Accounts of the “Crisis” in the Michigan Auto No-Fault System are Overblown, But Some Cost Control is Warranted

House Bill 4936 to reform the Auto No-Fault System has drawn a lot of attention. At least three economic studies and numerous other “analyses” have been published, for and against the proposal. Much information has been conflicting. Some has been downright misleading. This posting will examine some of the statements and attempt to reach a reasoned conclusion.

Background: “MCCA Premium Set At $145.00 for 2011-2012”, Michigan Catastrophic Claims Association, March 25, 2011:

“The premium paid to the Michigan Catastrophic Claims Association (“MCCA”) by member insurance companies will be $145.00 per insured vehicle effective July 1, 2011 to June 30, 2012. This represents an increase of $1.91 (1.3%) over the current MCCA charge of $143.09. The $145.00 premium reflects the amount necessary to cover future claims and the partial recoupment of the estimated deficit. The MCCA premium charge is determined each year at this time following its annual actuarial evaluation.

Michigan's unique no-fault auto insurance law provides unlimited lifetime coverage for medical expenses resulting from auto accidents. Created by the state legislature in 1978, the MCCA is a private, non-profit association whose mission is to protect the financial integrity of Michigan’s auto insurance industry by providing reinsurance for these unlimited benefits. The MCCA reimburses auto insurance companies for Personal Injury Protection (PIP) benefits paid in excess of a set amount per claim. That amount will increase to $500,000 on July 1, 2011.

All auto insurance companies operating in Michigan are required to be members and pay premiums for the reinsurance provided by the MCCA. These premiums, together with the insurer’s PIP premium, represent the cost to cover the mandatory unlimited medical benefits which, like other costs and expenses, are reflected in the auto premiums all Michigan policyholders pay.

Michigan is the only state in the nation that mandates unlimited lifetime medical benefits for people injured in auto accidents. (The state with the next highest level of benefits mandates only $50,000.) It is estimated that almost 850 Michigan insured’s will be catastrophically injured in auto accidents next year. Estimating the projected claim payments for long-term claims in which medical benefits are unlimited is complicated due to the difficulty in predicting life expectancies, medical cost inflation, investment returns, and the number of claims.

The MCCA paid out $897 million (more than $128 per insured car) in 2010 for claim costs resulting from catastrophic injuries. The majority of these catastrophic injuries involve closed-head injuries, paraplegia, quadriplegia and burns. Since 1979, there have been over 25,900 claims reported to the MCCA, which will cost an estimated $74 billion.”

1. Statement that there has been a 2400% increase in the MCCA premium from 1997 to 2007.
The assessment history is as follows:

Source: http://michigancatastrophic.com/ConsumerInformation/HistoricAssessmentData/tabid/2939/Default.aspx

A casual look at the data would indicate that the assessment rate has varied little in the past six years and it is only by intentionally selecting a very low starting point that the 2400% conclusion can be reached. While not wrong, the statement is misleading.

2. The statement that the system is broken, because there are $74 billion in claims already in the system.

The $74 billion is the total of loss reserves set up on the books of MCCA based on the data provided to it by the many auto insurance companies. These numbers are nominal dollars not discounted for when the estimated potential payments may need to be paid. Actuaries make numerous assumptions to derive a discounted loss reserve, and as of June 30, 2010 (the last audited statement available) they came up with $13.743 billion, against which they have assets of $13.807 billion. The bottom line deficit on the MCCA balance sheet was $1.035 billion, compared with $2.528 billion a year prior and $2.571 two years prior. While $1.035 billion is still a lot of money, it is a far cry from $74 billion which is discussed to attempt to paint the picture of a crisis.

The total premium charged by the MCCA is comprised of three components: the “pure premium”, the (surplus) deficit adjustment and the administrative cost. The deficit adjustment to make up for the bottom line deficit has been $29, $26, $24, $8, $16, $24, etc. for the past years. Again, while it is better not to have a deficit, the amount of the deficit adjustment and the stability of the total premium of the past few years indicate no “crisis” felt by the board of MCCA.

3. The statement that the actual payments on claims are growing so rapidly that the system is unsustainable.

This statement is supported by showing the following chart:

Source: http://michigancatastrophic.com/LinkClick.aspx?fileticket=ahn6NtlasVY%3d&tabid=2943

It is indisputable that the total payments on claims have increased. However, the total paid is the total number of claims times the average cost per claim. It is expected that the number of claims in the system would increase over time, as about 850 injuries per year exceed the $500,000 threshold for entry into MCCA are added to the total number. We started from zero when the MCCA was established in 1978. Some claims drop out of the total each year as well. Will the total number begin to level off as the system matures? I expect they will, but the data has not been released by the MCCA, claiming protection from the Freedom of Information Act claiming it is not a government entity. In committee, the members were told the information was not being provided because the legislators would not be able to understand it if they got it. Not good enough for me! Not being willing to make a decision on HB 4936 in the absence of good data, I have submitted the following request for information:

“I have a few questions regarding some of the actuarial assumptions from the MCCA that have been used to create the projections that have been presented.

1)  I had received a chart showing the increase in payments for claims from the MCCA, what I am looking for is a forward projection, preferably year by year that would include the presumed number of new claims multiplied by the avg. cost of claims (and factoring any inflationary adjustments) and the methodology that explains the assumptions behind the two factors just mentioned as well as the rate at which claims start to drop off.

2)  I have seen projections that the cost of open claims is estimated to total $70 billion.  The information that I have does not include an explanation of the assumptions for this total.  If you had this information or could direct me to it that would be helpful.

3)  The June 30, 2010 CAFR shows an unfunded liability of just over $1 billion.  What are the assumptions that were used in this calculation and how are they comparable or different from the assumptions used in the projections for the total cost of claims.  Additionally, what are the revenue assumptions that are being used to cover the costs.”

I have received no response to my request. What I expect to conclude once I get the information is that there is no crisis with the MCCA and nothing that requires drastic change to the system. The information I have received also shows no crisis in terms of the premiums owners of autos must pay because of the Personal Injury Protection (PIP) claims that the auto insurance company must pay under the $500,000 the companies are responsible for. While PIP costs are above the national average, 15 states’ rates are higher, while granting much lower benefits. Bottom line, I doubt if “the system is broken”.

While the system may not be “broken”, that does not mean that the system cannot be improved.

There is anecdotal evidence that health care services rendered under auto no-fault cost more (and in some cases, much more) than comparable services provided under workers’ compensation law, Medicaid, Medicare or even in the Blue Care Network. I have not seen any empirical evidence of that phenomenon, however. I can understand how that could happen. I envision medical care costs to be comparable to a balloon. If you squeeze a balloon in some places, it bulges out in other places. Similarly, if medical care costs are squeezed by charges under workers’ comp, Medicare, etc., lower than the cost of delivering that service, the uncompensated costs must be absorbed somewhere, and that somewhere might be the no-fault insurance. This deserves study.

Assuming for the moment that the services provided under no-fault insurance cost more than when provided under other plans, what are the options for cost control? HB 4936 proposes a fee schedule equivalent to that of workers’ compensation. Arguments against this fee schedule are that many health care providers believe that the fees are below the cost of delivering the service and opt not to provide the services. Proponents say that the auto insurers are in poor position to bargain for the appropriate rates as the system is not “managed care”, but rather “fee for service”, in which the injured party is free to choose which provider to go to.

Section 3107(1)(a) of the no-fault law says that an injured person is entitled to recover “allowable expenses”, consisting of, “All reasonable charges incurred for reasonably necessary products, services and accommodations for an injured person’s care, recovery or rehabilitation.” The allowable expense benefits are unlimited in amount and duration. Neither the statutes nor appellate court decisions specifically defines what is reasonable, and therefore each case is evaluated on its own merits as a “contractual dispute”. “The Michigan No-Fault Automobile Insurance Law: Your Rights and Benefits, A Practical Guide for Patients and Providers, 7^th edition, by George T. Sinas, 2011, pp. 4-5.

With little guidance as to reasonableness, it is not surprising that differences in opinion as to the scope of services and the cost of services arise. Advocates for the existing law claim that insurers “delay, deny and defend” to minimize their costs. See “Delay, Deny, Defend” by Dan Calabrese, in Business, November-December, 2011, pp. 66-72. That is, the claim is that the insurers delay payment even if they are required by law to pay within 30 days of receiving “reasonable proof of the fact and of the amount of loss sustained”. MCL 500.3142(2). The claim is that insurers routinely deny claims, with the hopes that the injured parties will not pursue payment. And, the claim is that the insurers will defend the claims to the hilt, knowing the worst that can happen is they will be required by the court to pay the claim, interest, court costs and attorneys fees. The truthfulness of these claims is not substantiated by any empirical evidence that I have seen, but I would expect that they are true to some extent, or at least some bad cases can be found as the insurers try to protect themselves from fraud and abuse.

Other ways the insurers attempt to control the cost of claims is to refer the case to an “Independent Medical Evaluation”, whose independence is open to question since the doctor is paid for by the insurer. Further, insurers may submit a patient’s medical expenses to an “independent” auditing company for an opinion whether the charges are “reasonable”. The Michigan Supreme Court has approved the basic concept of medical-bill auditing, but has not ruled on any specific methodology on how the audits should be conducted.

The bottom line is, despite the fact that we have a no-fault system designed to avoid unnecessary legal fees of determining the liability of someone who may have caused the injury, we still have multiple lawsuits regarding:

• The existence of a qualifying injury
• Medical causation
• Amount of medical expenses
• Amount or necessity of attendant care or replacement services
• The necessity and nature of home accommodations
• The necessity and nature of motor-vehicle transportation
• Work disability and earnings level
• Priority of payment and
• Coordination of benefits and benefit reductions.

Conclusion:

At this point, I don’t see the necessity of eliminating the “unlimited” benefit by placing caps on the total amounts that an injured party may receive. There are many injuries that require lifetime care that would exceed the caps suggested, and I would not wish to deny them the reasonable medical care they need.

I can see the desire to control costs in some way to lessen the “balloon” effect mentioned earlier. While fee schedules are one way to do that, an alternative way may be to allow (or perhaps require) auto insurers to join “networks” such as the Blue Care Network or Cofinity such that the charges for services are determined in arms length negotiations between parties of approximately equal bargaining power. George Sinas is considering potential statutory language that might accomplish that.

There should also be some tightening up of attendant care costs. The following chart shows that attendant care and residential care account for the vast majority of the expenses incurred.

Source: http://michigancatastrophic.com/LinkClick.aspx?fileticket=FzZwt0ugEjk%3d&tabid=2943

HB 4936 as it came out of committee would restrict the attendant care to 56 hours per week, or 8 hours per day. Many injured parties need a combination of skilled (nurse) care and other caregivers who are not RNs or LPNs for more hours than that. Anecdotal stories about abuse by family members or friends who provide such care have been shared. Should this care be compensated at the rates of $17 per hours for skilled care and $11 per hour for basic care as in HB 4936? Opponents say “no”, because these rates are below the charges of commercial agencies. Should there be some training a family member or friend should have before they become eligible for providing the service? Should there be some amount of care that is expected from the family without payment? These questions deserve further discussion.

It may be possible that sufficient cost control may be obtained through this combination of insurers working through networks and control of attendant care costs that substantial savings could accrue in the system without drastic changes. If so, auto owners could expect some savings for their basic PIP coverage within their insurance policy for the expenses under the $500,000 cap on the insurers’ responsibility, as well as some decline in the cost of the MCCA charge.