Rising rates for auto and health insurance have become a fact of life for most of us. Yet few realize how closely the two are related or how better government policy toward one could help alleviate the other.
When Michigan adopted no-fault auto insurance in 1973, the Legislature also made ours the only state to mandate that insurance companies provide unlimited medical and rehabilitation coverage for all accident victims. In 1978, a system was created to reimburse insurers for medical claim expenses above a certain amount per incident (currently $300,000). These reimbursements are paid from a "pool" funded equally by all motorists on a per-vehicle basis. The pool is managed by the Michigan Catastrophic Claims Association (MCCA), whose members are auto insurance companies.
Your auto insurance bill includes an MCCA assessment for all catastrophic medical expenses above $300,000. That "unlimited coverage" means MCCA's potential liabilities are huge. Lesser medical claims and other coverage (collision, liability, uninsured motorist, etc.) are paid by your insurance company. The cost of these claims may vary according to your driving record and geographic location, but the MCCA component is the same amount for everyone.
This "one-size-fits-all" approach results in serious inequities. According to insurance executive D. Joseph Olson, a former state insurance commissioner, MCCA payouts for commercial vehicles are as low as 16 percent of those for personal vehicles because workers' compensation frequently pays for losses in commercial vehicles. "Employers pay for insurance for auto injuries twice — once for their workers' comp insurance and again for their MCCA assessments," Olson points out. (Disclosure: Olson is chairman of the author’s employer, the Mackinac Center for Public Policy.)
Every year, MCCA determines the amount that must go into the fund to cover costs from past and current-year injuries. This amount is divided by the number of insured vehicles, and the result is the actuarial MCCA assessment. This varies based on the cost of future medical services and anticipated investment returns. The premium you actually pay is also influenced by politics. According to the Michigan Office of Financial and Insurance Services, in 2001, $61 was needed to cover additional future expenses (the actuarial assessment). However, because of a perceived "surplus" in the fund, legislative threats forced MCCA to offset this with a $47 subsidy, making the per-vehicle premium only $14. For the same reason, MCCA sent $180 rebate checks to motorists in 2000, an election year. This year the “surplus” is gone, and a $20.80 “deficit adjustment” in being tacked on assessments.
Nevertheless, the "bottom-line" actuarial assessments are rising rapidly, from $56 in 1999 to $79 this year, and a key reason is accelerating health care inflation. The medical care services inflation rate rose from 2.9 percent in 1997 to 6.6 percent in 2001, and continues to rise. And because MCCA must pay all future medical expenses for past accident victims, any health care inflation is compounded many times over.
The leading cause of this inflation is best explained by the adage that people use more of something when they don't have to pay for it. Eighty cents of every dollar used to buy health care is paid by someone other than the consumer receiving the care. So the incentive for consumers is to indiscriminately seek more health care, rather than to carefully limit expenses, shop around, and ask questions — activities that result in more efficient and prudent expenditures of resources.
There are three ways policy-makers can deal with health care inflation. First is to ration health care, a course most Americans reject because of the high costs and long waiting periods for treatment associated with socialized medicine. Second is to do nothing, which means costs will keep racing skyward, with care "rationed" to only those who can afford increasingly expensive insurance. The third, and best, option is to require consumers to pay a greater portion of routine health expenses up-front. This could be accomplished through higher deductibles or co-pays or through the introduction of medical savings accounts, which allow consumers to put away tax-free dollars to spend on health care. Studies show such market-oriented strategies retain quality while cutting overall costs.
It's not obvious how the inflation of medical costs directly contributes to rising auto insurance rates. But if politicians really want to do something to contain costs in both the auto and health insurance arenas, they would do well to move the health care system toward a more market-friendly model. Otherwise the costs of unwise mandates will keep cropping up in unexpected places.
Jack McHugh is a legislative analyst and manager of MichiganVotes.org, a web-driven legislative database operated by the Mackinac Center for Public Policy.