Lawmakers’ policies are making your car insurance higher than it should be. Rather than solving the problems that government intervention is causing, however, politicians would rather blame “greedy” insurance companies and institute more interventionist policies.
For Michigan residents, the situation is particularly precarious. In the last decade the state has lost nearly a million residents, lost thousands of businesses, and likely witnessed greater economic rot than many other states throughout the economic downturn.
In CEI’s newly released joint study with the Mackinac Center, “Reforming Michigan’s Auto Insurance Industry,” Professor Gary Wolfram of Hillsdale College and Joseph Olson, the former Michigan insurance commissioner, nail down some of the reasons why Michigan drivers pay the second highest premiums in the nation.
Much of the paper focuses on the state’s mandatory purchasing of unlimited personal insurance protection (PIP). Because Michigan is also a “no-fault” state, the possible cost for each driver is unknown to insurance companies and potential unlimited — they could end up paying out millions of dollars, regardless of the driving abilities of their customers. (In no fault states, drivers are limited in their ability to sue for recovery of non-economic losses, such as damages for pain and suffering. In return for this limitation, the driver’s insurance company pays for economic losses, such as medical expenses and lost wages, regardless of who was at fault.)
Now the Insurance Research Council (IRC) has released a new paper documenting how the reimbursements from public health insurance programs (i.e., Medicare and Medicaid) have prompted hospitals to shift costs to automobile insurance companies. This has resulted in a nationwide rise in auto injury claim costs and has forced insurance companies to scrutinize and negotiate hospital bills prior to payment.
When applying the conclusions of the IRC study in conjunction with the CEI/Mackinac paper, it provides strong evidence in support of the claim that publicly funded programs, which are limited and have low reimbursement rates, have serious and expensive consequences on the cost of private insurance.
“The conventional wisdom is that hospitals aggressively seek to shift costs from public insurance programs to private payers such as auto insurance companies,” said Elizabeth Sprinkel, Senior Vice President of the IRC. “With this study, we now have information on the magnitude of cost shifting and a better understanding of the need for supportive state laws and effective tools that will enable auto insurers to pay hospitals appropriately and help control auto injury claim costs,” said Sprinkel.
With the recent individual health care mandate (aka Obamacare) on its way, the consequences of this cost-shifting could have dire consequences for a state like Michigan, where costs are potentially unlimited.
From the CEI/Mackinac study:
A major weakness in Michigan’s auto insurance system is the requirement for consumers to purchase unlimited personal injury protection, for several reasons. First, as any economist will attest, people respond to incentives. Once third-party payment is introduced, and there is no limit on how much the third party must pay, then there is every incentive for health care providers to choose expensive methods for treating injury, and there is no incentive for the patient to restrain expenditures.
Insurance Information Institute President Robert Hartwig, in testimony before the Michigan House Insurance Committee, showed that Michigan’s high insurance premiums are being driven by rising medical costs associated with auto accidents. The average no-fault PIP claim rose by more than 250 percent from 1998 to 2007, reaching $31,383. Given the incentives by medical care providers to use expensive treatments, it is a problem that the state has no constraints on costs, such as medical fee schedules and treatment protocols.
Because Obamacare forces all residents to purchase some type of insurance, it is very likely that the flood of new Medicare and Medicaid subscribers will increase the strain on the program and decrease the amount of reimbursement. As a result, hospitals will continue shifting costs onto private insurance companies — like auto insurers. The potential increase in costs and increases in premiums could be astronomical.