Bills Digest No. 72 2002-03
Medical Indemnity (IBNR Indemnity) Contribution Bill
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Contact Officer & Copyright Details
Indemnity Bill 2002
Indemnity (IBNR Indemnity) Contribution Bill
Indemnity (Enhanced UMP Indemnity) Contribution Bill
Indemnity (Consequential Amendments) Bill 2002
13 November 2002
House: House of Representatives
Portfolio: Health and Ageing
The purpose of
the four bills is to put into place measures to address the
problems regarding medical indemnity insurance.
Liability insurance protects the insured against
the consequences of being legally liable for injury or damage to
third parties. There are a number of types of liability insurance
including personal liability, public liability, professional
indemnity, medical indemnity and product liability.
The insurance market has recently experienced a
number of shocks including the collapse of HIH Insurance and the
terrorist attacks on the World Trade Centre towers on 11 September
2002.(1) These large insurance shocks have contributed
to the problems currently being experienced in the medical
indemnity insurance market.
Medical defence organisations (MDO's), state
government funds and commercial insurers provide medical
indemnities to health professionals such as
MDO s are not-for-profit mutual organisations.
They are established for the benefit of their members rather than
for the financial benefit of shareholders. MDO s are not insurers.
They do not issue insurance contracts. They provide protection to
their members in exchange for a subscription income for membership
into the organisation.
There are seven major medical defence
organisations in Australia; United Medical Protection, Medical
Defence Association of Victoria, Medical Indemnity Protection
Society, Medical Defence Association of South Australia, Medical
Defence Association of Western Australia, Medical Protection
Society of Tasmania and Queensland Doctors Mutual
Most MDO s rely heavily on reinsurance to
protect their financial position. MDO s can raise additional
capital under their current structural arrangements by charging
increased subscriptions or making a call to members for an
additional amount of money.
Since 1999, four of the main MDO s have been
required to make a call on their members for additional funds.
The following events that relate to the medical
indemnity insurance market have occurred in recent months:
- A provisional liquidator was appointed to United Medical
Protection (UMP) and its wholly owned subsidiary Australian Medical
Protection Limited (AMIL) on 3 May 2002.(4)
- Collapse of UMP insurance would leave up to 60% of doctors in
Australia without professional indemnity cover.(5)
- There has been a large increase in the cost to medical
practitioners of subscribing to MDO s.(6)
- MDO s have not made sufficient provision for incurred but not
reported claims .
- One of the features of liability insurance is its long tail .
This means that there can be many years between when an injury
occurs and the time an insurer receives notice of a claim These
claims are referred to as incurred but not reported claims (IBNR
s). As IBNR s are claims that have occurred but have not been
notified to the MDO, the MDO is unable to assess the amount of
money they will need in reserve to meet the cost of these
On 31 May 2002 the Government announced that it
would provide assistance to UMP/AMIL to cover payment for claims
finalised and incidents occurring between 29 April and 30 June
(subsequently extended to 31 December 2002) made under an existing
or renewed policy.
On 23 October 2002 the Prime Minister announced
that the Government would implement the following additional set of
measures to address the medical indemnity crisis;
- An extension to the claims made guarantee made by the
Commonwealth to UMP members from 31 December 2002 to 31 December
- This offer is contingent upon the New South Wales Supreme Court
allowing UMP and AMIL to continue in provisional liquidation and
authorising the Provisional Liquidator to accept the extension of
- Government funding for incurred but not reported liability
(IBNR) of doctors that were MDO s at 30 June 2000, where the IBNR s
- Government reimbursement for medical indemnity providers (both
MDO s and medical indemnity insurers) on a per claim basis for 50
per cent of the insurance payouts over $2 million for incidents
notified on or after 1 January 2003.
- Provision for premium subsidies to obstetricians, neurosurgeons
and procedural GP s who undertake medicare billable
- Access to the subsidy conditional upon practitioners attending
incident management and quality assurance programs.
- Cost recovery measures.
- For unfunded IBNR s, there will be a levy imposed on the
- Measures to place providers of medical indemnity insurance on
an appropriate prudential and commercial footing that will involve
an expanded role for the Australian Prudential Regulatory Authority
The four bills discussed in this digest put in
place the legislative arrangements to give effect to the majority
of these measures (prudential regulation by APRA is not covered by
the current set of legislative measures).
In a recent article in Australian
Doctor(8) written by Pamela Burton Legal Counsel for the
Federal AMA, Ms Burton wrote that:
The package is a significant step forward in the
short term but its goals are very limited in relation to the
problem of escalating claims and costs .
We have major problems still with aspects of the
package. It does not achieve the long term reforms needed to put
medical indemnity on a sound footing .
The Government s choice to subsidise certain
high-risk groups within the profession does not address the
increasingly unfordable premiums of other groups.
The medical indemnity legislative package
contains four bills; Medical Indemnity Bill 2002, Medical Indemnity
(IBNR Indemnity) Contribution Bill 2002, Medical Indemnity
(Enhanced UMP Indemnity) Contribution Bill 2002 and the Medical
Indemnity (Consequential Amendments) Bill 2002.
The major amendments are contained within the
Medical Indemnity Bill 2002 (MIB).
The Medical Indemnity (IBNR Indemnity)
Contribution Bill 2002 and the Medical Indemnity (Enhanced UMP
Indemnity) Contribution Bill 2002 are both taxation bills and form
part of the cost recovery measures.
The separate taxation Bills are necessary to
satisfy the requirements of section 55 of the Constitution which
states, in part:
Laws imposing taxation shall deal only with the
imposition of taxation, and any provision therein dealing with any
other matter shall be of no effect.
The Medical Indemnity (Consequential Amendments)
Bill 2002 contains a series of consequential amendments to
legislation necessary to implement the Government s measures.
Unless specifically mentioned, all reference to
clauses in the following discussion are references to the Medical
Indemnity Bill 2002.
Proposed Part 1 of the Bill
sets out the object of the Bill and key definitions including
medical defence organisation . Included in the list of MDO s are
the seven major MDO s operating in Australia (as listed above).
Proposed Part 2 of the Bill
sets out the regime for Commonwealth indemnity arrangements.
Proposed Division 1 of Part 2
of the Bill deals with Commonwealth payments that are to be made
for unfunded IBNR s made by doctors. Essentially this division
provides that if MDO s do not have sufficient money to fund their
IBNR s, the Commonwealth will pay money to the MDO s to fund
payment of the claims.
Under proposed Division 1 all
MDO s will be participating MDO s and hence entitled to
Commonwealth payment for incurred but not report claims unless the
Minister determines that the MDO is not a participating MDO
The legislation states that the Minister will
consider a number of factors before making a determination that an
MDO is non participating, but essentially, if the MDO has
sufficient funds to pay their incurred but not reported
liabilities, the Minister can make a determination that the MDO is
non participating (clause 13). The effect of this
determination will be that the MDO will not be entitled to
Under proposed Division 1
claims relating to incidents will be covered by the scheme where
the incident meets the following criteria:
- the incident occurred before 30 June 2002
- the incident occurred in the course of the practice of a
medical profession by a person who was a member of a participating
MDO at the time of the incident
- the person had incident-occurring based cover with the MDO on
30 June 2002, and
- the incident was notified to the MDO after 30 June 2002
Under the proposed arrangement the MDO (or
insurer) will make the payment initially and then will be
reimbursed by the Commonwealth in accordance with clause
16 or if the insurer or MDO or insurer is in external
administration under proposed clause 17.
The Commonwealth may pay all or only a
percentage of the claim. The amount of the payment made by the
Commonwealth to the MDO or insurer will be determined by
multiplying the adjusted amount (clause 21) paid
by the insurer with the unfunded IBNR factor (clauses
21-23). The unfunded IBNR factors is an amount determined
by the Minister and is calculated by considering the extent to
which the MDO had sufficient available assets to cover its IBNR
There are a number of exceptions where IBNR
payments will not be made, including where the incident or all of
the incidents to which the claims relate occurred whilst treating a
public patient in a public hospital (clause 19).
If some of the incidents related to treatment of a public patient
in a public hospital the Commonwealth will not pay for that part of
the claim which can be attributed to the public hospital services
Proposed Division 2 sets out
the arrangements for the high cost claim indemnity scheme.
Essentially this Division provides that the Commonwealth will pay
for 50 per cent of the insurance payouts over $2 million by MDO or
insurers up to the limit of the insurance.
Clauses 29 and 30 provide that
the Commonwealth will make a payment to the MDO or insurer
- a claim has arisen from an incident that has occurred in
Australia (or an external territory) in the course of practice of
the medical profession
- the claim was notified to an MDO or an insurer after 1 January
- the amount to be paid is greater than $2 million or an amount
set by the regulations (the high cost claim threshold ), and
- the MDO has paid the amount or is liable to pay the
There are a number of exceptions to the payment
being made including where the claim relates to an incident that
occurred during the course of treatment of a public patient in a
public hospital (clause 32). If part of the claim
relates to treatment of a public patient in a public hospital, the
Commonwealth will pay only in relation to that part of the claim
that arose from the private sector treatment.
Proposed Division 3 sets out
the administrative arrangements for the two schemes including
application procedures (clause 36), date for
payment of a claims (clause 37), recording keeping
by MDO s (clauses 39 and 40), information
gathering powers of the Health Insurance Commission (HIC)
(clause 38) and procedures for the recovery of
overpayments (clauses 41-42).
Proposed Division 4 sets out
the arrangements for the medical indemnity subsidy scheme. Under
this scheme, the Minister will be entitled to formulate a scheme to
make payments to medical practitioners to help them meet the cost
of purchasing medical indemnity insurance. The legislation does not
identify the practitioners that will receive the subsidy nor does
it specify the amount of the subsidy. The bill provides that these
details will be determined by the Minister (clause
43). The Prime Minister, in his announcement on 23 October
2002 stated that the premium subsidy would be provided to
obstetricians, neurosurgeons and GP-proceduralists.
The Bill sets out arrangements for the funding
of the new arrangements.
Proposed Division 6 states that
the Consolidated Revenue Fund is appropriated for the purposes of
paying the IBNR indemnities, high cost claim indemnities and
subsidies under clause 43.
Arrangements for the funding of the IBNR scheme
are contained within proposed Part 3 Division 1
and the Medical Indemnity (IBNR Indemnity) Contribution Bill 2002
The IBNR arrangements will be subsidised by
requiring that all members of MDO s to make a payment each
financial year if:
- They are members of participating MDO s
- They were ordinarily resident in Australia or an external
Territory on 30 June 2000, and
- They have not been exempted under section 52 (clause
The IBNR contribution is imposed as a tax on
doctors. (clause 4 MIICB)
Under the Bill, the indemnity contribution
payable by the doctor is a percentage of the doctor's annual
subscription to the MDO (clause 54 and clause 6
In his announcement of 31 May 2002 the Prime
Minister stated that UMP members would be levied to pay for the
cost of the guarantee that was provided by the Government. UMP
members will however only be required to pay this levy if UMP goes
into liquidation and has to call against the guarantee.
Arrangements for the funding of the UMP
indemnity guarantee are contained within proposed Division
2 of Part 3 and the Medical Indemnity (Enhanced UMP
Indemnity) Contribution Bill 2002 (MIECB).
A person is required to pay an enhanced UMP
indemnity contribution if:
- The person was a member of UMP on 1 July 2002 (clause
- The year has been declared to be a contribution year
(clause 58 and clause 5
- The person was ordinarily resident in Australia or an external
Territory on 1 July 2002 (clause 58), and
- They have not been exempted from making the payment
The amount of the UMP indemnity contribution
will be equal to the Commonwealth payments made in the previous
financial year divided by the number of members of UMP on 1 July
2002 (clause 6 MIECB).
The UMP indemnity contribution will be imposed
as a tax on the doctors (clause 4 MIECB).
Proposed Division 3 of Part 3
sets out the administrative arrangements for the collection of the
medical indemnity contributions, including deferring payment of the
indemnity contribution (clause 62), payments by
instalments (clause 63), discounts for lump sum
payments (clause 64), and late payments penalties
The explanatory memorandum to the Medical
Indemnity (Consequential Amendments) Bill 2002 sets out that the
key objectives of the Bill are to:
- Amend the secrecy provision of the Health Insurance Act
1973 and the National Health Act 1953 to include
reference to the medical indemnity legislation
- Amend the definition of offences in the Health Insurance
Commission Act 1973 to allow the HIC to investigate offences
against the medical indemnity legislation, and
- Require the HIC to include in its annual report material on the
operation of the medical indemnity legislation.
The package of legislative reforms is designed
to ease the pressure being placed upon providers of medical
indemnity. Principally it targets incurred but not reported claims
and high cost claims with funding support being offered to medical
indemnity providers who have claims that fall within these two
categories. The package also puts in place the arrangements for the
Government to provide subsidies to certain sectors of the medical
profession seeking medical indemnity cover. Whilst the bills do
contain some mechanisms to recover the cost of the proposed
measures, some parts of the package, it would appear, will be
funded directly from Commonwealth revenue.
The legislative package does not however contain
measures to monitor the effectiveness of the Government s
assistance in reducing costs of medical indemnity, and the Bill
does not contain any prudential regulatory measures to address the
operations of medical indemnity providers.
- A more detailed analysis of the insurance crises can be found
in the current issues brief by David Kehl, Liability Insurance
Premium Increases: Causes and Possible Government Responses ,
Current Issues Brief, Department of the Parliamentary
Library, March 2002:
- Commercial insurers have recently left the medical indemnity
market and as a result there are now only MDO and government
funding for medical indmenities.
- Explanatory Memorandum, Medical Indemnity Bill 2002
(and others), p. 4.
- Chris Field, Medical Indemnity Agreement (Financial
Assistance-Binding Commonwealth Obligations) Bill 2002 , Bills
Digest No 24, 2002 03, Department of the Parliamentary
- Explanatory Memorandum, Medical Indemnity Bill 2002
(and others), p. 4.
- Explanatory Memorandum, Medical Indemnity Bill 2002
(and others), p. 4.
- Members and creditors of UNP voted on 27 November 2002 to
continue with the provisional liquidation of the group for another
- Pamela Burton, AMA Impact Statement Australian
Medicine, 18 November 2002, p. 18.
- The Australian Government Actuary will provide the Minister
with a written report which sets out whether the Actuary considers
that the MDO has unfunded IBNR s. The Actuary must rely on
information collected by the HIC in relation to the MDO
3 December 2002
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