Report on New York State Medical Indemnity Fund
June 12, 2017
New York State Medical Indemnity Fund
2017 Legislative Report
Purpose & Scope
Chapter 517 of the Laws of 2016, as modified by Chapter 4 of the Laws of 2017,
provides that the New York State Department of Financial Services (DFS) shall issue “a report to
the governor and the legislature on the financial condition of the state medical indemnity fund,
the future solvency of such fund, and any issues relating to the operation of such fund that the
superintendent, in his or her sole discretion, elects to include in such report.” This report is
provided by DFS pursuant to this provision. DFS, along with an independent actuary, has
reviewed the state medical indemnity fund’s (Fund) financial condition based on enrollment,
claims paid, administration costs, comparable data from similar funds in other states, and other
actuarially relevant factors.
Pinnacle Actuarial Resources, Inc. (Pinnacle) had been retained to provide quarterly
assessments of the Fund’s financial condition. Pinnacle’s scope of work was enlarged to prepare
an analysis to DFS for this report. This report “addresses the financial condition of the state
medical indemnity fund, the future solvency of such fund, and any issues relating to the
operation of such fund that the superintendent, in his or her sole discretion, elects to include in
such report.” This analysis is based on the Fund valued as of December 31, 2016.
Background
The Fund, created in 2011 under the Public Health Law, provides funding for future
health care costs of children with birth-related neurological injuries. The Fund was created to
provide a funding source for future health care costs associated with birth-related neurological
injuries and reduce medical malpractice insurance premiums. Enrollees of the Fund have been
plaintiffs in medical malpractice actions who have received either court-approved settlements or
favorable judgments.
Under the statute, a “birth-related neurological injury” is “an injury to the brain or spinal
cord of a live infant caused by the deprivation of oxygen or mechanical injury occurring in the
course of labor, delivery or resuscitation, or by other medical services provided or not provided
during the delivery admission.” To be eligible, these injuries must result in a “permanent and
substantial motor impairment” or a “developmental disability” or both.
Once enrolled, a qualified plaintiff will remain in the Fund for his or her lifetime. The
Fund pays or reimburses the cost of qualifying health care services. “Qualifying health care costs”
include future medical, hospital, surgical, custodial, home modifications, transportation to health
care appointments, prescriptions, and similar costs related to the child’s care. N.Y. Pub. Health L.
§ 2999-h. Qualifying health care costs are paid at the Medicaid reimbursement rate, and private
physicians are paid at the usual and customary rate.
A third-party administrator makes enrollment and claim determinations using regulations
promulgated by the Department of Health (DOH). Denials of enrollment are reviewable by a court
and claims denials are handled by a DOH administrative law judge, which is subject to court
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review. To date, there have been only 20 appeals of claims denials decided by a DOH
administrative law judge during the Fund’s history.
The Fund, which presently covers nearly 500 children, receives an annual appropriation
in an amount of $52 million (N.Y. Pub. Health L. § 2999-i(5)). The funds come from Health
Care Reform Act pools which are in turn funded by surcharges imposed on health care services.
The Fund held approximately $162.2 million at the end of 2016 and made over 15,000 claims
payments in 2016.
According to the Public Health Law, the Fund is designed to be funded by an
appropriation from the state up to a limit. If the estimated amount of current liabilities in the
Fund equals or exceeds 80% of the Fund's assets, then the Fund stops accepting new enrollments
until a new deposit into the Fund is made to bring the liabilities back below the threshold. N.Y.
Pub. Health L. § 2999-i(6). Fund enrollees are not impacted by a suspension in enrollment.
Those liabilities will continue on unaffected by the suspension of enrollment.
In 2016, a number of changes were made to the Fund’s governing statutes (the Recent
Amendments). Specifically:
1. Since its creation in 2011, the Fund has applied solely to children born in a hospital.
Under the Chapter 517 of the Laws of 2016, as modified by Chapter 4 of the Laws of
2017, (the “Recent Amendments”), that limitation has been abolished. N.Y. Pub. Health
L. § 2999-h. Naturally, the effect of that change is to increase the total possible pool of
children who may be eligible for the Fund. The greater the number of enrollees, it is
reasonable to assume that there will be a higher cost to the Fund.
2. Additional qualified benefits were included as part of the Fund. The costs of
“habilitation, respite, . . . [and] transportation for purpose of health care related
appointments” are now included in qualified benefits. N.Y. Pub. Health L. § 2999-h.
Again, the more benefits that are included, there is a greater likelihood of higher costs to
the Fund.
3. Effective June 30, 2017 through December 31, 2019, the reimbursement rates will
increase, and all services will be paid at the usual and customary rate. If no such rates are
available, then qualifying health care costs will be paid at the greater of 130% of
Medicaid or Medicare rates. Under the Recent Amendments, the usual and customary
rate means “the eightieth percentile of all charges for the particular health care service
performed by a provider in the same or similar specialty and provided in the same
geographical area as reported in a benchmarking database maintained by a nonprofit
organization specified by the superintendent of financial services” (N.Y. Pub. Health L. §
2999-j(4)). These changes substantially increase the costs to the Fund and will have the
most significant impact on the financial condition of the Fund. The increased costs will
be substantial, particularly if a decision is reached in 2019 to extend the period of
increased reimbursement.
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Financial Condition
Pinnacle provided estimates under the following scenarios:
1. Original Statute Without Giving Effect To Recent Amendments. It is projected
that based on the original statute without giving effect to the Recent Amendments the present
value of the Fund’s total unfunded liability would have been approximately $461.1 million
growing to $2.13 billion by 2027. In that case, the 80% threshold at which no additional children
are admitted to the Fund without further financial appropriation over the expected $52 million
per year from the state, would not have been reached in the next ten years.
2. Current Statute With The Recent Amendments With Sunset of Increased
Reimbursement. Giving effect to the Recent Amendments, including the sunset of increased
provider reimbursement at the end of 2019, it is projected that the present value of the Fund’s
total unfunded liability is now approximately $574.92 million. That unfunded amount would
rise to $2.33 billion by 2027. The 80% threshold at which no additional children are admitted to
the Fund without further financial appropriation over the expected $52 million per year from the
state, will not be reached within the next ten years.
Data, Assumptions and Analysis
The data reviewed in preparation of this report includes detail by Fund enrollee, benefit
category (i.e. nursing, medical, hospital, prescription drugs, etc.) and injury type. In this report
some of the long term forecasts and industry benchmarks used in the analysis are based on data
for the birth injury funds in Virginia and Florida, as well as medical professional liability
insurers in the State of New York. When Fund data has been deemed to be actuarially credible,
the assumptions incorporated actual Fund experience.
DFS staff, including actuaries, reviewed Pinnacle’s work, including its data, methods and
assumptions, and found them to be reasonable.
A. Number of Qualifying Participants
As of March 31, 2017, there were 455 enrollees in the Fund; because the work to prepare
this Report was done prior to that date, it was assumed that there would be 460 living
participants in the Fund at March 31, 2017.
Based on the experience of the Fund, it is estimated that on average there will be 4.5
enrollees accepted to the Fund per 10,000 live births in the state of New York. This frequency
rate is substantially higher than the birth funds in Virginia and Florida and reflects differences in
definitions of birth injuries and differences in eligibility determination between the states. This
rate has been adjusted over time as actual, credible experience has emerged.
The Recent Amendments have created the possibility of an increase in the number of
participants. The Recent Amendments opened the Fund to those not born in a hospital setting.
Based on national data, approximately 1.5% of all live births occur outside of hospitals. It is
therefore reasonable to assume that participation rates will increase by 1.5% annually as
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compared to what would be expected without the Recent Amendments, though this may be
higher given the potential added risks outside a hospital setting, or may be lower since high-risk
births may be more likely to occur in a hospital.
B. Effect of Inflation
There is ample evidence that the cost of medical and related services in the United States
has increased over time. Therefore, those increases must be taken into account in projecting out
the future cost of services. That increase, or inflation, is tracked by the federal Bureau of Labor
Statistics. The rate of increase in the cost of future benefits payments is assumed to be 3.5%
annually in this report. The benefits covered include: medical, dental, surgical and hospital care;
nursing and custodial care; medication; rehabilitation; medical equipment; home and vehicle
modifications, and certain others. The rate of 3.5% was determined based on a review of the
consumer price index from the Bureau of Labor Statistics and recalculating that index using the
Fund’s distribution of benefits. For purposes of this exercise, consumer price index categories
were matched to each type of benefit provided by the Fund to better estimate the impact of
inflation.
C. Discount Rate
In practice, presently the Fund makes promises to pay for medical care currently and well
into the future. In order to have the money available in the future, the Fund invests the money
that it has today so that there is enough money to pay out in the future. The income derived from
those investments play a large role in the Fund’s or an insurer’s ability to make payments in the
future.
An essential element of all birth injury funds in the United States is their ability to
generate investment income on the funds available to pay benefits from the time these funds are
available until the benefits are provided. In this report it is assumed that money paid today into
the Fund will earn 2.5% over time. That earning is referred to as a “discount rate.” The discount
rate shows how much money will be worth in the future if invested today. The rate of 2.5% is an
assumption used by some New York insurance carriers with similar types of obligations for the
purpose of discounting loss and loss adjustment experience (the cost of handling claims) and
setting prospective insurance rates. Available information indicates that actual returns on monies
in the Fund have not been as high as 2.5%. To the extent the Pinnacle had previously utilized a
4% discount rate, it did so based on programs in other states. However, 2.5% is consistent with
New York insurer practice and rules concerning investment and reserves. It is also more realistic
given the lower Fund balance available for investment purposes.
Because enrollees today will have costs to be paid many years from now, the impact of a
change in the investment earnings of the money set aside today for the payment of costs in the
future can be substantial. A change of .5% in the discount rate assumption results in a change in
investment income of less than $10 million until fiscal 2025, but the impact on the Fund balance
is much more dramatic. For fiscal year 2017, a .5% drop in the discount rate changes the Fund’s
deficit by more than $130 million. By fiscal year 2026, this impact increases to more than $400
million.
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D. Benefits Payments
Another element of the projections is how much and for long will payments have to be
made. That depends on the number of qualifying participants and how long they will need care.
Because care is provided for the life time of the enrollee those payments are tied to the lifespans
of the enrollees, which may last a long time. Based on the Fund benefit payments to date and
payment timing and mortality data from the Virginia medical benefit fund, it is estimated that,
prior to the Recent Amendments, the average Fund enrollee will currently receive approximately
$3.35 million in nominal (i.e. not subject to discounting as described above) benefits. Virginia’s
experience was also utilized to estimate the timing of these payments. This allowed an estimate
of future benefit payments by fiscal year and to compute the present value of these payments
based on the selected discount rate.
E. Fund Balance
The income statements are used to estimate the Fund balance at the end of each fiscal
year. The fiscal year-end Fund Balance is computed as the initial Fund balance (i.e. the ending
balance from the previous year), plus the expected annual funding contribution of $52 million
and any investment income realized by the Fund during the year. Benefit payments and
administrative expenses paid during the fiscal year are then subtracted producing the fiscal year
end Fund balance.
The balance sheets estimate the Fund’s surplus (positive) or unfunded liability (negative)
at the end of each fiscal year by subtracting the present value of all future benefit payments of
participants admitted to the Fund as of the end of that fiscal year, along with the estimated future
administrative expenses needed to provide these benefits. The future benefit payments are based
on the future benefit payments by enrollee entry quarter and payment quarter as described in
developing the income statement. The difference between these future liabilities (benefits and
expenses) and the current funds available to pay them is the unfunded liability.
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The Fund is required by law to suspend new enrollment when liabilities equal or exceed
80% of the Fund’s assets. As stated above, assuming that the increase in reimbursement rates in
the Recent Amendments lapses as stated in those amendments, that 80% threshold is not
expected to be breached in the next ten years.
F. Increase in Reimbursement Rates
Pinnacle has estimated the increased costs attributable to these increased reimbursement
rates based on various assumptions concerning the current procedural terminology (CPT) and
other codes. Assumptions are necessary as there may not be an exact match between existing
CPT codes used by Medicaid and the usual and customary costs as defined in the Recent
Amendments and/or such costs may not be available in the benchmarking database that is to be
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Note that by using the present value of the future benefit payments, this estimate is already reflecting future
investment income received by the Fund. While this is not consistent with statutory accounting, it is consistent with
practice among relevant New York domiciled insurers and has been approved by the New York Department of
Financial Services for presenting year-end financial statements.
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utilized under the Recent Amendments. Therefore, the actual increase in costs in the future may
be higher or lower than Pinnacle has estimated.
Based in part on the assumptions described, Pinnacle estimated that after giving effect to
the Recent Amendments, average lifetime benefits are estimated to increase over 3.5 times or
250% due to the impact of increasing reimbursement rates from Medicaid rates to the 80
th
percentile of all amounts billed by providers for the particular health care service performed by a
provider in the same or similar specialty and provided in the same geographical area as reflected
in the FairHealth database. The impact of the increase in reimbursement was selected for each
benefit category. This is important as some benefit categories, such as hospital and rehabilitation
benefits, are expected to demonstrate larger than average increases while some other categories,
such as home modifications, may experience no change.
G. Administrative Expenses
In 2017, the third-party administrator is currently charging the fund $809 per Fund
participant per month. That number was used to develop the estimated levels of administrative
expense in the various scenarios referenced in this report under the assumption that the
legislation has no impact on the per participant per month cost to administer the Fund, all other
things being equal.
Conclusion
Presently the Fund has unfunded future liabilities. Had the Recent Amendments not been
enacted, that liability would have been approximately $461 million and would have been
expected to increase to approximately $2.13 billion over the next ten years. After giving effect
to the Recent Amendments the present value of the Fund’s total unfunded liability is projected to
be approximately $575 million and is expected to grow to approximately $2.33 billion over the
next ten years. Under both scenarios, however, in the next ten years based on current law the
Fund is not expected to exceed the threshold after which further enrollment is suspended. This
liability projection assumes the Recent Amendments expire in 2020 as scheduled. Extending the
Recent Amendments beyond 2020 could more than double the Fund’s liabilities.
