COVER STORY

How a malpractice insurer grew TOO BIG TOO FAST

When this major liability carrier got in trouble, 17,000 doctors wondered how it happened, and whether they should have seen it coming.

By Berkeley Rice
Senior Editor

When MIIX Insurance—the country's seventh largest medical liability carrier—stopped writing new policies this summer, it left 17,000 policyholders in 24 states wondering about replacement coverage, most likely at substantially higher rates. In New Jersey alone, where the insurer started life in the '70s as a physician-owned company, the carrier covered 7,000—37 percent—of the state's physicians.

MIIX has now reorganized as a much smaller new company. It will operate only in New Jersey, thanks to doctors there who put up their own money to finance its reincarnation. But many of those doctors are still wondering how a company that had seemed so successful could go sour so rapidly, and whether they should—or could—have seen the trouble coming.

"I still can't believe it happened," says Howard Sheldon, a family practitioner in Cherry Hill, NJ, and one of the company's original members. "MIIX always had an excellent reputation for professional service and physician representation. That's why this is so disappointing and demoralizing."

Founded in 1977 as Medical Inter-Insurance Exchange of New Jersey, the company was sponsored by the Medical Society of New Jersey. Like many doctor-owned companies that sprang up about that time, MIIX was created in response to a national malpractice crisis that led some commercial carriers to drop out of the medical liability business, leaving thousands of physicians desperate for replacement coverage. As a result, they signed up in droves with the new "bedpan mutuals."

New Jersey doctors provided some $23 million to launch the company, with interest-free loans ranging from $3,000 to nearly $8,000 each. (The loans were repaid in the early 1990s.) MIIX grew steadily during the late '70s and '80s, becoming New Jersey's leading physician carrier.

A new president launches an aggressive expansion

In 1990, MIIX hired Daniel Goldberg as president. Within a few years, he convinced his board that to remain successful the company would have to move beyond the state's borders. By 1998, MIIX covered more than 16,000 physicians and other health professionals in 21 states. Expanding beyond the home state's border wasn't a novel idea; several other physician-owned carriers did so at around the same time. According to industry sources, however, MIIX achieved much of its out-of-state growth by offering low premiums to gain a share of what had become a highly competitive market. In the rush to sign up new policyholders, MIIX also may have taken on an unhealthy amount of high-risk business. In 1997, Goldberg proposed converting MIIX to a public stock company in order to raise more capital. The company needed the money, he claimed, to respond to increased competition, finance further expansion, "facilitate strategic acquisitions," and "develop new business opportunities."

Goldberg presented the plan to the board of directors and received their unanimous approval. The company sent physicians a brief notice about the plan in late October 1997. Then in mid-December, it followed up with a detailed prospectus for the plan, including the distribution of 12 million shares, plus a notice of a public hearing to be held by the state's Department of Banking and Insurance the following week, just three days before Christmas. Not surprisingly, no doctors showed up, and only two sent comments.

The insurance commissioner approved the conversion plan in March 1998, subject to a vote by MIIX policyholders. By then, however, a few of them had raised objections. They hired Neil Prupis, a health care attorney in West Orange, NJ, to appeal the DOBI's decision, claiming that the planned stock distribution was unfair to those who'd been paying premiums for many years. Their appeal was denied and in January 1999, Prupis filed a class action suit against MIIX on behalf of more than 200 physicians in an attempt to block the public stock offering. The suit attacked what it termed "excessive" compensation proposed for Goldberg and two vice presidents, whose total salaries and bonuses for 1998 would roughly double—in Goldberg's case, from about $500,000 to nearly $1 million. Those three executives would also receive generous stock options and loans to finance them. (The company says that those compensation packages were "entirely reasonable by industry standards.")

The suit also objected to the financial arrangement under which the new company would pay the medical society $11 million in stock—and assume nearly $20 million in debt—in exchange for "ownership" of MIIX and several subsidiaries. The court eventually dismissed the suit because it found insufficient evidence to support the plaintiffs' allegations, and because it had limited authority to overturn DOBI decisions.

A public offering, a drug bust, and a price drop

At a special meeting in March 1999, MIIX executives outlined the planned conversion to a gathering of physician members, who then voted overwhelmingly to approve it. On Aug. 4, 1999, MIIX sold 3 million shares on the New York Stock Exchange at an offering price of $13.50. The price soon climbed to $17.50, creating a potential 30 percent gain for MIIX executives with eligible options and the physician shareholders, who received an average of $20,000 worth of stock each.

By the end of 1999, however, MIIX's stock had slipped back close to its offering price. One possible reason for the falling price had nothing to do with the company's finances: In November 1999, Goldberg and his live-in companion were arrested for growing a sizable quantity of marijuana in a sophisticated hydroponic garden in the attic of Goldberg's home. Goldberg insisted the pot was for personal use only, and eventually pleaded guilty to a charge of possession. He was sentenced to one-year probation, and forfeited half the equity in his $350,000 home.

MIIX's directors allowed Goldberg to resign "for personal reasons," and appointed Chief Financial Officer Kenneth Koreyva to replace him as CEO. To shore up the falling stock, Koreyva announced early in 2000 that the company would repurchase its outstanding shares of public stock.

Big losses lead to an attempted rescue

The move propped up the stock, but only temporarily. The price continued to drop throughout 2000, falling to less than $8 a share by the end of the year. In February 2001, the company reported an operating loss of $32.6 million for 2000, which Koreyva attributed in large part to claims losses in some of the new markets. Nevertheless, he remained "cautiously optimistic" about the company's future.

Two months later, Koreyva was fired, due to what Vincent Maressa, then-chairman of MIIX and the medical society's executive director, termed "differences over management style." With MIIX's income still dropping, Maressa announced "aggressive actions to get the company back on track," which meant raising rates and jettisoning unprofitable or risky business in several states.

MIIX hired a new president in August 2001, but he lasted only a few months. The next new CEO, Patricia Costante, said the company's business plan was "showing strong evidence of success thus far." Despite her assurance, the financial drain continued, due in part to reduced investment income caused by falling interest rates, plus severance payments to all those departing CEOs.

Last winter, the company delayed the release of its year-end results for 2001, then reported whopping losses totaling more than $200 million for the last quarter of 2001 and the first quarter of 2002—whereupon the stock plummeted from $12 to less than $3. It now hovers close to $1. In May, MIIX announced a state-approved rescue plan called "voluntary solvent runoff." Under the plan, the company will continue to honor existing policies but will stop writing renewal coverage.

MIIX isn't broke. In fact it still has more than $1 billion in reserves, enough to cover future claims on existing policies. As a company spokesman states, "MIIX expects to meet its contractual obligations to its insureds." But because of what it calls "adverse claims experience," the company isn't financially strong enough to continue writing new business.

With DOBI approval, MIIX has formed a new private stock company—for New Jersey doctors only—to be named MIIX Advantage Insurance Company of New Jersey. To finance the $30 million reincarnation, the company has asked physicians to invest an average of $11,000 each, with some specialists paying as much as $25,000.

It's not clear yet how many will sign up with the new company, since many physicians have lost their feelings of loyalty. "A lot of doctors put a lot of money into MIIX," says Fred Silverberg, an ob/gyn in Chatham. "But because of what's happened in the last three years, I don't know how many will want to do that again."

Plenty of doctors are chipping in to the new company, however, since alternative coverage is hard to come by, and because the old MIIX always provided excellent service. Bernard Saccaro, a rheumatologist in Rochelle Park, says he and his partners are investing in the new MIIX because "we were happy with them for many years. It was really a nice company to work with."

To encourage enthusiasm for the new MIIX, CEO Costante assured New Jersey doctors that they could rely on the company's "experienced management team." That prompted one critic in an online chat group to comment, "All aboard for the second sailing of the Titanic."

Other liability carriers run into similar trouble

MIIX wasn't the only physician-owned carrier to encounter financial difficulties after expanding or going public in the mid to late 1990s. Ohio-based PIE Mutual went broke in 1997, after expanding to eight other states, leaving nearly 15,000 policyholders struggling to find coverage elsewhere. SCPIE (formerly known as Southern California Physicians Insurance Exchange) also ran into trouble after going public in 1997 and expanding into several other states. SCPIE has since stopped writing coverage outside California.

By the time mounting losses dragged Pennsylvania-based PHICO into bankruptcy last year, it had grown into one of the country's largest carriers. Even The St. Paul Companies, which covered 42,000 doctors around the nation, withdrew from the medical liability business last year when its losses approached $1 billion.

One problem public insurance companies face is trying to serve two masters whose needs may not coincide: doctors who want affordable coverage, and stockholders who want a high return on investment. While many of these companies—including MIIX—blamed their financial troubles on increased claims frequency and severity, there's more to the story. In New Jersey, for example, the number of malpractice claims actually declined 27 percent from 1994 to 2001, although the total dollar amount of paid claims has risen sharply since 1997.

Some industry critics instead blame bad management. At a recent hearing on New Jersey's malpractice crisis, Neil Cohen, chairman of the state assembly's Banking and Insurance Committee, said: "The problem isn't high jury awards or high settlements, or an increase in complaints. The only crisis that exists is that there are a lot of doctors who are now put in a bad position because of the poor business planning of MIIX, period." Looking back, MSNJ's Vincent Maressa says, "I still feel that MIIX's expansion strategy was correct. It was either expand or lose ground to competitors," he explains. "Of course, in retrospect it could have been better executed. The real problem was that the company's management may have tried to do too much, too fast, without having as much knowledge of the markets in the other states as it had in New Jersey. And the competition was greater in those states, so the company wasn't able to be as selective."

Why MIIX's insured physicians didn't foresee problems

MIIX's frequent changes in leadership and the falling price of its stock over the last few years must have caused some physician shareholders to worry about the company's stability. But MSNJ kept assuring them that MIIX was financially healthy. Indeed, it continued to receive excellent ratings from AM Best, an agency that evaluates insurers' financial condition. It wasn't until after the company reported huge losses last winter that Best finally lowered its rating from A to B-, and then to C+. Even then, CEO Costante assured MSNJ members, "We do not believe that the rating change reflects the potential positive impact of our ongoing actions."

Had MIIX doctors known about a competing service called Weiss Ratings, they could have gotten much earlier warnings. From the time MIIX went public in 1999, Weiss had rated the company "D+" or "weak," which might have prompted prudent buyers to shop around for a stronger carrier.

New Jersey physicians might have expected their medical society to protect their interests, but critics say such trust may have been unrealistic given the company's close relationship with MSNJ. The society remains one of MIIX's largest shareholders. (The $11 million in stock it received in 1999 is now worth less than $1 million.) MIIX paid MSNJ about $800,000 a year for the office space it shares at MSNJ's headquarters in Lawrenceville, NJ. Until last May, MSNJ's executive director Vincent Maressa doubled as board chairman of the subsidiary that controlled MIIX.

Neil Prupis, the attorney for the doctors who opposed MIIX's conversion to a public company, blames the company's troubles in part on its physician leadership. "None of the doctors on MIIX's board had sufficient financial experience to evaluate the planned expansion," says Prupis, "so they didn't see the trouble coming. Good lawyers and businessmen are trained to consider the worst-case scenario, but doctors never do. When they get involved in businesses, they always take a rosy view, and they end up paying for it."

How to protect yourself from an unstable carrier

In the wake of MIIX's financial crisis, thousands of doctors it covered in New Jersey and other states are wondering why they didn't realize problems were brewing, and how they can avoid such disasters in the future. Here's what you can do to protect yourself:

Don't buy on price alone.
Carol Golin, editor of the monthly newsletter Medical Liability Monitor, warns physicians against choosing a malpractice carrier merely because it offers bargain premiums. "Most doctors only look at the price when they buy malpractice insurance," says Golin. "But they should also consider the company's financial stability."

Check your carrier's financial rating.
Any good library should carry the publications of one or more well-known services that evaluate insurance companies, such as AM Best, Standard & Poor's, and Moody's. Weiss Ratings, which is less well-known, says they're the only one that's not paid by the companies it rates, which may explain why their evaluations are generally much tougher and provide earlier warning of corporate financial troubles.

Weiss ratings for individual companies are available by phone for $15 each at 800-289-9222, or online for $7.95 each at www.weissratings.com. For $12 per company, you can order Weiss' "Watchdog Service," which provides immediate notice of any change in a company's rating, plus a quarterly update. Or you can order Weiss' quarterly "Guide to Medical Malpractice Insurers" for $85, which includes ratings and analyses on most carriers and a list of recommended insurers.

Ask your agent tough questions.
Question your insurance agent or broker carefully about any carrier he recommends, particularly if you've heard rumors that it's financially shaky. Your agent should protect you from signing with an unstable company. After all, that's one reason to use him, and why he gets his commission.

Do your own research.
If your carrier is a publicly held company, follow its stock. Sharp drops in price may reflect major problems. Get a copy of the company's quarterly or annual report. If you don't understand such financial information, get some help from someone who does.

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Berkeley Rice. How a malpractice insurer grew TOO BIG TOO FAST.

Medical Economics

2002;18:60.