Personal Injury Protection Coverage

Rapid growth in personal injury protection claim severity in Michigan in recent years reflects increases in the overall cost of medical care. It also has been influenced by the comprehensive level of personal injury protection benefits and a lack of provisions that could help reduce benefit utilization in efficient ways. Suitable modifications in personal injury protection coverage could reduce the level and growth in personal injury protection premiums in ways that would benefit a large majority of drivers. They also would provide significant relief to low income persons for whom affordability problems are most pronounced.

Michigan Catastrophic Claims Association. The Michigan Catastrophic Claims Association (MCCA) was established by the legislature in 1978. The MCCA serves as a reinsurer for all personal injury protection claims for medical and rehabilitation costs that exceed $250,000. While only a small fraction of claims exceed this limit, the cost of unlimited benefits with virtually no controls on utilization is very large. [66]

The expected cost of MCCA coverage increases premiums. The MCCA assesses each auto insurer a fixed amount per insured vehicle. The annual assessment for 1989 was $43.65, and the assessment for 1990 will be $66.64. Assessments are based on the expected discounted cost of paying claims, and they generally include an amount designed to reduce the MCCA deficit (see below). Estimation of future costs for such injuries is problematic and subject to potentially large errors. Total assessments have grown rapidly in recent years, from $57.5 million in 1985 to $200 million in 1988. Nonetheless, the deficit of the MCCA (assets less discounted liabilities) was estimated at $300 million as of year end 1988. [67] Political pressure has begun to mount for developing methods to reduce the size of the estimated deficit and future assessments.

The no-fault law's requirement to cover necessary and reasonable expenses has been generous to injured persons. Common expenses include substantial costs to renovate (or buy new) homes, to provide home health care (even if it is more costly than institutional care), to provide specially equipped vans, and to provide vocational training. It is not clear that significant incentives exist for injured persons (or their families or guardians) to request anything but the most expensive form of care. Unlimited benefits and the lack of provisions for cost control in the no-fault act are very costly, and they are likely to become much more costly over time unless the law is modified. Once a person is seriously injured, it clearly is in his or her interest to seek the best and therefore most expensive care. The key question that should be addressed is whether, prior to injury, most auto owners are willing to pay the high premiums that will be necessary to provide for such benefits in the event that they become seriously injured. The answer in many cases is likely to be no.

Some form of cost control provisions that provide for reasonable quality are needed for catastrophic expenses paid by the MCCA. The goal should be to include the type of controls that would be included in a voluntary insurance arrangement, such as employment related group health insurance. Of equal importance, serious consideration should be given to allowing drivers either (1) to maintain unlimited benefits and pay for such benefits through MCCA assessments or (2) to choose a $250,000 limit on benefits and forego paying a premium for MCCA coverage. [68] The $250,000 limit would be sufficient to cover the vast majority of claims (see note 66 supra). In the small number of cases that would exceed this limit there exist alternatives to MCCA coverage. Many persons will have large limits on their group health coverage. Others would become eligible for government financed medical care, and some persons would receive "free" care from hospitals and physicians with the costs shifted to other parties,

Other Cost Control Measures. It is commonly believed that unlimited medical care coverage in health insurance plans can lead to excessive utilization of health care services. The no-fault law allows insurers to offer a $300 deductible in personal injury protection coverage. Serious consideration should be given to allowing insurers to offer other forms of co-payments to policyholders in exchange for lower premiums. For example, a choice of deductible amounts and a 20 percent co-payment on all claims above the deductible could be offered (subject to some reasonable limitation on total uninsured costs per injury), with the proviso that tort liability would still be limited for all medical expenses. Many consumers might prefer to bear the risk of small losses in exchange for reduced premiums (which would include savings on administrative expenses necessary to pay for small losses). Increased co-payments also could encourage consumers and health care providers to reduce the utilization of health care services in efficient ways. If co-payments of this type would be unlikely to reduce utilization, it might be necessary to adopt restrictions on medical care fees to control personal injury protection costs.

Duplicate Coverage. Many Michigan motorists are able to recover from both personal injury protection coverage and alternative sources of health insurance benefits. The availability of duplicate coverage increases the incentive for persons to inflate their medical expenses. As noted, economic theory and common sense suggest that most persons would not be willing to pay for duplicate coverage. The no-fault law requires insurers to offer premium reductions for auto owners who make personal injury protection coverage excess over other forms of coverage. However, administrative expenses associated with coordinating coverage, differences in the scope of alternative sources of benefits, and the possibility that alternative coverage will no longer be in effect at the time of an accident significantly reduce the premium savings that are available to policyholders from making personal injury protection coverage excess. As a result, this choice often will not be attractive.

One proposal that has been discussed in Michigan is to require mandatory offset for alternative forms of private coverage. [69] A potentially attractive alternative to mandatory offset, which could be instituted in conjunction with a reduction in required personal injury protection limits (see above), would be to allow policyholders with alternative coverage meeting specified requirements to forego buying personal injury protection coverage (medical, wage loss and survivor coverage, or both) up to some specified limit of benefits without allowing policyholders to sue in tort for expenses that otherwise would be covered by full personal injury protection coverage. A possible advantage of this system is that it would save on the expenses of coordinating personal injury protection and alternative health coverage for losses up to the specified maximum. It also would tend to produce a more accurate premium reduction than under the current system. Moreover, alternative coverage already is likely to contain a number of features to help control costs, such as prepayment of providers or deductibles and other co-payments.

In summary, a redesigned personal injury protection benefit system that would preserve most- of. the advantages of the present plan, emphasize cost control, and make coverage significantly more affordable is illustrated be low:

  1. Auto owners could choose to maintain unlimited coverage for medical care costs or choose a lower limit (e.g., $250,000 or less) in exchange for lower premiums.

  2. Auto owners with alternative private medical expense coverage could choose not to buy the minimum personal injury protection benefit: limit described in 1. above. They would maintain the choice of buying coverage in excess of the minimum limit.

  3. Deductible and co-payment options would be provided far "basic" personal injury protection benefits in exchange for lower premiums. Buyers could choose among the available options.

  4. Policyholders that opted for reduced personal injury protection coverage would not be able to recover for losses in a tort action that would have been paid by full personal injury protection coverage.

Possible objections to this system would be that it would hurt low income persons who might have to choose lower coverage limits to reduce premiums, that much of the likely increase in uninsured medical expenses would have to be borne by other parties, and that some persons might choose low limits without fully considering the ramifications of their decision. However, it is not at all clear that forcing low-income persons to buy costly, comprehensive personal injury protection benefits is appropriate, especially when it may lead to pressure for subsidies to make coverage more affordable. A fundamental drawback of compulsory coverage, whether liability or personal injury protection, is that it exacerbates auto insurance affordability problems for those least able to afford coverage. [70] Moreover, improved education and information disclosure could be developed if necessary to ensure that most motorists make informed decisions.

Adoption of these changes also would require re-examination of the notion (which frequently has been reflected in analyses of its constitutionality) that no-fault necessarily involves a tradeoff in which motorists obtain the right to receive first-party benefits for economic loss in exchange for restrictions on tort liability. The right to purchase and receive first-party benefits can exist even if it is not exercised. Moreover, even if the purchase of personal injury protection coverage were completely optional, tort limitations would still entail a meaningful cost-benefit tradeoff for motorists. While no-fault restricts the ability of motorists to pursue tort claims, they receive a corresponding exemption from tort liability and pay lower liability premiums as a result.