A $45 Billion Tax Cut

“Forget the fact that this is a good idea,” says one of its most vocal proponents. “Washington is awash in good ideas. This is a BIG idea.” And indeed it is. In theory (I’ll get to that), it would amount to something like a $45 billion-a-year middle class tax cut — without adding a dime to the deficit. “It’s certainly the biggest tax cut we’re likely to see this decade,” said Senator Daniel Patrick Moynihan as he and Senators Lieberman and McConnell introduced last month what they’re calling the “Auto-Choice” bill.

Faithful readers of this column will know that I’ve long advocated auto-insurance reform. In a state like California — one of the worst, but only Michigan does it well — nearly two-thirds of the $7 billion consumers pay each year goes to lawyers and fraud (I speak here of the $7 billion that goes for the “people” portion of auto insurance, not theft or dented metal), and those worst hurt recoup, on average, just 9% of their actual medical expenses and lost wages from this $7 billion pool.

As Consumers Union said as long ago as 1962: the traditional auto-insurance lawsuit system “produces results which are so unjust, capricious, and so wasteful of both the policyholders’ and the accident victim’s money that most laymen find it hard to believe the facts when they are first presented.”

But the facts are true, and they affect YOU, if you drive. All that’s changed since 1962 in most parts of the country; it’s gotten worse.

Michigan, in 1971, was the first and last state to fix this system. A dozen others only thought they had. Massachusetts, for example, passed the first no-fault law in the nation. But the trial bar sabotaged it as they have, more or less, all the others save Michigan. In Massachusetts, all you needed to start the lawsuit game was $500 in medical costs. So guess what? Far from being a “threshold” to weed out minor suits, it became a target instead. How hard was it to build the costs up to $500? (When the threshold jumped from $500 to $2,000 in 1988, guess what? The number of doctor’s and chiropractor’s visits for the typical injury claim jumped from 13 to 30.)

But how do you beat the trial lawyers? When enough money is at stake — and for them, this amounts to billions of dollars a year — they will say and do whatever it takes to win their case. I went on at some length about that last year.

The answer just may be this bill, Auto Choice. At the press conference to introduce it (technically, reintroduce it — it began last year with Senators Moynihan, Lieberman, McConnell and Dole), not only were senators from both sides of the aisle stepping up to the mike, but so were Al From, who heads the Democratic Leadership Council, conservative Grover Norquist, and a honcho of the Perot party. The New York Times, USA Today and others have given it enthusiastic ink as well.

Here’s how it works.

States would be allowed (not forced) to allow (not force) consumers to give up their right to sue-and-be-sued for pain and suffering. If you chose to stick with the current system, little would change from today. Or you could choose “Plan B,” the “Personal Protection” option. In that case, you could still sue anyone for uncompensated economic losses (medical, rehab, lost wages), but not for pain and suffering.

Why would anyone choose Plan B? Two reasons. First, premiums would drop like a rock. The Joint Economic Committee of Congress looked at this and estimated that if every consumer in America chose Plan B, they’d save, in total, something like $45 billion a year on their premiums. (Of course not every consumer would. And in many states the trial lawyers would doubtless succeed in preventing consumers from having the choice at all. But theoretically: $45 billion a year in savings, or nearly $400 for every household in America.) Second, you’d be assured of swift compensation for economic damages even if you couldn’t prove fault, or the other car did speed from the scene, or there was no other car (you skidded and hit a tree).

As to the specifics of how it would work, basically, there are three possibilities:

If two “lawsuit” drivers collided

If two “lawsuit” drivers collided with each other, they would sue each other just as today. Often they would get nothing, or next to nothing — but that’s just how it works today. It would be expensive — also about the same as today.

This is the system almost everyone is forced to “choose” today. If you earn $7 an hour and would just as soon not buy into a system that pays defense attorneys $150 an hour to fight your claim, and plaintiffs’ attorneys 33% or 40% of the settlement plus expenses to pursue it, tough luck. All that’s built into your premium. You’d just better hope whoever hurts your child doesn’t leave the scene, can be proven to have been at fault (sometimes kids just run out between two cars), and has insurance — lots of it. Few accident victims are so lucky. On average, those with actual losses in excess of $100,000 recoup just 9% of their losses from this great, expensive auto insurance system of ours.

If two “Personal Protection” drivers collided

By contrast, if two “Personal Protection” drivers collide, their medical, rehab and wage loss would come from their own insurer, just as a health insurance claim might today. Not every insurer would settle every claim fairly, but built into the law is a 2% a month penalty for delay (my idea, I’m proud to say), so the dynamic would change several ways. First, you’d have the choice of which insurer handled your claim. Today, the guy who hit you made that choice — and he may well have picked an insurer based solely on price, not service. Under Auto-Choice, you’d select an insurer you felt would give you a fair shake (which in turn would encourage insurers to compete more on that basis, to win business). Second, you wouldn’t be the insurer’s adversary; you’d be its customer. Not to say a lot of insurers don’t treat their own customers like dirt sometimes, too. But just as American Airlines treats its own frequent fliers better than it treats United’s (you’ve seen them: they’re the guys in the middle seats), so might insurers tend to try to please their customers. Third, insurers could no longer borrow at zero interest by stalling you. Now it would cost 2% a month. In their own selfish interest they’d say, “Hmmm. Money costs us 8% in the commercial paper market, so it used to make sense to borrow at zero, instead, from accident victims. But at 2% a month, or 24% annually — no thanks. The commercial paper market would be cheaper. And fourth, the vicious cycle of ill will would be broken, or at least weakened. Today, many people hate auto insurers — and with some reason. The rates are sky high, the claims handling is adversarial and in many cases outrageous. So people do things they ordinarily would not. Neck hurts? Sure it does! After all I’ve paid — overpaid, really — all these years, why shouldn’t I get my little $10,000 windfall like everybody else. (In California, people are three and a half times as likely to claim whiplash as in Michigan, where there’s no cash prize for doing so — only medical care and rehabilitation.) Yet the insurers are in a bind, too. They know statistically that most of the whiplash claims are faked — but there’s no way to tell which. So they treat everyone with suspicion, and they also have their eye on those zero percent loans.

Removing victims’ incentive to defraud insurers with phony or padded medical claims, and removing insurers’ incentive to “borrow” from victims by stalling (because now the rate would be 24%), could go a long way to make auto insurance claims little more of a battle than most health insurance claims. There would still be horror stories — and consumers should be encouraged to shout like hell and, if need be, sue for bad faith, when there are. But by and large, the war would be over.

If a “lawsuit” driver collided with a Personal Protection driver

What if you chose to stick with the lawsuit system and were hit by me, who had chosen Plan B? In that case, you’d make a claim against your own insurer, suing it, if necessary, much as you would today if I had been uninsured or underinsured and you had bought uninsured motorist coverage. (If you haven’t, incidentally, you should!) The other analogy would be two drivers who both happen to be covered by Allstate. With the larger insurers, obviously, that frequently happens. You wind up suing your own insurance company, not because you’re its customer, but because the guy who hurt you is.

The amount you could recover would be based on how much liability protection you yourself had purchased (just as today it is based on how much uninsured motorist coverage you purchased, or else how much liability coverage I purchased).

One thought to remember: Anyone in this system who couldn’t at least get his or her uncompensated economic losses paid without a lawsuit would be completely free to sue for that excess, whether they had chosen Plan A or Plan B. It’s just the pain and suffering portion that’s handled differently, because under the current system, it costs so much in legal fees to administer and so much more in fraud.

There it is in a band shell. It would give you a choice. It would save you money. It would make our economy more productive. It would even do a little to improve auto safety. (Today, insurers can’t reward you much for buying a safer car, because it’s the car you hit whose occupants you are buying insurance to protect. But when the insurer knows it’s your safety its insuring, it has an incentive to give you a break for buying a safer car — which in turn gives you a reason to weigh safety a little more heavily in your decision.) Choice. Price. Safety. Feel free to send a copy of this to your congressman.

Tomorrow: Can the Market Keep Climbing?
Next Week: The Star Arrives