A Test Drive for Obamacare

Michigan’s auto insurance nightmare

The Weekly Standard

Eli Lehrer

When Sam Howell woke up a year after a car accident left him in a coma, doctors believed the St. Charles, Michigan, man would never walk, talk, or eat solid food again. They were wrong, the Saginaw News reports. With care from his mother, a nurse, and a team of specialists, the 25-year-old can now walk, throw a shot put (he holds a record for disabled athletes), and even dance a bit.

The medical bills for his complex rehabilitative care totaled more than $700,000 for the first three months, and thanks to Michigan’s unique automobile insurance system, his ordinary auto insurance policy covered all of them. If his mother had wanted to be paid for her time caring for her son, the state insurance fund would even have sprung for that.

It’s a story with a happy ending. As Republicans in the Michigan legislature consider bills to change the state’s auto insurance system, its defenders haven’t been shy about trotting out Howell and others like him. But such stories don’t speak to the system’s serious problems.

For all the genuine good it does for people like Howell, Michigan’s auto insurance system has collapsed entirely in parts of the state. Major causes of the system’s ills—exploding costs, the failure of an “individual mandate” to provide universal coverage, and the high prevalence of fraud—serve as portents for the direction of the nation’s health care system and rejoinders to favorite shibboleths of both left and right.

Some background on Michigan’s system first. Like 11 other states, Michigan requires all auto insurance to be offered on a “no fault” basis, and, like all states, it imposes an individual mandate to buy coverage or otherwise show financial responsibility for the consequences of one’s driving. When individuals or their cars sustain damages in auto accidents, Michigan residents file claims with their own auto insurance companies rather than trying to bill the at-fault party’s insurer or filing a tort claim. (This is the way health insurance works too.)

Unlike auto policies sold in other states, which rarely cover more than $100,000 in medical bills before asking private health insurance, families, and government programs to pick up the tab, Michigan requires all auto insurance policies to include unlimited medical coverage, just as all U.S. health care policies will have to do starting in 2014. Insurers aren’t directly on the hook for unlimited benefits since a special tax on each policy, currently $145 per year, goes into a fund that covers claims above $480,000.

Michigan statutes and case law force the system on everyone. Paying into an uninsured motorists’ fund or posting a bond can’t substitute for auto insurance in Michigan, as it can in some other states. The state’s very high bar for tort cases, raised even further by a 2004 state supreme court decision, means that almost no one injured in an auto accident can even have a day in court. (People who have serious or costly injuries in other “no fault” states can almost always sue in practice.)

Not surprisingly, this system costs a lot even though it operates largely without the trial lawyers who are the bête noire of insurers everywhere else. The website Insure.com finds that in 2011 Michigan auto insurance quotes averaged $2,541 a year. This was the highest, by far, among the country’s big states and more than individual health insurance policies cost in some areas.

With that said, not everyone ends up worse off under the system. In a lightly populated part of Berrien County—a southwest Michigan locale that’s home to the appliance maker Whirlpool, apple orchards, and many Chicagoans’ summer cottages—a benefits-loaded, unlimited-medical-expenses two-car policy runs about a hundred dollars less than one with much scantier coverage in Northern Virginia.

But where crime, accidents, and fraud are bigger problems, the costs soar. The Insurance Information Institute reports that a typical single-car policy in Detroit costs more than $5,100, more than a third of the city’s per capita income of $15,000. Rates in Flint and other similarly distressed cities are almost as high. As a result, the insurance market has collapsed in some parts of the state. The state’s biggest auto insurer has 10 agents in Detroit (population 713,000) and 50 in more prosperous Grand Rapids (population 188,000).

Despite fines and mandates designed to encourage people to buy insurance, Michigan has one of the highest uninsured motorist rates in the country—almost 17 percent according to the Insurance Research Council. (States with larger uninsured motorist populations have large numbers of illegal immigrants and/or lax mandates.) And the Michigan numbers would look even worse if auto theft hadn’t dropped, the state’s shrinking, aging population hadn’t brought down the accident rate, and severely cut-back police departments in the fiscally troubled state hadn’t stopped generating records for many nonserious accidents.

Although state laws and enforcement procedures relating to insurance fraud differ so much as to make precise state-to-state comparisons difficult, it’s clear that fraud is threatening to swamp the state’s system. The National Insurance Crime Bureau reports that Michigan has seen its number of potentially fraudulent claims almost double since 2008. Michigan had almost as many suspect claims as vastly larger Texas.

Even relatively inexpensive claim types where fraud was virtually unknown a few years ago—broken auto glass, most prominently—have seen suspicious claims skyrocket more than 1,000 percent. (The state, which has cut its workforce deeply, just doesn’t investigate most claims that insurers suspect.) There’s no single cause for this, but one factor stands out. The existence of unlimited benefits from auto insurers makes it a lot more attractive and lucrative for the criminally inclined to bilk auto insurers, particularly since the government almost never pursues criminal charges against the individuals who work with the professional fraudsters.

But fraud isn’t the only problem. The costs of legitimate automobile-related doctors’ bills also have soared out of control. In Detroit, a single neck MRI that costs $484 for Medicare and $768 on the state’s workers’ comp fee schedule will run $3,260 if an auto insurer picks up the bill. And reimbursement rate differentials for everything from emergency room visits to shoulder surgery are just as large. In 2010, auto-insurance-related medical costs were easily the highest in the country. The typical no-fault claim in Michigan ran a little over $35,000, more than twice as high as in any other state. As a result, auto insurers have advocated applying the workers’ comp fee schedule to their claims. But they have faced vociferous opposition from nearly every medical lobby in the state—physicians’ assistants to brain doctors to everyone in between—who form the core of the well-funded Coalition Protecting Auto No Fault.

Given that medical industries have actually grown and created jobs in Michigan even as every other sector in the state has shrunk, the hospitals and doctors have the upper hand in many cases. Indeed, the Coalition Protecting Auto No Fault, which forthrightly defends these sky-high payments as necessary to preserving the state’s medical system and the jobs it creates, has even fought modest efforts that would let auto insurers audit bills.

There’s at least some chance the forces opposing change have the majority of the population on their side. An effort to reform the system in the early 1990s—when the problems were far less serious—got overturned in a referendum. The legislation now pending includes provisions that would stop it from going directly before voters, and, despite near–universal Republican distaste for the current system at the highest levels, opponents seem to have the votes to stop even the Republican legislature from advancing aggressive reforms that would end unlimited benefits and impose a workers’ comp fee schedule on medical providers.

Michigan’s auto insurance system, of course, is far from a carbon copy of President Obama’s health care reform plan. But its current ills could well presage the future of the health care system in ways that don’t cater to any side’s cherished myths. Conservatives should take heed that vastly reducing the involvement of lawyers in the system, as nearly all doctors have long wanted to do in health care, has proven utterly ineffective as a cost control measure. The same goes for faith that simple competition between providers will control costs: Michigan residents (like people almost everywhere else in the country) have many companies willing to sell them auto insurance in the individual market, but this competition has not produced affordable options.

There’s even more for liberals to worry about: Michigan is also a place where an “individual mandate” to purchase a comprehensive benefits package has proven unsuccessful and where insurance mechanisms of any kind have collapsed in poor areas. And one major issue, the enormous recent increase in fraud, offers a caution for people of all political persuasions. Not everything about Michigan’s automobile insurance system is broken. Like the American health care system, it serves some clients exceptionally well. But the system is nonetheless a mess that will prove very hard to fix—and a warning to health care reformers of all ideologies.

Eli Lehrer is vice president of the Heartland Institute.