By EILEEN SMITH
Courier-Post Staff


What started as a promising solution to the medical malpractice crisis of the 1970s in New Jersey ended up sowing the seeds of the state's present physician insurance mess.

The Medical Society of New Jersey backed a pioneering nonprofit company -- Medical Inter-Insurance Exchange -- to insure doctors in an affordable system.

The company thrived until 1998, when the organization's board reorganized the nonprofit into a for-profit stock company and expanded into 25 states.

Doctors angered by the conversion sued the directors but lost the case on appeal.

Industry watchdogs began to report that the company was mismanaged. One CEO was even arrested for a sophisticated marijuana-growing operation.

But at the heart of the company's failure was too much growth into too many states with too little reinsurance to absorb the risk.

"Everybody got greedy," said Assemblyman Neil Cohen, D-Roselle, who is chairman of the banking and insurance committee. "They decided that they were so successful in New Jersey, they'd duplicate that in other states . . . without doing due diligence."

By the time the company was clearly in trouble, it was posting enormous losses with both doctors and the victims of malpractice, who were left holding the bag.

Once the nation's seventh-largest medical malpractice insurer, the company plummeted from an "A" rating with the independent A.M. Best firm in 1999 to a "Not Rated" by May 2002. In August of that year, the company announced to its physicians that it would no longer issue policies.

That same month, though, the state insurance department licensed a new company, MIIX Advantage Insurance Co., to write malpractice policies in New Jersey.

By June 30, 2004, the original MIIX, its losses on old policies multiplying, was judged to be more than $250 million in the hole and the New Jersey Department of Banking and Insurance prohibited MIIX from writing new policies.

State regulators demanded they approve any payment of dividends, lending arrangements and "inter-company arrangements outside of the normal course of business."

MIIX Advantage, which shared office space and a management team with the original MIIX, began to experience difficulties as well.

Amazingly, a newly formed company with some apparent connections to MIIX, called MDAdvantage, was licensed to sell policies in the state and is already New Jersey's second-largest insurer.

"Doctors have limited places to go," said Cohen, chairman of the banking and insurance committee. "MIIX, and now MDAdvantage, have a captive audience."

In a June 15 letter to health professionals, MDAdvantage CEO Patricia A. Costante said the company terminated its relationship with MIIX.

But there are connections:

Costante also was MIIX's CEO.

MIIX sold its office furnishings to MDAdvantage, according to Securities and Exchange Commission filings.

MDAdvantage now occupies MIIX's former space in Lawrenceville, in a posh building that also houses the Medical Society of New Jersey.

Costante declined to be interviewed for this report.

The Medical Society of New Jersey owned 6 percent of MIIX and a short-lived successor, MIIX Advantage, but opted not to take a third bite of the apple.

John Shaffer, spokesman for the medical society, said the group is not associated with MDAdvantage. The society also sent letters to member physicians stating the society does not hold a stake in MDAdvantage.

Day in court

MIIX now leases more modest digs in the old Simon & Schuster building in Riverside. Under a July ruling by the state insurance department, MIIX will continue to handle claims in a solvent runoff rather than liquidate.

Plaintiffs who want to contest settlement offers from MIIX can appear Tuesday in Superior Court in Trenton before Judge Neil H. Shuster.

Last year, Cohen and Assembly Majority Leader Joe Roberts, D-Camden, put together a package of malpractice reforms that will toughen requirements for expert witnesses and subsidize premiums for three high-risk specialities: obstetrics, neurosurgery and radiology.

But the bill did not enact the cap on awards sought by physicians' groups, prompting Assemblyman Eric Munoz, R-Summit, a surgeon, to say the bill was not a cure.

Cohen blames insurers for hefty malpractice premiums, which can exceed $100,000 for a doctor who has lost a malpractice suit. But he said misguided physicians are focused instead on litigation.

"Doctors blame the lawyers when they should be blaming the insurance companies," he said. "Not one doctor ever says "the insurance company screwed us' because the doctors need insurance."

'Between two Goliaths'

But Delores J. Williams, a gynecologist from Trenton, said insurance companies are squeezing physicians in a vice.

"Doctors are caught between two Goliaths -- the med-mal insurers who charge too much and the health insurance companies that cut reimbursements to doctors."

Williams' insurance dropped from $50,000 to $26,000 when she stopped delivering babies. Next year, she will stop performing surgery.

"It will drop by half again," she said. "Everybody wants me now."

But Williams worries about who will care for the sickest patients.

"If you don't turn away the 400-pound woman with diabetes, the expectant mother with cancer, you'll have to pay big time," she said.

MIIX settling up

Kenneth Andres Jr., a partner in the Haddonfield law firm Andres and Berger, said eight of his 11 clients have agreed to accept payouts from MIIX.

While Andres believes the offers on less serious injury cases to be fair, he found the ones for more serious cases "not to be adequate."

All the plaintiffs declined to be interviewed.

Still, Andres believes the settlement provides the best solution in what he says is a difficult and "unique rehabilitation situation" of a medical malpractice provider.

"Everyone is benefiting," he said. "Cases are being removed from the court system, expenses are lower for both the insurance company and patients and the patients are getting to keep more money from the settlements."

Shaffer said MIIX's woes are due to bad business decisions. He said at least one other company made an abrupt about-face after its strategy went sour in the 1990s.

"Zurich American Insurance Co. came in to buy market share with OB/GYNs," Shaffer said. "They underpriced MIIX and other carriers and picked up a lot of high-risk doctors."

After the claims started rolling in, the medical society was flooded with calls from doctors who said Zurich had doubled its rates.

"Zurich was trying to price itself out of the market," Shaffer said.

Then-insurance commissioner Holly Bakke fined the company. But higher prices proved to be just what the doctor ordered for Zurich. Today, the company insures only about 70 physicians in New Jersey, Shaffer said.

A fresh start

State insurance department spokesman Marshall McKnight said MDAdvantage can profit from MIIX's experience.

"MDAdvantage is a new company that benefited from the infrastructure and resources of the previous company," he said.

McKnight said the department asked MDAdvantage to increase its oversight by adding more independent members to its board of directors and the company complied.

Costante, the MDAdvantage chief, did not respond to requests for comment.

Both A.M. Best and Weiss Ratings, two companies that evaluate insurance companies, said MDAdvantage has yet to reach the critical mass required to thrive in the marketplace.

Oldwick-based Best rates MDAdvantage NR-2.

"That means the company has insufficient size or operating experience," said spokesman Jim Peavy.

Weiss, headquartered in Florida, gives MDAdvantage a D-plus, which indicates a weak company.

"These days, most companies are making money on their underwriting as well as on investments," said Stephanie Eakins, a financial analyst at Weiss. "MDAdvantage is making money on investments but it's not enough to make up for their losses in underwriting."

A little competition

Several new not-for-profit carriers, including NJPURE and Coventus, are offering an alternative to the status quo. But they insure only a small percentage of physicians.

The three largest companies control nearly 80 percent of the market. MDAdvantage holds 18 percent and ProSelect Insurance Co. has 14.5 percent, according to the state insurance department.

Princeton Insurance Co., which has a 47 percent share, is classified NR-4 by Best, meaning the company is eligible for rating but requested the results not be published.

Cohen finds the ratings disconcerting.

"It's a problem," he said. "Doctors should be raising their antenna but they don't want to rock the boat."