In December of 2004, the Maryland General Assembly enacted legislation aimed at relieving physicians and certified mid-wives from the spiraling costs of professional liability insurance. However, that legislation may be working better for some physicians and mid-wives than others. To better explore this premise, this article will first explain the mechanics of the subsidy, and then look at two hypothetical physicians, Dr. Ordinary and Dr. Careful.
A. The 2005 and 2006 Subsidies
In 2005, the new legislation permitted insurers to increase malpractice insurance rates, but physicians and certified mid-wives only paid for 5% of the increase. The State picked up the balance of the increase. However, surcharges and reductions in loss experience discounts or dividends were not subsidized.
The subsidy for 2006 is more complicated. Basically, the subsidy is 25% of the amount that a physician or mid-wife would have paid in 2005 had there been no 2005 subsidy. The physician is only responsible for paying the amount of the premium that exceeds his or her 2006 subsidy.
B. Dr. Ordinary and Dr. Careful
A particular doctor, Dr. Ordinary, paid $10,000 in annual premiums in 2004. Dr. Ordinary was not eligible for any rate discounts or dividends for avoiding malpractice claims in the past.
Dr. Ordinary's medical malpractice insurance premium was raised to $13,000 for 2005, a thirty percent increase from 2004. Dr. Ordinary only paid $500 of the $3,000 rate increase, which $500 was 5% of his 2004 rate, while the State subsidized the $2,500 balance. Thus, Dr. Ordinary paid $10,500 in 2005 - $10,000 for the 2004 Rate, $500 of the rate increase.
Dr. Careful also paid $10,000 in annual premiums in 2004. Unlike Dr. Ordinary, Dr. Careful received a $5,000 discount from dividends and because of her track record of avoiding malpractice claims in the past. Accordingly, Dr. Careful's net cost in 2004 was $5,000.
For 2005, Dr. Careful's medical malpractice insurance premium was raised to $13,000, just like Dr. Ordinary. However, by the end of 2005, Dr. Careful's discount/dividend was reduced to $1,000. As a result, Dr. Careful paid a net of $9,500 -- $10,000 for the 2004 rate, plus $500 of the rate increase, but less $1,000 for the discount.
In 2006, Dr. Ordinary's subsidy is $3,250, or 25% of Dr. Ordinary's full 2005 premium of $13,000. Dr. Ordinary's 2006 actual rate increased by $1,300 to $14,300, a ten percent increase from 2005. As a result, Dr. Ordinary's cost in 2006 is $11,050 for malpractice insurance.
In 2006, Dr. Careful's subsidy is the same as Dr. Ordinary's, namely $3,250. Dr. Careful's actual rate for 2006 is also $14,300. Therefore, Dr. Careful's total cost in 2006 is $10,050, assuming another $1,000 discount/dividend ($14,300 - $3,250 - $1,000).
C. How the Physicians Fared
Dr. Ordinary paid $10,000 in total payments in 2004; $10,500 in 2005; and $11,050 in 2006, an almost twelve percent increase in payments over that time period. Compared to the 43% increase in the insurer's premiums in the same time period, Dr. Ordinary should be pleased with the medical malpractice subsidy program. However, if Dr. Ordinary felt that his 2004 rate was too high, he has not experienced any relief from that high water mark.
Dr. Careful paid $5,000 in 2004; $9,500 in 2005; and $10,050 in 2006, an almost 100% increase over that time period. Dr. Careful, who benefited the most from her discounts and dividends to keep her insurance costs low in prior years, did not feel much relief from the subsidy, notwithstanding that she received an identical amount of money from the State as Dr. Ordinary.