Ever seen a balance sheet with no cash on hand? If not, you should follow the trials of the Wisconsin’s Injured Patients and Families Compensation Fund. This is a classic example of the muddle you can get when politicians try to run insurance companies.
Wisconsin essentially bankrupted its state-run excess medmal insurer by, well, stealing $200 million from it. I really don’t think I’m exaggerating.
Mainstream media coverage is sketchy, as it usually is when actuarial issues are in play. Details are in the Legislative Audit Bureau’s report, which is what I’m relying on.
The state’s compensation fund covers health-care providers for losses above standard limits of $1 million per occurrence, $3 million aggregate. Providers – doctors, hospitals, co-ops – must buy coverage from the fund, in addition to having the standard policy.
Through 2007, the fund was perhaps a bit overleveraged – net assets of $94 million supporting $702 million of loss liabilities at 6/07. But overleveraging isn’t such a bad thing here. If the surplus got too thin, you could always increase rates. Since participation is mandatory, you wouldn’t suffer adverse selection.
Then the state needed money for Medicaid and other health insurance programs, which are maintained through the state’s Medical Assistance Trust Fund.
So the state took $200 million from the medmal fund and gave it to the health insurance fund. When I write took I do not mean borrowed. The state removed the money from the assets of the medmal fund, and there is no loan, no note, no promise to repay. The premiums the doctors paid – gone. They lost a lawsuit to get the money back, but the case is on appeal.
There was only one problem. The medmal fund didn’t have $200 million cash. It had never needed that much. Before 2008, it had never paid more than $40 million in claims in a single year.
So the fund had to – oh, ironies – borrow from the state general fund. And like any good borrower, it had to pay the lender – the state of Wisconsin – interest, a nifty $2.5 million windfall that I’m sure the legislature had no problem spending.
Not only was the fund out of cash at the end of fiscal 2009, it had a net worth of negative $109 million. Cash flow has been negative the past three years, totaling $68 million. By any measure, this insurer is broke.
If it were a private company, the state Department of Insurance would have taken it over, though given the state’s track record I can’t imagine what it would have done to improve the situation. After all, the head of the executive branch, Gov. Jim Doyle, said everything is OK, since the fund has $645 million in assets:
“There’s a lot of money in the patients compensation fund. There’s only a negative balance if you believe there is so much malpractice that’s been committed that everybody out there with malpractice claims recovered maximum amounts.”
First, the governor would be wise to understand that coverage is unlimited, so the theoretical maximum could only be calculated by all those monkeys at typewriters trying to be Shakespeare. So far the largest paid claim is $34 million.
Next, the governor could perhaps shift his gaze from the left side of the balance sheet to the right. There he will see $675 million in loss liabilities at 6/09. And that’s after the actuaries, Pinnacle Actuarial Resources, took prior-year reserves down by $192 million. (Reserves are hit with a 25% risk margin, then discounted by – increible! – 0.812.)
The other big liability at 6/09 was $76 million owed to the general fund, because – remember? – the medmal fund had to borrow so it could pay the $200 million the state – I think we agree now – stole. That $76 million has since been paid, but the negative net worth remains.
The medmal insurer limps along. Health care providers got hit with a 9.9% rate increase. And they gotta pay it, because – again, remember? – they gotta have medmal cover to practice. It’s state law.