The Texas Medical Liability Trust is an Island of Free Enterprise in a Sea of Government Regulations
by Bud Schauerte

A significant milestone in the competitive American free enterprise system is going almost unnoticed. This year, Texas is observing the silver anniversary of the Texas Medical Liability Trust (TMLT), today a prosperous medical liability insurance underwriter doing business like no other Texas insurer—unregulated by state government.

Unlike state regulated insurers whose premium rates, audits, and business practices are dominated by government, the TMLT has prospered as a competitive, yet unregulated insurer and, unlike other medical malpractice insurers, the only company willing to write insurance protection for all medical specialties anywhere in the state. The TMLT now provides liability insurance to about half of all Texas physicians and surgeons.

Free enterprise capitalism, as practiced by the TMLT, is the foundation of the U.S. economic system, which backward countries envy and sometimes resent, which has created the world’s highest living standards, and which a few elected officials have tried to “improve” upon through mandated government controls. The Texas Legislature comes to mind.

Government enhances free enterprise when it limits its involvement to three functions: “establish the rules, oversee compliance, and allow the invisible hand of competition to work its magic.” So says Adam Smith in his historic 1776 treatise on free enterprise capitalism entitled The Wealth of Nations.

Texas voters, by a borderline 51%-49% margin, rescued medical malpractice insurers when they voted, last September, in favor of Proposition 12, a constitutional amendment which allowed the Texas Legislature to limit non-economic damages awarded in medical malpractice lawsuits. Following the Legislature’s action, the TMLT voluntarily reduced its premiums by 12%.

W. Thomas Cotton, president and CEO of TMLT, praises the Prop 12 vote results but believes that “Texas government regulation of insurance casts a dark cloud over medical liability insurance and the entire insurance industry.

“After the Prop 12 vote we expected to see more medical malpractice insurers return to Texas,” he adds.

As recently as 2002, the Texas Department of Insurance (TDI) reported that the number of companies where physicians and surgeons liability insurance was available had skidded from 17 to four. Today the TDI website counts just eight companies, including the TMLT, where physicians and surgeons can insure themselves against professional liability lawsuits.

Like all forms of insurance, Texas medical malpractice protection persevered through crisis after crisis while in pursuit of both profitability and market stability. In mid 2001 the TDI discovered that as the result of outrageous jury awards during the previous twelve months, all regulated medical malpractice insurers lost a total of $229 million while the unregulated TMLT went into the tank for $7 million.

To characterize the Texas property and liability insurance industry as “free enterprise capitalism” would be accurate only in the broadest terms. Free enterprise demands that decision making over profit and loss matters, such as product pricing, is the obligation of management which takes full responsibility for the company’s profitability. But not in Texas.

At the core of the problem is the propensity of Texas state officials to manipulate insurance premium rates based upon political factors rather than competitive free market economics. Setting premium rates through legislation, rescinding rate increases already in force, or having your Governor sue the Farmers Group, the state’s second largest underwriter of home owners insurance, for alleged “insurance rate fraud” are some of ways Texas insurance premium rates are determined.

Government domination over insurance premium rates has resulted in a dismal chronicle of events which saw insurers sometimes withdrawing from the state, sometimes merging with other insurers, or, in some instances, terminating business altogether. Meanwhile, those insurers remaining continued to struggle with the state’s heavy handed, anti-competitive, and largely unprofitable, regulatory environment.

The 1977-79 medical malpractice insurance availability crises triggered the creation of the TMLT. With liability insurance unavailable at any price, a group of physicians, supported by the Texas Medical Association (TMA), convinced the Texas Legislature it should create a non-profit insurance trust capable of providing a stable source of insurance protection for TMA members.

Wisely, the Legislature in 1979 incorporated the TMLT into the Texas Insurance Code but exempted it from direct TDI oversight and regulation including authority over premium rates. It was a propitious moment for medical malpractice insurance and the friends of free enterprise.

Today the rancor which has ranged the Governor, the Lieutenant Governor and Texas Legislature on one side and the Farmers Group on the other seems almost insurmountable. But the outcome of the conflict is not in doubt. Free enterprise in the U.S. always survives. And it will in this instance also.

Insistence by Governor Rick Perry that the Farmers Group initiate radical reductions in its home owners insurance premiums will not happen unless the reductions make economic sense. It is not a difficult concept to grasp.

Meanwhile, the TMLT is reveling in well deserved applause for its twenty-five extraordinarily successful years. Another twenty-five unregulated years seems possible because who can argue with success? Oh yes! Of course, the Texas Legislature can argue with success and does.

–From the August 2004 Austin Review