Corrections or additions?

This article by Peter J. Mladineo was prepared for the November

20, 2002 edition of U.S. 1 Newspaper. All rights reserved.

In Search Of NJ’s Malpractice Insurance Cure

The Garden State, once an insurance nightmare for a

driver with a solitary scratch on his driving abstract, is now

becoming

a wasteland for doctors, who are considering leaving the state or

reducing the scope of their practices under the strains of a medical

malpractice insurance crisis.

Malpractice insurance costs increased 152 percent in three years,

according to a New Jersey Hospital Association study in April, while

74.5 percent of hospitals have had one or more doctors dropped from

coverage, and 65 percent report doctors who closed their offices

because

they could not get (or afford) coverage. The Medical Society of New

Jersey also reported that the malpractice dilemma has caused nearly

45 percent of doctors to adjust their practices in negative ways while

an estimated 3,000 physicians may not be able to afford coverage next

year.

"It doesn’t pay to open up a practice when your premium is $45,000

and your total income is $75,000 or $80,000. So you retire early,

leave the state, or you limit your speciality," says Robert

Rigolosi,

the Medical Society’s president.

In July doctors took it to the streets — rallying in front of

the statehouse in Trenton, raising fists, carrying signs, and chanting

for tort reforms.

James Sheeran and Lena Chang, a couple who made their mark during

the auto insurance fiasco of the 1990s, are making another foray into

another insurance battlefield. This time, Sheeran, the 79-year-old

decorated war veteran-cum-insurance guru, and his wife, insurance

actuary Chang, 63, are targeting the state’s crisis-ridden medical

malpractice insurance arena.

The two have organized New Jersey Physicians for a United Reciprocal

Exchange (NJ PURE). Last month the New Jersey Department of Banking

and Insurance gave NJ PURE, Sheeran and Chang’s third project using

the innovative reciprocal insurance concept, the go-ahead to solicit

business.

NJ PURE will operate out of the couple’s 13 Roszel Road headquarters

of its successful auto insurance reciprocal, New Jersey Citizens for

a United Reciprocal Exchange (NJ CURE), which tackled car insurance

in the 1990s.

Chang and Sheeran are the attorneys-in-fact for NJ PURE,

which operates as a non-profit and will charge rates comparable to

those charged by other malpractice insurers but without commissions

and a highly selective pool of low-risk clients.

The two have become practically synonymous with the reciprocal

concept,

setting up companies in several states suffering from insurance crises

in various sectors. In this case they are applying to NJ PURE the

same formula that they used with NJ CURE, in which the insureds pool

their premiums to pay for claims. "(NJ CURE and NJ PURE) are

exactly

the same except the animal is different," says Sheeran.

"They’re

almost like twins."

Chang and Sheeran could have hung their hats on their NJ CURE success.

Created in the midst of the auto insurance crisis of the early ’90s

that erupted after Governor Jim Florio scrapped coverage from the

Joint Underwriters Association for so-called bad drivers, CURE helped

thousands of drivers bypass rising insurance premiums. While still

a minnow among insurers, CURE’s success is sound — it insures

36,000 cars and has accumulated $36 million in assets for its

subscribers

— and is still purring away while other insurance companies are

heading out of state.

"Our rates have been very stable for the 12 years we’ve been in

business and we are becoming very financially strong while other

insurers

are seeking to leave. If you can do auto in New Jersey," says

Chang, "you can do any line of business anywhere. It’s the most

regulated, most rate-controlled line of business in the whole

country."

But medical malpractice should be a tough nut to crack. Jury Verdict

Research, a national database, says that in four years the median

medical malpractice jury award rose 110 percent, from just under

$500,000

in 1996 to $1 million in 2000. Insurers, like some doctors, are also

packing their boxes. St. Paul Companies abandoned the medical

malpractice

market in 2001 and giant Zurich tried to leave as well.

The snowballing effect began with the decline of MIIX, the medical

malpractice insurer that once held one-third of New Jersey’s market.

With huge losses in other states and other financial misplays

associated

with its decision to go public in 1999, it is now restructuring [See

sidebar, page 45.] "They changed gold into lead," says

Sheeran.

Another New Jersey malpractice insurer, Princeton Insurance Company,

insures more than 8,000 doctors in this state but like many other

companies has decided to cease operations in Pennsylvania.

While other insurers are leaving New Jersey, NJ PURE is flourishing.

Reciprocal companies, the couple explains, pool premiums from the

insured, using the funds to pay claims and eventually refunding unused

premiums with interest — a sort-of dividend. A traditional

insurer,

in contrast, has stockholders and must pay dividends.

"With our plan of operation every subscriber contributes their

own surplus contribution. Each individual doctor will put in one-third

of their annual premium. If the premium right now is too high, you

know that premium would be returned to you," says Chang. NJ PURE

claims to help its insureds save money by eliminating broker/agent

commissions and maintaining high selectivity about whom it insures.

The company offers discounts as an incentive to clean up shoddy

doctors’

office management — often an Achilles heel for doctors in

malpractice

suits. Obstetricians, for example, would pay $75,000 in premium per

year, and would be offered a 15 or 25 percent discount depending on

claims experience, loss control, and risk management.

"We put an emphasis on helping doctors’ office management to avoid

frivolous claims and to help doctors deal with their medical records

so their claims will be more defensible from the get-go. We want them

to dictate all their medical records, and that costs money, and we

give them money to do that," says Chang.

NJ PURE operates on a not-for-profit basis. "This way NJ PURE

will have no outside investors and will be totally focused on the

benefits for their subscribers," says Chang. However, the

corporation

(owned by Sheeran and Chang) works on a for-profit basis. It gets

12.5 percent of the premiums to provide senior management (about a

dozen officers and managers), act as attorney-in-fact, and assume

fiduciary responsibilities. "We don’t use agents and brokers who

charge from 7 to 12 percent just for commissions," says Chang.

Sheeran, a U.S. 101st Airborne veteran and the son of

a manager at Prudential, saw action in Normandy and in the Battle

of the Bulge, escaped capture in Germany, and earned a Bronze Star

and two purple hearts. After the war he got a BA and a law degree

from George Washington University, served as mayor of West Orange

— the youngest man to fill the position — and followed that

with his stint as insurance commissioner from 1974 to 1982 under

Governor

Brendan Byrne. Sheeran also did post-graduate work on the laws of

China at the East China School of Politics in Shanghai.

During his time as insurance commissioner he encountered his first

medical malpractice crisis and unearthed the reciprocal concept,

buried

in the statutes. "(Sheeran was) the one who started using

reciprocal,

which was on the books but no one ever used it before. Because of

what he did, New Jersey didn’t have a (medical malpractice) crisis

for 25 years," says Chang.

As insurance commissioner Sheeran helped set up one of the first

reciprocal-based

companies, Medical Inter-Insurance Exchange. With one-third of the

New Jersey market, MIIX is the state’s largest medical malpractice

insurer, and its recent financial troubles helped to spur on the

current

crisis.

Chang was born in the foothills of the Himalayas in China, the

daughter

of the chief engineer for the World War II China-Burma-China road

project under the direction of General Joseph Stillwell, the highest

ranking U.S. official who helped the Chinese fight the Japanese during

the conflict. After coming to the United States at age 16, Chang

earned

a BS in physics and a Ph.D in mathematics from the University of

Illinois,

followed by teaching posts in Taiwan, University of Illinois, and

Trenton State College, as well as a run as assistant dean of the

Temple

University business school, before starting out as an independent

actuary in Boston.

Her career got a boost during her time at the Massachusetts Division

of Insurance when she wrote an award-winning article on auto insurance

rating systems in Massachusetts.

That led to a study of the auto insurance rating systems in

Massachusetts,

which coincidentally was read by New Jersey Insurance Commissioner

Sheeran. A meeting between the two followed. "He read the paper

and came to look for me," says Chang. Between them they have seven

children from previous marriages. They married in 1988, but "we

always forget our wedding anniversary," says Chang.

On the heels of the NJ CURE auto insurance success,

Sheeran and Chang started the Massachusetts Employers Insurance

Exchange,

a workers compensation insurance reciprocal, when a crisis erupted

in that state.

"As we watched NJ CURE grow we moved into the Massachusetts market

because Massachusetts had the worst possible record in workers’

compensation.

They were looking for help just as New Jersey doctors are looking

for help now," says Sheeran.

The Sheeran-Chang partnership is not limited to either insurance or

to the United States. The couple’s real estate firm, LLB Realties,

owns the 13 Roszel Road building housing their NJ CURE and NJ PURE

offices, and they previously owned the 40,000 square-foot 7 Roszel

Road property, which they sold to SJP Properties, which turned it

into the 300,000-square-foot 7-9 Roszel office buildings, occupied

by Merrill Lynch during the boom years.

In addition, Sheeran and Chang are trying to bring their style of

insuring to China, where they have received 27 approvals from all

levels of the massive Chinese bureaucracy so far. In the meantime

they secured 40-year development rights for a dormant volcano near

Fujianin Fuzhou, on the Chinese mainland on the Strait of Taiwan.

Currently the couple is seeking out a consortium of investors to build

four and five-star resorts there, to be designed by the Boston-based

Thompson Design Group, whose dossier includes Fanueil Hall and South

Street Seaport.

"It’s 32-square kilometers (14 square miles) — literally

virgin

land, volcanic canyons, and waterfalls. Trekking has been developed

in five main areas in that mountainous resort," says Chang.

All fall NJ PURE has been the talk of the medical community —

it has been covered by all the major New Jersey papers and ads have

been buzzing on the airwaves. As part of its New Jersey Department

of Banking and Insurance permit, NJ PURE needs to sign up at least

200 physicians — a task that seems well within its reach. So far

the desks are stacked high with applications and the company expects

to write $15 million in premiums in 2003, its first actual year of

business, covering 500 to 700 doctors.

The Medical Society of New Jersey contends that more is needed in

terms of tort reforms and economic damage caps in malpractice cases.

"Not any one insurance company can solve the problem," says

the Medical Society’s Rigolosi, who supports proposed laws to cap

non-economic (pain and suffering) damages. [See box on this page.].

"The model state in the United States is California, and

California

in 1975 instituted a non-economic cap of $250,000. They’re the gold

standard for every state in the country."

New Jersey, a state with no caps for non-economic damages, has seen

premiums climb 300 to 400 percent in recent years, he estimates.

A recent survey by the New Jersey Hospital Association

showed that nearly two-thirds of hospitals reporting had some

physicians

cease practice because they were dropped from coverage or could not

afford premium increases. Some specialists have reported malpractice

premiums doubling into six figures during one year. The NJHA survey

also said hospital institutional premiums rose from $373,328 in 1999

to $942,539 this year.

What’s driving the premiums up, doctors say, are high jury awards.

"Jury awards are not uncommonly in the millions of dollars and

it drives the cost of the premium up considerably," says Rigolosi.

Robert Cottone, who leads the healthcare insurance practice at Rue

Insurance on Quakerbridge Road, says that there is no single reason

for why malpractice rates are soaring; it does start with problems

with the awards and judgments in the legal systems, but that it also

involves the restrictions and other issues in the managed care

environment

and "the litigiousness of our state and our society." Problems

are exacerbated, he says, by the downturn in the economy, and how

stock market performance affects insurance carriers’ financial

well-being.

"And the cyclical nature of the insurance industry, which veers

from a hard market to a soft one, creates volatile rate structures.

The blame doesn’t lie in any one place — all the sources have

to be addressed."

Across the aisle, lawyers say devices like damage caps and tort

reforms

still won’t lower premiums and that the root of the problem is buried

in the economic slowdown and bad business decisions by the insurance

companies — as well as sloppy doctoring.

"You have insurance companies robbing us blind because of 9/11

and they’re not making these millions of dollars on the stock market

and they’re tripling the premiums and it’s just not appropriate,"

says Douglas Grossbart, an attorney and MD who practices law with

Braff, Harris and Sukoneck, based in Livingston.

Grossbart adds that the medical profession itself is helping raise

premiums because of the ploys it uses to handle the malpractice cases.

"They (doctors) hide everything. They run up litigation costs

so at the end of the day the secrecy is leading to poor medicine.

They need to settle the cases that need to be settled instead of

dragging

them out for years, and they need to realistically stop making

mistakes,"

he says.

Meanwhile, Sheeran and Chang will be stepping into this breach with

confidence. "The doctors who rallied in Trenton really wanted

us to help them create the reciprocal opportunity for physicians.

We never shy away from doing something new as long as it’s the right

thing to do and we always have confidence in what we do. We have a

good track record of operating reciprocals," says Chang.

— Peter J. Mladineo

New Jersey PURE, 13 Roszel Road, Princeton 08540.

609-520-9619; fax, 609-951-0091.


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