Pay Less, Get More

In Michigan, the one state with a real no-fault auto insurance system, in place since 1973, people pay less for the “people” portions of the coverage than residents of many other states, yet they are far better protected — with unlimited medical benefits and rehab, plus significant wage-loss coverage — than anywhere else in the country.

So why wouldn’t all the other states flock to adopt a system like the one in Michigan? Because the lawyers, faced with billions of dollars in lost fees, do whatever it takes to keep the rest of us from having it.

That is old news, as regular readers of this column know all too well. (Sorry!) But there’s a bit of new news, which I’ll get to in a minute.

There are two ways of looking at auto insurance reform. One is just with common sense. If more than half the money people pay for the “people” portion of auto insurance goes to lawyers and fraud in some states, then a no-lawsuit system that inspired no routine fraud (there will always be a little organized criminal fraud) would obviously deliver consumers and crash victims more bang for the buck.

Or look at it this way. Could adding a lawyer to every health insurance claim possibly make health insurance a better deal? Could offering a cash prize to compensate for the pain and suffering of an illness possibly fail to encourage some people to exaggerate or invent their pain and suffering — or even, in some cases, to get sick on purpose? That’s what happens now. In California, three-and-a-half times as many people claim whiplash after an accident as in Michigan, where there’s no cash incentive to do so. And sometimes, people actually cause accidents on purpose to be able to sue.

To me, common sense — and the quarter-century experience in Michigan — should be enough. But it obviously hasn’t been enough, so any number of good people have tried over the years to analyze the data in more sophisticated ways.

The most recent example of this is a clever piece of work just done by Robert Hunter, who is sort of the dean of insurance-industry critics in America, the former federal insurance administrator under Ford and Carter, former Texas insurance commissioner (boy were the insurance companies happy to get rid of him), an actuary, and currently head of the insurance arm of the Consumer Federation of America.

He made a little list of all the states, with one column showing what kind of auto insurance system it had — 27 traditional lawsuit states, 14 so-called no-fault states, the rest hybrids — and then other columns showing how they ranked for cost.

Of course, most of the states that think they’re no-fault aren’t really, in any meaningful way. Indeed, they’re the worst of all possible worlds, because not only do they still have tons of lawsuits and tons of incentive to invent or exaggerate pain and suffering — they actually increase the incentive, with hurdles you have to meet in order to be able to sue. Example: in Massachusetts, from 1971 to 1987 or so, you had to have $500 in medical bills in order to be able to sue. (So everyone just went out and racked up that much in medical bills.) Then in 1988 the threshold was raised to what was meant to be a more meaningful $2,000. Over the next year, the average number of medical visits following an auto accident jumped from 13 to 30.

So whatever the statistical tests you devise, you’d expect Michigan to fare well, and the other so-called “no-fault” states to fare badly.

Which is as it happens exactly what Hunter, being an honest guy in no one’s pocket — least of all the insurance industry’s pocket — found. His report concluded:

Real no-fault, Michigan, succeeds under these tests. Ranked 3rd most expensive in the nation in collision prices, Michigan’s cost for “liability” [the damage-to-people portion] is only 32nd. And Michigan gives victims the remarkable unlimited no-fault medical and rehabilitation benefits!

For the five-year price-change test, Michigan’s collision rank was 16th [in the rate at which premiums rose] but only 42nd for liability [the damage-to-people portion].

Good no fault works! Bad no-fault does not.

Michigan’s benefits are so much higher than in other states you could understand how it might be expensive. But it’s not. You could understand how it might be vastly more costly than in the 27 traditional lawsuit states, like California. But it’s not. In California, if you’re really badly hurt — $100,000 or more in actual economic damages — you recoup just 9% of your losses from the auto insurance system. In Michigan, it’s much closer to 100%. Yet coverage cost less in Michigan than in most states and significantly less than in California. Why? Because most of the bodily-injury premium that is collected isn’t going to lawyers and fraud, it’s going to people with bodily injuries.

Now there’s a novel concept.

Tomorrow: The Problem With Michigan