MEDICAL INDEMNITY (PRUDENTIAL SUPERVISION AND PRODUCT STANDARDS) BILL 2002Cognate bill:MEDICAL INDEMNITY (PRUDENTIAL SUPERVISION AND PRODUCT STANDARDS) (CONSEQUENTIAL AMENDMENTS) BILL 2002: Second Reading
Mr CADMAN (Mitchell) (6.26 p.m.) —I listened with interest to the previous speaker, the member for Chisholm, and I welcome her thoughtful contribution. This area of medical insurance and indemnity confronting doctors and specialists is something that is of concern to everybody.
Our whole community was shocked to find that, despite announcements by the chairman of UMP that everything was okay—that they were handling their claims and that doctors and the community need not worry—within a few weeks the company folded and the government had to bail it out.
Part of the problem was that UMP was not a proper insurance company and some of the factors that had to be considered in looking at the changes that had occurred in medicine were not taken into account. One factor, for instance, was the long-term prospect of claims—claims that may be made 25 years after an operation or procedure has been performed on a patient. That long delay is something that most doctors did not think would apply to them. They had considered a period of five or ten years to be reasonable for seeing whether any untoward side effects of a particular treatment or procedure might occur, and they had considered that that would be covered by insurance. But to find that something could be stretched out for 25 years and then a court could find that the doctor was indeed liable or that insurance needed to be paid was a surprise to the industry.
The second factor, of course, in the whole medical area was the size of the claims that were being settled by courts. The massive amounts being paid out by way of compensation were unexpected and, in the eyes of many in the public, unwarranted. It seemed that trivial matters were receiving large payouts, and that was a cost to UMP and to medical insurers. So gradually there was an attrition in the resources such companies had. They could not cover the claims that were being made; the contributions or premiums being paid by the medical profession were not adequate for them to predict a reliable future. So medical defence organisations, of which UMP was one, came under the microscope, and on 31 May last year the Prime Minister announced the key elements of the government's strategy for ensuring that medical indemnity insurance be made a viable commercial product and that proper assessment of the risk take place, along with proper prudential management and proper assessment of what the likely payouts would be. This legislation is part of that package.
There have been complaints by some that the legislation does not go far enough—or that it goes too far. I think the government has got it about right. I think that Senator Helen Coonan, after a great deal of careful examination and a great deal of negotiation, has got it right. She has listened carefully to all sides of the argument. There may be some areas in which we will have continuing interest and in which there may be the prospect of further change, but I believe it behoves the parliament to pass this legislation. On 23 October, the Prime Minister announced further details of the government's strategy. In that announcement the Prime Minister said that, in respect of prudential supervision of medical defence organisations, the Australian Prudential Regulatory Authority, APRA, would be administering the prudential arrangements. So we have a process for these organisations that I think most of the community felt were just like any other insurance companies, although in fact they were not. These organisations that doctors pay premiums to are now going to be gathered into a proper process where they are under APRA's supervision and where they will be required to meet certain prudential standards.
The changes proposed in these two pieces of legislation are interesting. The Medical Indemnity (Prudential Supervision and Product Standards) Bill 2002 will require medical defence organisations to operate prudentially on a sound footing, as I have said. They will have to provide certain information about their products and information to their members—that is, the medical profession. They will incur some additional costs in order to operate prudentially and on a sound basis. For example, they may have to raise additional capital to meet their prudential requirements. That is a matter of /files/includes/content.cssion with doctors because, as we will see shortly, the costs involved in operating a medical practice are very substantial compared to what a doctor or specialist receives in return. It has been said, therefore, that additional costs for doctors will force some out of the medical profession and will force others to restrict the types of services they give.
As I have mentioned previously in the House, my electorate is close to the great Westmead Hospital. When speaking to specialists there, particularly those involved in neurological or obstetric services, I have been told that some of those specialists are facing huge insurance bills—$100,000 to $120,000 a year before they even start up. They then have the costs of their surgeries, their rooms and their staff and all the other costs that go with practices. Insurance alone was looking to be a horrific factor which might drive many out of medicine. That would have been a tragic loss of brains and skill that might otherwise have benefited the Australian community.
These bills bring medical defence organisations under the coverage of APRA, where they will be properly supervised and where they will have to fulfil certain conditions. These conditions have been set over a period of time, with discussions between the medical profession, the insurers, the medical defence organisations and the government. There are two important points that really do apply for discretionary cover. They have important implications for members of medical defence organisations. Previously, there was a lack of prudential regulation. The key elements of prudential regulation are minimum standards for the amount of capital that an organisation must hold—the corporate governance and risk management. We heard something today about HIH, and that is exactly the thing. The process of risk management and corporate governance has been lacking, and that must be applied to medical defence organisations.
The other point is that a financial institution must maintain certain practices in order to obtain and continue to hold a licence to operate. That is a general insurance principle. Medical defence organisations rarely exercise a discretion against a claim for indemnification, and they lack prudential regulation and reliable, transparent public reporting. Those have been some of the shortcomings of the system up to this point.
Another shortcoming in the system that has existed up to this point is that discretionary cover provides uncertainty to doctors regarding the extent to which a claim is going to be covered, should it be made. The Medical Indemnity (Prudential Supervision and Product Standards) Bill 2002 will address issues that relate to the outline of the medical indemnity market. The intent is to ensure that providers of medical indemnity cover are subject to appropriate prudential supervision. The bill provides for transitional arrangements. There will be a five-year period in which medical defence organisations can get their houses in order, so it is not going to happen overnight, but the process is to move towards that point. The government's intention is to give these organisations a chance to change but, at the same time, to be prepared to be flexible enough to meet some of the issues that have been raised in the House today that need to be assessed. This bill also provides for minimum product standards for medical indemnity in insurance contracts.
The main purpose of some of the consequential amendments in the Medical Indemnity (Prudential Supervision and Product Standards) (Consequential Amendments) Bill 2002 is to require medical defence organisations to provide data to APRA: that is, APRA will have access to their books and to the processes they are using. That process applies to all general insurance, and it is going to apply here. APRA will have the power to inspect, to take extracts from and to make copies of the books, accounts and other documents—perfectly reasonable stuff.
The main bill, the Medical Indemnity (Prudential Supervision and Product Standards) Bill 2002, is the one that sets the framework for the changes that were announced in May last year by the Prime Minister, the details of which were finalised in, I believe, October last year. Some of the reasons for these changes are interesting. The report of Trowbridge Consulting of November 2001 noted:
As medical defence organisations are not insurers, they have not been subject to the same accounting and reporting requirements as insurers. MDOs need to comply with the usual company accounting standards but do not need to comply with the sections of the act that apply to general insurers. This has led to a variety of accounting practices in relation to the reporting of incurred but not reported claims and full insurance disclosure of known claims liabilities. Liabilities for known reported claims have always been reported in medical defence organisations' balance sheets. However, there has been inconsistency in reporting the incurred but not reported claims between the medical defence organisations, with some incurred but not reported claims on their balance sheets, others disclosing it in a note of the accounts and others not disclosing it at all.
There we see that there is an inconsistent approach to prudential management.
The Australian Health Ministers Advisory Council stated that one of the reasons, in their opinion, that the medical defence organisation industry had experienced financial difficulty was that it had not been subject to the same prudential scrutiny as insurers and that the difficulties faced by UMP in particular were of a kind which might well have been identified and acted upon earlier had there been a regulatory regime in place. The council also stated that some of the key problems of competitive underpricing of products and the failure to adequately reserve potential liabilities were likely to have been addressed at an earlier stage. That is absolutely right; nobody could argue with that.
Under the Insurance Act there is a requirement for a rigorous prudential regulatory regime. APRA must give authorisation for a body corporate to carry on insuring. They must approve it, ensuring that the standards of conduct are set and that the prudential supervision is of a certain standard. General insurers have for years been used to this. APRA is the approved authority, and an organisation must have an APRA approved actuary and auditing process. Certain standards of conduct, including ensuring that all those involved are `fit and proper persons', are set down. A minimum assets requirement is placed on insurers, and they must have funds of a set level in reserve. All of this has been calculated and laid down, and that is part of this legislation that the House is dealing with tonight. The clauses of the legislation spell out the need for prudential requirements one after another. The standards of minimum cover and offers for retroactive and run-off cover are there, and the legislation fits together as a package.
In conclusion, I want to refer to comments made recently by Dr Kerryn Phelps about some of the concerns that the AMA have. To my mind, they are not matters that should delay the passage of this legislation. The government needs to get it through. If there are shortcomings identified over a period of time or factors which need further amendment, the government can deal with them, but we need certainty in place. We do not need the Senate playing games and delaying things, and I do not think the intention of the opposition is to cause that to occur. We need to have the government's proposals out there, and we need certainty for the medical profession, whether we are talking about specialists or general practitioners.
Regarding the comments by Dr Phelps, I have noted that she has asked the government to extend its high-claim subsidy to 100 per cent of the so-called blue sky liability for the amount of claim above $15 million. Dr Phelps says $15 million is an extraordinary claim. Yes, it is, but in this day and age I consider that we would be unwise not to consider it. Dr Phelps says that the massive and unpredictable future care costs for the severely disabled need to be assessed. I notice that she also says that the AMA recommends a community funded, nationally coordinated medical accident care and rehabilitation scheme for patients severely injured as a result of medical accident. That needs to be examined, but this bill should proceed.
Dr Phelps says that the biggest sticking point could be the proposed levy on doctors. Dr Phelps outlines some of the costs of running a practice. They are very interesting. If one looks at the value of bulk-billing and the cost of insurance, it must be a matter of concern to general practitioners. Dr Phelps has said that she does not believe that doctors can contemplate a premium or levy that will provide a scheme which can be expanded to cover 100 per cent of claims above the insurable cap, which is $15 million, or that they can cover the long-term care and rehabilitation and the tort law reform that is necessary. But, all in all, the AMA strongly agrees and encourages the government to proceed. I am pleased that that is the case. The government should proceed. I do not believe that the opposition has indicated that it will be obstructive, but it is also seeking to get a reasonable result from this process with the prospect of future changes—perhaps those outlined by Dr Phelps—as time transpires.
Author: Alan Cadman MP
Source: House Hansard - 24th March 2003
Release Date: 24 Mar 2003