Five years ago, citing a malpractice insurance crisis, Maryland's powerful medical society persuaded the state legislature to approve the nation's first doctor-run malpractice insurance company.
The product of that vigorous lobbying effort -- Medical Mutual Liability Insurance -- has succeded far beyond expectations, compiling more than $60 million in assets, paying out less than $1.4 million in claims, and gaining a near monopoly in selling insurance to the state's 6,500 practicing doctors.
Medical Mutual also has brought unanticipated benefits to the medical society: commissions amounting to hundreds of thousands of dollars paid to a subsidiary of the society in return for selling the company's policies to its members.
From a malpractice situation that was portrayed as being bleak for doctors and their patients alike only a half-decade ago, the insurance company and the medical society that fostered it have emerged as the clear -- and only -- winners.
This story of medical politics features a small but powerful special interest group that sought state assistance to solve an industry crisis, and then seized the opportunity to further enrich itself.
The story began in 1975 when the St. Paul Insurance Co., Maryland's single largest malpractice insurer, stopped writing policies, leaving Maryland doctors without coverage and prompting the state medical society -- the Medical and Chirurgical Faculty of Maryland -- to push for a new law to alleviate what they saw as a malpractice crisis.
After what some legislators say was the most intensive lobbying campaign in recent times -- several key lawmakers were called by their personal physicians and asked to support the bill -- the General Assembly agreed to let the doctors control their own destiny and set up Medical Mutual, an insurance company owned and operated by physicians.
Although the medical society was supposed to remain independent of Medical Mutual after pushing through the legislation that created it, the new law specifically allowed the society to control the selection of the insurance company's officers.
As an result, a majority of the company's board of directors had connections to the medical society. The society's president was appointed to its board and its directors included the medical society's chief lobbyist, John Sargeant.
Shortly before it began operations Medical Mutual's board of directors made a decision that promised to result in a windfall for its chief benefactor -- the medical society. The insurance company would pay commissions to outside brokers to sell its policies.
At about the same time, the medical society, with its unique access to a membership of more than 5,000 private physicians, established its own brokerage agency which, among other business, began to handle the malpractice policies for Medical Mutual.
The profitable commissions received by this society-controlled brokerage agency are earmarked to help fund the society's many activities, including its formidable lobbying efforts in Annapolis.
The medical society all but guaranteed Medical Mutual's success -- and, in turn, its agency's flow of commissions -- by soliciting doctors through the mail to buy the insurance.
But while the society has profited from this system, it has proven controversial among some doctors, who have three major complaints:
Because Medical Mutual has a virtual monopoly on the malpractice business in Maryland, some doctors see no need for a middleman to solicit their business. Complained one doctor: "Medical Mutual is the only game in town."
The modest amount of paperwork and service provided by the medical society's brokerage agency, according to some doctors, does not justify the commissions -- which amount to 4 percent of premiums. "Basically, all they do is get the application from the doctor and forward it to the insurance company," said one former employe.
The commission -- $160 on the average malpractice policy of $4,100 -- inflate the already expensive premiums, which reach as much as $13,000 for some doctors.
"This isn't like Allstate and State Farm doing battle on national television," said the head of a doctor-run insurance company in California that does not pay commissions. "There aren't any other companies willing to do business in the field. I don't think the commissions should be paid."
Few of the nation's two dozen other physician-controlled companies established after Maryland's dole out commissions for brokering their policies. Critics of Maryland's system say it is a thinly disguised payoff to the medical society for its role in establishing the insurance company.
"They're [the medical society] just raking it off," said one medical society official who helped set up the insurance company. The commissions, said this official, are a waste for the doctors and are "ultimately being reflected in the cost of medical care."
For the medical society, however, Medical Mutual's decision to pay commissions proved lucrative. According to sources and documents obtained by The Washington Post, the society's insurance-selling venture has netted almost $500,000 -- about $100,000 a year -- in commissions, far more than the fees received by any of the hundreds of other small Maryland brokers selling the malpractice policies. In all, more than one-third of the commissions went to the society's commercial subsidiary.
Medical Mutual officials deny that the commission system was established to benefit the medical society, claiming that the newly formed company lacked the expertise to market malpractice policies by itself and needed the outside help.
The state medical society -- known as "Med Chi" -- is one of the most potent special interest groups in the state. Its lobbyists usually get their way in the state legislature, many of whose members accept large campaign gifts from the doctors' political contributions committee.
The committee -- called the Maryland Medical Political Action Committee (Med Pac) -- is headed by the medical society's treasurer, Joseph Harrison, who also serves as director of the society-owned brokerage agency.
With its political strength and broad representation of Maryland's doctors, the society's lobbyists had little difficulty swaying legislators to set up Medical Mutual, which they said would stop spiraling malpractice costs and assure coverage for doctors.
During the lobbying campaign in Annapolis, the doctors and their hired guns argued that, since no other insurance company was willing to insure Maryland physicians for malpractice, the only remaining manner in which physicians would be able to obtain malpractice insurance was to establish the doctor-run company. Without that, they said, some physicians would stop providing services to patients.
The crisis had its roots in a 1974 Maryland insurance commission decision that denied a rate increase to the St. Paul Co., when then insured eight of every 10 doctors in the state. As it had warned, St. Paul stopped writing malpractice policies, and the doctors suddenly found themselves in trouble.
In the views of some critics, the doctors precipitated their own crisis by lobbying against the rate increase, fully aware that St. Paul planned to stop writing the policies if it were denied.
By all standards, Medical Mutual has done well.
It was able to get higher rates approved than those originally requested by St. Paul, whose rate request had first sparked the crisis. In five years, it has amassed $60 million in premiums and investment income, and captured the business of 80 percent of Maryland's doctors, the same percentage once held by St. Paul.
And because of the long delay in malpractice arbitration -- another medical society-sponsored innovation pushed through the legislature -- it has only had to pay less than $1.5 million in claims.
The future appears even more promising as a result of a recent insurance division ruling that will enable Medical Mutual to complete its monopoly of Maryland's practicing physicians.
A state insurance hearing officer looking into the actions of the insurance broker who handles the 750-doctor medical malpractice account of the state-run University Hospital in Baltimore -- which is insured by a firm unlicensed in the state -- ruled that, according to state laws, the account had to be transferred to a Maryland insurer.
As a result of that ruling, the hospital's account is expected to be transferred to Medical Mutual, unless legislation passes the General Assembly -- which is examining the matter -- allowing the hospital to keep its account with its present insurer.
Hospital officials estimate that because of a complicated buy-out plan and Medical Mutual's higher premium rates, the transfer will cost taxpayers several million dollars more to pay for physician coverage in the state-run facility.
Medical Mutual's chief operating officer, William Grove, concedes that the decision will "sure as hell give Medical Mutual a monopoly," on the state's malpractice business, something he professes not to want. "I don't even know who filed the complaint (leading to the insurance division's action)," Grove said.
But Grove's boss, Dr. Manning W. Alden, president of the insurance company, acknowledges that the complaint resulted from a request from his company.