Executive Member Advisory Richard E. Anderson, MD, FACP August 13, - - PDF document

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Richard E. Anderson, MD, FACP Chairman and Chief Executive Officer

Executive Member Advisory Board

August 13, 2009

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Introduction

We have reached the inflection point of the current market cycle

Evidence Implications and opportunity

Reflections on the national debate on health care

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• 10.0

20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0 100.0 110.0 120.0 130.0 140.0 150.0 160.0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Year Ratio

• Orig. Report-year Loss Ratio

Calendar-year Loss Ratio Investment Ratio

HARD MARKET HARD MARKET SOFT MARKET SOFT Source: Best’s Aggregates and Averages 7/18/2008

Three Decades of Market Cycles (1980–2007)

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Market Cycles

Market cycles are everywhere

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Let’s look at frequency, severity, investment return and pricing trends more closely

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Frequency

TDC Claims Per 100 Mature, FTE Doctors

17.9 17.9 17.6 17.7 12.6 10.7 10.2 9.7 10.0 11.2 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 20.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Report Year Data evaluated as of 3/31/09

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Severity

TDC PHYSICIAN SEVERITY (Gross of Deductibles) NATIONWIDE

20 40 60 80 100 120 2002 2003 2004 2005 2006 2007 2008 Report Year 5.8% Annual Trend Rate

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Volatility of Claim Severity

% Change in Average Loss Compared to Prior Year

• 30%
• 20%
• 10%

0% 10% 20% 30% 40% 1 9 8 9 1 9 9 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 2 1 2 2 2 3 2 4 2 5 2 6 2 7 2 8

Closing Year Severity significantly different than expected in half the years 10 Points Above Mean 10 Points Below Mean Mean +8%

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TDC Group – Investment Yield (Including Realized & Unrealized Capital Gains & Losses)

7.3% 5.7% 4.1% 4.9% 2.4% 5.8% 1.2% 5.0% 4.9%

• 4.4%
• 5.0%
• 3.0%
• 1.0%

1.0% 3.0% 5.0% 7.0% 9.0% '99 '00 '01 '02 '03 '04 '05 '06 '07 '08

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Combined Ratios: Historical Perspective Virtually always above 100%

–Offset by investment return

Below 100% in 2005 – 2008

–First time in history we have had four consecutive years below 100% –Very important that we not confuse the exception and the rule

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5 Changes Driving Inflection Point Frequency: no longer declining

– Flat since 2005 and probably heading upward

Severity: continuous upward pressure

– Has moved upward by 5% - 6% annually over a long term – BUT annual levels very difficult to predict

Pricing

– Large rate increases in 2002 – 2003 – Moderated in 2004 – 2005 – Stable or downward since 2006

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5 Changes Driving Inflection Point Regulatory pressure

– Regulators no longer recognize industry need to rebuild financial strength – No additional tort reform likely in near future

Investment markets chaotic and unpredictable

– Subsidization of rates must decrease

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What This Means For You

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Falling Rates

Written Price Changes Evaluated as of 3/31/09

25% 12% 4%

• 4%
• 6%

24%

• 5%
• 2%
• 10%
• 5%

0% 5% 10% 15% 20% 25% 30% 2002 2003 2004 2005 2006 2007 2008 2009

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The Doctors Company Dividends Paid

$124 $21 $23 $- $20 $40 $60 $80 $100 $120 $140 1976 - 1995 2007 2008 2009 $17

($ Millions)

16 $50,000,000 $325,000 $50,000,000 $406,000 $53,000,000 $50,000,000 $50,000,000 $- $10,000,000 $20,000,000 $30,000,000 $40,000,000 $50,000,000 $60,000,000 2007 2008 2009 2010 2011 Approved Funding Distributed Funding Commitment

Tribute Funding

Average Tribute Balance at 1/31/09: $3,100 Highest Tribute Balance at 7/31/09: $76,000

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And Always Best available claims handling Best available patient safety services TDC Advocacy TDC Foundation patient safety research grants

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Conclusions All of the factors that contributed to extremely low combined ratios are now moving adversely Critical that we maintain the disciplines that led to our success and adjust our expectations to match today’s reality

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Thinking About Federal Impact on Health Care

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Some Interesting Facts

High health care costs -- some drivers are not unique to United States Aging population

– Spending increasing in all age groups – Some European countries have even older populations

Insulating effect of third party payers

– Americans have higher out-of-pocket costs than

• ther developed countries

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More Interesting Facts

Some drivers have distinctly American flavor Litigation/defensive medicine Higher prices

– Pharmaceuticals – Charge what the market will bear

Paperwork

– ~$1,000 per person in U.S. (3.5x Canada)

Intensive treatments

– High-tech equipment and procedures – Supply drives demand

Unnecessary care

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Michael Porter

“Despite many waves of debate and piecemeal reforms, the U.S. health care system remains largely the same as it was decades ago.” Must change the way health insurers compete

Today: Seek healthier subscribers, deny services, negotiate deeper discounts, shift more costs to subscribers

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Speculating on Outcomes

Effective reform is enormously complicated because it must attack three major areas simultaneously: Cost Coverage Quality (Fuchs)

The short-term and long-term views look very different Will change be incremental or disruptive?

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Speculating on Outcomes

Short-term: Very little can change within a year or two

– Most of the proposed legislation does not become effective until 2013 – 2014 – Writing the legislation – Implementation – Simple example: EMR

Initial legislation will almost surely bring (only) incremental change

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Speculating on Outcomes

Long-term: Change will be profound –Demographic tides:

– Graying population – Women in medicine – Declining attractiveness of primary care – Implications of selling a medical practice today

–Some things cannot change

– The practice of medicine will still be one-on-

• ne

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Preparing for the Future

The Doctors Company insures every form of medical practice from solo physicians to multi-state groups organized to provide comprehensive or single specialty care We follow the fortunes of our members, but not passively Size, scale, and scope provide resources for advocacy, information systems, patient safety tools, and the financial wherewithal to invest to meet the challenges of change

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The Doctors Company Advocacy

Platforms

Collaborative Unique

Legal reform

Collateral source Periodic payment Practice guidelines

– No new causes of action

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What We Must Not Do:

Over-react to obvious truths that

weren’t

Responding to prospect of national health care 1994

–Medical community –Insurers

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Conclusions

Rare opportunity to call an inflection point prospectively We have experienced virtually unprecedented volatility on both the upside (frequency) and downside (investment return) We must be prepared to participate in making changes before they are forced upon us

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Conclusions

There will be significant change in health care financing and ultimately in delivery, but not immediately The Doctors Company maintains an unwavering commitment and unmatched resources to advance, protect, and reward the practice of good medicine, now and in the future

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Richard E. Anderson, M.D. Chairman and Chief Executive Officer