MINUTES OF THE
SENATE Committee on Commerce and Labor
Seventy-second Session
March 11, 2003
The Senate Committee on Commerce and Labor was called to order by Chairman Randolph J. Townsend, at 7:00 a.m., on Tuesday, March 11, 2003, in Room 2135 of the Legislative Building, Carson City, Nevada. The meeting was videoconferenced to the Grant Sawyer State Office Building, Room 4412, 555 East Washington Avenue, Las Vegas, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. All exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.
COMMITTEE MEMBERS PRESENT:
Senator Randolph J. Townsend, Chairman
Senator Warren B. Hardy II, Vice Chairman
Senator Ann O'Connell
Senator Raymond C. Shaffer
Senator Joseph Neal
Senator Michael Schneider
Senator Maggie Carlton
GUEST LEGISLATORS PRESENT:
Senator Alice Costandina (Dina) Titus, Clark County Senatorial District No. 7
STAFF MEMBERS PRESENT:
Scott Young, Committee Policy Analyst
Lynn Hendricks, Committee Secretary
Maryann Elorreaga, Committee Secretary
OTHERS PRESENT:
Alfredo Alonso, Lobbyist, Lionel Sawyer and Collins
William T. Montei, CPA, President and CEO, Physicians Insurance Company of Wisconsin
Bill Bradley, Lobbyist, Nevada Trial Lawyers Association
Matthew L. Sharp, Lobbyist, Nevada Trial Lawyers Association
Keith L. Lee, Lobbyist, State Board of Medical Examiners
Alice A. Molasky-Arman, Commissioner, Division of Insurance, Department of Business and Industry
Lawrence P. Matheis, Lobbyist, Nevada State Medical Association
Sharon Carr
Chairman Townsend opened the hearing and said Senate Bill (S.B.) 122 and Senate Bill (S.B.) 250 would be heard together.
SENATE BILL 122: Makes various changes regarding malpractice insurance and actions. (BDR 57-265)
SENATE BILL 250: Revises various provisions relating to regulated businesses and professions. (BDR 57-835)
Senator Alice Costandina (Dina) Titus, Clark County Senatorial District No. 7, said S.B. 122 addressed reasonable insurance reforms needed to deal with the medical malpractice crisis. Comparable provisions and reforms were already in place in several states across the country. She addressed the sections representing the substantive parts of the bill.
Senator Titus said section 1 of the bill allowed any interested person or entity to intervene in ratemaking proceedings related to medical malpractice insurance. Interested parties would have standing, be able to submit documents, make arguments, and appeal decisions. Participation as a formal intervener would be different from voicing an opinion during public testimony. The laws in Illinois, California, New Hampshire, and Kentucky already provide for this procedure.
Senator Titus next addressed section 3, stating it prohibited the commissioner from exempting medical malpractice insurers from the provisions of chapter 686B of Nevada Revised Statutes (NRS), which set the standards for establishing insurance rates. She commented the provision codified existing practice but should be put into statute. She said section 4 should be amended to include the disapproval of a decrease in an insurance rate if the rate did not comply with NRS 686B.050. The amendment would prevent an insurer from proposing artificial low rates to corner the market. Rate changes could also be disapproved if based on capital losses, diminished dividends, returns, income, or any other financial loss as a result of imprudent investments. Senator Titus said the provisions in the amendment were a statement of Nevada policy and insurers should be notified of the policy. Similar provisions are found in the law of other states, such as Florida and Nebraska. Senator Titus suggested a change to section 3 to clarify illegal activity of an employee of the insurer must be related to insurance business. She also suggested replacing the term "vexatiously" with "in bad faith."
She recommended a change to section 10 of the amendment which would allow the commissioner to set rates for "tail coverage" using the same guidelines used for setting rates in other areas of insurance. Section 11 would disallow charging different insurance rates for obstetrics and gynecologic physicians (OB-GYNs) who deliver different numbers of babies. Insurers would have to provide a rationale for charging different rates. Section 12 would prohibit confidentiality agreements in medical malpractice settlements. The public would be allowed to know which doctors had been accused of malpractice. Section 13 would require the commissioner to determine, on an annual basis, what percentage of the market was held by each insurer. If a company with 40 percent or more of the market wanted to withdraw from the market, the company would have to give written notification to its insureds and the commissioner, at least 120 days before withdrawing. The company would also have to submit, for approval, a withdrawal plan in compliance with the requirements set forth by the commissioner.
Senator Titus said section 14 would allow a physician to obtain independent counsel, at the expense of the insurer, should the insurer and the insured disagree on the response to a settlement demand. She said section 15 requires a reduction in premium, under certain circumstances, unless the insurer could show the reduced premium failed to provide a fair and reasonable return to the insurer or was otherwise confiscatory.
Senator Titus recommended the addition of a new section to the amendment that would create a compensation fund to subsidize insurance costs of OB‑GYNs. She proposed taxing gentlemen's clubs to finance the fund. The tax would be assessed on a per-square-foot basis. She pointed out the dancers in the clubs were independent contractors; therefore, the club owners did not pay business, workers' compensation, or unemployment taxes, nor did they offer any benefits. The commissioner of insurance could regulate the fund.
Senator Carlton asked if intervention, as described in section 1, was currently in use in other tort reform states. Senator Titus said the method is in use in Illinois, California, New Hampshire, and Kentucky.
Senator Neal asked if the commissioner of insurance would have the authority to regulate insurance companies in Nevada, in consideration of the Employee Retirement Income Security Act of 1974 (ERISA). Scott Young, Committee Policy Analyst, said ERISA would apply to employer health plans, not to malpractice coverage.
Chairman Townsend gave a brief overview of S.B. 250.
Alfredo Alonzo, Lobbyist, Lionel Sawyer and Collins, said he was representing Physicians Insurance Company of Wisconsin and introduced employees of the company.
William T. Montei, CPA, President and CEO, Physicians Insurance Company of Wisconsin (PIC Wisconsin), read from a prepared statement (Exhibit C. Original is on file in the Research Library.). He explained PIC Wisconsin was a privately held, physician-owned-and-governed medical malpractice company. He testified in opposition to S.B. 122. Specific objections are listed in Exhibit C.
Senator Carlton asked why PIC Wisconsin disagreed with the provisions in section 1. She said Nevada lawmakers would like everyone with an interest in rate making to be able to intervene and present their thoughts at a hearing. Better decisions could be made based on additional information provided by interested parties. Since the rates would affect all Nevada residents, intervention should not be restricted to certain entities. She pointed out California, a leading tort reform state, had successfully applied a similar law.
Mr. Montei said there was a difference between what tort reform would do regarding the stability of the ratemaking process and the actual rates. Allowing interested parties to intervene could extend the process and potentially cause a rate request to be denied, based on factors other than actuarial data. Under some circumstances, such as losses over time in Las Vegas, an insurer's need for a rate increase could be urgent. Often, that was when the ratemaking process could become muddied. He said PIC Wisconsin had no personal experience with rate hearings.
Chairman Townsend asked what generally contributed to PIC Wisconsin's premium rates. He also asked Mr. Montei's opinion of the cause of the problems in the Las Vegas market. Mr. Montei answered 80 to 85 percent represented loss costs, including litigation expenses. Operating expenses represented 10 to15 percent. He said many states charge premium taxes, which would represent up to 2 percent. Finally, there would be a provision for profit.
Chairman Townsend asked what percent of PIC Wisconsin was invested in equities. Mr. Montei said the company had about 10 percent in equities, which was average for the industry. He said it was the practice of the company to set aside a portion of the portfolio to cover losses. They took more risks with the remainder of the funds. Although the portfolio went down in 2002, it was because of the market, not because of imprudent investments.
Chairman Townsend said the goal of the lawmakers was to provide the greatest access to the best medicine available and asked what kinds of claims were contributing to losses. Mr. Montei said there were probably ten things that caused the majority of claims. Failure to properly diagnose was a primary cause. He offered to get more definitive information for the committee. Chairman Townsend said it was easier to fix a problem when it could be determined where it started. Knowing which types of claims were causing the most loss would be helpful.
Senator O'Connell asked how many patients per day would be examined by an OB-GYN covered by PIC Wisconsin. Mr. Montei said he did not have that information, but it could be obtained from individual physicians. Senator O'Connell said such information is important to the committee. The OB-GYNs in Nevada must see 60 patients per day just to meet their overhead, including insurance premiums. She said the situation caused concern over the amount of time a physician could spend with a patient and how that would contribute to failure to properly diagnose medical conditions. Mr. Montei said PIC Wisconsin believed strongly in risk management and was willing to work with the Board of Medical Examiners to improve the practice of medicine.
Senator Neal asked for clarification about cost drivers, "surplus" money, and ratemaking. Mr. Montei explained "surplus" was equity or retained earnings; money left over after payment of claims. Those funds were used for investments. Rates were all driven by losses. Ratemaking was based on losses of PIC Wisconsin and filed industry data. He said there was a lot of judgment involved in ratemaking, and PIC Wisconsin relied on actuaries to make those judgments.
Chairman Townsend asked how PIC Wisconsin qualified a physician for coverage and what procedure would be followed if a covered physician were sued. Mr. Montei answered physicians seeking coverage were required to complete a detailed five-page application. If a claim were filed against a covered physician, the physician would be contacted by telephone within 1 week. The physician would be involved in the process, along with a claims specialist and defense counsel. The physician would be included in deciding whether to go to trial or settle the claim.
Chairman Townsend asked what would happen if a physician wanted to settle a claim but PIC Wisconsin did not agree. Mr. Montei said in most instances physicians agreed to go to trial. Even if they were reluctant to do so, they would not want their reputation to suffer nor would they want a payment to go to the National Practitioner Databank, the Board of Medical Examiners, or the insurance commissioner's office. He said he could not imagine PIC Wisconsin would insist on a trial if a physician strongly disagreed.
Chairman Townsend asked if a large settlement were to be paid on behalf of a physician covered by PIC Wisconsin, would it cause an increase in rates for other physicians in the group or just the individual physician. Mr. Montei said rates were based on geographic jurisdiction. Cook County, Illinois, for example, would have a higher rate than the rest of Illinois because of its loss history. Physicians who had claims in that area would pay a higher rate and, if there were a trend, they might specifically and individually pay a higher rate. He said they would not charge all insureds a higher rate simply because PIC Wisconsin covered physicians in Cook County. He said that would also be true in Las Vegas. Chairman Townsend asked if that meant PIC Wisconsin did not export the higher volatility of Las Vegas to other jurisdictions. Mr. Montei said they did not.
Chairman Townsend asked what would happen if provisions for rate regulations in section 1 were avoided and insurers were allowed to charge what they wanted, provided it was not below cost and the insurance commissioner continued to determine if insurers were financially able to pay claims. Mr. Montei said he thought removal of the provision would result in greater rate volatility cycles; higher highs and lower lows. He said he was in favor of rate regulation but wanted to see the right balance of regulation.
Chairman Townsend asked if Mr. Montei thought section 1 created a problem with the process of establishing rate regulations. Mr. Montei said that was a fair assessment. He said 80 percent of a rate dealt with losses and information that came from technical judgments. Participants in a ratemaking process should understand the information used.
Mr. Montei continued reading his written testimony (Exhibit C). Chairman Townsend and Mr. Montei entered into a discussion of the wording in section 10. It was clarified that a tail policy is not available for purchase until termination of a current policy.
Senator Neal asked what should be done if bad faith became part of a claim. Mr. Montei said bad faith could be resolved through common law. Since there was a remedy in common law, bad faith did not need to be addressed in the bills.
Bill Bradley, Lobbyist, Nevada Trial Lawyers Association, said there are some important Nevada statistics, related to the cause of the medical malpractice insurance crisis, which need to be examined. He gave a brief description of the claims process in Nevada. He then referred to a chart listing medical malpractice verdicts (Exhibit D) and discussed a claim filed in Las Vegas. In that case, Dr. Kramer, an obstetrician, was sued for malpractice when a child he delivered sustained brain damage during the birth process. A screening panel determined the doctor had been negligent and the plaintiff demanded payment of the $1 million limit of Dr. Kramer's policy. In Nevada all medical malpractice policies contain a consent clause. The physician would have to consent to payment of a settlement, although the physician would have no say in the amount the insurer offered to the plaintiff. The insurer offered $200,000, which the plaintiff rejected as insufficient and the matter went to trial. As a result, the plaintiff was awarded $5.35 million. Mr. Bradley said the $4.35 million in excess of the policy limits was considered in the loss figures when the insurance company established future rates. He said insurance companies should not be allowed to take such action.
Chairman Townsend asked if the award was paid right away. Mr. Bradley said awards were not paid, they were appealed. Chairman Townsend asked if an appeal were to be denied, would the award amount in excess of the policy limit be applied as an actuarial issue and spread, geographically, within the Las Vegas market. Mr. Bradley said he understood that is what would happen.
Matthew L. Sharp, Lobbyist, Nevada Trial Lawyers Association, gave a PowerPoint presentation and provided paper copies of his presentation (Exhibit E. Original is on file in the Research Library.). He said his presentation would assist the committee to understand some of the concepts of insurance. He said Nevada's malpractice insurance problems stemmed from the actions of the St. Paul Companies. They cornered the market, had improper underwriting practices, and did not charge adequate rates. He said if Nevada did not address those problems, they would occur again. Referring to Exhibit E, Mr. Sharp explained good-faith claims handling, consequences if an insurer failed to act in good faith, and proper underwriting practices.
Chairman Townsend asked if there were any statistics available that list how many malpractice suits had been filed against each company underwriting malpractice in Nevada and what actions were taken by the Board of Medical Examiners.
Keith L. Lee, Lobbyist, State Board of Medical Examiners, said he would get the information for Chairman Townsend. He said the Board of Medical Examiners had been directed to provide that information to the Legislative Counsel Bureau in odd numbered years.
Chairman Townsend asked which insurance companies, national, mutual, or physician-owned best met standards for good-faith claims handling. Mr. Sharp said companies that appreciated claims departments existed to pay claims fairly, regardless how it might affect company profits, were the companies that understood good faith and fair dealing.
Alice A. Molasky-Arman, Commissioner, Division of Insurance, Department of Business and Industry, distributed copies of a chart showing a history of rates in Nevada (Exhibit F) and a chart showing which insurers had been doing business in Nevada over the past 5 years (Exhibit G). She said the St. Paul Companies acquired Nevada Medical Liability Insurance Company in 1995 and made a commitment not to raise rates for at least a year.
Chairman Townsend asked who authorized the acquisition, what percent of the market did the company have, and had the company acted responsibly by not raising rates.
Ms. Molasky-Arman said she had authorized the acquisition and the rates were considered adequate at the time. She said she did not know what share of the market was held by Nevada Medical Liability Insurance Company at the time of the acquisition, but The Doctor's Company Group held the greater market share. Nevada Medical Liability Insurance Company held the next largest share.
She explained the loss ratios listed on the experience chart (Exhibit G) were developed over time. The percentages listed for 1997 were not known until the end of 2002. The St. Paul Companies estimated their rates in consideration of experience that had occurred prior to 1995. She said the company also offered discounts to their policyholders.
Chairman Townsend asked the reasons for the discounts. Ms. Molasky-Arman said they were based on participation in risk management programs and on membership in the Nevada State Medical Association. The Nevada Medical Liability Insurance Company had offered similar discounts to their insureds.
Lawrence P. Matheis, Lobbyist, Nevada State Medical Association, explained the discount was based on the creation of participation of members of the Nevada State Medical Association in a risk management program to be created by the association.
Chairman Townsend asked if the discount was given for something that was going to happen in the future, rather than on actuarial information. Ms. Molasky‑Arman said the judgment of the insurer was also a factor in the ratemaking process. In this instance, the insurer probably thought the plan would reduce future risk.
Chairman Townsend asked if the commissioner had become concerned in the year 2000 when there was a 50 percent decrease in the market share of The Doctors' Company Group, but the market share of St. Paul Companies remained consistent. She said the situation was not of concern. The decrease in market share was due to new companies writing policies in Nevada.
Senator Neal asked when the commissioner became aware of the 15 percent discount requested by St. Paul Companies. Ms. Molasky-Arman said it was first requested in 1997 and was approved after a routine rate-filing review by the commissioner.
Chairman Townsend asked for clarification of the process for analyzing current rates. Ms. Molasky-Arman said rates were based on past losses projected into the future to the time the new rates would apply.
Chairman Townsend asked if the St. Paul Companies had justified the 15 percent discount at the time of the rate filing and if such discounts were common practice. Ms. Molasky-Arman said the insurer would have had to justify any discount or rate change before it would have been approved. She said insurers with association plans did discounting frequently.
Chairman Townsend asked how long the discount lasted and if it was transferred to the new carrier. Ms. Molasky-Arman said the discount remained in place until the St. Paul Companies withdrew from the market. The discount was not transferred to any other carrier.
Sharon Carr testified about her experience when trying to obtain malpractice insurance as an office manager for a group of physicians. She said the process was frustrating and complicated.
Chairman Townsend adjourned the meeting at 10:55 a.m.
RESPECTFULLY SUBMITTED
Maryann Elorreaga,
Committee Secretary
APPROVED BY:
Senator Randolph J. Townsend, Chairman
DATE: