The Injured Patients and Families Compensation Fund (formerly the
Patients Compensation Fund) was created to pay medical malpractice
claims that exceed primary insurance thresholds established by statute.
Statutes require most health care providers that operate or have permanent
practices in Wisconsin to maintain primary malpractice coverage
of $1 million for each incident and $3 million per policy year. In addition,
these providers are required to participate in the Fund, which
provides unlimited liability coverage for economic damages that exceed
the primary limits.
The Fund is managed by a Board of Governors, administered by the
Office of the Commissioner of Insurance, and financed through assessments
on health care providers and earnings on the Fund’s investments.
It has paid over $553.2 million in claims from its inception through
June 30, 2004. 2003 Wisconsin Act 111, which changed the Fund’s name
from the Patients Compensation Fund to the Injured Patients and Families
Compensation Fund, established it as an irrevocable trust for the sole
benefit of participating health care providers and proper claimants.
Statutes require the Legislative Audit Bureau to perform financial
audits of the Injured Patients and Families Compensation Fund at least
once every three years. Our audit report contains our unqualified
opinion on the Fund’s financial statements and related notes as of and
for the years ending June 30, 2003, 2002, and 2001.
Financial Position
The uncertainty and long-term nature of medical malpractice claims make it difficult to predict
the size and timing of claims that will be settled and paid from the Fund. In the past ten
years, annual claims payments have varied from a low of $18.7 million to a high
of $50.3 million.
Since its creation in 1975, the Fund has typically received more in
assessments and investment income than it has paid out in claims and
administrative expenses. As a result, its cash and investment balances
have grown to $658.9 million as of June 30, 2003.
However, the Fund’s financial position is also significantly affected
by its loss liabilities, which are based on estimates of what it may be
required to pay for malpractice incidents that have occurred but
may not yet have been settled or even reported. The Board of Governors
relies on a consulting actuarial firm, which it has employed since
the Fund’s initial years, to estimate these loss liabilities.
The Fund reported an accounting deficit for several years in the past
because estimated loss liabilities exceeded the cash and investments
available to pay them.
Its accounting balance reached a low of -$122.7 million on
June 30, 1988. The Fund’s financial position has since improved significantly.
The accounting balance was $7.9 million as of June 30, 2003,
and is estimated to be $21.0 million as of June 30, 2004.
Actuarial Estimates
Annual actuarial adjustments to the Fund’s estimated claims have
contributed to the improvement in its financial status in recent years.
Because a medical malpractice claim may be filed years after an
incident, and there is no limit on the amount of economic losses the Fund
may be required to pay, the actuary reviews and revises individual and
total loss liability estimates each year, based on subsequent experience
and information.
The Fund’s actuary indicates that annual adjustments have been
within the normal range of variability for actuarial projections,
especially considering the uncertainties surrounding medical
malpractice cases.
Nevertheless, in nine of the ten years from fiscal year (FY) 1993-94
through FY 2002-03, the actuary’s initial estimate of loss liabilities has
been decreased one year later, following actuarial review of subsequent
experience and information. Furthermore, the actuary’s original
loss estimates for the last 20 policy years have been reduced over time
by $217.3 million, which represents 13.9 percent of the
original losses estimated for these years.
Some interested parties continue to be concerned that the actuary may
be overly conservative in estimating the Fund’s loss liabilities. For example,
interest groups representing patients and trial lawyers suggest
that over the years, conservative actuarial estimates have exaggerated
medical malpractice costs in Wisconsin and, consequently,
contributed to 1995 legislation that re-established limits on noneconomic
damages awarded to patients and their families for pain
and suffering, embarrassment, mental distress, and the loss of
companionship and affection that results from medical malpractice.
As of May 15, 2004, these awards are limited to $432,532.
On the other hand, from both an actuarial and an accounting perspective,
conservative actuarial estimates are considered more
prudent than overly optimistic ones, not only because of uncertainties
surrounding long-term medical malpractice claims,
but also because of the unlimited coverage for economic damages
available under the Fund.
While several other states have medical malpractice funds, only a
few provide unlimited coverage. Therefore, relatively limited experience
pertaining to unlimited coverage is available in the industry.
Prudent estimates are also important because of the significant role
that medical malpractice funds can play in a state’s medical malpractice
environment. The Injured Patients and Families Compensation Fund is
often cited as an important factor in Wisconsin’s relatively stable environment
for health care providers in comparison to other states. Its
solid financial position provides flexibility to readily respond to
changes that may occur in the medical malpractice environment
in the future.
Actuarial Audit
In light of questions raised about the actuarial estimates, we recommended
in June 2001 that the Office of the Commissioner of
Insurance contract for an audit of the actuarial methods and assumptions
used in estimating the Fund’s loss liabilities. A comprehensive
review by an independent actuary is likely not only to suggest refinements
to the actuarial analyses, but also to promote broader acceptance
of the analyses by the various interested parties.
However, more than three years after our 2001 recommendation, an
actuarial audit of the Fund has not been completed. The Office contracted
with an actuarial firm in August 2002, but after reviewing a
draft report and working with the firm for several months, the Office
and the Board’s Finance, Investment, and Audit Committee concluded
that the contractor’s work and the original request for proposals
did not meet the original intent of the Audit Bureau’s recommendation
and that further analysis and discussion of the nature,
structure, and funding of the Fund was needed.
The Office paid the first contractor a total of $23,183 and issued a
second request for proposals in April 2004. Five proposals were
received and rejected. Subsequently, the Office has obtained proposals
from other actuarial firms it has determined to be experts in the area
of medical malpractice.
A contract for another actuarial audit is expected to be issued in
October 2004 and completed in November 2004. In addition, the
Board recently established a policy to obtain an actuarial audit of the
Fund once every three years.
Provider System
Another continuing challenge for the Fund is the decreasing effectiveness
of its aging computerized provider system. Since the system
was first developed in the early 1990s to track medical malpractice
claims, it has been expanded to incorporate other aspects of the
Fund’s operations, including billings and provider compliance
with liability coverage requirements. However, the provider
system has not been able to easily accommodate the changes that
have occurred over time.
As a result, errors in health care provider accounts have occurred,
including incorrect bills and noncompliance notices. As a result of
these regularly occurring errors, staff must, on a daily basis, review
the account information in the system, bills and notices generated
by the system, and system reports to ensure that information is
complete, accurate, and current.
The regular occurrence of errors and the need to manually identify
and correct them increase the risks associated with the Fund’s operations
and, consequently, required additional audit effort before we
could issue an opinion on the fairness of the Fund’s financial
statements. The condition of the system is likely to worsen, resulting
in increased risk to the Fund’s financial operations and requiring
additional efforts to keep the system operational.
In its 2003-05 biennial budget proposal, the Office requested
authority to spend $607,800 from the Fund for a new provider
system. Like other budget requests for systems work, the Office’s
request for additional resources for a new provider system was denied
by the Legislature. The Office is now more fully documenting
problems with its provider system and assessing its ability to internally
complete incremental enhancements. As part of our ongoing
financial audit work at the Fund, we will continue to monitor the
Office’s status in addressing problems with its provider system.
Recommendation
Our recommendation addresses the need for the Office of the Commissioner of Insurance to:
report to the Joint Legislative Audit Committee by
November 30, 2004, on the status and results of the
actuarial audit expected to be completed in November
(p. 21).