Ohio MDs Say Insurance Ending Practice

[cb88]

Poll: Ohio MDs Say Insurance Ending Practice



NU Online News Service, April 19, 12:52 p.m. EDT—Some 58 percent of Ohio's doctors surveyed in a new poll said they will close their medical practices within three years if medical malpractice insurance rates continue to soar, according to the Ohio State Medical Association.

The poll also found that 34 percent of Ohio physicians surveyed said they expect to close their practices within the next two years if the current insurance environment persists.

The survey, conducted by the Ohio State Medical Association in March and April, was randomly distributed to 4,000 Ohio doctors, to assess their top concerns in their medical practices.

Additional study findings include:

• Around 80 percent of those surveyed agreed that rising insurance rates have “directly impacted” their patients and that they are very concerned about patient access because of the health care crisis.

• More than 51 percent of doctors surveyed said they believe the way they practice medicine has changed because of the insurance rate hikes. They reported troubles hiring new physicians and said that they have doctors leaving their practice groups.

• More than 56 percent of those surveyed said they have boosted the number of tests they have ordered for their patients, in order to protect themselves from potential liability. These defensive medicine practices can be linked to rising health care costs for patients, doctors said. cb88 note: This is a common practice. Doctors are being sued, and they KNOW the insurance rate hikes are because loss ratios on med mal books are well above 150-300% (in otherwords, the insurance companies are losing 50-200% on premiums written on med mal)

"These statistics confirm that Ohio is facing a real health care crisis," according to the Ohio State Medical Association president, William Sternfeld.

Dr. Sternfeld said that with reimbursements declining—and expenses dramatically going up—more and more Ohio doctors are faced with the decision of whether to leave the state, retire or even close their practice.

“Any of these decisions,” he said, “reduce the availability of quality health care and forces fewer physicians to see more patients.”

[BrianOKeeffe]

Auto accidents, malpractice highlight top jury awards

Brent Wilder
For Business First

Death and severe permanent loss can lead a Franklin County jury to award amounts rarely seen in the bulk of injury cases that make up much of the area's civil court proceedings, according to a sample of the top verdicts handed down in the county last year.

Belinda Barnes, partner with the Columbus law firm Lane Alton & Horst LLC and case reporter to the Columbus Bar Association since 1998, says the 2003 list of top awards from Franklin County Common Pleas Court is representative of the types of cases filed, even though they are atypical in award amounts, which range from $250,000 to more than $7 million.

"Auto accidents are ... 90 percent of the cases I would report. Those are the majority of cases that are tried just because there are more of them filed," says Barnes. "(When) money is coming out of both (defense and plaintiff) pockets, those cases are almost always settled."

But although motor vehicle accident cases are also frequently settled, insurance-funded representation can fuel the process toward trial, Barnes says.

Lawsuit crisis?

Fred Gittes, president-elect of the Ohio Academy of Trial Lawyers and a partner with the Columbus law firm Gittes and Schulte, says the 2003 list, topped by a $7.02 million verdict for the surviving family members of a man who fatally crashed his motorcycle due to a commercial diesel fuel spill, provides "excellent examples of why there are large verdicts - and should be."

Arguments for caps on jury awards "are lumping together ... cases in which there is sometimes permanent, life-changing injury or death with ... cases in which there is temporary injury from which there is a total recovery," Gittes says.

The second-highest local verdict, an award of $6 million, came in a medical malpractice case that left a 49-year-old woman without both legs.

"She lost her legs from the thigh down," Gittes says. "Because of how much of her legs were lost, she cannot be fitted for prothesis - and it was easily preventable. I get sick and tired of people talking about these made-up stories, of someone put a cat in a microwave and it killed the cat and they sued the microwave company. There is no 'lawsuit crisis.' "

Barnes says that in motor vehicle accident injury cases, the median award is about $5,000 to $6,000.

"Very often, the medical bills are well in excess of what the verdict is. Sometimes they don't even give the plaintiffs even close to their medical bills," she says, noting that "if it ends up in a jury trial, there's probably a reason it wound up in a jury trial."

Stephen Chappelear, partner in charge of the Columbus law firm Hahn Loeser + Parks LLP, says although large medical malpractice awards grab headlines, "the reason that the median jury verdict in medical malpractice cases is zero is that 75 percent of all medical malpractice cases that go to trial, the plaintiff loses."

Chappelear, who has been compiling Franklin County civil jury verdict information for 15 years, says that not only are medical malpractice cases unusual, the even slimmer margin of successful verdicts typically involves extreme loss stemming from major medical negligence, therefore netting statistically higher awards.

The 2003 top awards list also includes a legal malpractice award of more than $600,000 and two unusual accidents, one fatal fall by a resident of a house under construction and a dog bite victim. Barnes says the categorization of cases is complicated by this smattering of personal injury filings, which is represented in the smaller jury awards as well.

Punitive awards

Although the top awards represent statistically unusual verdict totals for 2003, Chappelear points out that only two of the verdicts include punitive damages, one for $100,000 in the dog bite case and more than $5 million in the fatality involving the diesel fuel spill.

"This does not represent anything different from a window in time of two years ago or 10 years ago or 20 years ago," Chappelear adds. "At any time that you would pull the top 10 verdicts, you would expect to find death cases and permanent injuries to be the highest awards, and since those typically result from serious car crashes or medical negligence, that's not a surprise."

Gittes, citing an Ohio Bar Association study, says there have been just 64 cases since 1998 when jury awards exceeded $215,000, out of 476 jury trials in civil cases in Franklin County Common Pleas Court in those six years. He says just 26 of those cases included any punitive damages.

"For those cases that are not well-founded, they don't get a lot of money," Gittes says. "Juries don't run around awarding people a lot of money. They don't award money unless they think it's really deserved."

Barnes says the Columbus bar is expected to release a compilation of Franklin County civil court cases from 1998 to 2003 in its member magazine this summer.

http://www.bizjournals.com/columbus/...s5.html?page=1

[BrianOKeeffe]

The real reason behind the increasing medical malpractice is not because of lawsuits, rather, because there are fewer companies selling malpractice insurance in Ohio compared to other states.

Since 1998, we in Ohio have seen a number of insurance companies because of mismanagment or in the case PIE Mutual Insurance Company, because of corruption (a la' Enron) either be liquidated or leave the state.



How bad was PIE Mutual Insurance Company? Read On:

In 1997, PIE Mutual sold medical malpractice insurance to 15,000 policyholders in nine states, including West Virginia. In December 1997, an Ohio judge placed the company in receivership, declaring the company to be hopelessly insolvent with claims exceeding assets by $275 million. The Ohio Department of Insurance found, during PIE's liquidation, that PIE had an $11.6 million payroll for 150 employees, an average of more than $77,000.00 per employee. Salaries consumed 25% of all premiums paid by PIE's insured physicians, salaries 4.5 times the national average. Travel expenses were $2.6 million -- 4.7% of premiums -- an average of $17,000.00 per employee.
Five months before PIE was liquidated, the company gave $11.8 million to three of its top executives. Of $6.1 million received by the CEO, $92,000.00 went to a cattlepurchase from a member of the CEO's family, $95,000.00 was paid to MGM Gaming, and $30,000.00 went to RIO Casino. And the bonuses didn't stop there.
The CEO's son, who was the vice president of marketing, got an $8,000.00 salary advance from PIE -- an advance that was never repaid. The CEO's secretary got a $48,000.00 salary bonus; one vice president got a $264,000.00 bonus, another a $160,000 bonus. An accountant got an extra $132,000.00, while the assistant controller got $67,000.00. Meanwhile, the vice president of claims had a $350,000.00 loan forgiven.
Not all the money went into the pockets of employees. From 1992 until 1997, PIE paid $1.4 million to a board member for “consulting.” The company also gave money to the Republican Party, nearly $300,000.00 between 1994 and 1996. It also paid $50,000.00 toward the cost of remodeling the Ohio Republican Headquarters. PIE executives underwrote the $35,000.00 cost of the Southern Legislative Conference in Charleston in June 1996, and gave $13,000.00 to five West Virginia legislative candidates in 1996. It is unclear how much PIE spent on its luxury Skybox at Jacob's Field in Cleveland, home of the Cleveland Indians, but a contingent of politicians from West Virginia were hosted in the box as late as 1997.
In June 1998, the Ohio Department of Insurance auctioned off many of PIE's assets to pay its claims. At PIE's Cleveland headquarters, it auctioned off china and crystal services for 60, as well as a rare Frederick Remington lithograph collection. The Board of Director's conference table alone sold for $30,000.00. It also auctioned off “TidePoint,” anexclusive 63-acre Hilton Head retirement complex, 80% owned by PIE, for $23.7 million. The facility, with condominiums and villas ranging in price from $166,000.00 to $606,000.00, was coincidentally the home of the CEO's parents.
There is not now, nor has there ever been, a “medical malpractice” crisis. The premiums for malpractice insurance are high -- but as the PIE situation demonstrates, often for reasons wholly unrelated to malpractice verdicts. http://www.state.wv.us/wvsca/DOCS/Spring01/27464d.htm

[cb88]

Originally Posted by BrianOKeeffe

The real reason behind the increasing medical malpractice is not because of lawsuits, rather, because there are fewer companies selling malpractice insurance in Ohio compared to other states.

Brian,

You are, in part, correct. However, it's a cause & effect (chicken and the egg) argument. There are also less companies due to increased settlements and insolvency of insurance companies. Partly due to mismangement, but also the proverbial "straw" in many was the hefty lawsuits. In some companies, it was just the lawsuits. But, yes, the less companies to offer the insurance, the more the remaining can charge (less competition). However, the companies are still losing money. Loss ratios on many med mal books were well over 100%, in fact, many were up into the 150-300% range (meaning they paid out 1 1/2 to 3 times what they collected in premiums). Kind of hard to stay in business when you are paying that out.

[cb88]

Just so y'all know I'm just as critical of the "players" in my own industry as anyone outside (and sometimes more so).....I wrote this article last year. It was not published, it was a part of a school project with my study group. (we got an A+ ) (this does not include the bibliography or references, but I can get them if anyone questions the validity of my report):

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Abstract



Kemper Insurance was a company that up until eighteen months ago was well respected across the insurance industry. However, by spending more at executive levels than the company’s earnings and budget would support, a downward spiral began that ultimately resulted in the company’s doom. This demise could be traced to Kemper’s top executives, who were all but isolated from the corporate operations themselves. Perks and bonuses, such as unconstrained and exorbitant expense accounts and salaries, created an atmosphere that further isolated management from the financial realities of the company. Financial mismanagement grew, and to cover the mounting budget, executives begin writing high-risk insureds at standard insured pricing to boost their premium volume. This strategy would work initially. However, as is typical of a fragile financial foundation, this policy eventually left Kemper Insurance with the only possible option – divide and divest. The limited scope of options is due to failing financial ratings by industry rating companies and lending institutions. The other alternative is to let the Illinois Department of Insurance is take over Kemper Insurance Companies if the company cannot strengthen its liquid assets to comply with statutory accounting regulations.



INTRODUCTION



Background 1.1



Kemper Insurance Company has enjoyed nearly one hundred years as a respected figure in Chicago and throughout the world. James S. Kemper created the mutual insurance company in 1912 to provide workers compensation coverage to lumberyards. The company bloomed into an international company over the years writing multiple lines of insurance, primarily through the independent agency system. Kemper was the 15th largest property casualty insurance organization in America and a behind-the scenes political powerbroker in Illinois. Kemper boasted a conglomerate of twenty-five affiliated insurance companies as well as a services company. In addition to the insurance operations, Kemper Insurance owned a world-renowned golf course that hosted an annual Professional Golf Association tournament up until this year. Kemper was a company that was, according to AM Best, over $1billion in size. (Ha, Michael) Independent insurance agents across the nation respected Kemper and often used them as their “company of choice.”



In the past, Kemper was known and respected for their ethical business practices; their business was guided by their inherent values of responsibility, understanding and integrity. Company policy included standing behind their commitments and treating people fairly. Kemper was a finalist in the 2002 Better Business Bureau International Torch Award for Marketplace Ethics. (www.insurancejournal.com ) The criteria for such an award includes ethical practices in the marketplace, high standards of behavior toward customers, employees, suppliers, shareholders and communities; truthfulness and accuracy of advertising and sales practices; an ethical reputation among industry peers and in communities where they do their business; training programs that assist employees in executing ethics policies; and management practices and policies that give long-term value to shareholders, customers, employees and vendors.



Kemper was progressive, and some might say too aggressive, in their operations. In an effort to expand the markets they could reach, Kemper forged alliances with Independent Insurance Agents of America’s “Trusted Choice” Program and Insurance Noodle, a marketing resource for smaller agencies. (www.insurancenoodle.com) Kemper employed over 1500 people in the Chicago area with an estimated 3000 employees nationwide. (www.employerhealth.com)





Problem 2.1



With changes in management over the years, Kemper’s philosophy and practice of making sound business decisions started to change. Dave Mathis who was described as arrogant and a spendthrift was named Chairman and chief executive officer in 1996, and most say that was when the slide began. Additionally, Kemper Insurance was hit hard with Mold, Asbestos, 9/11, Enron and Arch Dioceses claims compounding their already growing internal financial and ethical difficulties. The company would see its coveted AM Best rating of A++ steadily drop to an A in January 2002; then, when more difficulties came to light, the company would see the interlocked downward spiral of declining ratings and increasing financial difficulties. Kemper Insurance was eventually left with unpleasant options of which only two were realistic.



Purpose of Report 2.2



Kemper Insurance Company has been facing many financial difficulties. We researched numerous articles from the last few years to try and discern where and how the problems started. The purpose of this report is to bring to light the complexities of the problems so that the board could determine where the problems occurred, how they occurred and why they occurred. Additionally, there was a need to consider all possible solutions to ensure the path being taken was the correct path.



Scope 2.3



This report focuses on problems that stemmed from management and executive philosophies; outside contributing factors were not discussed in this report. The report expands on the problems caused by out-of-control spending by the executives and their business decisions made to cover their spending. It reviews options that might have been available to Kemper and makes a recommendation of the solution the researchers felt was in Kemper Insurance Company and its investors’ best interest.





DISCUSSION



The Beginning of the problems 2.4



The company began crumbling at the end of 2002 however its problems were rooted in bad business decisions made long before that time. Kemper’s policyholder surplus was a source of concern. Surplus accounts in any insurance company are typically invested until needed to pay claims. Kemper invested much of its surplus in stocks in the 1990’s as the stock market was doing well. However, stocks are more risky than high-quality bonds. Insurance rating agencies and state regulators don’t like to see large amounts of risk in investment portfolios. Insurance rating agency A.M. Best Co. told Kemper to diversify its investments or face a rating downgrade. (www.programbusiness.com)



Kemper Insurance Company also grew rapidly. They gobbled up many other companies in the industry in an attempt to strengthen their hold in the marketplace. Some in the industry say that they grew at pace their technology could not keep up with. (Hutchinson)



Over Exuberant Spending 3.1



Insiders and former employees state that David Mathis, chairman and chief executive officer and William Smith, president of Kemper Insurance Corporation had much to do with the demise of the company. (Stanak,S) The insiders site their unethical business practices and overspending. Mathis and other Kemper Corporation directors and officers had strong incentives to make better deals for the corporation due to their ownership of Kemper stock. For example, the Lumbermens Mutual Corporation, often referred to as the flagship company of Kemper, agreed to several transfers of stock between Kemper and Lumbermens creating a large dollar return for Kemper’s shareholders. Was it a coincidence that Kemper, which shared directors with Lumbermens, came out so far ahead in its deal with Lumbermens?



It has also been stated that the spendthrift habits of David Mathis and William Smith contributed greatly to Kemper’s financial woes. Mathis and Smith had signed off on a purchase of a corporate jet. Smith and Mathis often used this jet for personal reasons. According to insider accounts, the accounting department was told not to question any of Smith’s or Mathis’ expense accounts. In addition, Smith often insisted Kemper’s branch offices host lavish receptions for him when he visited their facilities. Those expenses included ice sculptures, fine wines and expensive settings. In addition, Smith often stayed at lavish hotels at a price of $800 dollars a night. As is tradition with many insurance companies, Kemper hosted annual trips, called the Mark of Excellence, for its top producing agents and brokers. The level of these trips, however, far exceeded the norm in the insurance industry, costing Kemper millions of dollars annually.



Mathis had been with Kemper for 44 years and his retirement was announced May of 2002. He was to hold his position until April of 2003, when William Smith was to take over his position. A press release stated that William Smith resigned abruptly, however, inside information states he was actually fired. (www.snl.com)





Management/Underwriting Decisions 3.2



In another effort to raise capital and bolster the company financially, Kemper launched a program to aggressively write new commercial lines business called “Shoot the Lights Out.” (Stanak, S) Some executives’ bonuses were based almost entirely on hitting targets for this aggressive program. These same executives were given the authority to sign off on business exceptions – a conflict of interest some might say. Sales climbed however in the insurance industry that can have a negative effect. The larger the premium volume for a company, the larger the policyholder surplus account required by statutory accounting and insurance regulators.



Larger numbers of policyholders carries a larger risk for catastrophe business. Unfortunately, Kemper found they were facing just this problem after the 9/11 World Trade Center tragedy. Claims climbed too quickly and the company eventually launched “Fix the Business,” a program to try to improve underwriting results, but claims had already poured in on business that was originally written at inadequate rates.



The mid-to-late-1990s were “soft” market years. A soft market is one in which cutthroat competition drives down insurance premiums. In the preceding soft market many of the policies Kemper sold were under priced. They started writing more business, yet they admitted the company was having trouble raising money. Compounding the problem, Kemper purposely started going after some of the riskiest business in the industry. They launched initiatives to write pollution liability, excess casualty and other lines of business that are notorious for producing huge losses and wrote it at preferred risk pricing. The executives’ rational was that there was little competition for this business, and where there is little competition an insurer can drive pricing. What Kemper executives failed to consider was little competition existed in those markets for a reason. Unless an insurer knows what it is doing, it is likely to lose its shirt. Few, if any, Kemper employees had experience handling that kind of business.





Financial Downward Spiral 4.1



A.M. Best Co. established in 1899, is the worlds oldest and most authoritative insurance rating and information source. Once assigned one of the top ratings by A.M. Best, Kemper’s financial problems started a downward rating spiral that they would not be able to recover from. Financial ratings are used by many entities. Agents use them to decide the most stable insurance company to place the insured. Insureds use them to determine the strength of the company that they anticipate being there at the time of a covered loss. Financial institutions and investors use the ratings to determine the risk/reward factor for potential lending and investments.



Upon initial financial problems in early 2002, A.M. Best downgraded Kemper’s coveted A rating to a B++. (AMBest.com) As previously stated, AM. Best directed Kemper to correct its financial troubles or face further downgrading in their ratings. Former Illinois Governor, Jim Edgar, who currently sits on the board of Kemper, took credit for moving Kemper out of equities before the stock market slide began; in fact Kemper made that move because of the threat of a lower rating, which would have jeopardized some of the company’s business. (Stanak, Steve) The timing of the move was good. The execution of the move was bad. Much of the money was invested in telecom bonds, most of which have become nearly worthless due to the collapse of the telecom industry. At the end of 2002 Kemper Insurance Company’s rating was downgraded as a result of its marginal capitalization, weak cash flows and reduced overall liquidity position. They saw their financial strength rating go to B (fair) from B+ (very good) by A.M. Best Co.



In early 2003 A.M. Best lowered the debt rating of the surplus notes to “ccc+” from “bb-“ issued by Lumbermens Mutual Casualty Company, the lead member of the inter-company pool and group. The lowering of Kemper rating was a result of many factors. Their weakened capitalization and the ongoing operating uncertainties were strong contributors to the downgrading. Their execution of risk associated with management’s announced restructuring initiatives added to Kemper’s financial woes. The restructuring included the sale of the renewal rights to various lines of business; bundled and unbundled large risk national accounts; alternative risk programs; environmental; excess casualty and surety business. (Ha, Michael)



Every move Kemper made seemed bad for them and their rating continued to slide, assuring that policyholders would flee for more stable carriers. The more the policyholders fled, the less income Kemper had. A.M. Best Co. recently downgraded the majority of Kemper’s companies’ financial strength rating to D (Poor). (A.M. Best) (See Illustration 1.1)



Kemper now faces a federal lawsuit over its default on surplus notes and has announced that its finances are so shaky it could be taken over by the Illinois Department of Insurance if drastic measures are not taken. (Stanak, Steve) They have announced that it will make “audit adjustments” that could prompt the state of Illinois to take control of the company. Kemper issued a statement that warns, “…statutory surplus reflected on the audited statements of assets, liabilities, and surplus as of December 31, 2002, is currently expected to be substantially less than what was reflected on the 2002 unaudited statement.”(www.kemper.com)





Conclusion

Kemper Insurance Company, a company that for nearly a century was one of the most respected names in insurance, has reached a point where they must take drastic measures or face dire consequences. The problems caused by lack of ethics at the executive level and poor business decisions resulted in a sharp decline in Kemper’s financial stability and respect in the insurance industry. Kemper Insurance’s difficulty in writing new business lies in the lack of statutory surplus required by Regulators to support the risk. This surplus requirement unfortunately increased over time as the rating agencies lowered the rating. As Kemper was a mutual insurer, owned by its policyholders, it was limited in any financing options. Its outlook was depending on the potential for obtaining fresh capital to boost its policyholder surplus so that it could write new business and increase its profitability. Kemper would not be able to take advantage of the debt market, however, since Moody’s Investors Service Inc. downgraded $700 million of Kemper’s surplus notes to below investment grade. (www.jsmithlanier.com) While there have been many options facing Kemper, there are few realistic options left for Kemper are very few. The inability to write business and the inability to obtain additional capital has left Kemper only one option – to divest itself or be taken over by the department of insurance.



Recommendations



After review of the information in regards to Kemper Insurance Companies’ troubles, our recommendations are as follows:



1. Break apart the numerous companies into smaller more sellable companies. Kemper has a multitude of individual companies that can be broken apart and sold individually. This would make it easier to find a buyer or buyers for the business, as it would not require such a large investment on the part of one potential buyer.



2. Sell off individual companies, where this is not possible, cease underwriting and sell renewal rights of lines of business and run-off existing policies. Wherever it is not possible to sell the business of a company, as it exists, the option to sell the right of renewal to an existing insurance company and run-off the policies remaining until expiration dates pass would be feasible.



3. Sell off Kemper Lakes Golf Course. Kemper owns a PGA classified golf course that it has sponsored numerous tournaments on. It is our recommendation that it sell that golf course to raise capital.



4. Sell off all Kemper Real Estate. Kemper owns numerous buildings nationwide. These buildings could also be sold to raise capital.