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Citizens ResearCitizens ResearCitizens ResearCitizens ResearCitizens Research Cch Cch Cch Cch Councilouncilouncilouncilouncilof Michiganof Michiganof Michiganof Michiganof Michigan

Citizens ResearCitizens ResearCitizens ResearCitizens ResearCitizens Research Cch Cch Cch Cch Councilouncilouncilouncilouncilof Michiganof Michiganof Michiganof Michiganof Michigan

Board of DirectorsChair Vice Chair Treasurer

Jeffrey D. Bergeron Terence M. Donnelly Aleksandra A. Miziolek

Marybeth S. HoweWells Fargo Bank

Nick A. KhouriDTE Energy Company

Daniel T. LisKelly Services, Inc.

Kristen McDonaldThe Skillman Foundation

Michael P. McGeeMiller, Canfield, Paddock and Stone PLC

Aleksandra A. MiziolekDykema Gossett PLLC

Paul R. ObermeyerComerica Bank

Brian PetersMichigan Health & Hospital Association

Jeffrey D. BergeronErnst & Young LLP

Michael G. BickersPNC Financial Services Group

Beth ChappellDetroit Economic Club

Terence M. DonnellyDickinson Wright PLLC

Randall W. EbertsW. E. Upjohn Institute

Eugene A. Gargaro, Jr.Manoogian Foundation

John J. GasparovicBorgWarner Inc.

Ingrid A. GreggEarhart Foundation

June Summers HaasHonigman Miller Schwartz and Cohn LLP

Kevin ProkopRockbridge Growth Equity, LLC

Jay RisingDetroit Medical Center

Kelly Rossman-McKinneyTruscott Rossman

Jerry E. RushMeritor, Inc.

Candee SaferianPVS Chemicals, Inc.

Terence A. Thomas, Sr.Thomas Group Consulting, Inc.

Kent J. VanaVarnum

Theodore J. VogelCMS Energy Corporation

Advisory DirectorLouis Betanzos

Board of TrusteesChair

Eugene A. Gargaro, Jr.

Terence E. AdderleyKelly Services, Inc.

Jeffrey D. BergeronErnst & Young LLP

Stephanie W. BergeronWalsh College

Beth ChappellDetroit Economic Club

Richard T. ColeMichigan State University

Mary Sue ColemanUniversity of Michigan

Brian M. ConnollyOakwood Healthcare, Inc.

Matthew P. CullenRock Ventures LLC

Tarik DaoudLong Family Service Center

Stephen R. D’ArcyDetroit Medical Center

Richard DeVorePNC Bank

Terence M. DonnellyDickinson Wright PLLC

John M. DunnWestern Michigan University

David O. EgnerHudson-Webber FoundationNew Economy Initiative

David L. EislerFerris State University

David G. FreyFrey Foundation

Mark T. GaffneyEugene A. Gargaro, Jr.Manoogian Foundation

Ralph J. GersonGuardian Industries Corporation

Eric R. GilbertsonSaginaw Valley State University

Allan D. GilmourWayne State University

Alfred R. Glancy IIIUnico Investment Group LLC

Thomas J. HaasGrand Valley State University

David S. HaynesNorthern Michigan University

James S. HilboldtThe Connable Office, Inc.

Paul C. HillegondsDTE Energy Company

Daniel J. KellyDeloitte. Retired

David B. KennedyEarhart Foundation

Mary KramerCrain Communications, Inc.

Gordon KraterPlante & Moran PLLC

David LeitchFord Motor Company

Edward C. Levy, Jr.Edw. C. Levy Co.

Daniel LittleUniversity of Michigan-Dearborn

Alphonse S. LucarelliErnst & Young LLP, Retired

Sarah L. McClellandJPMorgan Chase & Co.

Aleksandra A. MiziolekDykema

Glenn D. MrozMichigan Technological University

Mark A. MurrayMeijer Inc.

James M. NicholsonPVS Chemicals

Don R. ParfetApjohn Group LLC

Philip H. PowerThe Center for Michigan

Keith A. PrettyNorthwood University

John Rakolta Jr.Walbridge

Douglas B. RobertsIPPSR- Michigan State University

Milt RohwerGeorge E. RossCentral Michigan University

Gary D. RussiNancy M. SchlichtingHenry Ford Health System

John M. SchreuderFirst National Bank of Michigan

Lloyd A. SempleUniversity of Detroit Mercy School of LawAmanda Van DusenMiller, Canfield, Paddock and Stone PLC

Kent J. VanaVarnum

Theodore J. VogelCMS Energy Corporation

Gail L. WardenHenry Ford Health System,Emeritus

Jeffrey K. WillemainDeloitte.

Citizens Research Council of Michigan is a tax deductible 501(c)(3) organization

C I T I Z E N S R E S E A R C H C O U N C I L O F M I C H I G A N

M A I N O F F I C E 38777 Six Mile Road, Suite 208 • Livonia, MI 48152-3974 • 734-542-8001 • Fax 734-542-8004L A N S I N G O F F I C E 124 West Allegan, Suite 620 • Lansing, MI 48933-1738 • 517-485-9444 • Fax 517-485-0423

CRCMICH.ORG

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Medical Costs of No-FaultAutomobile Insurance



Why is there a revised version of this CRC report?

After reviewing comments CRC received after the initial publicationof this report, CRC made several changes in wording to enhance theaccuracy and consistency of the report’s language. The changesare to the wording only. The revisions do not impact othercomponents of the report or other findings contained therein.Changes are denoted in red font.

C i t i z e n s R e s e a r c h C o u n c i l o f M i c h i g a n i

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Contents

Summary .................................................................................................................... iiiWhy High Health Care Expenditures are Problematic ................................................ 1Summary of No-fault Automobile Insurance .............................................................. 2

Variations of No-fault Insurance ..................................................................................... 2Tort Thresholds ....................................................................................................... 2Optional versus Mandatory PIP ................................................................................. 3Choice .................................................................................................................... 3

Michigan’s No-fault Automobile Insurance ................................................................ 4Personal Injury Protection ............................................................................................. 4Bodily Injury ................................................................................................................ 4Verbal Tort Threshold Definitions ................................................................................... 4

Medical Expenditures Associated with Michigan’s No-fault Insurance Claims .......... 6Prices for Medical Care .................................................................................................. 6

Priority of Recovery ................................................................................................. 6Automobile Insurers Pay Higher Prices ...................................................................... 6

Medical Service Use ...................................................................................................... 9Unlimited Lifetime Medical Benefits .............................................................................. 10

Why are MCCA costs so high? ................................................................................ 11Quality and Appropriateness of Medical Care................................................................. 13

Policy Options to Reduce Automobile Accident Medical Expenses ........................... 15Cost-Shifting ......................................................................................................... 16Incentive Structures .............................................................................................. 17

Reforms that Address Medical Pricing ........................................................................... 18Fee Schedules for Medical Services Covered by PIP Insurance................................... 18Increase Number of Health or Disability Insurers as Primary Payers for Claims ........... 19Automobile Insurers Pay Amount Customarily Received ............................................ 20Allow Automobile Insurers to Pay Health Insurance Prices ........................................ 20

Policy Options that Target Claiming Behavior ................................................................. 21Implement a Tort-based System with Optional or Mandatory “Add-on”No-fault Insurance................................................................................................. 21Implement a Choice Insurance System.................................................................... 21Allow Consumer Choice in Coverage Levels ............................................................. 21Switching to a Dollar Tort Threshold ....................................................................... 22Allow Automobile Insurers to Implement Cost Containment Measures ....................... 22

Reform Options that May Make the Largest Impact on Medical Costs .............................. 23Capping Medical Care Coverage .............................................................................. 23Require all Automobile Accident Related Medical Coststo be Covered by Health Insurers ........................................................................... 24Repeal No-fault Insurance and Reinstitute a Tort-based Automobile Insurance ........... 24

Summary of Policy Options .......................................................................................... 25

Conclusion ................................................................................................................. 26

CRC Report

C i t i z e n s R e s e a r c h C o u n c i l o f M i c h i g a nii

TablesTable 1 Medical Fee Comparison, Detroit versus Medicare –

Detroit and Workers’ Compensation...................................................................... 7

Table 2 Medical Fee Comparison, Lansing and Grand Rapidsversus Medicare and Workers’ Compensation ........................................................ 8

Table 3 MCCA Payouts as Percent of Total Michigan Health Care Spending, 2009 ............... 11

Table 4 Claims Reported to the MCCA, Inception through June 30, 2012 ........................... 11

Table 5 Mix of Injuries for Claims Reported to the MCCA ................................................. 12

ChartsChart 1 Number of New Claimants to the Michigan Catastrophic Claims Association,

1990 to 2012 .................................................................................................... 13

MapsMap 1 Automobile Insurance Type, by State .................................................................... 3

C i t i z e n s R e s e a r c h C o u n c i l o f M i c h i g a n iii


Summary

for the products, services and accommodations ren-dered. The charge shall not exceed the amount theperson or institution customarily charges for like prod-ucts, services and accommodations in cases not in-volving insurance.” This language has been held tomean that auto insurers must pay the amount cus-tomarily charged and not the amount customarilyreceived. This provision in the Insurance Code mayexplain why providers’ claims for reimbursement formedical care related to auto accidents are 24 percenthigher in Michigan than in other states, when holdingthe amount of care constant.

Not only are medical prices associated with autoaccidents higher in Michigan, but medical use is aswell. Michigan’s unique and relatively generousmedical coverage, which includes “all reasonablynecessary products, services and accommodationsfor an injured person’s care, recovery, or rehabilita-tion,” has resulted in expansive and nearly unlimitedcoverage for those who need or want medical ser-vices. The result is a higher use of medical servicesin no-fault states compared to states with other in-surance systems that rely on health insurers for autoaccident related injury care. Patients may use moremedical services in order to receive better, morecomprehensive care, or in an attempt to gain accessto the tort system. Auto insurers cannot containuse to prevent providers from ordering medical ser-vices that other insurers might have declined to cover.

Should policymakers consider changes to Michigan’sno-fault auto insurance, many reform options wouldreduce the medical costs associated with the sys-tem, and consequently, auto insurance premiumcosts as well. Policymakers have available to themmany reform options for Michigan’s no-fault autoinsurance that could reduce the associated medicalcosts. Several of these reforms may maintain thequality and comprehensiveness of current benefits,while others would alter the benefits of the currentsystem to varying degrees, but may introduce ancil-lary impacts to accident victims or payers in othermarkets. For example, capping medical benefits for

Many factors contribute to health care cost growthand recent research shows that Michigan’s no-faultauto insurance policy is one such statewide driver.No-fault insurance means that an injured automo-bile accident victim receives compensation from hisor her auto insurance company rather than havingto show fault of the other driver in order to recovercompensation from that driver’s insurance company.Enacted in 1973, Michigan’s mandatory no-fault autoinsurance system was envisioned to reduce the num-ber of disputes, fraudulent claims, and litigation as-sociated with auto accidents. No-fault auto insur-ance has been successful at paying claims morequickly, which may allow auto accident victims toreceive more timely and appropriate care to treattheir injuries.

Michigan is one of 12 states with either mandatory oroptional no-fault insurance. While successful in meet-ing some important policy goals, no-fault insurancepremiums and associated medical costs have provento be more expensive than those in all other types ofauto insurance systems. Accounting for both higherprices and higher usage, medical claims in Michigancost auto insurers 57 percent more than claims forsimilar crashes in other states; consequently, auto-mobile insurance premiums are 17 percent higher onaverage. Driving higher costs under no-fault insur-ance is the practice that auto insurers are the pri-mary payers for auto accident related medical care,whereas health insurers tend to be the primary pay-ers in tort insurance states. This responsibility forpayment becomes expensive if and when auto insur-ers are paying higher prices than health insurers forthe same medical services. In Michigan, all payersare charged the same rate for services, but payersoften do not pay the full amount charged. The actualamount paid by auto insurers is higher than theamount paid by most other payers.

Auto insurers pay higher rates because they have lim-ited power to negotiate discounts on the rates theyare charged. The Michigan Insurance Code statesthat providers “…may charge a reasonable amount

CRC Report

C i t i z e n s R e s e a r c h C o u n c i l o f M i c h i g a niv

those injured in automobile accidents may lead toreductions in health care spending and reductionsin automobile insurance premiums, but caps mayalso negatively impact the comprehensiveness of carereceived by those catastrophically injured in auto-mobile accidents. Fee schedules for auto insurerswill reduce medical prices associated with auto acci-dents but may cause providers to shift costs to otherpayers to recoup lost revenue, and may cause otherdistortions in the healthcare market.

Policy options for consideration by state policymakersto address no-fault medical costs include:• Introduce fee schedules for auto insurers, simi-

lar to that required for workers’ compensation;• Designate the health insurer as primary payer

for auto accident related medical expenses andthe auto insurer as the secondary payer;

• Allow auto insurers to pay the amount custom-arily received or allow auto insurers to pay thesame prices as health insurers;

• Reform auto insurance to be a tort-system withadded mandatory or optional no-fault;

• Allow customers to choose between a less ex-pensive no-fault and a more expensive tort autoinsurance;

• Allow customers to choose between severalpersonal injury protection coverage amountsrather than require all customers to haveunlimited coverage;

• Change the tort threshold from verbal to dollar,where verbal thresholds allow access to the tortsystem if injuries meet certain criteria and dollarthresholds allow access after a specified amountof economic damages has occurred;

• Allow auto insurers to implement cost contain-ment measures similar to those allowed for healthinsurers;

• Cap medical benefits;• Designate health insurers as payers for all auto

accident related medical expenses;• Repeal no-fault and revert back to a tort based

system.

Michigan’s no-fault insurance system provides Michi-gan drivers with a robust medical safety net. Michi-gan drivers may take comfort in knowing they havecomprehensive medical coverage in the event theyare injured in an auto accident. This coverage islikely more expansive than the coverage they wouldreceive through private health insurance if they wereinjured in some other way. However, the trade-offfor this more generous medical coverage is higherauto insurance premiums for Michigan drivers. Re-ducing the medical costs associated with no-faultauto insurance may reduce overall medical spend-ing in the state while also reducing the cost of autoinsurance premiums. However, Michigan driverswould have a less generous safety net, and somemedical costs may be shifted to other payers suchas private insurers.

C i t i z e n s R e s e a r c h C o u n c i l o f M i c h i g a n 1


Original and current proponents of the state’s no-fault automobile insurance system envisioned manybenefits of no-fault automobile insurance includinglower premium costs, more equitable payment ofclaims, fewer fraudulent claims, and faster claimsprocessing. As a follow up to Health Care Costs inMichigan: Drivers and Policy Options, this paper looksspecifically at how the no-fault automobile insurancesystem in Michigan contributes to higher health carespending in the state and provides a variety of poli-cy options that may reduce the insurance system’smedical costs.

Health care costs are a significant concern for indi-viduals, families, and businesses, and there is noone source or factor that is single handedly drivingprices, usage, and spending. A recent report by CRC(Report 383: Health Care Costs in Michigan: Driversand Policy Options) found that no-fault insurance isa driver of health care costs in Michigan. Thesemedical costs are raising automobile insurance pre-miums, disproportionately increasing overall healthcare spending, and likely causing some costs to beshifted from other health care payers to automobileinsurers and drivers.

Why High Health Care Expenditures are Problematic

Health care costs have been growing as a percent ofthe state’s economic output, as a percent of individ-ual and household incomes, and as a percent ofbusiness and government revenues. Not only havecosts grown, but they are growing at a rate that isfaster than that of the economy as a whole. Whileon one hand this indicates a growing health careindustry with increased employment and incomes,on the other hand, health outcomes are not grow-ing commensurately with increases in healthexpenditures.a International and interregional com-parisons show that after a certain level, spending isnot correlated with health outcomes.1

In 2009, individuals, businesses, and governmentsin Michigan spent nearly $66 billion on health careservices and products. This was equal to almost 19percent of Michigan’s gross state product. National-ly, households spent 6.2 percent of their incomes onhealth care. Private businesses spent an amountequal to 10.2 percent of wages and salaries; stateand local governments spent 28 percent of reve-nues on health care.2 As health care costs grow,businesses have fewer resources to reinvest in their

own companies and to use for hiring, governmentshave fewer resources to spend on other publicprojects and priorities, and households must limittheir spending in other sectors of the economy.

While the medical costs associated with auto acci-dents are just a portion of overall health care spend-ing levels and growth, it is one of the areas thatpolicymakers can meaningfully impact through statepolicy. Features of Michigan’s no-fault insurancesystem contribute to higher overall health care spend-ing when compared to other states and, while cau-sation cannot be assigned, medical costs in no-faultinsurance states are higher and are growing morequickly than in states without no-fault insurance.b

a In other words, if we are spending 20 percent more onmedical costs, it is not clear that patients are 20 percenthealthier as a result.

b This problem is compounded in the larger, verbal thresh-old (term defined below) no-fault insurance states, whichinclude Michigan. In 2007, the relative cost of care forlarge, verbal threshold no-fault insurance states was 61percent higher than in tort states and 4 percent higher thanin small, monetary threshold (term defined below) states.

CRC Report

C i t i z e n s R e s e a r c h C o u n c i l o f M i c h i g a n2

The distinguishing feature of no-fault auto insuranceis that an injured auto accident victim receives com-pensation from his or her insurance company ratherthan having to show fault of the other driver in or-der to recover compensation from that driver’s in-surance company. This type of insurance is referredto as first-party insurance because an individual’sown insurance company, rather than another per-son’s insurance company, provides the reimburse-ment. It is similar to health insurance, which is alsoa first-party insurance, and is incontrast to tort-based auto insur-ance where auto accident victimsmust show fault of the other driv-er before recovering damages fromthe other party’s insurance (a third-party).

The required first-party insuranceis called personal injury protection(PIP) and is in contrast to bodily injury (BI) insur-ance that is required in states that have tort-basedsystems. While BI insurance covers a driver from aspecified amount of damages that they may inflicton other drivers in an accident, PIP is paid out tothe driver regardless of which driver is at fault.

PIP has many potential benefits. Because there isno need to show fault, there should be less autoaccident litigation, which reduces overall expensesrelated to accidents and liability. Additionally, no-fault insurance advocates believe that victims arecompensated more fairly and promptly under no-fault insurance than under tort-based insurance. No-fault insurance has delivered on many of these ben-efits, which were highly touted in the 1970s and1980s as a reprieve from the problems existing inthe tort-based system.

However, no-fault auto insurance premium prices havegrown rapidly and are now higher than those paid bycustomers with tort-based auto insurance. In 1987,no-fault insurance injury costs were 12 percent high-er than tort insurance injury costs and this gap grewto 73 percent by 2004. The rising cost of premiumshas resulted in a great deal of backlash to no-faultinsurance and a number of states have since repealed

no-fault insurance in favor of the traditional tort-basedinsurance. The price of auto premiums has broughtthis argument to Michigan as well, where, since itsenactment in 1973, Public Act 294 of 1972, whichadded the requirement of PIP insurance for registeredmotor vehicles, has endured many amendments andstate policymakers are continuing to grapple withoptions for making the insurance system both timelyand equitable as well as affordable.

Variations of No-fault Insurance

The 12 states that allow or requiretheir residents to purchase no-faultauto insurance all have varying fea-tures. The main ways in which no-fault insurance varies are in accessto the tort system and whether PIPis required or optional.

Tort Thresholds

True no-fault insurance eliminates tort claims com-pletely because it is neither necessary nor possible tosue. No system in the United States, however, oper-ates in this manner. States with no-fault insurancehave one of two types of thresholds that must be metfor a tort claim to be pursued. Verbal thresholds al-low for lawsuits only when damages meet certain cri-teria. In Michigan, lawsuits may only be pursued incases involving serious impairment of body function,permanent disfigurement, or death. Florida and NewYork, the other two states with verbal thresholds, havesimilar criteria. The remaining no-fault insurancestates have dollar thresholds that limit lawsuits tocases where economic damages exceed a certaindollar amount. The dollar cap that economic damag-es must exceed is typically set in statute but oftenadjusted upward to reflect inflation.

The type of tort threshold that best subdues costs isdebatable. In theory, verbal thresholds would be moreeffective in reducing medical costs as well as the num-ber of tort cases. When there is a dollar threshold,some victims may attempt to gain access to the tortsystem by running up medical costs. However, a studyfrom RAND Institute for Civil Justice notes that

Summary of No-fault Automobile Insurance

In 1987, no-fault insuranceinjury costs were 12 percenthigher than tort insuranceinjury costs and this gapgrew to 73 percent by 2004.

MEDICAL COSTS OF NO-FAULT AUTOMOBILE INSURANCE


Optional versus Mandatory PIP

Some states have systems referred to as “add-on”insurance because PIP coverage is added on to aconventional tort system. Some states require driv-ers to purchase PIP (mandatory add-on) and otherstates require only that insurers offer PIP (optionaladd-on). In other words, in these states there areno limitations in accessing the tort system, but con-sumers may or must have PIP coverage as well.

Choice

Three states – Kentucky, New Jersey, and Pennsyl-vania – allow consumers to choose between tradi-tional tort insurance and limited tort insurance. Inan auto accident, consumers who elect traditionaltort insurance (which is more expensive) may suefor damages incurred. Consumers who elect theless-expensive limited tort option may attempt torecover economic damages, but are limited in theright to recover non-economic damages such as painand suffering.

counter-intuitively, victims are more likely to sue un-der no-fault insurance with verbal thresholds thanunder tort systems. As the victim uses more medicalcare, he or she begins to build a case for a moreserious injury and is more likely to qualify for accessto the tort system and thus recover noneconomicdamages.3 The higher the PIP coverage, the moremedical care it is possible for the victim to use. Be-cause Michigan has unlimited PIP coverage, there maybe an incentive for Michigan auto accident victims totry to increase their use of medical services. Datashow that states with dollar thresholds encourageclaiming around the threshold and neither verbal nordollar thresholds especially encourage claiming of hardto verify injuries (rather, incentives in the insurancesystem likely drive these claims).4 Data specific toMichigan are not available.

Alternatively, no-fault insurance may see more law-suits because in tort states, victims may be morelikely to accept first settlement offers in order to paynecessary medical bills. Because first-party insur-ers pay in a timelier manner, victims may be morelikely to counteroffer and land the case in court.

Map 1Automobile Insurance Type, by State

CRC Report


Michigan’s No-fault Automobile Insurance

Verbal Tort Threshold Definitions

Michigan statute limits tort liability for non-econom-ic damages in auto accidents to cases where theinjured person has suffered death, serious impair-ment of body function, or permanent serious disfig-

urement. The question of wheth-er the latter two conditions are metis deferred to the fact finder andultimately the courts.5

Catastrophic Claims Coverage

One of the most unique featuresof Michigan’s no-fault insurancesystem compared to other no-fault

insurance systems is that unlimited medical benefitsare afforded to those injured in auto accidents. Af-ter Michigan, New York has the highest mandatorycap on benefits at $50,000.d

Michigan auto insurers are required to pay for theunlimited lifetime medical benefits of those injuredin auto accidents. The private, non-profit, unincor-porated Michigan Catastrophic Claims Association(MCCA) was created to reinsure auto insurers fromthe financial risk associated with these benefits.6 TheMCCA acts to reimburse auto insurers for no-faultinsurance PIP claims that exceed a certain amount(called the retention level) over the lifetime of theclaim. The retention level for July 2013 through June2015 is $530,000; auto insurers will be reimbursedby the MCCA for medical costs that exceed $530,000

Chapter 31 of the Insurance Code of 1956, PublicAct 218 of 1956, sets forth the laws and conditionsrelated to auto insurance in Michigan. In 1973, theInsurance Code was amended to require that Mich-igan residents purchase PIP coverage. Michigan isone of 12 states with either op-tional or mandatory PIP coverage.Additionally, Michigan law requiresdrivers to carry property protectionand coverage for property damageto other people’s property.

Personal Injury Protection

Michigan requires that all driversbuy PIP coverage. This coverage pays for unlimitedmedical costs of the driver in an accident, regard-less of fault. Michigan’s coverage also pays up to 85percent of the income the driver would have earnedhad the driver not sustained an injury in the acci-dent. Drivers may receive this income reimburse-ment for up to three years with a monthly limit thatis revised annually.c Drivers are also entitled to upto $20 per day in replacement household services(such as housekeeping and yard work) if injured in-dividuals are unable to perform these services them-selves.

Bodily Injury

If an insured driver is found legally responsible foran accident, and the injuries to the other driver meetthe verbal thresholds, then the injured driver cansue the at-fault driver for damages. The at-faultdriver’s insurance will pay up to a certain amount,which at a minimum includes $20,000 for a personwho is hurt or killed, $40,000 for each accident ifseveral people are hurt or killed, and $10,000 forproperty damage in another state.

c Effective October 1, 2012, the reimbursement maxi-mum is $5,189 per month.

d New Jersey previously had the second highest manda-tory PIP coverage of $250,000. Recent changes to theauto insurance statute now allow policyholders to choosebetween several reduced coverage limits. The minimumcoverage is now $15,000 per person per accident butallows for additional coverage up to $250,000 for specif-ic catastrophic injuries- permanent brain damage, spinalcord injury, disfigurement, and other significant and per-manent injuries.

Chapter 31 of the InsuranceCode of 1956, Public Act 218of 1956, sets forth the lawsand conditions related toauto insurance in Michigan.



per injured party.e In accordance with Public Act 3of 2001, the retention level will increase every twoyears by the lesser of six percent or the increase inthe consumer price index.

The MCCA assesses each auto insurance company afixed premium per vehicle to fund the reimburse-ments. These assessments are typically passed on

to consumers through auto insurance premiums. OnJuly 1, 2013, the assessment rose $11 to $186 pervehicle. The assessment is calculated by indepen-dent actuaries and accounts for expected medicalcost inflation, economic conditions, investment re-turns, the number of claims submitted to the MCCA,and fund surpluses or deficiencies from earlier as-sessments.

e The retention level is dependent upon the date the motorvehicle policy covering the loss was issued or renewedrather than the date the loss occurred or began or whenthe accident occurred. This means that the retentionlevel may be lower if the motor vehicle accident policywas issued or renewed in a prior year.

CRC Report


Medical Expenditures Associated withMichigan’s No-fault Insurance Claims

In contrast, in tort states, providers are more likelyto seek reimbursement from health insurers.9 As willbe discussed below, because health insurers pay low-er prices than auto insurers, spending per claim islower.

Automobile Insurers Pay Higher Prices

The same medical care costs more for individuals inauto accidents in no-fault insurancestates than in tort states. Holdingthe amount of medical care con-sumed constant, in 2007, provid-ers’ claims for reimbursement formedical care related to auto acci-dents were 24 percent higher inMichigan than in other states.10

This higher reimbursement rate isdriving overall claim costs as well.

When accounting for the price and amount of med-ical care, researchers calculated that the averageauto injury claim in Michigan would be expected tocost $12,885, but instead the average claim cost$20,229; this is a 57 percent higher claim cost thanfor similar crashes in other states. This calculationwas based on variables such as claimant demograph-ics, accident circumstances, and reported injuries.11

These researchers found that, “simple calculationssuggest that a substantial fraction of the high costof auto insurance in Michigan can be explained bythese higher levels of reimbursement. If injury pay-ments account for 30 percent of total premiums andinjury payments are 57 percent higher in Michiganthan in other states, other factors being equal, wewould expect premiums in Michigan to be 17 per-cent higher than in other states.”12 Researchers in-deed found that premiums in Michigan were 17 per-cent higher than the average of other states in 2007.

Tables 1 and 2 provide a sample of medical servicesthat are among the 15 most common medical charg-es related to auto accidents and the respective pricespaid by various payers. Table 1 compares the pricespaid by no-fault auto insurers in Detroit, Medicarereimbursement rates in Detroit, and a statewide fee

Generally, medical expenditures per claim are high-er in no-fault insurance states than in tort states.Many factors may contribute to higher medical spend-ing: a higher number of claims, a higher number offraudulent claims, higher reimbursement rates, fewersafety features in insured vehicles, and others. Datado not support claims that no-fault insurance itselfleads to more accidents, more injuries, more severeinjuries, or higher medical claim-ing rates. Many factors point toPIP coverage as being a lead costdriver, both because of higher pric-es for auto accident related medi-cal services and because of higheruse of medical services.7

Prices for Medical Care

Higher prices related to auto inju-ries are contributing to higher totalmedical spending in Michigan. Prices paid by autoinsurers are higher than those paid by other payersfor the same services and Michigan’s auto insurancestatute ensures that auto insurers are more likely thanother parties to pay for auto-related injuries.8

Priority of Recovery

The first-party auto insurer is the first priority payerfor PIP benefits. The order of priority for benefitpayment to drivers and passengers is the following:1) no-fault insurer of injured occupant; 2) no-faultinsurer of injured occupant’s Michigan relative; 3)no-fault insurer of the owner or registrant of thevehicle occupied at the time of the accident; 4) no-fault insurer of the driver of the vehicle occupied;and 5) if none of the above, claims go to the Michi-gan Assigned Claims Facility, which provides finan-cial assistance to those injured in uninsured motorvehicle accidents. In cases where the policyholderhas elected to coordinate their auto insurance ben-efits with their health or disability insurance (exceptMedicaid, Medicare, or a Medicare supplementalpolicy) the auto insurer is unlikely to be the primarypayer and another insurer will act as the first-partyinsurer.

When accounting for theprice and amount of medi-cal care, medical claims inMichigan cost 57 percentmore than claims for simi-lar crashes in other states.



charged for workers’ compensation claims. Table 2compares the same services but looks at the pricespaid by no-fault insurance in both Lansing and GrandRapids compared to Medicare reimbursement in Mich-igan (excluding the rates in Detroit), and again to theworkers’ compensation fee schedule. Because thesedata are not comprehensive of all services or all pay-ers, it may be premature to draw definite conclusions.However, it does corroborate other claims that pricespaid by no-fault auto insurers are in fact higher, andin many cases much higher, than those paid by otherpayers in Michigan.

In general, Medicare pays lower prices than otherpayers, but typically higher than Medicaid. So it is

not surprising that both workers’ compensation feesand auto insurance prices are higher than Medicarein Tables 1 and 2. While this is just a snapshot ofthe data, there were no reimbursements in the avail-able dataset paid by no-fault insurers that were lessthan either Medicare or workers’ compensation foranywhere in the state for the top 15 services claimedin auto accidents. Parity is most closely achieved byreimbursement rates for a 25 minute office visit foran established patient when comparing the reim-bursement rates for no-fault insurers in Grand Rap-ids to workers’ compensation rates statewide; in thiscase, only a four percent premium was paid by no-fault insurers over that paid by workers’ compensa-tion insurers.

Table 1Medical Fee Comparison, Detroit versus Medicare- Detroit and Workers’ Compensation

Average Price Paid Percent No-FaultReimbursement

Detroit Exceeds…Statewide Statewide

No-Fault Medicare Workers’ Workers’Service Description Reimbursement Reimbursement Compensation Medicare Compensation

Physical therapy -therapeutic exercises for $79.38 $30.66 $41.57 159% 91%strength (15 min)

Chiropractic manipulativetreatment; spinal, $72.60 $36.43 $48.67 99% 49%3-4 regions

ER visit – moderate medical $297.04 $65.70 $90.75 352% 227%complexity

Physical therapy- $66.26 $12.50 $16.73 430% 296%ultrasound (15 min)

Office visit, established $151.30 $107.90 $133.85 40% 13%patient (25 min)

Neck CT scan $1,820.09 $261.50 $418.78 596% 335%

Low Back MRI $3,278.55 $484.31 $765.57 577% 328%

Shoulder surgery $2,806.13 $730.70 $939.98 284% 199%

Source: Mitchell DecisionPoint®; CRC calculations

Note: Source data contain prices only and not total expenditures. Of the 15 most common charges, the averagedifference between the prices paid by auto insurers in Detroit and Medicare in Detroit was 268 percent. Of the 15 mostcommon charges, the average difference between the prices paid by auto insurers in Detroit and the statewide workers’compensation fees were 160 percent. These calculations use pricing data, are not weighed, and no standard deviationis available.

CRC Report


Notably absent from Tables 1 and 2 are the pricespaid by private health insurers – these data are dif-ficult to come by as not every insurer pays the sameamount and providers and insurers are not requiredto disclose the amounts they accept or receive. Sincemany of the policy options discussed later in thepaper assume that health insurers pay lower pricesthan no-fault, it is important to estimate how muchprivate health insurers pay for these same services.By comparing prices of each no-fault and privateinsurers to Medicare we are able to estimate howno-fault and private insurance prices differ.

The Center for Studying Health System Change, ahealth care policy research firm, used 2011 claims

data from non-elderly privately insured autoworkersand dependants to calculate the price difference be-tween Medicare and private insurance for various Mich-igan cities. For hospital inpatient services, Lansingprices were 46 percent higher than Medicare andDetroit prices were 42 percent higher than Medicare.For hospital outpatient services, Lansing private in-surers paid 27 percent more than Medicare and De-troit private insurers paid 49 percent more than Medi-care. In comparison, for the 15 most common chargesrelated to auto accidents, the no-fault reimbursementin Detroit was 268 percent higher than Medicare. No-fault reimbursement in Lansing was 190 percent moreand Grand Rapids was 193 percent more than Medi-care. While this is not a direct comparison of the

Table 2Medical Fee Comparison, Lansing and Grand Rapids versus Medicare and Workers’Compensation

Average Price Paid Percent Lansing Percent Grand RapidsNo-Fault No-Fault

No-fault Reimbursement ReimbursementReimbursement Exceeds… Exceeds…

MedicareReimbursement Statewide Statewide

Service Grand (excluding Workers’ Workers’ Statewide Workers’ StatewideDescription Lansing Rapids Detroit) Compensation Compensation Medicare Compensation MedicarePhysical therapy -therapeutic $56.17 $57.97 $29.03 $41.57 35% 93% 39% 100%exercises forstrength (15 min)

Chiropracticmanipulative $60.67 $57.05 $34.22 $48.67 25% 77% 17% 67%treatment; spinal,3-4 regions

ER visit- moderate $282.98 $255.01 $60.92 $90.75 212% 365% 181% 319%medical complexity

Physical therapy- $49.80 $43.82 $11.74 $16.73 198% 324% 162% 273%ultrasound (15 min)

Office visit, established $142.85 $138.85 $100.61 $133.85 7% 42% 4% 38%patient (25 min)

Neck CT scan $1,142.25 $1,176.14 $244.59 $418.78 173% 367% 181% 381%

Low Back MRI $2,057.55 $2,118.60 $452.56 $765.57 169% 355% 177% 368%

Shoulder surgery $2,201.71 $3,041.06 $654.87 $939.98 134% 236% 224% 364%

Source: Mitchell DecisionPoint®; CRC calculations

Note: Source data contain prices only and not total expenditures. Of the 15 most common charges, Lansing autoinsurers paid 190 percent more on average and Grand Rapids auto insurers 193 percent more on average for the 15 topcharges than Medicare. Of the 15 most common charges, Lansing and Grand Rapids auto insurers paid 93 percent and95 percent more on average than workers’ compensation insurance, respectively. These calculations use pricing data,are not weighed, and no standard deviation is available.



same services, the data suggest that private insurerslikely do in fact pay lower prices than no-fault autoinsurers for the same services.

Why Michigan Auto Insurers Pay Higher Prices.Prices paid by auto insurers can be higher than thosepaid by other insurers and payers mainly because ofthe way the Insurance Code is written and how ithas been interpreted by the courts. Section 3157 ofthe Insurance Code states,

“A physician, hospital, clinic orother person or institution law-fully rendering treatment to an in-jured person for an accidentalbodily injury covered by person-al protection insurance, and aperson or institution providingrehabilitative occupational train-ing following the injury, maycharge a reasonable amount forthe products, services and accommodations ren-dered. The charge shall not exceed the amountthe person or institution customarily charges forlike products, services and accommodations incases not involving insurance” (emphasis addedby CRC).

While providers typically charge all payers the sameamount for each service, not all payers pay theamount charged or billed. Medicare and Medicaid,for example, typically do not negotiate prices andpay a specific amount for each type of service re-gardless of the amount they are charged. Otherpayers, such as private health insurers, can negoti-ate lower prices and therefore also pay amountsbelow what they are charged. Health insurers areable to negotiate discounts from the charged rateby including certain providers in their network; pro-viders are willing to accept a lower rate becausethey may see a higher patient volume in exchange.Auto insurers have little market power to negotiatelower prices, in part because of the language ofthis statute, in part because they generate a lowervolume, and in part because of other provisions inthe Insurance Code that somewhat limit their abil-ity to incentivize patients to visit certain “in-net-work” providers in exchange for reducedcopayments and premiums.

Since this language was added in 1973, auto insur-ers have attempted to find ways to reduce the pricethey pay for medical services. One such strategyhas been to simply pay the amount customarily paid(rather than the amount customarily charged). Thismay result in litigation and the most definitive opin-ion on the matter was submitted by the MichiganCourt of Appeals in 1996 in Munson Medical Centerv Auto Club Insurance Association. The Court ofAppeals affirmed the trial court’s decision that the

amount a person or institution“customarily charges” means thestandard amount a provider bills,regardless of whether the provid-er routinely accepts less than thisamount.

In this case, Auto Club InsuranceAssociation (ACIA) was particular-ly concerned that providers were

essentially shifting costs to the auto insurers andwere protected by the law in doing so. The Court ofAppeals noted that, “in its view ACIA had the ‘highmoral ground’ with regard to its concerns about cost-shifting,” however, because of government regula-tion in the insurance and health care industries, thecourt decided the plaintiff should expect to receivethe amount that they billed for service.13 In otherwords, in a free market economy, private business-es are allowed to set up discriminatory pricing sched-ules and many companies in industries other thanhealth care utilize discriminatory pricing for a vari-ety of economic and financial reasons.

Medical Service Use

Higher rates of utilization also drive higher medicalspending in no-fault insurance states. In 2007, vic-tims in states with no-fault auto insurance were morelikely to visit the emergency room, have an over-night hospital stay, and visit a chiropractor, physicaltherapist, dentist, or psychotherapist. They wereless likely to go without medical treatment. Theaverage number of claimed visits to a variety of pro-vider types was also higher in no-fault insurancestates.14

While providers typicallycharge all payers the sameamount for each service,not all payers pay theamount charged or billed.

CRC Report


While the percent of Michigan claim-filing auto acci-dent victims that receive medical treatment (92.8percent) is not significantly different to those in oth-er states (92.1 percent), the mix of services and theusage of each service claimed is substantially differ-ent.15 Once adjusted for accident and injury charac-teristics and claimant demographics, Michigan autoaccident victims are 19 percent more likely to visit ahospital and 25 percent more likely to visit an emer-gency room. Michigan auto accident victims claimmore reimbursements for X-raysand CT scans, and are more likelyto purchase durable medical equip-ment. Michigan claimants also aremore likely to claim reimbursementfor lost work. On the other hand,Michigan auto victims are less likelyto submit claims for chiropractorcare, anesthesiology, and alterna-tive providers (such a massage therapy).16

Michigan’s auto insurance structure may be contrib-uting to higher medical service use among auto ac-cident victims for several reasons. First, auto insur-ance companies are required to cover “all reasonablecharges incurred for reasonably necessary products,services and accommodations for an injured person’scare, recovery, or rehabilitation.”17 This provision inthe Insurance Code provides for very few limitationsin treatment scope and scale. This may lead to bet-ter health outcomes for those injured in auto acci-dents as treatment is not limited in the same way asmany other health insurers.

Second, auto insurance companies have very limit-ed ability to constrain service use especially whencompared to health insurers. Health insurers oftenuse cost sharing through copayments, coinsurance,and deductibles to make consumers price sensitiveto certain services, which typically results in reducedutilization. Since auto accident victims in tort insur-ance states typically rely on their health insurer, theyface much of these cost-sharing and other treatmentlimitations that would reduce overall medical use.

Third, the high threshold of allowable services meansthat injured auto accident victims can obtain morenecessary services while also having access to addi-tional services that might not be covered by othertypes of insurance. Auto insurers’ weak ability to

constrain service use means that providers are notprevented from, and may benefit in, ordering andcharging for more services that may provide little,no, or even negative health value to the patient.This may be done to increase the level of care com-pared to what would be covered with private healthinsurance, and may also increase revenues for theprovider. Patients too can utilize a greater multitudeof services for a variety of reasons, including an at-tempt to establish a more serious injury and obtain

access to the tort system. Underany of these scenarios, patientsand providers have the means andincentive to utilize services beyondwhat would typically be coveredunder other types of insurance.

Finally, because Michigan providescatastrophic injury coverage, autoaccident victims will be using a

greater number of services over the course of theirlifetime than in other states. However, long-terminjuries tend to be treated through greater use oflong-term care and rehabilitative therapies and it isunclear why unlimited lifetime services would resultin relatively more emergency room and hospital vis-its considering they treat more acute injuries ratherthan chronic ones.

Unlimited Lifetime Medical Benefits

A unique feature of Michigan’s no-fault auto insur-ance is the lifetime medical care afforded to injuredauto accident victims. The high cost of this pro-gram is a major criticism of Michigan’s no-fault autoinsurance. For the period between July 1, 2009 andJune 30, 2010, the MCCA paid out $816.9 million inclaims for 1,684 claims involving 2,174 claimants.In 2009, Michigan individuals, businesses, and gov-ernments spent $65.9 billion on total personal healthcare services and products. The annual amount paidin lifetime benefits through the MCCA represents 1.2percent of this amount (See Table 3) and is rough-ly equivalent to the amount the state governmentappropriated for community health programs, ex-cluding Medicaid, in Fiscal Year (FY) 2012. Whilethis expenditure is small relative to total health careexpenditures in Michigan, it does represent an ex-penditure of approximately $80 per capita.

Michigan auto accident vic-tims are 19 percent morelikely to visit a hospital and25 percent more likely tovisit an emergency room.



While this is an expensive system, these health carecosts need to be paid by someone – health insurers,Medicaid, or the victims themselves – or the treat-ment forgone. The unlimited lifetime benefits cre-ate a uniquely generous and high quality insuranceproduct for Michigan consumers. In tort states with-out a catastrophic injury coverage option, auto acci-dent victims would face treatment and usage limita-tions and potentially higher out-of-pocket expensesrelated to their insurance plan. In those states, ac-cident victims covered by Medicaid face potentialchallenges associated with Med-icaid’s low reimbursement rates,such as difficulty accessing pro-viders. In addition, they can berequired to spend down theirassets prior to qualifying for Med-icaid coverage.

Why are MCCA costs so high?

As of July 2013, auto accidentrelated medical costs paid byauto insurers that exceed$530,000 are reimbursed by theMCCA. Many factors contributeto medical expenditures that ex-ceed this retention level. First,claims covered by the MCCA are

either very severe in nature or, because of lifetimebenefits, are costly over a long period of time. FromMCCA’s inception through June 30, 2012 (excludingnon-probable lifetime care claimants), 46.1 percentof claims involved injuries to the brain, 3.7 percentwere for injuries resulting in quadriplegia, 3.1 per-cent were for injuries resulting in paraplegia, and0.5 percent were claims from a burn injury (SeeTable 4).18

Table 3MCCA Payouts as Percent of Total Michigan Health Care Spending, 2009

Michigan Health Care Expenditures: 2009* $65,887,631,000

Total MCCA Claims Payouts: June 2009-June 2010** $816,909,758

Catastrophic Claims Spending as a Percent of All Heath Care Spending 1.23%

* The most recent and comprehensive data available that estimates total health care spending in Michigan.

**Older data are used to keep comparison years consistent. In FY2012, the MCCA paid out $931,689,712 in claims.

Note: Health Care Expenditures measure spending for all privately and publicly funded personal health care servicesand products (hospital care, physician services, nursing home care, prescription drugs, etc.). Hospital spending isincluded and reflects the total net revenue (gross charges less contractual adjustments, bad debts, and charity care).Costs such as insurance program administration, research, and construction expenses are not included in this total.

Sources: Centers for Medicare & Medicaid Services (2011). Health Expenditures by State of Residence. MichiganCatastrophic Claims Association Annual Report to the Commissioner, Fiscal Year Ended June 30, 2012. CRC Calculations

Table 4Claims Reported to the MCCA, Inception through June 30, 2012

Number Percentof Claims of Total

Injury TypeBrain 14,382 46.1%Quadriplegia 1,145 3.7%Paraplegia 952 3.1%Burn 154 0.5%Miscellaneous 14,537 46.6%

Total 31,170 100.0%

Source: Michigan Catastrophic Claims Association, Injury Type SummaryInception to Date (as of June 30, 2012); CRC calculations

CRC Report


Claiming data also indicate ashift in the mix of injuries beingclaimed to and paid by theMCCA over time. Table 5 liststhe percentage share of eachinjury claim reported to theMCCA for selected years begin-ning in 1992. Here, the miscel-laneous category from Table 4is broken out to include ampu-tation, back and neck, multiplefracture, and other injuries. InTable 5, brain injuries havebeen declining as a share of to-tal injury claims and a highernumber of back and neck andmultiple fracture injuries havebeen meeting the retention threshold. While frac-tures and injuries to the back and neck can be se-vere and long-lasting, injuries such as brain trauma,quadriplegia, paraplegia, and burns more often re-quire intensive, lifelong care. Inother words, the mix of injuriesthat are meeting the threshold forcatastrophic coverage are perhapsnot what was originally intendedto be covered by catastrophic in-jury coverage.

Second, the MCCA pays the sameprices as the auto insurers for med-ical services; in other words, the high prices paid byauto insurers are being paid for the lifetime of theinjury. Because MCCA reimburses auto insurers forthe claims, the organization does not have contactwith providers directly. As part of their statutoryresponsibility, the MCCA tracks claims procedures andauto insurer practices to ensure that they are notout of line compared to other auto insurers, but oth-erwise has very limited ability to contain costs.

The inability of the MCCA to implement cost con-tainment strategies and monitor for fraud and abuseis a concern. The statute creating the MCCA doesnot allow explicit use of these tools, but the MCCA’sPlan of Operation sets up some parameters by whichthey monitor the procedures and practices of theauto insurance members. Because the MCCA reim-burses the members there is little direct role they

can play in cost containment, however, they do havepower to take action if they determine a member isnot meeting the required procedures and practices.This role is limited in its ability to significantly re-

duce unnecessary medical costs.

The third driver of MCCA spendingis attendant and facility care. Forthe period covering July 1, 2010through June 20, 2012, roughly57.8 percent of MCCA loss pay-ments were for residential care andattendant care by an agency or fam-ily member. Providers of these ser-

vices have the same legal right to receive the entireamount they bill, as stated in statute (MCL §500.3157)and clarified by Munson Medical Center v Auto ClubInsurance Association, 1996. As such, prices for at-tendant and facility care vary widely. The statute onlyrequires that that charges be “reasonable.”19

Between 2010 and 2012, 21.8 percent of MCCA pay-ments went to family attendant care.20 Several cas-es have been litigated regarding the rate that familymembers should receive for necessary services foran accident victim. In several recent cases, courtsruled that in determining a rate for family attendantcare services (versus attendants hired through anagency), fact-finders should not use agency ratesas comparables, but instead should use the rate re-ceived by the individual working for the agency.21

This finding may lower costs to insurers.

Table 5Mix of Injuries for Claims Reported to the MCCA

1992 1997 2002 2007 2012Brain 59.5% 51.6% 40.4% 43.9% 29.3%Burn 0.7% 0.3% 0.4% 0.2% 0.6%Amputation 3.2% 3.0% 3.2% 3.1% 2.5%Back & Neck 4.8% 7.3% 14.2% 13.1% 34.1%Multiple Fracture 19.4% 23.3% 30.8% 29.5% 27.2%Other – Misc. 4.4% 6.4% 7.1% 7.0% 3.9%Paraplegic 3.9% 3.3% 2.1% 1.5% 1.0%Quadriplegic 4.1% 4.7% 1.9% 1.7% 1.4%

Source: Michigan Catastrophic Claims Association; CRC calculations

The inability of the MCCAto implement cost contain-ment strategies and moni-tor for fraud and abuse is aconcern.



However, the cost of attendant and facility care isstill a cost driver for the MCCA. Auto insurance com-panies require that a doctor prescribe the amountand level of care needed; whether it be for “roundthe clock” care or just for certain functions and ac-tivities. For injury victims that require 24-hour care,costs for these services can add up quickly. Whilean average hourly rate is unavailable, a common ratewould fall between $10 and $40 an hour (the lowerrate may be more common for family attendantswhereas the higher rate would be more common foragency attendants). Attendants providing care 24-hours per day at a rate of $10 per hour would re-ceive annual payment equal to $87,760. Attendantscharging $30 per hour for 24-hour care would re-ceive $262,800 per year for their services. Twenty-four hour care is not the norm and is typically pro-vided to patients in a permanent vegetative state,those with moderately severe brain injuries, quadri-plegics, and those whose injuries require constantcare or supervision.

Fourth, expenditures of the MCCA are increasing withincreases in utilization of health care in general andnot with changes in the severity of vehicle crashes,which has been declining over the last 20 years.22

Despite evidence of lower incidences of auto acci-dent fatalities andauto injuries both inMichigan and na-tionally, the numberof new claimantsbeing added to theMCCA is increasing,although the num-ber of new claim-ants in 2012 waslower than that in2010 (See Chart1).23 The mix of in-juries of thoseclaimants whosecases reach and ex-ceed the retentionlevel is also chang-ing as was demon-strated in Table 5.The number of inju-ries to the brain and

resulting in quadriplegia or paraplegia has declinedover time and a higher number of claims are beingsent to MCCA that involve injuries such as severefractures.

Finally, because benefits are provided for the life ofthe injured victim, there are more cases being openedeach year than are being closed, so the overall costsof the MCCA are growing overtime. As of March2013, the MCCA had an estimated $2 billion deficitrelated to existing claims. This is an amount equalto $300.17 per insured vehicle. The MCCA raised itsassessment 6 percent for FY2014, in part to addressthe claims deficit.

Quality and Appropriateness of Medical Care

A higher quality insurance product is another factorthat may lead to higher auto insurance premium pric-es. Claims are paid out more quickly in no-fault in-surance states, which provides injured accident vic-tims more timely treatment. Victims in tort statesmay have to forgo some treatment until they receivea payout or may be tempted to accept a low initialpayout offer in order to pay immediate medical needs.The payouts, however, may not be sufficient to treat

Chart 1Number of New Claimants to the Michigan Catastrophic ClaimsAssociation, 1990 to 2012

0

500

1,000

1,500

2,000

2,500

3,000

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Year

Nu

mb

er o

f N

ew C

laim

ants

Source: Michigan Catastrophic Claims Association; CRC calculations

CRC Report


the extent of their condition or for the duration nec-essary when compared to PIP coverage.

Between 1998 and 2002, 43.9 percent of first-partyno-fault insurance claims were settled within threemonths, whereas only 20.3 percent of third-partyclaims in tort states were resolved in the same timeperiod. One survey found that victims are slightlymore satisfied with the amount and speed of theirno-fault insurance reimbursement compared to tortsystems.24 Customer surveys how-ever may be deceiving becausecustomers likely have different ex-pectations for the different systemsand are not basing their satisfac-tion on what it could have beenlike under a different system.

A possible consequence of quickpayments may be a rise in fraudand abuse. Because first-partyauto insurers in Michigan must re-imburse within 30 days after rea-sonable proof of the loss being in-curred, there may be less oversight in preventingfraudulent claims or abuse of benefits through ac-tions such as over-claiming. Insurers are penalizedif they do not pay the claim in a timely manner.

The high medical service use rates related to autoaccidents in Michigan and across no-fault insurancestates may mean claimants are receiving more ap-propriate medical care compared to tort systems;this would support assertions that no-fault insuranceprovides a more equitable reimbursement structure.While the level of care may be more appropriate,this care may come with a disproportionately highrelative cost; Michigan auto insurers are paying 57percent more for medical claims but it is not clearthat auto accident victims are improving their healthoutcomes by the same amount.

The extensive and generous coverage provided tothose injured in auto accidents is also creating ahigher quality auto insurance product. Auto insur-ance companies are required to cover “all reason-able charges incurred for reasonably necessary prod-

ucts, services and accommodations for an injuredperson’s care, recovery, or rehabilitation.”25 Thesebenefits tend to be more generous than would beprovided by Medicare, Medicaid, or by private healthinsurers and are delivered at a low out-of-pocketfinancial cost to the victim (some auto insurancepolicies charge a deductible of $500).

Over 2,000 people sustain life-altering injuries fromauto accidents each year in Michigan. For the 12

months ending June 30, 2012,2,354 claimants received benefitsthrough the MCCA. Without un-limited lifetime benefits, many ofthese accident victims may receivereimbursed care by their health in-surance plans, including Medicaidand Medicare, but would face lim-itations in medical service scope,duration, and intensity, as well asage restrictions, injury severity andcause of injury restrictions, andpaperwork burdens.26

Unfortunately, it is difficult to quantify whether ornot the additional treatments and the quality of thosetreatments add value to Michigan auto accident vic-tims’ health. Data on treatment outcomes and long-term patient health and recovery are not availableacross states. Several Michigan-based studies ar-gue that not only does the state’s no-fault insuranceaccomplish what it seeks to do, but it is also a goodvalue for the cost.f

f See The Impact of Reducing PIP Coverage in Michigan,August 2011, Prepared by Public Sector Consultants forthe Michigan Brain Injury Provider Council and Impact ofProposed “PIP Choice” Law in Michigan: The PotentialEffects of Changes to Personal Injury Protection LiabilityLaw. 2011. Prepared by Erin Agemy and Alex Rosaen ofAnderson Economic Group, LLC for the Coalition Protect-ing Auto No-Fault.

The high medical serviceuse rates related to autoaccidents in Michigan andacross no-fault insurancestates may mean claimantsare receiving more appro-priate medical care com-pared to tort systems.



Policy Options to Reduce Automobile Accident Medical Expenses

duce new benefits of their own. In reducing themedical costs associated with no-fault auto insur-ance, policymakers may impact the overall medicalspending in the state and likely reduce the cost ofauto insurance premiums.

Many policy reform options for Michigan no-faultauto insurance could reduce the associated medi-cal costs. Several of these reforms may maintainthe quality and comprehensiveness of current ben-efits, while others would alter the benefits of thecurrent system to varying degrees, but may intro-

Summary of Policy Reform Options

A brief summary of the no-fault policy reform options discussed in this paper.

Reforms that Address Medical Pricing

Fee Schedules for Medical Services Covered by PIP

• Fee schedules for medical services are commonly set for a variety of payers. Michigan has a fee schedule forworkers’ compensation medical claims.

• Fee schedules can reduce prices paid by auto insurers but may also be financially burdensome to providers ifrates do not cover the fixed and variable costs of service. If new fees do not cover costs, providers may shiftcosts to other payers.

Increase Number of Health or Disability Insurers as Primary Payers for Claims

• Auto insurers are secondary payers, paying for services that are not covered by the injured victim’s health ordisability insurer.

• In Colorado, reimbursement rates fell 40 percent when health insurers became primary payers.

• The potential benefit of this policy may be small because many auto insurance policies already coordinatebenefits with the policyholder’s health insurer and auto insurers would still pay for services not covered byhealth insurers.

Auto Insurers Pay Amount Customarily Received or the Amount Paid by Health Insurers

• Policymakers change the Insurance Code to allow auto insurers to pay the amount customarily received ratherthan customarily charged.

• Allows auto insurers to benefit from the negotiating power of health insurers in setting prices.

Reforms that Target Claiming Behavior

Implement a Tort-based System with Optional or Mandatory “Add-on” PIP

• States with mandatory or optional “add-on” no-fault insurance have lower medical costs associated with autoaccidents than mandatory no-fault states. The savings are greater when no-fault is an optional add-on.

• Medical spending associated with auto accidents may be lower with this type of insurance because victimshave access to the tort system at any time; they do not need to meet certain spending or categorical criteriato gain access and therefore may use fewer services.

Allow Customers to Choose between No-fault and Tort

• Customers choose between a more expensive tort insurance and a less expensive no-fault insurance option.

• Three states currently offer this option and the choice of insurance type may provide a better value forconsumers who do not want access to the tort system.

CRC Report


Medical costs are just one aspect of auto insuranceand should be treated as such. Reforms should con-sider all ramifications prior to implementation includ-ing changes to premiums, changes to the rate ofuninsured drivers, treatment and service for thoseinjured in auto accidents, and incentive structuresthat may encourage adverse actions (such as pay-

ment structures that may encourage false claims orsystems where auto insurers may intentionally de-lay payments). This list of reforms focuses on waysto change incentives to reduce medical usage andinequitable pricing. Some reforms do this by shift-ing costs to other payers which may have ramifica-tions outside the insurance industry.

Allow Customer Choice in Level of PIP Coverage

• Policymakers allow auto insurers to offer policyholders several choices in PIP coverage. This may or may notinclude an unlimited benefits option.

• While studies suggest that policyholders would underinsure themselves, policymakers could set level optionsthat are likely to cover the majority of claim costs; in 2007, roughly 94 percent of claims cost $50,000 or less.

Implement a Dollar Tort Threshold

• Some research shows that absolute cost levels for bodily injury plus PIP are higher among no-fault states withverbal thresholds than among no-fault states with dollar thresholds.

• Since the sample size is small and there are many other differences between these two groups, more researchshould be conducted before any associated policy is enacted.

Allow Auto Insurers to Implement Cost Containment Measures

• Most other medical insurers, except for auto insurers, are permitted to implement cost containment measuresto reduce the use of marginally beneficial medical services. Examples include cost-sharing and alternativepayment options.

Reforms that May Make the Largest Impact on Medical Costs

Cap Medical Benefits

• Reduce costs associated with unlimited lifetime benefits by introducing a dollar cap on benefits. The majorityof claims (99.995 percent) cost $400,000 or less in 2007 and in 2012, 3,345 (41 percent) of catastrophic claimspaid by the MCCA exceeded $1 million.

• Those with claims that exceed the cap would rely on their health insurer for additional services or spend downassets to become eligible for Medicaid.

Require all Automobile Accident Related Medical Costs to be Covered by Health Insurers

• Unlike auto insurers, health insurers are specialized in navigating the health care system. They have moreexperience and market power in negotiating prices and instituting cost containment measures.

• The payment priority of health insurers in tort insurance states is a major factor in lower medical spending.

• This reform would result in a noticeable reduction in the scope and scale of benefits to future auto accidentvictims as more health insurance policies have coverage and use limitations. This may result in higher healthinsurance premiums as health insurers now have added costs.

Repeal No-fault and Reinstate a Tort System

• Repealing no-fault insurance and returning to a tort-based system would reduce medical spending associatedwith auto accidents but would compromise other benefits currently provided by the no-fault system.



Cost-Shifting

Reforms that reduce the amount spent (eitherthrough price reductions or usage reductions) onmedical services related to auto accidents may re-sult in cost-shifting – the practice of charging somecustomers more in order to cover lower rates paidby other customers. Because providers accept dif-ferent payment amounts from different payers forthe same service, it is likely that they may be shift-ing the cost of their lower paying (or no-payment)customers to others in order to make up for the lostrevenue. This practice is made possible because ofvarying degrees of willingness to pay and marketpower. Cost-shifting is a type of price discriminationthat is practiced widely in many industries.

In the case of the health care industry, Medicare andMedicaid pay mostly non-negotiated prices that tendto be the lowest of any payer (excluding uncompen-sated care). Providers negotiate pricing and discountswith other insurers. In some cases, the state govern-ment sets the prices, such as is the case with Michi-gan’s workers’ compensation fee schedule.

Cost-shifting can occur for one or more reasons.First, because of uncompensated care and low re-imbursement rates from Medicare and Medicaid, pro-viders may need to charge other payers higher ratesin order to generate enough revenue to cover theiraverage costs, which includes fixed costs such asbuildings and equipment as well as the marginal cost

of providing each good or service. Second, provid-ers are allowed to utilize their market power to pricediscriminate and payers can use their market powerto negotiate discounts on those prices.

If it is the case that health care providers are shift-ing costs to auto insurers in order to generate suffi-cient revenue to maintain essential services, thenreforms allowing auto insurers to pay lower priceswill result in providers needing to either reduce theircapacity or shift costs to other payers, likely privateinsurers. Alternatively, the reduced spending couldmaterialize in other places such as the bottom lineof health care providers.

Incentive Structures

Another consideration is how new policies mightchange the incentive to consume health care relat-ed to auto accidents. A study by RAND Institute forCivil Justice on Colorado’s change from no-fault in-surance to tort-based auto insurance in 2003 foundthat the change caused provider reimbursements todrop roughly 40 percent, but procedures increased5 to 10 percent and charges increased 5 percent,with no improvement to patient mortality.27 If thegoal of auto insurance reform is to decrease medi-cal expenditures, it is important for policymakers tobe aware of potential changes in medical practicesthat are wasteful and designed only to make up forlost revenue.

Average versus Marginal Costs

Cost-shifting often occurs because providers need to recoup their average cost for providing goods and services.Average cost differs from the marginal cost in that it includes not only the variable costs associated with in-creased usage, but the fixed costs of delivering health care services, such as land, buildings, and equipment.Because of this, even if Medicare, Medicaid and other insurers pay the marginal cost of the service, typicallydisposable goods and labor, the cost of paying the fixed costs falls to the other payers. Providers would not beable to stay in business if every payer reimbursed for the marginal cost of the service or good provided.

For example, a robotic surgical device for minimally invasive procedures may cost only $800 per procedure; aprice that covers the required operating supplies. This may be close to the rate that Medicare and Medicaid pay,however, it does not account for the $1 million purchase price nor the $100,000 cost of annual maintenance. Ahospital with this equipment would have to charge other payers higher rates for the same service in order tomake this equipment available.

CRC Report


Reforms that Address Medical Pricing

Fee Schedules for Medical Services Covered byPIP Insurance

To address the higher prices that auto insurers of-ten pay for services relative to those paid by otherpayers, several states with no-fault auto insurancehave adopted fee schedules. By paying prices thatare presumably lower than without the fee sched-ule, states may help to reduce excessive medicalspending. Adopting a fee schedule protects autoinsurers who do not negotiate prices or do not haveenough market power to effectivelynegotiate prices.

Fee schedules are a common tooland are utilized to varying degreesby states for certain types of in-surance. Maryland is the only stateto have a hospital reimbursementrate schedule specific to health in-surance. Many states, includingMichigan, maintain fee schedulesfor workers’ compensation insurance. New York, NewJersey, and Pennsylvania have reimbursement sched-ules for no-fault insurance where the costs on aver-age are lower than those paid in Michigan and arecloser to those set forth in the state’s workers’ com-pensation fee schedule. For example, an emergen-cy department visit of moderate medical complexitycosts $283 in Lansing if paid by auto insurance, $90if paid by Michigan’s workers’ compensation feeschedule, and around $200 in New Jersey’s automedical fee schedule. A 25 minute office visit for anestablished patient would cost $151 in Detroit if paidby an auto insurer, $134 if paid by Michigan’s work-ers’ compensation, and $126 if paid by New Jersey’sauto medical fee schedule.28

A 2007 study of potential reforms to Michigan’s autoinsurance on behalf of the Insurance Institute ofMichigan found that adoption of the workers’ com-pensation fee schedule for auto accident relatedmedical expenses would result in total PIP savingsto insurers of 37.5 percent and total PIP premiumsavings of 34.1 percent. These savings assume sim-ilar treatment limitations included in workers’ com-pensation (such as limitations for certain medical

services and limitations on attendant care to eighthours per day, seven days per week). As attendantcare costs result in 38.7 percent of MCCA loss pay-ments, the study predicted that savings for PIP claimsover $400,000 (the retention level in 2007) wouldbe 40.5 percent versus only 33.0 percent of claimscosting $50,000 or less.29 If the statutory definitionand legal interpretation of auto insurance treatmentcriteria (all “reasonably necessary products”) remainunchanged then the cost savings from this reformwill not be as dramatic as this study suggests.

Introducing a fee schedule is unlikely to directly al-ter any of the distinguishing fea-tures of Michigan’s auto insurancesystem (no medical benefit cap,generous medical coverage, verbaltort threshold, mandatory PIP), butsecondary impacts may occur. Apotential consequence of feeschedules is that it may raise theprice of certain services for certainauto insurers who have negotiat-ed lower prices. However, the

Michigan auto insurance pricing data suggest that itis unlikely that any auto insurers are currently pay-ing on average an amount that would be significant-ly lower than what could be achieved by a fee sched-ule similar to workers’ compensation.

Because long-term care expenses are such a largecomponent of the medical expenditures related toauto insurers, it may also be an effective policy toset fee schedules for attendant care. Currently, at-tendants are being paid different amounts for theirservices; some are likely being underpaid while oth-ers may be overpaid, based on the actual servicesprovided. The current average rate paid for atten-dant services is not available, and CRC does not havea suggestion for an appropriate rate. Therefore it isdifficult to know if this reform will save money. How-ever, a set rate may provide more equity and great-er cost predictability. Rates would be more equita-ble if they were adjusted for cost of living differencesacross the state and the skills required to providethe services, and increased with inflation over time.

Fee schedules may be a powerful tool if they areimplemented such that they do not negate the ben-

Adopting a fee schedule pro-tects auto insurers who donot negotiate prices or donot have enough marketpower to effectively negoti-ate prices.



efits afforded when health or disability insurers arethe primary payers. A fee schedule implementedsuch that the fees apply as a maximum payment(allowing auto insurers to potentially pay less thanthe scheduled rate) or as a payment schedule forauto insurers only (so as to not raise costs for otherpayers) would most effectively reduce medical pric-es. If the fee schedule dictates the price of all ser-vices related to auto accidents, then health and dis-ability insurers may end up paying higher prices thanthey were before. This would not only raise somemedical expenditures related to auto accidents, butcould raise health insurance pre-miums as well. Because health in-surers in particular have marketpower to negotiate prices, if theprices related to auto accidents risecompared to other services, thenhealth insurers may decide to of-fer lower priced health care poli-cies that exclude coverage for in-juries related to auto accidents.

Fee schedules can be burdensome to providers asthey may prohibit them from charging and receivingthe amounts necessary to cover the costs of proce-dures. Costs associated with medical services varyamong providers, but fee schedules, perhaps withsome basic adjustments for location, require set re-imbursements for each service. If reimbursementrates from certain payers are too low, providers mayshift costs to other payers or stop providing servicesto those patients altogether. Medicaid and Medicareprovide an example of the latter case as patients cov-ered by these programs are not accepted by someproviders because of low reimbursements rates. Inan extreme case, providers may close altogether –evidence of the impact of Michigan’s low Medicaidreimbursement rates is the contiguous 16 county areaof the upper part of the lower peninsula that is with-out obstetrical services (Medicaid and non-Medicaid).30

Finally, there is the question of whether governmentprice intervention is warranted. In most other in-dustries, businesses are permitted to charge pricesat levels the market can bear. Fee schedules wouldbe one of just a few pricing interventions by thegovernment in private industry.

Increase Number of Health or DisabilityInsurers as Primary Payers for Claims

Auto insurance consumers in Michigan can currentlyelect to coordinate benefits with their health or dis-ability insurance policy (except for with Medicaid,Medicare, or a Medicare supplemental policy). Inthese cases, auto insurance pays for any reasonableexpenses that are not covered by the health or dis-ability policy.31 Customers that elect another insur-ance as the primary payer may see discounts in theirauto insurance premiums,32 however, not all healthor disability insurance policies will provide benefits

for injuries related to autoaccidents.g

Increasing the number of auto in-jury medical services paid for byhealth insurers has been shown toreduce prices. When Coloradolawmakers repealed no-fault insur-ance and reinstituted a tort-based

auto insurance system in 2003, auto injury claimswere shifted from the auto insurer to the health in-surer. Consequently, provider reimbursement ratesfell roughly 40 percent.33

At least three policy options can make this change:1) make it simpler for auto insurance customers toelect their health insurer to be the primary payer; 2)require that health insurers assume payment forclaims above or below a certain dollar amount (say,above a PIP cap or below the MCCA retentionamount); or 3) require health insurers to assumepayment for all claims (discussed below).

By 2014 when the federal Patient Protection andAffordable Care Act is fully implemented, health planswill no longer limit annual or lifetime benefits foressential services. If auto accident medical claimsare paid entirely by the health insurer, then cata-strophically injured auto accident victims will likely

g Some health insurance policies exclude or restrict med-ical coverage for injuries related to auto accidents if theinjured person is also covered by an auto insurance pol-icy. This exclusion is most common among self-insuredemployer health insurance plans.

Increasing the number ofauto injury medical servic-es paid for by health insur-ers has been shown to re-duce prices.

CRC Report


have access to covered medical benefits for the du-ration of their injuries. However, the benefits willlikely not be as generous under health insurance asthey would be under the current auto medical cov-erage. If auto insurers are always the secondarypayers then benefits should remain intact.

Coordination of benefits may increase some admin-istrative costs as auto insurers provide benefits thatmany health insurance plans may not. Residentialand attendant care and rehabilitation benefits aretypically limited under health insurance plans.

Whether this reform will providesignificant cost savings is debat-able, though positive savingsshould occur. Based on CRC inter-views with auto insurers and healthinsurers, at least half of all currentauto insurance policyholders haveelected a health insurer as a pri-mary payer. Additionally, if theremaining auto insurance plansdesignate a health insurer as a pri-mary payer, then under the currentstatute auto insurers will still be required to cover“reasonable” expenses beyond what is covered byhealth insurers. Health insurers tend to have limita-tions on rehabilitation services and may not coversome alternative treatments such as massage ther-apy and acupuncture. Facility and attendant carecoverage is also frequently limited to a discrete timeperiod by health insurers; these costs make up nearly60 percent of the MCCA loss payments and healthinsurers’ contributions to this expense may not besignificant in the long run.

Cost-shifting may occur under all reforms that shiftauto accident coverage to health insurers. As healthinsurers absorb these new costs, they will likely buildthe expense into health insurance premiums. Healthinsurance premiums are paid for by the insured andoften by their employers. For those that have em-ployer sponsored health insurance, the cost increasewill be disproportionately shifted to employers who,on average, pay 70 percent of employer sponsoredhealth insurance premiums.34 To compensate forthese increased costs, employers may forgo expan-sion or reinvestment, reduce the benefits afforded

to employees, or reduce current wages or futurewage increases.

Automobile Insurers Pay Amount CustomarilyReceived

Section 3157 of the Insurance Code states that, “Thecharge shall not exceed the amount the person orinstitution customarily charges for like products, ser-vices and accommodations in cases not involvinginsurance.” Because few payers other than auto in-surers pay the amount they are charged, changing

this sentence so payment focuseson the amount received rather thanthe amount charged will reducecosts for auto insurers as well astotal health care spending. Manyhealth insurers are able to negoti-ate prices using Medicare as abaseline; a similar strategy couldbe used to ensure that auto insur-ers are not paying significantlymore than others for the same ser-vices.

Allow Automobile Insurers to Pay HealthInsurance Prices

In cases where the health insurer is the primarypayer, providers may charge the health insurer lessfor a service for an individual patient than they wouldcharge the auto insurer once the health insurer ceas-es coverage. For example, in a case where an autoaccident victim requires physical therapy and hascoordinated their benefits with their health insurer,the auto insurer may take over payments after 60days. The amount charged to the auto insurer wouldbe higher than what was charged to the health in-surer even though it is the same patient with thesame condition receiving the same service.

One policy option that would reduce medical spend-ing would be to allow auto insurers to pay the sameprices as the claimants’ health insurance in caseswhere the health insurer was the primary payer.Providers would continue to bill services at the samerate but to a different payer once the health insur-ance benefits run out.

Cost-shifting may occurunder all reforms that shiftauto accident coverage tohealth insurers. As healthinsurers absorb these newcosts, they will likely buildthe expense into health in-surance premiums.



Policy Options that Target Claiming Behavior

Michigan auto accident claimants use more medicalservices and the strategies that will be most effec-tive in reducing medical spending will need to alterthe behavior of those involved in reporting and treat-ing claims. RAND researchers agree: “Unfortunately,many current reform proposals do little to alter theincentives faced by patients, physicians, and insur-ers who are considering the appropriate level of carefor a given injury. Without changing incentives toconsume care, it may be difficult to achieve long-term reductions in the cost of autoinsurance in Michigan.”35 The fol-lowing reforms attempt to addressthis claiming behavior.

Implement a Tort-based Systemwith Optional or Mandatory“Add-on” No-fault Insurance

If it is the case that an unsatis-factory portion of the medicalspending is due to auto accidentvictims using unnecessary procedures in order togain access to the tort system, then a system thatis tort-based, but has PIP coverage, may be effec-tive in reducing medical costs. This is a variationof no-fault insurance called “add-on” no-fault in-surance (see page 3). In this case, there would beno barriers to accessing the tort system, but someof the major policy goals of no-fault insurance (otherthan limiting access to the tort system) may re-main intact.

This system may be effective because victims haveaccess to the tort system and can sue for noneco-nomic damages. With access to the tort system al-ready established, some studies suggest that autoaccident victims will be less likely to run up theirmedical use. PIP paid claims per vehicle in stateswith “add-on” PIP insurance are lower than no-faultinsurance but higher than tort. Mandatory add-onPIP paid claims per vehicle are higher than thosewith the option to add-on no-fault insurance.36

Implement a Choice Insurance System

Allowing drivers to decide which type of insurancethey wish to purchase – no-fault insurance or tort –

has been successful in keeping costs low in the fewstates that offer choice. Kentucky, New Jersey, andPennsylvania allow consumers to choose betweenless expensive limited tort insurance and more ex-pensive full tort insurance. The latter allows acci-dent victims full right to recover damages againstthird parties, whereas the former allows victims torecover damages in excess of their PIP coverage.

In Pennsylvania, which has a choice system, the no-fault insurance sector of auto insurance grew from37 percent of drivers in 1993 to 53 percent of driv-

ers in 2005. Rates for no-fault in-surance in Pennsylvania have beenat or below the regulatory guide-lines. However, Pennsylvania re-quires only $5,000 in PIP cover-age which would hardly cover thecosts of catastrophic injuries andis likely responsible for keeping no-fault insurance costs down.37

Allow Consumer Choice inCoverage Levels

Another option that would allow consumers morepricing and coverage options is to permit insurers tooffer various levels of coverage. New Jersey offersthis model for PIP insurance. Legislation sets up abasic policy offering $15,000 in PIP. Standard poli-cies allow consumers to choose among various PIPlimits: $250,000, $150,000, $75,000, $50,000, or$15,000. All policies provide coverage up to$250,000 for catastrophic injuries. While New Jer-sey does have auto insurance premiums that aresome of the highest in the country, this may be re-lated to factors other than health expenditures.

Providing customers choice in how much risk theywould like to accept affords several advantages.RAND researchers point out that, “offering consum-ers broader choices rather than mandating gener-ous but expensive coverage could allow more indi-viduals to obtain affordable but less-comprehensivecoverage while permitting those satisfied with theexisting system to maintain their current coverage.”38

One study calculated that if Michigan policyholderswere offered a range of coverage levels, policyhold-ers that choose the $50,000 option (the minimum in

Allowing drivers to decidewhich type of insurancethey wish to purchase – no-fault insurance or tort – hasbeen successful in keepingcosts low in the few statesthat offer choice.

CRC Report


this example) would expect to save 11 to 13 percentand as much as 16 percent in premium costs com-pared to the unlimited coverage option.39

Several studies suggest that when faced with thesedecisions, consumers chronically underinsure them-selves; in a few states that offer various coverageoptions, 95 percent of consumers purchase the min-imum required PIP coverage.40 One study estimatesthat between 75 percent and 90 percent of Michi-gan drivers would purchase less than lifetime PIPcoverage if given a choice.41 Whilethis certainly decreases the cover-age for a large number of drivers,data show that 94.4 percent ofclaims cost $50,000 or less.42 Anunderinsured accident victim woulduse their health insurance or wouldpay out-of-pocket for medical ex-penses that exceed the auto insur-ance coverage.

Switching to a Dollar TortThreshold

Comparisons of total injury costs among no-faultinsurance states with verbal versus dollar tort thresh-olds show that the former have significantly highercosts. This may be evidence that cost containmentis more plausible under dollar thresholds. Research-ers tracked trends in absolute cost levels for bodilyinjury plus PIP and found that they are higher amongno-fault insurance states with verbal thresholds(Michigan, New York, and Florida, which are alsolarger) compared to states with dollar thresholds.43

However, no-fault insurance states with a dollarthreshold are also smaller and less densely populat-ed which may lead to lower injury costs. More re-search would need to be done on the ease of con-taining costs among different types of tort thresholds.

Allow Automobile Insurers to Implement CostContainment Measures

If auto insurers are to remain the primary medicalpayers for auto injuries then allowing and encour-aging auto insurers to implement cost containmentmeasures can help address high costs and spend-ing. A great deal of legislation addresses cost con-

tainment in the health care industry and policies re-quire and incentivize health insurers and providersto reduce costs and improve health outcomes. Thestate continuously implements policies designed toreduce spending for Medicaid through various costcontainment measures. Uniquely, Michigan’s autoinsurance does not contain cost containment mea-sures related to medical spending and some provi-sions make it difficult or impossible for auto insur-ance to initiate such changes on their own.

Health insurers have a multitudeof cost containment options at theirdisposal, many of which could beeffective in the auto insurance in-dustry as well; some policies mayhave no negative effect on healthoutcomes and may even improveoutcomes. Policies that encouragealternative payment systems (suchas managed care or global pay-ment), would reduce the pricespaid for services as well as induceproviders to only provide services

that increase the wellness of the accident victim.Currently, auto insurers can provide policyholderswith premium discounts by electing to participate ina managed care program or a preferred providernetwork, but auto insurers have no tools to requirepatients to abide by the requirements that makethese options more affordable. Similarly, auto in-surers have limited market power to switch from thecostly fee-for-service payment model to a more costeffective one, such as global payments.

One study proposes that the incentives of Michigan’sno-fault insurance increase claiming behavior by vic-tims and medical providers. In this case, reformsthat target this behavior would be most effective indriving down unnecessary medical costs associatedwith auto accidents.44 Health insurers utilize manystrategies to decrease usage among the insured withthe hope that only high-value services are utilized.Patient cost-sharing has been shown to be effectivein reducing health service use, however, there isdebate regarding the effect on health outcomes.Specifically, unnecessary or low-value health servic-es may be reduced by implementing health caredeductibles, similar to those paid when there is prop-

Uniquely, Michigan’s autoinsurance does not containcost containment measuresrelated to medical spendingand some provisions makeit difficult or impossible forauto insurance to initiatesuch changes on their own.



erty damage, and introducing co-payments or co-insurance for all or just some types of treatments.Again, auto insurers are not permitted to chargedeductibles or fees that are not approved by theinsurance commissioner.45

CRC’s recent paper Health Care Costs in Michigan:Drivers and Policy Options provides other policy op-tions, such as developing and pro-moting evidence-based medicalguidelines that in combinationwith auto insurance reform couldplay a major role in reducing ex-cessive health care costs and im-proving health outcomes. How-ever, many of the cost controloptions afforded to health insur-ers may not be appropriate forcatastrophically injured patients.

Reform Options that May Make the LargestImpact on Medical Costs

Capping Medical Care Coverage

Michigan is the only no-fault insurance state thatprovides unlimited medical benefits to victims of autoaccidents. While injuries related to auto accidentsmay be severe and require treatment and care forthe lifetime of the victim, few other insurance poli-cies provide this same level of generous and unlim-ited medical coverage. Therefore, an option avail-able to state policymakers is to cap medical benefitspaid by auto insurers.

With the enactment of the federal Patient Protectionand Affordable Care Act (ACA) in 2014, Michiganresidents will be required to have health insurance.Federal health insurance premium subsidies andstate-level expansion of Medicaid will help makehealth insurance more affordable for those youngerthan age 65. Additional provisions in the ACA donot allow health plans to limit annual or lifetime ben-efits for essential services. However, many healthplans do not provide as many services as are typi-cally provided by auto insurance coverage and theintensity and comprehensiveness of care, and po-tentially the health outcomes of those injured, couldbe negatively impacted.

If Michigan’s insured drivers no longer pay for thecatastrophically injured through the MCCA, at leastsome of those expenses will be shifted to the state’sMedicaid program. As the catastrophically injuredspend down their assets to pay for their care, theywill begin to qualify for Medicaid; a study by PublicSector Consultants estimates that this may add asmuch as $30 million to the state’s Medicaid costs

annually.46 Medicaid program en-rollment growth would effectivelydistribute the costs to all Michigantaxpayers through higher taxes, orthrough a reduction in other stateservices as state resources areshifted to the Medicaid program.An increasing number of the cata-strophically injured will also be el-igible for and enroll in the federalMedicare and Social Security dis-

ability programs, having similar effects but at a na-tional level.

While some no-fault insurance states offer optionalPIP coverage, victims in the 11 other states with no-fault auto insurance can recover damages throughtort according to their respective tort thresholds.However, after PIP and lawsuit options are eliminat-ed or exhausted, victims apply for the same govern-ment assistance.

To reduce the exposure of auto accident victims toexorbitant medical costs related to catastrophic inju-ries, policymakers could enact a fairly high cap andone that captures the majority of claims. As of 2007,99.995 percent of claims cost less than $400,000,the 2007 retention level; so only 0.5 percent of claimswent to the MCCA.47 That same year, 33.4 percent ofclaims paid by the MCCA exceeded $1.0 million. By2012, 40.9 percent of claims paid by the MCCA ex-ceeded $1.0 million.48 These and similar data mayhelp policymakers determine the most appropriatecap, if they should implement one.

Depending on the amount of the benefit limit, theMCCA may or may not be necessary. However, thedebts of the current system, and the needs of thevictims currently covered under auto insurance pol-icies guaranteeing lifetime benefits would need tocontinue to be met.

As of 2007, 99.995 percentof claims cost less than$400,000, the 2007 reten-tion level; so only 0.5 per-cent of claims went to theMCCA.

CRC Report


Require all Automobile Accident Related Medi-cal Costs to be Covered by Health Insurers

A more extreme measure than having health insur-ers pay for some of the medical costs associatedwith auto accidents is to take auto insurers out ofthe business of providing medical coverage altogeth-er. Doing this would leave health insurers as theprimary and only payer for PIP coverage. This re-form allows medical services to be monitored andpaid for by insurers that specializein this area and may significantlyreduce health care costs and fu-ture growth.

While this will likely lower overallmedical spending, this could leadto higher priced health insurancepremiums. As health insurers’costs grow with the new expenseof covering auto related medicalexpenses, health insurers will passthese costs on to consumersthrough health insurance premi-ums. Because a large proportion of health insur-ance plans are paid for by employers (through em-ployer sponsored plans) and by Medicaid andMedicare, these groups could see their costs increasewith this policy change. However, assuming thatthis policy change does not alter the number of inju-ry claims associated with auto accidents, total healthcare spending should decline.

Of significance would be the resulting change in thegenerousness of the medical benefits offered to ac-cident victims. Currently, any “reasonable” medicalexpenses are covered by auto insurers, but health

insurers have many more coverage limitations thatmay impact recovery and health outcomes of acci-dent victims.

Repeal No-fault Insurance and Reinstitute aTort-based Automobile Insurance

Based on the available data, the medical costs ofthe no-fault insurance system are driven in large partbecause auto insurers are the primary payers. Tort-

based systems do not meet thesame policy goals as a no-fault in-surance system, but they are lessexpensive because medical provid-ers are more likely to bill healthinsurers, reducing medical costs aswell as reducing auto insurancepremiums.

Several states that once had a no-fault insurance system repealedthose laws in favor of a tort-basedsystem. Average liability premiumsin Georgia, Connecticut, and Colo-

rado, all of which repealed no-fault insurance, de-clined sharply following repeal. Whether or not pre-miums declined due to lower medical costs has notbeen verified. However, it is likely that with medicalcosts making up 30 percent of premiums there wassome decline in medical costs that resulted in lowerpremium prices. Other data that show lower medi-cal expenditures in tort-based states support thetheory that premiums declined at least in part be-cause of lower medical costs and use. Studying thesestates can help Michigan policymakers assess whatoutcomes may occur if they were to repeal, ratherthan reform, no-fault insurance.

A more extreme measurethan having health insurerspay for some of the medi-cal costs associated withauto accidents is to takeauto insurers out of thebusiness of providing med-ical coverage altogether.



Summary of Policy Issue

Michigan auto insurers pay for higher medical costsrelated to auto accidents than do auto insurers inmost other states. This analysis identified as rootcauses that:

1. Auto insurers pay higher prices for the samemedical services than do private health in-surers, workers’ compensation, and Medi-care;

2. Those injured in auto accidents in Michiganhave higher rates of utilization of health careservices than those injured in auto accidentsin other states; and

3. Those injured in auto accidents are entitledto lifetime medical care.

CRC’s analysis of the policy options suggest that it ispossible to address these issues while maintainingthe no-fault program and continuing to offer cata-strophic coverage in the case of severe accidents.The ability to do so would provide for an opportuni-ty to reign in at least one avenue of the escalatingcost of medical care.

Health Care Prices. If state policymakers want toaddress the higher prices paid by auto insurers formedical services related to auto accidents they canchange conditions in the Insurance Code requiringauto insurers to pay the full amount billed. The op-tions for policymakers are to allow auto insurers tocreate fee schedules for medical services coveredby PIP insurance; to increase the number of healthor disability insurers as primary payers for claims; toallow automobile insurers to pay the amounts cus-tomarily received; or to allow automobile insurersto pay health insurance prices. Each of these wouldnot alter the primary features (mandatory PIP, un-limited medical benefits, and a verbal tort thresh-old) of the program in a fundamental way, but wouldbring tools available to other payers of health insur-ance to the no-fault program. With the implemen-

tation of the Affordable Care Act in 2014 and itsprovisions forbidding health plans from limiting an-nual or lifetime benefits for essential services, therewill be more options available to pay for catastroph-ic care going forward.

Higher Rates of Utilization. If state policymakerswant to address the higher rates of health care uti-lization due to auto accidents, they have severaloptions to bring utilization in line with that in otherstates. The options consist of implementation of atort-based system with optional or mandatory “add-on” no-fault insurance; implementation of a choiceinsurance system; allowing consumers to choosecoverage levels; switching the system to a dollar tortthreshold; or allowing automobile insurers to imple-ment cost containment measures. Some of thesereform options would cause changes to the level ofmedical benefits and may alter the number of tortclaims, but would bring tools available to other pay-ers of health services to the no-fault program.

Lifetime Medical Care. State policymakers haveoptions for addressing the high cost of lifetime med-ical care, including: capping medical care coverage;requiring all automobile accident related medicalcosts to be covered by health insurers; and repeal-ing no-fault insurance and reinstituting a tort-basedautomobile insurance. Adoption of any of theseoptions would fundamentally change the no-faultprogram.

It is possible that reform of the health care pricingand the rates of utilization will lessen the need forlifetime medical care and the costs associated withlifetime provision when it is necessary. Additionally,policymakers may want to further investigate thetypes of injuries currently covered by the MCCA.Table 5 (on page 12) shows that brain injuries havebeen declining as a share of total injury claims and ahigher number of back and neck and multiple frac-ture injuries have been meeting the retention thresh-old. The question policymakers might consider ishow these types of injuries should be paid – by thecatastrophic care funds or by other means.

CRC Report


Conclusion

This paper provides an overview of the medical costsassociated with no-fault auto insurance in Michiganand proposes a variety of policy options that mayreduce medical spending associated with auto acci-dents, and consequently auto insurance premiumsas well. Auto insurers’ primary responsibility of pay-ment and their statutorily limited market power tonegotiate lower payments with providers and imple-ment cost controls is principally responsible for themajority of excess health care spending related toauto accidents. However, other features of Michi-gan’s no-fault structure may be causing higher med-ical spending including its verbal tort threshold andunlimited lifetime medical benefits for catastrophi-cally injured accident victims.

Whether or not higher medical expenditures relatedto no-fault insurance claims are caused by over-claim-ing, higher prices, and a general lack of cost con-trols or because claimants are receiving a more ap-propriate level of care compared to tort-basedsystems is unclear. More research should examinethis question and determine if there are greater in-centives for fraud or to claim inappropriate care whenauto insurers are the primary payers rather thanhealth insurers. Regardless, medical spending ishigher in no-fault insurance states, particularly thosewith verbal thresholds, and policymakers in Michi-gan must determine whether or not there is suffi-cient value in the current system to justify its priceor if reforms should be made.

Ultimately, policymakers will need to select policiesthat best match their priorities related to auto insur-ance. This discussion did not focus on insurancepremium costs, but rather the role of no-fault insur-ance in driving medical prices overall. Because autoinsurers pay higher prices than other insurers forhealth care services and there are barriers to pro-tecting against over- and unnecessary use of themedical services, no-fault auto insurance is playinga role, albeit small, in overall medical inflation inMichigan.

With the current structure of the auto insurance sys-tem, auto insurers, and consequently, Michigan driv-ers, are subsidizing the health care system by pay-ing higher prices than other payers for identicalservices. In the same way that policymakers re-quire and encourage health care providers and healthinsurers to decrease the costs of the health caresystem, policymakers should be using the same lensto scrutinize excessive spending in health care fromauto accidents. Some actions would have no im-pact on the major features of no fault – unlimited,lifetime benefits; verbal tort threshold; and manda-tory PIP – but could still reduce health care spend-ing, and consequently, auto insurance premiums.Policymakers should consider reforms to Michigan’sno-fault insurance that have little to no impact onaccident victims but would potentially lead to signif-icant reductions in health care spending related toauto accidents.



Endnotes

1 Report 383: Health Care Costs in Michigan: Drivers and Poli-cy Options. Citizens Research Council of Michigan, May 2013.www.crcmich.org/PUBLICAT/2010s/2013/rpt383.html

2 National Health Expenditures 2010: Sponsor Highlights. Cen-ters for Medicare and Medicaid Services, Office of the Actuary,National Health Care Statistics, 2010.

3 Anderson, James M., Paul Heaton, and Stephen J. Carroll.The U.S. Experience with no-Fault Automobile Insurance: ARetrospective. RAND Institute for Civil Justice, Santa Monica,CA: 2010.

4 Anderson, James M., Paul Heaton, and Stephen J. Carroll.The U.S. Experience with no-Fault Automobile Insurance: ARetrospective. RAND Institute for Civil Justice, Santa Monica,CA: 2010.5 MCL §500.31356 MCL §500.31047 Anderson, James M., Paul Heaton, and Stephen J. Carroll.The U.S. Experience with No-Fault Automobile Insurance: ARetrospective. RAND Institute for Civil Justice, Santa Monica,CA: 2010.

8 Anderson, James M., Paul Heaton, and Stephen J. Carroll.The U.S. Experience with no-Fault Automobile Insurance: ARetrospective. RAND Institute for Civil Justice, Santa Monica,CA: 2010. And MCL §500.3101-500.3179.

9 Anderson, James M., Paul Heaton, and Stephen J. Carroll.The U.S. Experience with no-Fault Automobile Insurance: ARetrospective. RAND Institute for Civil Justice, Santa Monica,CA: 2010.10 Heaton, Paul. Auto Insurance Reform in Michigan: WhatCan the Data Tell Us?, RAND Corporation, 2010.11 Heaton, Paul. Auto Insurance Reform in Michigan: WhatCan the Data Tell Us?, RAND Corporation, 2010.12 Heaton, Paul. Auto Insurance Reform in Michigan: WhatCan the Data Tell Us?, RAND Corporation, 2010.13 Munson Medical v Auto Club Insurance Association N.W.2d49 (Mich.App. 1996)14 Anderson, James M., Paul Heaton, and Stephen J. Carroll.The U.S. Experience with No-Fault Automobile Insurance: ARetrospective. RAND Institute for Civil Justice, Santa Monica,CA: 2010.15 Heaton, Paul. Auto Insurance Reform in Michigan: WhatCan the Data Tell Us?, RAND Corporation, 2010.16 Heaton, Paul. Auto Insurance Reform in Michigan: WhatCan the Data Tell Us?, RAND Corporation, 2010.

17 MCL §500.3107(1)(a)

18 Michigan Catastrophic Claims Association, Injury Type Sum-mary Inception to Date (as of June 30, 2012) http://michigancatastrophic.com/LinkClick.aspx?fi let icket=b3E7fvqaXcU%3d&tabid=294319 MCL §500.3107(1)(a)

20 Michigan Catastrophic Claims Association, MCCA Loss Pay-ment Summary by Category. http://michigancatastrophic.com/LinkClick.aspx?fileticket=0uMqjvZ%2fz2o%3d&tabid=294321 Bonkowski v Allstate Insurance Co. and Douglas v AllstateInsurance Co, 492 Mich. 241 (2012)

22 U.S. National Highway Traffic Safety Administration, TrafficSafety Facts, annual.

23 U.S. National Highway Traffic Safety Administration, TrafficSafety Facts, annual.24 Anderson, James M., Paul Heaton, and Stephen J. Carroll.The U.S. Experience with no-Fault Automobile Insurance: ARetrospective. RAND Institute for Civil Justice, Santa Monica,CA: 2010. pg. 66.

25 MCL §500.3107(1)(a)

26 Agemy, Erin and Alex Rosaen. Impact of Proposed “PIPChoice” Law in Michigan: The Potential Effects of Changes toPersonal Injury Protection Liability Law. Prepared by of Ander-son Economic Group, LLC for the Coalition Protecting Auto No-Fault. 2011.27 Heaton, Paul and Eric Helland. Does Treatment Respond toReimbursement Rates? Evidence from Trauma Care, RANDCorporation, WR-648-ICJ, 2009.28 Mitchell DecisionPoint® and New Jersey Auto Medical FeeSchedule, Accessed August 8, 2013 www.state.nj.us/dobi/pipinfo/aicrapg.htm29 Miller, Michael J. Private Passenger Automobile Analysis ofNo-Fault Legislative Reforms. EPIC Consulting, LLC on behalfof the Insurance Institute of Michigan. June 2007.30 The West Branch Regional Medical Center in Ogemaw Coun-ty closed its obstetric unit in 2010 citing underfunding of theMedicaid program as forcing, “many of the hospitals in North-ern Michigan out of the [obstetric care] business and unlesssomething is done, the trend will continue.”West Branch Re-gional Medical Center Health Report. Summer 2010.www.wbrmc.org/DOCS/Health%20Report-Summer10.pdf31 2008 Buyers’ Guide to Auto Insurance. Department of Laborand Economic Growth, Office of Financial and Insurance Reg-ulation.32 MCL §500.3109a33 Heaton, Paul and Eric Helland. Does Treatment Respond toReimbursement Rates? Evidence from Trauma Care, RANDCorporation, WR-648-ICJ, 2009.

CRC Report


34 Centers for Medicare and Medicaid Services, Office of theActuary, National Health Care Statistics, 2011.35 Heaton, Paul. Auto Insurance Reform in Michigan: WhatCan the Data Tell Us?, RAND Corporation, 2010.

36 Anderson, James M., Paul Heaton, and Stephen J. Carroll.The U.S. Experience with no-Fault Automobile Insurance: ARetrospective. RAND Institute for Civil Justice, Santa Monica,CA: 2010.37 Anderson, James M., Paul Heaton, and Stephen J. Carroll.The U.S. Experience with No-Fault Automobile Insurance: ARetrospective. RAND Institute for Civil Justice, Santa Monica,CA: 2010.38 Reducing Michigan Auto Insurance Rates. RAND Corpora-tion, 2010.39 Agemy, Erin and Alex Rosaen. Impact of Proposed “PIPChoice” Law in Michigan: The Potential Effects of Changes toPersonal Injury Protection Liability Law. Prepared by AndersonEconomic Group, LLC for the Coalition Protecting Auto No-Fault.2011.40 Agemy, Erin and Alex Rosaen. Impact of Proposed “PIPChoice” Law in Michigan: The Potential Effects of Changes toPersonal Injury Protection Liability Law. Prepared by of Ander-son Economic Group, LLC for the Coalition Protecting Auto No-Fault. 2011.41 Agemy, Erin and Alex Rosaen. Impact of Proposed “PIPChoice” Law in Michigan: The Potential Effects of Changes toPersonal Injury Protection Liability Law. Prepared by of Ander-son Economic Group, LLC for the Coalition Protecting Auto No-Fault. 2011.42 Miller, Michael J. Private Passenger Automobile Analysis ofNo-Fault Legislative Reforms. EPIC Consulting, LLC on behalfof the Insurance Institute of Michigan. June 2007.43 Anderson, James M., Paul Heaton, and Stephen J. Carroll.The U.S. Experience with No-Fault Automobile Insurance: ARetrospective. RAND Institute for Civil Justice, Santa Monica,CA: 2010.44 Heaton, Paul. Auto Insurance Reform in Michigan: WhatCan the Data Tell Us?, RAND Corporation, 2010.

45 MCL §500.3109(3)

46 The Impact of Reducing PIP Coverage in Michigan, Preparedby Public Sector Consultants for the Michigan Brain Injury Pro-vider Council. August 2011.

47 Miller, Michael J. Private Passenger Automobile Analysis ofNo-Fault Legislative Reforms. EPIC Consulting, LLC on behalfof the Insurance Institute of Michigan. June 2007.

48 House Fiscal Agency. Legislative Analysis. HB 4612, No-Fault Auto Insurance Amendments. Updated on May 30, 2013.

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