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Indemnity levy - Federal AMA advice

September 2003

The HIC's IBNR contribution notices

The AMA has opposed the imposition of the IBNR levy on medical practitioners. Nevertheless, the levy has been implemented as a tax by Federal Government legislation. Relevant Medical Practitioners have now received an IBNR contribution invoice from the HIC.

Some are expressing shock and surprise at the total amount and are asking the AMA what they can do about it. We urge that doctors read the documentation provided and the invoice carefully in order to consider the options open to them. They may also wish to access the HIC's website at http://www.hic.gov.au/providers/programs_services/indemnity_contributions.htm.

There are some points that should be highlighted

The back page of the invoice explains how the lump sum amount levied on a practitioner as been calculated. The figures given there are by way of example only. Turn to the first page of the invoice for the figures that apply to you.

The contribution due by 1 November for the 2004 contribution year is set out in Option 1. Options 2 and 3 set out the amounts required and dates due if the 2004 contribution is to be paid in instalments through out that year.

Option 4 sets out the discounted lump sum that can be paid by 1 November 2003 to acquit the practitioner of all future contribution obligations. It is about this option that a few further points should be considered.

The discounted lump sum (Option 4)

First - the lump sum payment has been calculated on the assumption that the level of the 2004 contribution will remain for each contribution year for 10 years, and on the assumption that the practitioner will be liable to pay the levy for each of those years.

The calculation is based on the current assessment of the IBNR liability. This could later be reassessed upwards, or downwards. The legislation does not permit the contribution in any subsequent year to exceed that of the previous year, and nor for the annual contribution to exceed 50% of the practitioner's indemnity premium in the year 2000. However, there is no limit in the legislation as to the number of years over which the levy will be payable. The HIC has assumed that the levy will be required for ten years.

In that light, and without any mechanism for refunds to individual practitioners of over-payments, the discounted lump sum amount has been calculated with regard to what is this year reasonably expected to be the maximum contribution the medical practitioner will be required to make.

However, that is not to say that the IBNR liability could be revised upward, and the number of contribution years could be extended beyond ten.

Second - from an example provided to us, the discounted lump sum has been calculated with a discount rate of 4.92% (assuming the levy applies for 10 years). This rate is well below the 10 year bond rate (currently about 5.6%). On the face of it, the Government is not offering an incentive for practitioners to pay the lump sum as opposed to yearly payments.

The AMA is not able to give generic advice as to whether it is better for a practitioner to pay the lump sum or to pay the annual contributions. The issues to be considered are whether:

the annual contributions might continue beyond 10 years (were the IBNR reassessed at a higher amount) or finish within that period (were the IBNR reassessed at a lower amount);
the annual contribution rate might be reduced, depending on the revised assessments of the IBNR over time;
the practitioner might become exempt from paying the contribution in future years, eg turn 65 and earn less than $5000 from medical practice;
the practitioner might become exempt from paying the contribution from events of which they are not now aware, for example in the future the government may make regulations establishing more equitable exemption provisions, such as for females leaving the workforce to raise children, giving the practitioner cause to 'wait and see';
there is an advantage for a practitioner in obtaining a full tax deduction now for the lump sum; and/or
the practitioner may be able to earn a higher rate of interest on funds currently held than the 4.92% discount rate implicit in the HIC's calculations.

In summary there are quite a few unknown factors which make it difficult for a practitioner to assess whether or not there is an advantage in paying the upfront lump sum. There do, however, appear to be a number of risk factors which could result in the levy being payable for less than 10 years.

Each practitioner should take their own financial advice on what Option is best for their particular situation.

A word about deferral:

The legislation provides for an IBNR contributor to apply for deferral of one year's contribution. Only one contribution year can be deferred. The amount due in that year will be payable the year following the last contribution year. Thus, if the person contributes for three years, and then becomes exempt by reason of meeting the age, retirement and income levels requirements, the deferred levy will still be due and payable irrespective of the practitioner's means to pay.
The practitioner should consider the impact of deferring a years' contribution, to a period where they may not be able to obtain full benefit of the tax-deductible status of the contribution.
While no additional interest on the deferred payment will be required of a practitioner, it should be borne in mind that the overall IBNR liability will be increased by the amount of interest lost to government from the totality of deferred payments - adding to the overall IBNR debt to be paid by relevant practitioners.

Practitioners may call the HIC's help line on 1800 813 167.

Are you exempt from the IBNR levy?

Section 52 of the Medical Indemnity Act 2002 sets out the grounds upon which practitioners are exempt from paying the levy. The section is set out below.

Since the enactment of the legislation Senator Coonan announced further concessions:

Retiring doctors aged 65 years or more and earning less than $5000 in medical income will now be exempt from the IBNR indemnity contribution. The government will fund the cost of the exemption for retirees.
Doctors who have purchased comprehensive retroactive cover prior to 1 July 2003.
Doctors who have had their entire liabilities covered by a State or Territory government.
Doctors who have left private practice before 1 May 2002 and taken up full-time salaried public hospital positions. This exemption applies even if they continued to treat pre-booked patients for a short time after 1 May.
In the 2003-2004 the Government's IBNR indemnity scheme will not apply to members of other MDOs than UMP members as at 30 June 2000.

Sections 51 to 54 of the Medical Indemnity Act 2002 extracted below sets out who is liable to pay the IBNR indemnity contribution, who qualifies for exemption, and how the amount is calculated.

Subdivision B - Who pays IBNR indemnity contribution?

51. Who is liable to pay the IBNR indemnity contribution

A person is liable to pay an IBNR indemnity contribution for a financial year if:

the person is a participating member of a participating MDO; and
the financial year is a contribution year for the MDO; and
the person was ordinarily resident in Australia or an external Territory on 30 June 2000; and
the person is not exempt from the contribution under section 52.

52. Exemptions

A person may be exempt from an IBNR indemnity contribution under subsection (2) or under regulations made for the purposes of subsection (4).
A person is exempt from an IBNR indemnity contribution for a contribution year for a participating MDO if:
1. the person dies before the imposition day in that contribution year; or
2. the person has not practised a medical profession in Australia for reward at any time after 31 December 2001; or
3. if the person's medical income for both:
  1. the financial year starting on 1 July 2001; and
  2. the financial year immediately before the contribution year; was less than $5,000; or
4. the person was not on, or at any time before, 30 June 2000:
  1. a medical practitioner; or
  2. a health professional;
    and is not a person specified in the regulations made for the purposes of this paragraph; or
5. before the day on which the contribution would otherwise become due and payable, the person paid a lump sum under section 64 in relation to the IBNR indemnity contributions payable by the person; or
6. the HIC determines under section 53 that the person has comprehensive insurance cover for all incidents covered by the IBNR indemnity scheme.
For the purposes of paragraph (2)(c), a person's medical income is:
1. if the person is a medical practitioner-the sum of the medicare benefits payable in respect of professional services rendered by, or on behalf of, the person; and
2. if the person is a health professional-the sum of the amounts payable in respect of health care related services rendered by, or on behalf of, the person.
The regulations may provide that a person is exempt from IBNR indemnity contribution in the circumstances specified in the regulations.
Regulations made for the purposes of subsection (4) may provide that a person is exempt from IBNR indemnity contribution either generally or for a particular contribution year of a participating MDO.

53. Comprehensive insurance cover determination

The HIC may determine, in writing, that a person who is a participating member of a participating MDO has comprehensive insurance cover for all incidents covered by the IBNR indemnity scheme.
The HIC may make the determination only if satisfied that:
1. on 30 June 2002, the person had:
  1. an insurance contract or contracts with an insurer; or
  2. insurance contracts with 2 or more insurers; and
2. (b) the contract or contracts indemnified the person in relation to claims against or by the person in relation to all the incidents that:
  1. occurred in the course of, or in connection with, the practice of a medical profession by the person; and
  2. are covered by the IBNR indemnity scheme; and
3. the insurer or each of the insurers:
  1. is either authorised to carry on insurance business in Australia under the Insurance Act 1973 or is approved by the HIC for the purposes of this subparagraph; and
  2. is not a related body corporate of the participating MDO; and
4. the insurer or all the insurers have remained and will continue to remain liable to indemnify the person for claims against and by the person in relation to all those incidents (without any further premium payments by the person at any time after 30 June 2002).

54. Annual subscription for base year

Under section 6 of the Medical Indemnity (IBNR Indemnity) Contribution Act 2002, the amount of the IBNR indemnity contribution imposed on a participating member of a participating MDO depends on the amount of the member's annual subscription for the base year.
The member's annual subscription for the base year does not include:
1. a fee paid, or a fee to the extent to which it is paid, by the member:
  1. to join the MDO initially; or
  2. to re join the MDO after having ceased to be a member of the MDO; or
2. an amount paid by the member in response to a call made by the MDO; or
3. any other prescribed amount.
The base year for the member is:
1. if an amount was payable by the member for membership of the participating MDO for a full year that commenced during the financial year that started on 1 July 2000-that full year; or
2. if no amount was payable by the member for membership of the participating MDO for a full year that commenced during that financial year-the most recent preceding full year for which an amount was payable by the member for membership of the MDO; or
3. if neither paragraph (a) nor paragraph (b) applies-the most recent period that started before 1 July 2000 and for which an amount was payable by the member for membership of the MDO.