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

Chairman and Chief Executive Officer 1 Executive Member Advisory Richard E. Anderson, MD, FACP August 13, 2009 Board

Introduction � We have reached the inflection point of the current market cycle � Evidence � Implications and opportunity � Reflections on the national debate on health care 2

Three Decades of Market Cycles (1980–2007) Orig. Report-year Loss Ratio Calendar-year Loss Ratio Investment Ratio 160.0 150.0 140.0 130.0 120.0 110.0 100.0 90.0 Ratio 80.0 70.0 HARD MARKET SOFT MARKET HARD MARKET SOFT 60.0 50.0 40.0 30.0 20.0 10.0 - 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 Source: Best’s Aggregates and Averages 7/18/2008 3

Market Cycles Market cycles are everywhere 4

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

Frequency TDC Claims Per 100 Mature, FTE Doctors 20.0 18.0 17.9 17.9 17.7 17.6 16.0 14.0 12.0 12.6 11.2 10.0 10.7 10.2 10.0 9.7 8.0 6.0 4.0 2.0 0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Report Year Data evaluated as of 3/31/09 6

Severity TDC PHYSICIAN SEVERITY (Gross of Deductibles) NATIONWIDE 120 100 5.8% Annual Trend Rate 80 60 40 20 0 2002 2003 2004 2005 2006 2007 2008 Report Year 7

Volatility of Claim Severity % Change in Average Loss Compared to Prior Year 40% 10 Points Above 30% Mean 20% Mean +8% 10% 0% 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 8 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 -10% 10 Points Below Mean -20% Severity significantly different than expected in half the years -30% Closing Year 8

TDC Group – Investment Yield (Including Realized & Unrealized Capital Gains & Losses) 9.0% 7.3% 7.0% 5.8% 5.7% 5.0% 4.9% 4.9% 5.0% 4.1% 3.0% 2.4% 1.0% 1.2% -1.0% -3.0% -4.4% -5.0% '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 9

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 10

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 11

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 12

13 What This Means For You

Falling Rates Written Price Changes Evaluated as of 3/31/09 30% 25% 20% 15% 25% 24% 10% 12% 5% 4% 0% -4% -5% -2% -6% -5% -10% 2002 2003 2004 2005 2006 2007 2008 2009 14

The Doctors Company Dividends Paid ($ Millions) $140 $124 $120 $100 $80 $60 $40 $23 $21 $20 $17 $- 1976 - 1995 2007 2008 2009 15

Tribute Funding Average Tribute Balance at 1/31/09: $3,100 Highest Tribute Balance at 7/31/09: $76,000 $53,000,000 $60,000,000 $50,000,000 $50,000,000 $50,000,000 $50,000,000 $50,000,000 $40,000,000 $30,000,000 $20,000,000 $10,000,000 $406,000 $325,000 $- 2007 2008 2009 2010 2011 Approved Funding Distributed Funding Commitment 16

And Always � Best available claims handling � Best available patient safety services � TDC Advocacy � TDC Foundation patient safety research grants 17

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 18

19 Thinking About Federal Impact on Health Care

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 other developed countries 20

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 21

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 22

Speculating on Outcomes � Effective reform is enormously complicated because it must attack three major areas simultaneously: � C ost � Coverage � Quality (Fuchs) � The short-term and long-term views look very different � Will change be incremental or disruptive? 23

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 24

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- one 25

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 26

The Doctors Company Advocacy � Platforms � Collaborative � Unique � Legal reform � Collateral source � Periodic payment � Practice guidelines – No new causes of action 27

What We Must Not Do: � Over-react to obvious truths that weren’t � Responding to prospect of national health care 1994 – Medical community – Insurers 28

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 29

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 30

Chairman and Chief Executive Officer 31 Richard E. Anderson, M.D.