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Malpractice fund stable, but uncertainty looms

Health Care Stabilization Fund director warns legislators against transfers

By Andy Marso | October 16, 2014

A state fund meant to diffuse the costs of medical malpractice claims is on stable footing, but the fund's executive director said this week that legislators should not consider using reserve money for other purposes.

Chip Wheelen, executive director of the Kansas Health Care Stabilization Fund, said the fund is in a key transition period due to changes in new legislation.

Chip Wheelen, executive director of the Health Care Stabilization Fund, speaks to the fund's oversight committee Wednesday at the Statehouse. Wheelen said the fund is stable, although two new bills will affect its projected reserves.

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That makes the financial future less certain. But even without those changes, Wheelen said, all the money in the fund should remain devoted to paying malpractice claims and the costs of administering the fund.

"It should never be used for anything other than its intended purpose," he said, adding that the Health Care Stabilization Fund is a trust fund like the state employee pension fund and the unemployment insurance fund. Wheelen's comments came during a Wednesday meeting of the Health Care Stabilization Fund Oversight Committee.

The stabilization fund helps pay malpractice claims above what is covered by a provider's required malpractice insurance. It is funded through a surcharge on that insurance, as well as state funds allocated to cover University of Kansas medical residents.

While there is no legislative proposal to transfer money from the stabilization fund, the state faces a projected $260 million budget deficit in the general fund next fiscal year. Wheelen said talk of a stabilization fund transfer has surfaced even when the budget picture was much rosier.

"There have been rumors almost every year that some member of the Legislature has decided to take money from the Health Care Stabilization Fund and use it for some other purpose," he said.

Wheelen said legislators likely would face legal action if they tried to follow through on such a plan.

There's legal precedent inside and outside the state.

The Kansas Legislature made a series of transfers from other industry fee funds to close a budget deficit in 2009, only to have trade groups representing those who pay the fees file a lawsuit. Plaintiffs in the class action were represented by then-House Speaker Mike O'Neal.

In 2007, Wisconsin legislators transferred money from that state's version of the Health Care Stabilization Fund. Within three days, the Wisconsin Medical Society filed suit.

A lower court initially ruled that the state was within its rights to reappropriate the money, but the Wisconsin Supreme Court overturned that decision, 5-2.

In Kansas, years of taking in more than the fund was paying out have created a healthy reserve in the stabilization fund.

The Kansas stabilization fund has benefited from a $250,000 statewide cap on non-economic damages, commonly called "pain and suffering," that has been in effect for decades.

The Legislature, after some prodding from the Kansas Supreme Court, agreed to gradually increase the cap to $350,000 by 2022 when it passed Senate Bill 311 last session.

That's expected to eat into the stabilization fund reserves, though Wheelen said the effect is hard to predict.

“That does not mean there will be a 40 percent increase in every professional liability claim," he said. "But it does mean there will be some increase. We just don’t know how much.”

Legislative changes in House Bill 2516 also define some 630 assisted living facilities throughout the state as heath care facilities that fall under the stabilization fund's protection and provide immediate "tail coverage" for previous claims against them.

Russel Sutter, an actuary from the St. Louis consulting firm Towers Watson, said the stabilization fund is projected to have about $266 million in assets when the current fiscal year ends in July 2015.

Before the two bills went into effect, it was projected to pay out about $194 million in liabilities, leaving almost $72 million in projected reserves. The legislative changes increased the projected liabilities to just shy of $222 million, which drops the projected reserves to $44 million.

“In our view the $44 million still makes the fund financially strong,” Sutter said.

“At what point do you become concerned it’s too low?" Dennis George, a member of the oversight committee, asked Sutter.

"That’s a real judgment call," Sutter said. "I think something south of 20 (million dollars) would make me nervous.”

Wheelen praised the state's "fiscal discipline" for allowing it to sustain the stabilization fund for almost four decades. But he also expressed regret at the impending departure of Rep. David Crum, R-Augusta, who is chairman of the House Health and Human Services Committee.

"Over the last seven years we have had a guardian in the Legislature,” he said of Crum. “I’m really going to miss him. We’re sorry he’s decided to not run for reelection.”

Sen. Laura Kelly, D-Topeka, said she thought Wheelen was being generous in his praise of lawmakers, because while they had not tried to transfer money from the stabilization fund, they had failed at times to pay the state's full share of the medical residents' portion.

Kelly opposed the income tax cuts that caused the current projected state general fund deficit. She said an ill-advised raiding of the stabilization fund to make up some of the difference, while unlikely, could be floated next session.

"It's always a possibility," Kelly said. "But I think we'd probably end up in the same situation as Wisconsin. We'd be taken to court by the physicians, and they would win."

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