Given the current government review of the sector, what might this mean for your premiums in the near to mid term?
Warren Buffett is famous for many wisdoms in investment, key among them, the concepts of “durable competitive advantage” and “economic moats”. Both ideas are reasonably self-explanatory. Invest in things that have some natural protection against long-term competition from other players in a market.
Which begs the question of relatively new medical indemnity market entrant, Tego. Did someone in Buffett’s Berkshire Hathaway realise that launching into this market now would provide a natural and durable competitive advantage over the four incumbents, by way of legislative imbalance?
Each of the incumbents – Avant, MIPS, MIGA and MDA National – are compelled, post legislation introduced into the market by the government in 2002, to insure the more-risky doctors, and at a price which is capped well below normalised market cost. Tego isn’t. Tego isn’t a medical defence organisation, though. It’s a non-mutual commercial entity. All the others are ultimately owned by their clients, that is, doctors.
As a part of stabilising the market when UMP (now Avant) collapsed in 2002, the legislation that the government introduced, among other things, compelled the four remaining companies to be insurers of last resort and provide universal cover. This isn’t normal in insurance but it’s important to doctors as it ensures they that they have access to secure and affordable insurance. This is particularly important for some doctors, such as rural proceduralists and obstetricians/gynaecologists, for example, who may have very high risk associated with their practice.
Depending on their circumstances – isolation is a common example – that risk can be amplified quite a lot. The legislation is there to ensure there is a mechanism by which such doctors, no matter where they practice or what their circumstances – so long as they aren’t subject to disciplinary action – can feel safe in continuing to practise and that they won’t go broke by being sued. The legislation ultimately protects important parts of our community, as without it, no doctors would take the risk of practising in certain areas of Australia. But some analysts argue the legislation ends up protecting poor doctors and thus creates risk to the community.
At the time of these legislative changes, no-one imagined anyone wanting to get into the medical indemnity market. It was truly a mess. The government’s swift action in moving to prop up the-then UMP and subsidise the sector saved the industry and did much to stabilise medical practice.
Importantly, the industry accepted “insurer of last resort” provisions on the basis of the stability those provisions provided doctors and that they were off-set by the financial support offered via the medical indemnity legislation, particularly the High Cost Claims Scheme.
But 15 years on, with the help of that legislation, the industry is much better capitalised and doing reasonably well. Well enough for the government to have another look at the settings. Well enough for a Buffett-backed company to feel it is worth launching into.
Has Tego snared a classic Buffett-style durable competitive advantage? And if it has, is it fair?
Some of the incumbents don’t think so, and have said as much in their submissions to the Department of Health’s First Principles Review of the sector, which is the first comprehensive look at how things are going and what might now need changing in the government-funded scheme since the tumultuous changes in 2002.
MIGA’s submission sums their position up with just two key points. The second states “Where pricing and cover obligations are imposed on MIIs [medical indemnity insurers] as part of the IIF [Indemnity Insurance Fund] they should apply equally to all the MIIs that have access to the benefits of the IIF, thus ensuring a level playing field and competitive neutrality.”
It doesn’t feel as if Buffett would go for that investment tactic of “competitive neutrality”. As it stands, Tego currently has access to the financial benefit of the High Cost Claims Scheme without the need to support the universal cover principle through insurer-of-last- resort obligations.
MDA’s submission frames the situation as it having an “illogical impact on the competitive landscape”. Avant says “all insurers who benefit from the scheme [IIF] should be compelled to participate”. MIPS takes a very different tack suggesting that requiring universal cover at all “materially increases risk of harm to the community”.
Tego is conspicuous by the fact that it is the only one of the five current insurers who did not make a submission to the review.
The CEO of MIGA, Mandy Anderson, told The Medical Republic that the way things have unfolded has essentially put Tego in a position where it is able to enjoy the benefits of the legislative framework without being required to abide by the conditions that apply to others, an outcome which is potentially “anti-competitive”. She doesn’t accuse Tego of being anti-competitive per se, however.
“ If the rules are that everyone gets access to the benefit, but only four out of five are bound by the requirements, for example, to insure higher risk doctors, then that is clearly not workable and not fair”, Anderson said.
Some people, like MIPS, would like to see the last-resort provisions of the legislation removed altogether. This would, in effect, remove any unfair advantage Tego has. But it would also create a lot of instability. Instability, which Anderson, says wouldn’t be good for doctors or patients.
“We believe that in an environment where the federal government is providing the degree of support it is for the industry that the quid pro quo for the insurers is that we bear reasonable responsibility, as well to ensure that the framework works for all the medical profession,” Anderson said.
But Tego CEO Eric Lowenstein isn’t buying this argument.
He told The Medical Republic that the universal cover provisions should be changed in order to make the system fairer for all doctors.
“We price every doctor on their unique individual risk profile. Practitioners without significant claims pay less and don’t subsidise those that who have a significant claims history,” he told The Medical Republic.
“The choice we have made is open to all participants in the medical indemnity industry and therefore is not an unfair advantage. Review of universal cover, in particular changing the limitations on premiums charged to poorly performing doctors are key to improving patient safety and providing more equitable premiums for the majority of doctors who do not have an adverse claims experience. ”
In one sense Lowenstein is arguing for a commercially more equitable system. If universal cover was dropped, as he seems to want, and as does MIPS in their submission, all the insurers would be back on an even playing field. But getting rid of universal cover is not a simple proposition. Some doctors have a bad claim history more from the context of what they do and where they work, rather than from poor performance. What do we do about them?
Anderson is accepting of the recent increase by the government of the threshold in the Premium Support Scheme (PSS) from $300,000 to $500,000, saying that there had been no indexation of the threshold since it was introduced in 2002 and this was a reasonable measure for the government to take. She says some things should be accepted as part of the insurers’ responsibility to keep the system robust into the future, given the government’s contribution.
Anderson, like many of the other groups putting in a submission – the AMA, RACGP and ACRRM among them – harbours some anxiety over whether some in the government might be tempted with the opportunity the review could present to rein-in costs. They could do that by sending the HCCS threshold even higher, or by reducing the level of support the government currently provides.
“MIGA is very clear that we need to deliver certainty for the medical profession. We understand that in an environment where there is heavy government support that in return we have to be a part of delivering that certainty,” Anderson told The Medical Republic.
None of the groups representing the doctors interests, the mutual providers included, wants to see any erosion of the current stability of the sector. But if the review finds that the mutuals have a point about Tego, and bring it under the same legislative umbrella, that is likely to affect Tego’s premiums.
Presumably, without its potential “durable competitive advantage” – its ability to cherry pick its doctors for lower risk and likely payouts – Tego’s premiums will need to rise. That’s bad if you’re a Tego client.
The government support of the industry and the associated rules by which the mutuals are bound have brought stability to the industry. Stability in product, stability in availability and stability in price.
All good news for doctors concerned about their protection and well-being over the long term. Instability only creates uncertainty and risk, and doctors and their patients don’t need something else to worry about.
Anderson says that given the commonwealth support, anyone servicing this market has a responsibility to all the doctors in it, not just a few, and to the overall stability of the system and the protection it provides for doctors and the community.
It seems the view from all is that Tego shouldn’t be upset if it is brought into line.
We’re not sure Warren Buffett would agree.
