment in Illinois, this is unlikely. In order to be fair to our policyholders, ISMIE needs to base our rates on the most recent actuarial data, not the vagaries of the political process.

Oklahoma is a state that requires prior rate approval. Yet, in November, an insurer in Oklahoma requested and was granted a rate increase over a three-year period of 82.8%. Prior approval does not reduce medical liability rates and, more importantly, it does not address the root of the problem: the runaway legal system.

This brings me to our proposal for a solution to the medical liability crisis that caused us to gather here today. Caps on non-economic awards stabilize insurance rates and have done so in states throughout the country. Let me clarify that these limits would only pertain to the pain and suffering portion of an award; they would not limit in any way that part of the award which would provide for future medical care, loss of wages, and more. ISMIE firmly believes that the legal system should fairly compensate those patients injured by medical negligence, but exorbitant, non-economic awards must be controlled before more doctors leave Illinois and further affect patients’ access to health care.

In closing, I would like to thank you, on behalf of ISMIE Mutual, for hosting this important hearing. ISMIE Mutual stands ready to assist you in working toward liability cost containment. We have a strong track record of solid management, physician advocacy and fairness in our business operations. What we really need now is a similar philosophy in the courts. I’d be happy to answer any questions you might have.