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2004-2005
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
MEDICAL INDEMNITY (COMPETITIVE ADVANTAGE PAYMENT) BILL 2005
MEDICAL INDEMNITY LEGISLATION AMENDMENT
(COMPETITIVE NEUTRALITY) BILL 2005
EXPLANATORY MEMORANDUM
(Circulated by authority of the Minister for Health and Ageing,
the Honourable Tony Abbott MP)
Medical Indemnity (Competitive Advantage Payment) Bill 2005 and
Medical Indemnity Legislation Amendment (Competitive Neutrality) Bill 2005
INTRODUCTION
These Bills give effect to the Government's decision to remove competitive advantages
stemming from Government assistance to the medical indemnity market announced on
13 May 2005 by the Minister for Health and Ageing and the Minister for Revenue and
Assistant Treasurer. The Bills build on previous medical indemnity legislation to ensure that
medical indemnity costs remain affordable for doctors and that the medical indemnity market
remains viable in the long term.
The Bills are designed to strengthen the viability of the medical indemnity market by
ensuring that market participants benefiting from the Government's Incurred But Not
Reported (IBNR) Indemnity Scheme do not enjoy a competitive advantage as a result of
receiving this Government assistance. The legislation introduces a competitive advantage
payment to neutralise the competitive advantage that might otherwise accrue to medical
defence organisations (MDOs) participating in the scheme and their associated medical
indemnity insurers.
The legislation also reduces the medical indemnity costs borne by doctors making UMP
Support Payments.
The Bills provide for:
a competitive adjustment payment to be made by insurers providing medical
indemnity to members of MDOs participating in the IBNR indemnity scheme
established under the Medical Indemnity Act 2002; and
amendments to the UMP support payment scheme to reduce the extent and duration
of payments required by doctors.
Medical Indemnity (Competitive Advantage Payment) Bill 2005
Outline
This Bill imposes the competitive advantage payment as a tax.
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Medical Indemnity Legislation Amendment (Competitive Neutrality) Bill 2005
Outline
This Bill amends the Medical Indemnity Act 2002, Medical Indemnity (UMP Support
Payment) Act 2002, Health Insurance Act 1973, Health Insurance Commission Act 1973 and
the National Health Act 1953 to introduce administrative arrangements for the competitive
advantage payment and modify aspects of the UMP support payment.
Schedule 1 amends the Medical Indemnity Act 2002 to enable the implementation of the
competitive advantage payment by adding a new Division 2A to Part 3 of the Act. Other
items in the Schedule amend or insert relevant definitions, and provide for consequential
amendments to the Health Insurance Act 1973, the Health Insurance Commission Act 1973
and the National Health Act 1953.
Schedule 2 amends provisions under the Medical Indemnity Act 2002 and the Medical
Indemnity (UMP Support Payment) Act 2002 affecting the UMP support payment scheme.
Under the new UMP support payment arrangements members and former members of United
Medical Protection (UMP) will only need to make payments for a further two contribution
years, and their payments will be reduced by $1,000 annually. The number of contribution
years for the payment will be reduced from six to four years. The maximum amount that
members and former members of UMP will pay for the final contribution years will be the
lesser of either $4,000; the amount by which the applicable percentage of the member's
annual subscription for the base year exceeds $1,000; or 2% of their gross medical income in
excess of $50,000.
Schedule 3 includes a technical amendment to the run-off cover payment provisions under
the Medical Indemnity Act 2002.
FINANCIAL IMPACT
The competitive advantage payment will increase gross revenue over ten years by
$79 million in net present value terms, or $53 million after taking account of corporate tax
offsets. The new UMP support payment arrangements will reduce revenue by $53 million
over four years in net present value terms. In total these measures will have a total fiscal cost
of $11.4 million over the next four years.
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REGULATION IMPACT STATEMENT
MEDICAL INDEMNITY - IMPLEMENTATION OF THE COMPETITIVE
NEUTRALITY REVIEW'S RECOMMENDATIONS
BACKGROUND
Medical defence organisations (MDOs), mutual organisations of medical practitioners, have
traditionally provided medical indemnity cover to medical practitioners in Australia. In the
years leading up to 2002, some MDOs had not recognised liabilities on their balance sheets
that had been `incurred but not reported' (IBNR). Consequently, they had insufficient capital
to meet their full liabilities.
In April 2002, United Group (United Medical Protection (UMP) and its registered insurer
Australian Medical Insurance Limited (AMIL)), the largest medical indemnity provider in
Australia, went into provisional liquidation. United's financial difficulties were a result of its
IBNR liability being brought onto its balance sheet as well as large-scale market expansion,
chronic underpricing, reliance on a reinsurer that became insolvent, and a claims spike in
New South Wales stimulated by the announcement of tort law reform.
If United had gone into full liquidation, approximately 60 per cent of Australian medical
practitioners would potentially have been without medical indemnity cover and patients may
not have been able to obtain redress for medical negligence.
The Australian Government responded to this crisis by introducing a medical indemnity
framework in October 2002, which included a short-term guarantee for all UMP liabilities,
the IBNR Indemnity Scheme and the High Cost Claim Scheme (HCCS). The IBNR
Indemnity Scheme provides coverage of claims for which UMP had failed to adequately
provision. At the time, the unfunded liabilities of UMP were actuarially estimated at $460
million. This rescue package allowed medical practitioners who were members of UMP to
continue to practice. Stabilised by the IBNR Indemnity Scheme, on 14 November 2003
United came out of provisional liquidation.
To fund payments made under the IBNR Indemnity Scheme the Government introduced an
IBNR contribution scheme, to collect contributions from medical practitioners and other
health professionals who were members of UMP as at
30 June 2000. The original announced policy was for those members to fully reimburse the
Government over time through an annual levy. In December 2003, to address medical
practitioners' affordability concerns, the Government agreed to fund a large proportion of the
IBNR claims.
Medical practitioners contribute $114 million to the cost of the IBNR Indemnity Scheme
through the UMP Support Payment Scheme. The UMP Support Payment Scheme is capped
at a maximum of six years (with four years remaining). It also takes into account the length
of time the medical practitioner was a member of UMP. For example, a medical practitioner
who had been a member of UMP for two years would pay UMP support for two years.
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Medical practitioners who are or were members of UMP in 2000 pay per annum the least of:
50 per cent of the premium they paid in 2000-2001;
2 per cent of their gross Medicare billable income from the preceding
12 months; or
$5,000.
The Australian Government also introduced a wider package of measures to improve the
security and affordability of medical indemnity insurance for practitioners. These measures
included:
working with state and territories to reform tort law;
market regulation of medical indemnity insurance and better protection for medical
practitioners who buy insurance. The Australian Competition and Consumer
Commission (ACCC) monitors medical indemnity premiums, to ensure they are
commercially and actuarially justified. The Australian Prudential and Regulatory
Authority (APRA) provides prudential supervision to medical indemnity insurers to
ensure that they have adequate funding plans and meet minimum capital requirements;
introducing the Premium Support Scheme, to help medical practitioners whose medical
indemnity costs exceed 7.5 per cent of their gross private medical income;
introducing the HCCS to fund 50 per cent of the cost of medical indemnity insurance
payouts over a specified threshold (currently $300,000);
introducing the Exceptional Claims Scheme, to provide protection for medical
practitioners against personal liability for claims that exceed a set threshold (currently
$20 million); and
establishing the Run-Off Cover Scheme, to cover the cost of claims against eligible
medical practitioners who retire or leave the private medical workforce permanently.
PROBLEM
In late 2004, AMIL announced that it would reduce its premiums significantly in 2005.
Some medical indemnity insurers raised concerns that United had achieved a competitive
advantage through the Government's rescue package for the group. On 17 December 2004,
the Government announced that it would commission an independent review of competitive
neutrality in the medical indemnity insurance market. On 12 January 2005, the Government
announced that Mr Graham Rogers would head the review. He reported to the Government
on 15 March 2005.
Mr Rogers found that United has a competitive advantage due to the IBNR Indemnity
Scheme. He found that other elements of the Government's assistance do not provide a
systemic advantage to any participant in the industry. Mr Rogers suggested United's
competitive advantage is equivalent to the cost of putting commercial arrangements in place
to fund half the net IBNR liability (after accounting for the effect of the HCCS and the Run-
Off Cover Scheme). His calculation also took the UMP Support Payments into account, as
funding the other half of the net IBNR liability.
Mr Rogers found that United was in a much stronger financial position than other medical
indemnity insurers, with net capital of 184 per cent of minimum capital requirement
compared to an industry average (excluding United) of 135 per cent at
30 June 2004. Mr Rogers also found that United's 2005 premiums were consistently and
substantially lower than other insurers. He concluded that United's government-assisted
competitive advantage was partly responsible for its stronger financial position and lower
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2005 premiums. Other medical indemnity insurers suggested that United's competitive
advantage greatly affects their ability to compete in the market.
If this competitive advantage continued, it could destabilise the medical indemnity market.
Sustained and significant disparities in premiums could result in other insurers losing
members to United. This could reduce their ongoing commercial viability. Alternatively,
other insurers could attempt to retain their market share by competing with United by setting
their premiums below the actuarially justified technical rate. APRA prudential supervision
and current ACCC monitoring of the actuarial justification of premiums would limit the
degree to which they would be able to reduce their premiums. However, given the risky
nature of the medical indemnity industry and its recent transfer to prudential regulation, it
would be best to avoid net assets falling due to lower premiums.
The UMP Support Payment has always been a contentious issue with the Australian Medical
Association and the medical practitioners required to pay it. They have continued to lobby
Government to remove or reduce this cost. Medical practitioners continue to be sensitive
about medical indemnity costs (including the UMP Support Payment where they are liable to
pay it) and when they see these costs as being too high, they change their work patterns.
Objective
The Government's objective is to ensure a medical indemnity market that is:
viable;
affordable;
fair; and
competitive
recognising the interests of all stakeholders - insurers, medical practitioners, patients and
taxpayers.
This objective includes addressing any issues of competitive neutrality.
PROPOSED ACTION / OPTIONS
In his report, Mr Rogers identified three broad options for addressing the competitive
advantage:
Option 1. completely withdraw IBNR support from United;
Option 2. provide equivalent support to other medical indemnity insurers;
Option 3. require United to make a series of payments to the Government.
Methods of implementing Option 3
Mr Rogers calculated the amount of the payment as equalling the cost of putting commercial
arrangements in place to fund half the net IBNR liability, a total of
$79 million in net present value terms (based on Australian Government Actuary estimates).
Mr Rogers found that while the source of the competitive advantage rested with UMP, the
competitive advantage in the market rested with AMIL. Mr Rogers therefore recommended
that the payment come from AMIL. This is appropriate as AMIL holds $135 million of
United group's $175 million net assets.
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Two methods of implementing Option 3 are:
A. Introduce a competitive advantage payment; or
B. Withholding HCCS payments to AMIL.
Option 3A - Competitive advantage payment
Under this option, the Government would impose a competitive advantage payment on
insurers with an MDO receiving assistance under the IBNR Indemnity Scheme. Presently
there are three MDOs that could receive assistance under the IBNR Indemnity Scheme. The
level of payment in a given year would be set as a percentage of the outstanding IBNR
liability at the end of the preceding financial year.
Option 3B - Withhold HCCS payments to AMIL
Currently, under the HCCS, the Government pays 50 per cent of claims over a threshold that
were notified after 1 January 2003. (The threshold is currently $300,000 for claims notified
after 1 January 2004.) So far, no actual HCCS payments have been made to medical
indemnity insurers due to the lag between notification and payment of claims. However, the
HCCS allows an insurer to place an asset on its books equal to the expected recoveries under
the HCCS. That is, as claims are notified, insurers benefit from the HCCS.
This option would reduce the recoveries to which AMIL is entitled by the total competitive
advantage calculated by Mr Rogers. Currently, AMIL accumulates assets of around $10
million a year related to HCCS recoveries. Under this option, AMIL would not accumulate
these assets, until the value of claims notified to AMIL after 1 January 2006 exceeds the total
competitive advantage.
This would require a legislative amendment to the Medical Indemnity Act 2002 to allow the
Minister for Health and Ageing to set a HCCS front end deductible. This deductible would
equal the total value of the competitive advantage payments recommended by Mr Rogers
($79 million in net present value terms). This would mean that AMIL would not receive
payments under the HCCS for claims notified after 1 January 2006, until the amounts that
would otherwise have been paid exceed $79 million in 2004-05 dollars.
Addressing affordability
The primary regulatory issue is how to remove United's Government-assisted competitive
advantage. The above options focus on that issue.
There is a secondary issue relating to the use of funds recovered. While the way the
Government chooses to use the funds recouped will not change the regulatory impact of the
proposals, it may have additional impacts of its own.
Mr Rogers noted that the support provided by the Australian Government has been critical in
providing stability to the medical indemnity industry and suggested that, to maintain future
stability, it was important that the level of support be seen as stable and ongoing.
The Government could retain moneys collected from the payment or withholding HCCS
payments (as per option 3A and 3B).
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Alternatively, the Government could redistribute these funds within the medical indemnity
package. The Government could reduce the UMP Support Payments paid by the medical
practitioners who were members of UMP in 2000. Option 4A would introduce a competitive
advantage payment and reduce UMP Support Payments. Option 4B would withhold HCCS
recoveries and reduce UMP Support Payments.
Under both option 4A and 4B, the UMP Support Payment would be limited to 4 years
(instead of the current of 6 years) and payments would be reduced in years 3 and 4 by $1,000
for the medical practitioners who were members of UMP in 2002 making the payments.
Impact Analysis
The options for removing United's competitive advantage and the subsequent use of funds
recovered would affect a number of parties, some negatively and some positively.
The directly affected parties are:
· MDOs and their captive insurers;
· medical practitioners;
· patients;
· plaintiffs (persons who make personal injury claims against medical practitioners);
· the Australian Government and taxpayers.
Option 1 - completely withdraw IBNR support from United
Option 1 is to withdraw the IBNR Indemnity Scheme, resulting in the withdrawal of
$253 million, in net present value terms, of support from UMP (United's MDO). This could
make UMP insolvent, the situation that led to the Government's decision in April 2002 to
intervene in its provisional liquidation. This option would address United's competitive
advantage, but with this withdrawal of support it could be put at a position of competitive
disadvantage.
Impact on MDOs and insurers
If UMP could not raise the appropriate level of capital that would be required under this
option to cover IBNR claims made against it, it would go into liquidation.
Mr Rogers suggested that it would be unrealistic to require UMP to raise this level of capital.
Whilst United functions as a group in the market place, its constituent parts include a mutual
organisation/association (UMP) and a general insurer. These corporate differences mean that
different regulatory regimes apply to each element of the group and each would be affected
differently were the IBNR Indemnity Scheme to be removed.
UMP, the MDO holds most of the group's liabilities. This is as a result of United past
practice of providing most of its medical indemnity cover to doctors through the mutual
UMP. Currently, AMIL (the insurer) holds the majority of the net assets. This reflects
changes in United's business practices and includes the impact of the requirements of the
Medical Indemnity (Prudential Supervision and Product Standards) Act 2003. This Act
requires medical indemnity cover to doctors to be provided by way of insurance.
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As UMP does not now have a large income stream (AMIL now receives all the premium
revenue whilst UMP receives membership fees), it is unlikely that it could obtain
subordinated debt. Notwithstanding its membership of the group, AMIL's constitution as a
general insurer means:
it is regulated by APRA;
it has a separate Board to that of UMP.
Its capacity to assist UMP financially, were the IBNR Indemnity Scheme to be removed, will
be constrained by APRA's regulatory requirements and the obligations on AMIL's directors.
APRA may not allow the transfer of over $200 million from AMIL to UMP or allow AMIL
to borrow such an amount on UMP's behalf because this may force AMIL below APRA's
minimum capital requirement and potentially leave it in an extremely weak, if not insolvent,
position.
Other insurers, while not directly affected by the withdrawal of the IBNR Indemnity Scheme,
would face a destabilised medical indemnity insurance market. They could potentially face
demands for retrospective and ongoing insurance cover in excess of their capacity, should
United withdraw from the market.
Impact on medical practitioners
This option would create a large degree of uncertainty. If UMP were to fail, as would be
likely under this option, around 60 per cent of medical practitioners would be without cover
for incidents that occurred prior to 2002.
If United did not fail, this option would dramatically increase the cost of medical indemnity
insurance to medical practitioners who purchase their cover from AMIL. However, the
Government is likely to remove the UMP Support Scheme which would partly offset this
increase in costs.
An alternative scenario would be for UMP not to honour the discretionary assistance that it
offered to medical practitioners under claims-incurred products before 2002. This would
also leave a large number of medical practitioners without cover.
Impact on patients and plaintiffs
If United is able to secure its financial stability and continue to offer cover and honour
previous insurance arrangements, plaintiffs' successful claims for damages are unlikely to be
affected. However, private medical patients may face increased costs of health care as
medical practitioners pass on higher medical indemnity costs.
If UMP was to return to an insolvent position or not honour discretionary insurance
arrangements, injured patients could be left without redress to obtain the compensation to
which they are entitled to, if the negligent medical practitioner did not have sufficient
personal assets.
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Impact on the Australian Government and taxpayers
This option would reduce taxpayers' outlays, as the Government would no longer be required
to meet UMP's IBNR liabilities, currently valued at $253 million in net present value terms.
These reductions in expenses would impact over a number of years. If the UMP Support
Payment Scheme was also wound up with refunds of contributions given, the reduction in
revenue would equal $119 million in net present value terms.
It may also result in further pressure on the Government to stabilise the industry if there are
perceived threats to the public's access to healthcare or the availability or affordability of
medical indemnity cover.
Option 2 - provide equivalent support to other medical indemnity insurers
Under this option, the Government would provide the other four medical indemnity insurers
with the same level of support as United.
Impact on MDOs and insurers
Providing an equivalent level of support to United's competitors would increase their capital
holdings, thereby assisting them to be more aggressive in their pricing policy. This could
lead to a taxpayer-funded price war and potentially result in financial instability for some
smaller insurers. Providing more funding to other insurers may also introduce other
unforseen competitive advantages - particularly given the difficulties in determining the
appropriate amount of support to be provided to each insurer.
Impact on medical practitioners
While medical indemnity premiums are likely to fall in the short-term under this option, the
industry may become unstable in the longer-term.
Impact on patients and plaintiffs
There would not be significant change for patients and plaintiffs from the current
arrangement, unless small insurers were to fail in which case plaintiffs may not be able to
obtain the compensation to which they may be entitled.
Impact on the Australian Government and taxpayers
This option would cost the Australian Government and taxpayers well over $100 million.
This would greatly increase the amount of support provided by taxpayers.
Furthermore, it would establish a precedent of the Government intervening to assist
individual companies that are not facing financial difficulties and pose no systemic risk to the
industry.
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Option 3A - introduce a competitive advantage payment for insurers that are owned by an
MDO receiving assistance under the IBNR Indemnity and return funds to consolidated
revenue
Under Option 3A the Government would impose an annual competitive advantage payment
on medical indemnity insurance groups that receive a benefit from the IBNR indemnity
scheme, over a period of 10 years. The level of the payment would be set as a percentage of
the net present value of the IBNR liability (after recoveries from other Government schemes
are accounted for) , reflecting the cost UMP would face provisioning for that liability in the
commercial market.
Impact on MDOs and insurers
This option would remove the competitive advantage introduced by Government action. It
would reduce United's net assets by the amount that Mr Rogers calculated to be equivalent to
the competitive advantage. Even with the payment, AMIL's capital would still exceed the
minimum level of capital required by APRA, assuming appropriate premium levels were set.
This option precisely addresses the competitive advantage identified by Mr Rogers.
If other insurers were to receive a benefit from the IBNR Indemnity Scheme, they would also
receive a competitive advantage and so would also be liable to pay the competitive neutrality
adjustment.
While some insurers may remain more efficient than others, this would reflect the nature of
the market and its members (as in any market), as opposed to the impact of Government
assistance. In effect, the Government would be facilitating competition in the industry.
Impact on medical practitioners
This option may increase the medical indemnity premiums of some medical practitioners,
depending on how insurers choose to meet the costs of the payment.
United may increase premiums when the competitive advantage is addressed, so that its
premiums become closer to its competitors' premiums. However, AMIL, has a large amount
of surplus assets, well above that required by the Australian Prudential and Regulatory
Authority and it could choose to reduce these assets instead of increasing premiums. If
medical practitioners, perceive any increase in premiums to be unjustified they may change
their work patterns.
If the same level of financial support by the Government is not maintained, medical
practitioners making the UMP Support Payments may respond adversely to a competitive
neutrality payment and may threaten to change their work patterns.
Impact on patients and plaintiffs
This option is unlikely to threaten the stability of any medical indemnity insurer and therefore
the availability of appropriate compensation.
If medical practitioners who are members of United change their work patterns because of
premium increases by United, patients may not be able to access vital medical services as
10
high-risk specialists retire or change specialities due to increased medical indemnity costs.
The out of pocket expenses for patients may increase.
Impact on the Australian Government and taxpayers
This option would increase revenue over ten years by $79 million before taxation offsets are
considered or $53 million in net present value terms after allowing for a reduction in
corporate tax paid by AMIL.
Option 3B - Withhold HCCS payments to AMIL and return funds to consolidated revenue
Under Option 3B the Government would withhold HCCS payments to AMIL until the
amount withheld is equal to the amount calculated as the competitive advantage in net present
value terms.
Impact on MDOs and insurers
This option would remove the competitive advantage United has received, after several years,
depending on the rate at which claims accumulate. It would reduce United's net assets by the
total amount that Mr Rogers calculated to be equivalent to the competitive advantage.
However, the annual impact of this option does not precisely equate to the annual competitive
advantage assessed by Mr Rogers. Even with the reduction in HCCS payments, AMIL's
capital would still exceed the minimum level of capital required by APRA, assuming
appropriate premium levels are set and United obtains adequate reinsurance.
As with Option 3A, while some insurers may remain more efficient than others, this would
reflect the nature of the market and its members (as in any market), as opposed to the impact
of Government assistance. In effect, the Government would be facilitating competition in the
industry.
Impact on medical practitioners
This option may increase United's medical indemnity premiums. The amount of any
premium increase would depend on how AMIL chooses to secure sufficient assets to replace
the HCCS support.
United may increase premiums when the competitive advantage is addressed, so that its
premiums become closer to its competitors' premiums. If medical practitioners, who were
members of United, perceive this increase to be unjustified they may change their work
patterns. However, AMIL, has a large amount of surplus assets, well above that required by
the Australian Prudential and Regulatory Authority and it could choose to reduce these assets
instead of increasing premiums.
Impact on patients and plaintiffs
This option would have a similar impact on patients and plaintiffs as option 3A.
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Impact on the Australian Government and taxpayers
Option 3B would reduce Government expenditure by $79 million in net present value terms
(or $53 million, taking into account corporate taxation offsets) over approximately 7 years.
Monitoring and ongoing administration of this option would be more complex than Option
3A.
Option 4A - introduce a competitive neutrality payment for insurers with an MDO receiving
assistance under the IBNR Indemnity Scheme and reduce the UMP Support Payment
In effect, option 4A is the same as option 3A, with the additional Government action of
reducing the UMP Support Payment.
Impact on MDOs and insurers
This option would have a similar impact on MDOs and insurers as option 3A.
The UMP Support Payment is paid by medical practitioners who were members of UMP on
30 June 2000, irrespective of whether or not they are currently members of UMP. To that
extent, any reduction in UMP Support Payments is not expected to alter incentives for
medical practitioners to seek insurance from any one insurer.
Impact on medical practitioners
Under this option, United may increase its premiums after the removal of the competitive
advantage. However, AMIL, has a large amount of surplus assets, well above that required by
the Australian Prudential and Regulatory Authority and it could choose to reduce these assets
instead of increasing premiums.
However, for those members of United paying the UMP Support Payments, this increased
cost of their premiums would be offset by a reduction in those payments.
Impact on patients and plaintiffs
This option would have a similar impact on patients and plaintiffs as options 3A and 3B.
However, the threat of wide spread change in medical practitioner's work patterns would be
alleviated due to the reduced cost of UMP Support Payments to medical practitioners that
were members of United in 2000.
Impact on the Australian Government and taxpayers
As noted above, option 3A would increase revenue over ten years by $79 million before
taxation offsets are considered or $53 million in net present value terms after allowing for a
reduction in corporate tax paid by AMIL. The additional Government action of reducing the
UMP support arrangements would reduce revenue by
$53 million over 4 years in net present value terms, which is the same as the value of funds
recouped, after tax offsets are considered (excluding departmental costs).
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Overall, the Government would need to fund the reduced UMP Support Payments before the
full amount of competitive advantage payment is received (in both cash and accrual terms).
Option 4B - withhold HCCS payments to AMIL and reduce the UMP Support Payment
In effect, option 4B is the same as option 3B, plus a reduction in the UMP Support Payment.
Impact on MDOs and insurers
This option would have a similar impact on MDOs and insurers as option 3B.
As for option 4A, a reduction in UMP Support Payments is not expected to provide
incentives for medical practitioners to favour any one medical indemnity insurer.
Impact on medical practitioners
This option would have the same positive impact on medical practitioners as
option 4A.
Impact on patients and plaintiffs
This option would have the same positive impact on patients and plaintiffs as
option 4A.
Impact on the Australian Government and taxpayers
As noted in option 3B, withholding payments under the HCCS would reduce expenditure
over approximately 7 years by $79 million before taxation offsets are considered or $53
million in net present value terms after allowing for a reduction in corporate tax paid by
AMIL. The additional Government action of reducing the UMP support arrangements would
reduce revenue by $53 million over 4 years in net present value terms.
Overall, the Government would need to fund the reduced UMP Support Payments before the
full amount of HCCS support has been withheld (in both cash and accrual terms).
Consultations
As part of his review into competitive neutrality review Mr Rogers consulted widely.
Organisations consulted included the five medical indemnity insurers associated with medical
defence organisations, the ACCC, APRA, the Australian Medical Association, the Institute of
Actuaries of Australia, and the New South Wales Government.
The five medical indemnity organisations made submissions to Mr Rogers' review. As part
of the review process, United noted a preference for providing additional support to other
insurers if a competitive advantage was substantiated. Some medical indemnity insurers
noted a preference for winding back the level of support provided to United if a competitive
advantage was found, but considered it important to keep the same level of government
support within the industry. The Australian Medical Association, in its submission to the
review, suggested that the level of government support should remain stable and later
recommended that this should be done by a reduction in the UMP Support Payment.
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Conclusion
Option 1, the complete withdrawal of the IBNR Indemnity Scheme, would fail to meet the
Government objective of maintaining a viable medical indemnity market. In intervening in
the provisional liquidation of UMP in 2002, the Government demonstrated its commitment to
ensuring that medical practitioners would not be left without adequate medical indemnity
cover. The adoption of Option 1 is likely to leave the United group in a weak, if not
insolvent, position. Even if AMIL could continue to operate, UMP could collapse, thereby
threatening availability of retroactive cover for sixty per cent of the medical profession.
Option 2, providing equivalent support to other medical indemnity insurers, would fail to
meet the government objective of balancing the interest of all stakeholders. The provision of
significant taxpayer funded assistance to a functioning market would create a poor precedent
for the Government.
Options 3A, 3B, 4A and 4B each meet the Government's objectives, although in varying
ways. All four options increase the costs of doing business for AMIL, thereby removing the
competitive advantage without threatening the viability of the medical indemnity provider or
creating a poor precedent for taxpayer assistance. The main differences between the `A'
options (introducing a competitive neutrality adjustment) and the `B' options (withholding
HCCS payments) are in the timing of the impact and the nature of Government action. The
`A' options are more precise because the competitive advantage is addressed over the
recommended ten years, as opposed to seven years for the `B' options. Options 3A, 3B, 4A
and 4B will not greatly increase the administrative burden on the industry, as options do not
significantly change the current administrative arrangements.
Options 4A and 4B maintain the same level of Government support to the medical indemnity
industry as a whole, and reduce one component of doctors' medical indemnity insurance
costs.
Option 4A is the only option to address precisely the competitive advantage caused by the
IBNR Indemnity Scheme and to provide an opportunity to reduce medical indemnity
insurance costs at the same time.
Implementation
Legislation to give effect to these measures would be introduced in the Winter sitting period.
The Health Insurance Commission will administer the measures following Royal Assent of
the proposed legislation. As the preferred option reduces the length of the UMP Support
Payment Scheme there would be departmental savings for the Health Insurance Commission
administering the scheme of $7.5 million over the next four years.
As required by the Medical Indemnity Act 2002, the Australian Government Actuary
completes a reassessment of the liabilities that the Government has assumed under the IBNR
Indemnity Scheme, each year until the end of the scheme.
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Review
A broad review into the effectiveness of the Government's medical indemnity package and
associated tort law reforms will proceed as planned in mid-2005. However, the timing of that
review is such that it would be too early to assess the impact of the Government's response to
the review of competitive neutrality in the medical indemnity market. It would be
inappropriate to assess the Government's response before its full implementation and full
impact.
The ACCC will continue to monitor medical indemnity premiums and report on whether they
are commercially and actuarially justified. Its final report is due in December 2005.
APRA monitors medical indemnity insurers to ensure that all medical indemnity insurers
have adequate funding plans and meet prudential requirements. This would extend to the
impact of any Government action to remove United's competitive advantage.
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Medical Indemnity (Competitive Advantage Payment) Bill 2005
NOTES ON CLAUSES
Clause 1 Short title
This clause sets out the short title of the Bill.
Clause 2 Commencement
This clause provides that the Bill commences, or is taken to commence on 1 July 2005.
Clause 3 Definitions
This clause defines terms used in the Bill, or indicates where else in the Bill or the Medical
Indemnity Act 2002 terms are defined.
Clause 4 Imposition of competitive advantage payment
This clause imposes the competitive advantage payment as a tax on insurers providing
medical indemnity cover to members of medical defence organisations (MDOs) participating
in the IBNR indemnity scheme under an arrangement with those MDOs.
Clause 5 Contribution year
This clause defines a contribution year for the purposes of the competitive advantage
payment as a financial year. The first contribution year starts on 1 July 2005, and the last
year finishes on 30 June 2015 unless regulations are made specifying an earlier year as the
last year.
Clause 6 Amount of competitive advantage payment
This clause provides that the amount of the competitive advantage payment imposed in a
given year is a percentage of the outstanding net IBNR exposure of the insurer's participating
MDO at 30 June in the previous financial year multiplied by the MDO's unfunded IBNR
factor.
The percentage for a contribution year is to be prescribed in regulations made on or after the
start of the contribution year, and must be less than 15%. Unless regulations are made there is
no liability to make the payment, which consequently cannot be accrued on an insurer's
balance sheet. In framing regulations for consideration by the Executive Council the
Government will consult with the Australian Government Actuary and the Australian
Prudential Regulation Authority.
Clause 7 Regulations
This clause allows the Governor General to make regulations prescribing matters required or
permitted to be prescribed under the Bill or necessary or convenient to be prescribed for
carrying out or giving effect to the Bill.
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Medical Indemnity Legislation Amendment (Competitive Neutrality) Bill 2005
NOTES ON CLAUSES
Clause 1 Short title
This clause sets out the short title for the Bill.
Clause 2 Commencement
This clause sets out the commencement arrangements for the Act. Clauses 1-3 of the Act will
commence on Royal Assent. Schedules 1 and 2 will commence or be taken to have
commenced on 1 July 2005, and Schedule 3 is taken to have commenced immediately after
the commencement of Schedule 2 to the Medical Indemnity Legislation Amendment (Run-off
Cover Indemnity and Other Measures) Act 2004 on 1 July 2004.
Clause 3 Schedules
This clause provides that each Act that is specified in a Schedule to this Act is amended or
repealed as set out in the applicable items in the Schedule concerned, and any other item in a
Schedule to this Act has effect according to its terms.
Schedule 1 -- Competitive advantage payment
Amendments to the Health Insurance Act 1973
Item 1 inserts a new paragraph (aa) into subsection 130(25) of the Health Insurance Act
1973. This amendment expands the definition of medical indemnity legislation to include the
Medical Indemnity (Competitive Advantage Payment) Act 2005 for the purposes of the
secrecy provisions in the Health Insurance Act 1973.
Amendments to the Health Insurance Commission Act 1973
Item 2 inserts a new paragraph (aa) into subsection 42(2) of the Health Insurance
Commission Act 1973. This amendment expands the definition of medical indemnity
legislation to include the Medical Indemnity (Competitive Advantage Payment) Act 2005 for
the purposes of the annual reporting requirements under the Health Insurance Commission
Act 1973.
Amendments to the Medical Indemnity Act 2002
Item 3 inserts a new paragraph (c) into subsection 3(4) of the Medical Indemnity Act 2002.
This amendment expands the objects of the Act so that they also provide that the
Commonwealth can require a payment from medical indemnity insurers in certain
circumstances. These circumstances are where the Commonwealth meets the costs
associated with certain IBNRs of organisations that indemnify doctors and have not made
adequate provision for these liabilities. The amendments to the Objects will make it clear
that where organisations receive assistance with their unfunded IBNRs and have a
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competitive advantage in relation to other medical indemnity providers as a result of this
assistance, the Commonwealth is able to require a payment from medical indemnity insurers
associated with the organisation. The purpose of the payment is to remove competitive
advantages stemming from Government assistance to the medical indemnity market.
Item 4 inserts a new paragraph (c) into the definition of contribution year in subsection 4(1)
of the Act. This amendment ensures that the term contribution year, as applied to a
competitive advantage payment, has the same meaning as in the Medical Indemnity
(Competitive Advantage Payment) Act 2005.
Item 5 inserts a new paragraph (c) into the definition of medical indemnity payment in
subsection 4(1) of the Act. This amendment ensures that the term medical indemnity
payment applies to a competitive advantage payment payable under Division 2A of Part 3 of
the Act.
Item 6 inserts a new paragraph (c) into the definition of medical indemnity payment
legislation in subsection 4(1) of the Act. This amendment ensures that the term medical
indemnity payment legislation applies to the Medical Indemnity (Competitive Advantage
Payment) Act 2005.
Item 7 amends subsection 4(1) of the Act to include a new definition. This is for the term net
IBNR exposure. The amendment adumbrates its meaning, which is set out in more detail in
the new section 8A of the Act.
Item 8 inserts a new section 8A defining net IBNR exposure. It defines the net IBNR
exposure of a MDO at a particular time as the MDO's IBNR exposure reduced by any
amounts of high cost claims or run-off cover indemnities that are likely to be payable in
respect of incidents that relate to the MDO's IBNR exposure at the time of calculation.
Item 9 inserts the words `or its net IBNR exposure' into paragraph 40(1)(d) of the Act. This
amendment will require those MDOs participating in the IBNR Scheme to keep records
which are relevant to determining their net IBNR exposure.
Item 10 inserts a new Division 2A after Division 2 of Part 3 of the Act. This new division
provides the mechanism for collecting the competitive advantage payment. The competitive
advantage payment is imposed on medical indemnity insurers where the medical indemnity
insurer provides medical indemnity cover to members of an MDO participating in the IBNR
Scheme under an arrangement with that MDO. The new Division contains the following new
section numbers and titles.
Division 2A - Competitive advantage payment
Subdivision A - Introduction
59A Guide to the competitive advantage payment provisions
Subsection 1 describes the operation of the Medical Indemnity (Competitive Advantage
Payment) Act 2005, which imposes payments on medical indemnity insurers for contribution
years and specifies the amount payable by reference to the net IBNR exposure of the
insurer's participating MDO for the contribution year.
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Subsection 2 provides a table that outlines where to find the provisions dealing with
particular aspects of the competitive advantage payment.
Subdivision B - Who makes a competitive advantage payment
59B Who is liable to pay the competitive advantage payment
This section sets out the criteria to identify a person who is liable to pay the competitive
advantage payment for a contribution year. A person is liable to pay if the person is a
medical indemnity insurer, the financial year is a contribution year and the person is not
exempt from the payment under section 59C.
59C Exemptions
Subsection 1 provides that regulations may be made to exempt a person from the competitive
advantage payment under circumstances specified in the regulations.
Subsection 2 provides that exemptions from the competitive advantage payment set out in
regulations made under subsection 1 may apply either generally or for a particular
contribution year.
Subdivision C - Annual reassessment of participating MDO's net IBNR exposure
59D Object of this Subdivision
This section sets out the object of this Subdivision, which is to allow the annual reassessment
and publication of a participating MDO's net IBNR exposure. This will ensure that the
competitive advantage payment reflects the competitive advantage the participating MDO
and any associated insurer enjoy.
59E Process for annually reassessing net IBNR exposure
Report by the Actuary
This new section sets out the process by which the Australian Government Actuary (the
Actuary) will prepare and present a report to the Minister for Health and Ageing on an
MDO's net IBNR exposure. It includes provisions on what information must or may be
considered in this process and how information can be obtained for the Actuary.
Subsections 1 and 2 set out the requirements for the written report the Actuary must provide
to the Minister for each contribution year for the competitive advantage payment. The report
by the Actuary must state the Actuary's assessment of an MDO's net IBNR exposure at the
end of the financial year that ends immediately before the start of a contribution year and set
out the reasons for the assessment.
The Actuary must take account of any information provided by the Health Insurance
Commission (HIC) under the new subsection 59E(6) in relation to an MDO.
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HIC information gathering powers
Subsections 3 and 4 provide for the HIC to seek information from a participating MDO if it
is relevant to assessing its net IBNR exposure. Failure on the part of the MDO to comply
with this request is an offence.
The kind of information that the HIC may request includes financial statements and a report
by a suitably qualified actuary which assesses the MDO's net IBNR exposure.
Subsection 5 provides for the form and content of the HIC's request for information. It must
be in writing, state what information the MDO is to give the HIC, state the day on or before
the information must be given and that a failure to comply with the request is an offence.
The request may also require information to be verified by statutory declaration.
Subsection 6 provides that the HIC must give to the Actuary any information it receives from
an MDO which is provided for the purpose of the Actuary preparing a report to the Minister
for Health and Ageing.
Publishing net IBNR exposure
Subsection 7 provides that the Minister must cause to be published in the Gazette a notice of
the amount of any net IBNR exposure of an MDO which is stated in a report to him under
new subsection 59E(1).
Subsection 8 provides that a notice made under new subsection 59E(7) is not a legislative
instrument. This provision has been included in the Act to assist readers by making clear that
this type of notice is not a legislative instrument within the meaning of section 5 of the
Legislative Instruments Act 2003. In effect, this notice will not be a disallowable instrument.
Item 11 amends subsection 60(1) to insert a reference to the competitive advantage payment
and include it as a payment which is provided for under Division 3 of Part 3 of the Act.
Item 12 amends section 61 to include the competitive advantage payment as a medical
indemnity payment for the purposes of this section and to provide for the day on which the
payment becomes due and payable. The competitive advantage payment will be due and
payable on 30 April of a contribution year, or such other day as is specified in regulations
(either generally or for a class of persons).
Item 13 inserts a new paragraph (aa) into subsection 73(1) of the Act. This amendment
inserts a reference to the subsection 59E(3) in the subsection. Section 73 is an offence
provision, which applies in certain circumstances where a person has failed to provide
information to the HIC.
Amendments to the National Health Act 1953
Item 14 amends subsection 135A(24) of the National Health Act 1953 to include the Medical
Indemnity (Competitive Advantage Payment) Act 2005 in its definition of medical indemnity
legislation for the purposes of secrecy provisions under the National Health Act 1953.
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Schedule 2 -- UMP support payment scheme
Amendments to Medical Indemnity Act 2002
Item 1 amends paragraph 52(2)(ca) of the Act so that it exempts from the requirement to
make a UMP support payment for contribution years starting on or after 1 July 2005 medical
practitioners who are participating members of a participating MDO and whose gross
Medicare billable income is less than or equal to $50,000. This is because under paragraph
6(1)(c) of the Medical Indemnity (UMP Support Payment) Act 2002 (as proposed to be
amended by Item 8 of this Schedule) such practitioners would not be required to make a
payment under the UMP support payment scheme.
Item 2 amends paragraph 52(2)(cb) of the Act so that it exempts from the requirement to
make a UMP support payment for contribution years starting on or after 1 July 2005 health
professionals who are participating members of a participating MDO and whose gross
medical income is less than or equal to $50,000. This is because under paragraph 6(1)(d) of
the Medical Indemnity (UMP Support Payment) Act 2002 (as proposed to be amended by
Item 9 of this Schedule) such practitioners would not be required to make a payment under
the UMP support payment scheme.
Item 3 inserts a new exemption into section 52 as paragraph (2)(cc), exempting from the
requirement to make a UMP support payment for contribution years starting on or after 1 July
2005 participating members of a participating MDO if the applicable percentage of the
annual subscription for the base year for the member is less than or equal to $1,000. This is
because under paragraph 6(1)(b) of the Medical Indemnity (UMP Support Payment) Act 2002
(as proposed to be amended by Item 7 of this Schedule) such practitioners would not be
required to make a payment under the UMP support payment scheme.
Item 4 amends paragraph 52(2)(db) of the Act so as to reduce the maximum number of
contribution years for which a person is liable to make a UMP support payment from 6 to 4.
Item 5 amends section 52 of the Act. This item inserts a new subsection (3AA), defining
terms used in the new paragraph 52(2)(cc) inserted by Item 3 of this Schedule. Annual
subscription and base year are defined as having the same meanings as in section 54 of the
Medical Indemnity Act 2002, and applicable percentage is defined as having the same
meaning as in section 6 of the Medical Indemnity (UMP Support Payment) Act 2002.
Amendments to the Medical Indemnity (UMP Support Payment) Act 2002
Items 6 to 9 amend subsection 6(1) of the Act. These items reduce by $1,000 the amount of
UMP support payment that a participating member of a participating MDO will make for a
contribution year beginning on or after 1 July 2005.
Subsection 6(1) currently provides that a member will pay the least of three amounts:
- $5,000 (paragraph (a));
- the applicable percentage of the member's annual subscription for the base
year(paragraph (b)); or
- 2% of the member's gross Medicare billable income (in the case of medical
practitioners) (paragraph (c)) or 2% of the member's gross medical income (in the
case of health professionals other than medical practitioners) (paragraph (d)).
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Items 6 to 9 provide that a member will pay the least of:
- $4,000 (paragraph (a));
- the amount by which the applicable percentage of the member's annual subscription
for the base year exceeds $1,000 (paragraph (b)); or
- 2% of the amount by which the member's gross Medicare billable income (in the
case of medical practitioners) exceeds $50,000 (paragraph (c)) or 2% of the amount
by which the member's gross medical income (in the case of health professionals
other than medical practitioners) exceeds $50,000 (paragraph (d)).
Schedule 3 -- Technical correction
Amendments to the Medical Indemnity Act 2002
Item 1 amends paragraph 58(c) of the Act. This item corrects an error in the current
expression of the Act by deleting `contribution' and substituting `payment'.
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