Friday, May 10, 2002 | 11:19 a.m.
The state insurance division is investigating a business arrangement between the Nevada State Medical Association and St. Paul insurance company as the agency tries to resolve the medical malpractice insurance crisis.
The state hopes to use evidence of insurance regulation violations as leverage to get the company to ease financial burdens on physicians who were left in a bind when the company withdrew from the market earlier this year.
State officials say St. Paul Cos., which insured 60 percent of Nevada's more than 4,000 doctors before withdrawing from the market in December, was paying "royalties" to the Medical Association, a professional organization of about 1,500 physicians.
The association and St. Paul entered into an agreement in 1996 in which the company paid the association 1 percent of premiums for association doctors who chose St. Paul to be their malpractice insurance carrier, and a half percent for doctors who renewed their policies with St. Paul.
A representative from the Insurance Division said the fees were a violation of regulations that require companies to disclose sales commissions.
But Larry Matheis, executive director of the association, said the money was exchanged as part of a larger agreement in which the association created a risk management program for its members. Physicians who participated in the program received a 15 percent discount on their premiums from St. Paul.
St. Paul, however, issued a statement about the arrangement saying it was "a common marketing practice" and made no mention of a risk management program.
"The royalty payment to the Nevada State Medical Association of 1 percent was in exchange for the association's endorsement of our products, which are sold only through licensed insurance agents," says a statement issued by St. Paul spokeswoman Andrea Wood. "The arrangement was legal and made in accordance with Nevada state law."
Matheis said the contract between the association and St. Paul stipulated that the company would get approval from the Insurance Division. But Insurance Division representatives said the state was not aware of the arrangement.
"This is something new to us," said John Orr, Insurance Division deputy commissioner. "We have not yet filed a formal complaint, but we continue to look into the issue. We are scrutinizing St. Paul's business conduct in Nevada, hoping we can soften the blow on the doctors."
Orr said the state could assess penalties against St. Paul for each time it paid the association and failed to report, but would rather use the information to persuade St. Paul to provide relief for doctors it formerly insured. Those doctors were asked to pay for "tail coverage"-- coverage for possible previous malpractice incidents that may become claims at a later date.
St. Paul wanted doctors to buy out their tail coverage in a lump sum on April 27, Orr said -- which would have forced some doctors to come up with as much as $100,000 on short notice. The division negotiated with St. Paul to allow doctors to make that payment in three installments.
"We would like the company to cover some of the tail," Orr said.
Orr said that the company violated other regulations, including the 120-day prior withdrawal notice, which is intended to give doctors and the insurance division a chance to find other carriers to replace the departing company.
St. Paul notified the state and its insured doctors simultaneously about its immediate intentions to leave in December.
"St. Paul has not been cooperative," Orr said. "They could have tried to soften the impact (of their departure) on doctors -- maybe given us six months or a year to line up other insurance companies ...
"So we would like to negotiate a more graceful exit," Orr said.
Matheis said his organization collected from St. Paul about $40,000 in 1996 and $25,000 in 1997. He said he could not recall the amounts collected in 1998, 1999, and 2000, but said they were less than the first two years. The association collected $6,000 in 2001, he said, and has "very little" left.
The money was put into a separate account and spent to help educate physicians about risk management in the medical setting, he said.
Matheis said he wasn't aware until this spring, after St. Paul left the market, that the company failed to tell the Insurance Division about the financial arrangement with the association.
"Are we embarrassed about this? Yes. We went into partnership with a group that doesn't keep their promises," he said. "But we encourage the division to investigate St. Paul. I encourage them to look at everything. We didn't do anything wrong, and we are offended that St. Paul has put us in this position of embarrassment."
Matheis said he met with Insurance Commissioner Alice Molasky-Arman last month to discuss the situation, and he said "after recovering all of our files the next day, our legal counsel realized that in fact (St. Paul) may not have been totally compliant with our contract with them ... because our contract made it very clear that the division would have to approve this."
Matheis said the risk management program was created during a similar malpractice rate crisis in the mid-1990s.
"It was intended as a way to reduce risk. We were trying at that time to create a market-based response to the medical liability problem happening then," Matheis said. Physicians pay about $300 a year to belong to the Nevada State Medical Association.
Dr. Raj Chanderraj, president of the Clark County Medical Society, said he was surprised when he found out about the deal with St. Paul.
"From my understanding the money was given to the association for endorsing St. Paul, and I have heard of that in other states," he said. "I feel the association did this to help physicians, because the product (premiums) became cheaper for physicians."
He said he is not aware of any other Nevada physician associations that have similar arrangements with insurance companies.
Assembly Majority Leader Barbara Buckley, D-Las Vegas, said the deal between the association and St. Paul points to a need for further investigation of the company, and of the state's regulating process.
"It is obvious that St. Paul caused this crisis and we have heard of a number of questionable practices engaged in by this company," Buckley said. "If this situation doesn't call for insurance reform, what does?"
Orr said other states are investigating St. Paul's practices -- it began pulling out of the malpractice insurance business last fall and has been tagged with instigating the nation's malpractice insurance crisis.
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