For several years the Executive Director of the HCSF was Robert D. Hayes. After a distinguished career of public service, Mr. Hayes decided to retire in September this year. Some of those years were difficult, and even controversial, but Mr. Hayes provided steady leadership and guidance needed to assure the survival of the Health Care Stabilization Fund. As a result of his diligence, the HCSF is actuarially sound and it continues to serve its intended purpose.

Historical Review

During the first half of the seventies decade, many Kansas physicians were confronted with rapidly escalating medical malpractice insurance premiums. Some physicians could not purchase professional liability insurance at all. By 1975, several insurers had discontinued offering medical malpractice coverage in Kansas, and the remaining companies had reached their capacity. Some doctors continued to practice without liability insurance, but others limited their services in order to reduce their exposure to liability. It became increasingly difficult for patients to find physicians willing to deliver infants or perform surgery.

The 1976 Legislature responded by enacting the original version of the Health Care Providers Insurance Availability Act, which, among other things, created the Health Care Stabilization Fund. To accommodate those doctors who could not buy commercial insurance coverage, a joint underwriting association was created; the Health Care Providers Insurance Availability Plan.

An important feature of the early version of the Availability Act was a requirement that insurers sell “claims made” rather than occurrence coverage. This was accompanied by a somewhat unique provision for prior acts coverage under the HCSF. In other words, the health care provider was insured for any claims made during the term of the insurance policy, regardless of when the incident occurred. Equally important, if the doctor retired or left Kansas to practice elsewhere, he or she had prior acts (tail) coverage via the HCSF for any claims that might arise after his or her claims made insurance policy was discontinued.

Unlike commercial insurance policies, the HCSF provided unlimited coverage. In other words, a doctor or hospital could be sued for any amount of money, and there was no limit on the amount a jury could award to a plaintiff, or the amount that could be agreed to in a settlement. Yet there was a statutory limit on the reserves that could be maintained in the Fund.

1980 was a significant year in the Fund’s history because 87 new cases were filed and the trend continued with 98 new cases in 1981. By the end of fiscal year 1982, the Fund had paid out over $5-million in losses and there was cause for alarm. It appeared obvious that accrued future liabilities were rapidly exceeding cash reserves in the Fund.

The 1984 Legislature attempted to correct problems inherent in the original Act. The law was changed to limit the Fund’s liability to $3-million per claim and $6-million annual aggregate liability. Another major amendment removed the statutory limit on the Fund’s balance and prescribed that the premium surcharges should be based on estimated future liabilities. In other words, the Legislature decided the HCSF should be administered like an insurance plan, and should be actuarially sound.

During the second half of the eighties decade there was significant pressure on the Legislature to reform the rules of civil litigation. The medical profession and its allies engaged in an aggressive campaign for tort reform, whereas some members of the legal profession and certain consumer organizations were adamantly opposed. Eventually the Legislature passed a number of tort reform measures, and the cornerstone was a $250,000 limit on non-economic damages.

The controversy surrounding tort reform focused a great deal of attention on the HCSF, and there were those who blamed the Fund for causing the crisis. Some legislators insisted that the State should divest from the HCSF and legislation was passed that provided for a gradual phase-out. It was argued that in the absence of the Stabilization Fund, the commercial insurance industry would respond by offering adequate coverage to physicians and other health care professionals. But legislators were unwilling to use general tax revenue to pay for HCSF liabilities that were not funded by existing reserves.

In the meantime, the Legislature reduced the Fund coverage to $1-million per claim with annual aggregate limits of $3-million. Another important policy decision pertained to tail coverage. It was decided that a health care provider should participate in the Fund at least five years before the provider could become inactive and receive the benefit of prior acts coverage. In other words, the tail coverage had to be purchased by payment of premium surcharges for at least five years.

The filing of new cases began to level off during the early nineties, and the Fund balance began to gradually increase. By 1992 the Fund was considered actuarially sound, and premium surcharges were reduced accordingly. By this time there had been some changes in the Legislature and interest in phasing out the HCSF waned. Instead, the 1994 Legislature decided to remove the Fund from the Insurance Department and delegate responsibility for administration to the Board of Governors.

Principal Features of the Act

Defined health care providers are required to purchase professional liability insurance with coverage limits of $200,000 per claim with an annual aggregate total limit of $600,000 coverage. The health care providers are also required to select one of three options for additional coverage via the HCSF. Those options are:

$100,000 per claim with $300,000 annual aggregate

$300,000 per claim with $900,000 annual aggregate

$800,000 per claim with $2,400,000 annual aggregate

Most health care providers choose the highest coverage option which provides $1-million per claim with an annual aggregate limit of $3-million when combined with the primary level of insurance. Some health care providers purchase excess insurance in addition to the HCSF coverage.

There are sixteen categories of defined health care providers currently participating in the HCSF: (1) all three licensees under the Healing Arts Act - DCs, DOs, MDs, (2) three types of medical care facilities - hospitals, ambulatory surgery centers, recuperation centers, (3) podiatrists, (4) nurse anesthetists, (5) professional corporations, (6) limited liability companies, (7) partnerships, (8) not-for-profit corporations, (9) graduate medical education programs affiliated with KU, (10) dentists certified by the Board of Healing Arts to administer anesthesia, (11) psychiatric hospitals, and (12) community mental health centers. State psychiatric hospitals and state hospitals for the mentally disabled are specifically excluded from the definition.

21st Century

Several states throughout the country have experienced another crisis situation. In some areas, medical malpractice insurance is unavailable, and in other areas, the cost of premiums has caused physicians to retire early or limit the services available to patients. Some physicians are confronted with a dilemma when they cannot afford to relocate or retire because the cost of prior acts (tail) coverage is unaffordable. The old phrase “malpractice crisis” has been replaced, and is more accurately described as a professional liability insurance (PLI) crisis.

 In Kansas, however, the Health Care Stabilization Fund has accomplished precisely what was intended. It provides stability by assuring that physicians and other health care professionals have access to liability insurance. It operates somewhat like a mutual, not-for-profit insurance company because it is held in trust by the State of Kansas instead of being owned by investors. There is no demand for profits and dividends. Instead, we assure that health care providers are actively defended when there is litigation involving the Fund, and that when there is a settlement or judgment in favor of a plaintiff, the injured party is promptly compensated. In other words, the Fund is efficiently administered in accordance with the Health Care Providers Insurance Availability Act.

 Commercial Insurance

Currently there are over twenty insurance companies or risk retention groups offering the primary level of insurance in Kansas. Some of those companies and RRGs offer coverage only to a specific profession or specialty group. Most Kansas health care providers can purchase professional liability insurance from one of these companies, but there are some who cannot. As a result, there are almost 600 health care providers participating in the Availability Plan.

This year the HCSF will be required to transfer over $2-million to subsidize underwriting losses attributable to the Availability Plan. This will increase the total accrued net subsidies to over $15-million in revenue that has been collected from Kansas health care providers. On the other hand, during the recent five-year period, the Plan has produced modest surplus revenues. We are hopeful that the Availability Plan will continue to serve its purpose without requiring substantial transfers from the HCSF.

Financial Status and Trends

Subsection (b) of K.S.A. 40-3403 imposes specific reporting requirements on our Board of Governors. This section of our report will address those reporting requirements and will elaborate.

We concluded fiscal year 2007 with a fund balance of $206,861,948. Our actuary, Mr. Sutter will provide detailed information regarding estimated future liabilities and will explain why this Fund balance is adequate but not excessive.  

The surcharge rates for fiscal year 2007 were adjusted based on loss experience for the category of health care provider. The increases ranged from 3% for chiropractors and physicians who do not perform invasive procedures, to 15% for surgical specialists and nurse anesthetists. The lowest annual surcharge was only $50 for a chiropractor selecting the lowest coverage option.

The highest surcharge for an individual health care professional was $13,898 for a neurosurgeon selecting the highest coverage option. During fiscal year 2007 we collected premium surcharges amounting to $23,056,279. Premium surcharge rates did not change for the current fiscal year.

 It is particularly noteworthy that in July this year our Board of Governors made an important decision. In the past, it has been our practice to assign reserves for prior acts of inactive health care providers only after the health care provider became inactive, and therefore eligible for tail coverage. Beginning in fiscal year 2008 we will alter our practice and estimate our future liabilities for tail coverage when health care providers are still actively practicing their profession. This will necessarily reduce our unassigned reserves to a modest percentage of our fund balance, but will improve the accuracy of our estimated total future liabilities.

 For fiscal year 2007, those health care providers who also provided services in Missouri were charged an additional 20% because of the added liability exposure. For fiscal year 2008, the Missouri practice modification factor was increased to 25% based on our Actuary’s recommendation. Institutional health care providers continue to pay surcharges based on a percentage of their primary insurance premium. Those percentage rates did not change in either fiscal year.

 During fiscal year 2007 we also received investment income amounting to $7,900,081. You may recall that the Pooled Money Investment Board manages investment of our unencumbered balances. A graph that compares our recent investment performance with other benchmarks accompanies this report.

We began fiscal year 2007 with 707 open cases. During the year, we closed 374 cases and opened 239 new ones, ending the fiscal year with 572 open cases. Because there was a significant increase in new cases during fiscal year 2006, there was cause for concern. The average number of new cases during the past three fiscal years is, however, consistent with, or less than prior years.  

Because many cases involve two or more claims, our legal staff was extremely busy during fiscal year 2007. Claims payments during fiscal year 2007 amounted to $22,467,114 and several cases remained open at the conclusion of the year. In addition, we expended $4,840,828 for claims related costs such as attorney fees. A detailed report on litigation and claims activity has been compiled by our Chief Attorney and is an addendum to this report.

 Self-Insured Health Care Providers

You may recall that K.S.A. 40-3414 allows certain health care providers to self-insure. That section of the Statutes also declares certain state facilities for veterans, as well as faculty and residents at the University of Kansas Medical Center and its affiliates, to be self-insured. Our Deputy Director who also serves as our Chief Attorney will provide a separate report on the status and cash-flow characteristics of those programs.