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Wednesday, May 23, 2012

Reforming the Reform: No-Fault Auto Insurance

A couple of weeks ago (while I was busily grading papers and exams), Susan Ladika published a piece at that was picked up by Fox Business News entitled Reforming Reform:  Fixing no-fault insurance

In the article, the author discusses current efforts to reform no-fault insurance, given its greater-than-expected costs.  No-fault has been successful in some ways.  The article often relies on a 2010 RAND study by James M. Anderson, Paul Heaton, and Stephen J. Carroll, The U.S. Experience with No-Fault Automobile Insurance.  That study, at pages 96-97, found that "no-fault systems provide reimbursement for a larger proportion of economic losses, greater satisfaction with the speed of payment, and faster resolution of third-party claims."  However, no-fault was advertised as being cheaper than liability insurance.  Instead, in most states, it has been just as expensive, if not more so.  As a result, no-fault, which once seemed on the cusp of becoming the law of nearly every state, has lost traction.  What went wrong and how can it be fixed?

First, the thresholds were set poorly.  No-fault was designed to compensate the injured for small and moderate injuries and leave tort for serious injuries.  This would be more efficient and would leave the full (and expensive) tort system for those claims that were sufficient to merit it.  The key is to separate small and moderate claims from serious ones.  This was done by thresholds.  However, monetary thresholds were set too low and verbal thresholds were too vague.  The Ladika article points to three jurisdictions, Georgia, Connecticut, and Colorado, that moved back to liability insurance from no-fault.  In all three jurisdictions, costs were reduced when the state reverted to liability insurance.  However, each jurisdiction had a monetary threshold (as part of a combination threshold) that was miserably low:  Georgia's was $500, Connecticut's was $400, and Colorado's was $500 (though raised to $2,500 before it was repealed in 2003).  Almost any auto accident will create $500 in costs, which means that the tort system will operate in addition to the no-fault system for such claims.  As such, costs are bound to increase.   

In addition to being set too low, monetary thresholds, even if part of a combination threshold, created incentives for padding medical bills, inequitably treated those living in low cost areas, and provided an easy way for no-fault opponents to undermine the law.  Instead, jurisdictions should use a verbal threshold that is sufficiently limited and clear to reduce litigation. 

Second, protections against fraud were not included.  This may be understandable.  No one thought that no-fault would have fraud problems; tort, with its payment for pain and suffering, was supposed to be the favored target for fraud.  However, that was overly optimistic.  No-fault has attracted considerable fraudulent claims in many jurisdictions, and it must be dealt with to keep costs under control.  This may be jurisdiction-specific, but New York has proposed legislation that would:  (1) modify the requirement that insurers pay claims within 30 days if there is a suspicion of fraud; (2) allow the insurance department to review and decertify unscrupulous medical providers from billing and collecting no-fault benefits; and (3) increase penalties and enforcement for insurance fraud.

Third, no-fault insurers did not implement the same restrictions that health insurers routinely use.  The RAND study found that a major problem with no-fault was spiraling health care costs.  However, it was not clear whether total costs increased or there was a reallocation of costs from health insurance to auto insurance.  No-fault insurers need to implement restrictions, such as fee schedules and medical protocols, that are already used by health insurers.  For example, New Jersey recently implemented precertification medical guidelines or "Care Paths."  Care Paths set forth the particular paths of treatment that are acceptable for specified injuries; when the treatment plan deviates from the Care Paths, the treatment will be reimbursed only where demonstrated to be reasonable and necessary. 

Another improvement would be to make no-fault into a choice plan.  Allow motorists to choose between tort and no-fault.  Evidence from Kentucky, New Jersey, and Pennsylvania suggests that a large number of motorists will choose no-fault if given the option.


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Insurance fraud is out of control in NJ and the laws need to be reformed if there is going to be any kind of significant change.

Posted by: Dylan | Jun 1, 2012 12:10:16 PM

Looks like to me that many of these "no-fault" programs were either just written very poorly or they are just not very good to begin with. Now, because there have been problems, it may be that no states will opt to use this form over liability requirements.

Posted by: Texas Insurance | Nov 19, 2012 4:51:41 PM

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