The consistent escalation of auto insurance premiums in Michigan tops the growing list of economic hardships facing residents and is arguably the most under-reported and easily fixable scandal that underscores how broken Michigan's 'No-Fault' system is and how ineffectual the State Legislature has become through their failure to address the problem.
When the insurance industry sold the notion of 'No-Fault' auto insurance to the public with promises of cost-containment and lower premiums back in 1978, they created the Michigan Catastrophic Claims Association - a private, non-profit association designed to reimburse auto insurers for Personal Injury Protection (PIP) benefits after they exceed $500,000 per claim.
Michigan is the only state in the union that guarantees unlimited lifetime medical care for auto-related injuries under its no-fault auto insurance system. Consequently, car owners are forced to buy personal injury protection as part of their policy, even if they already have personal medical coverage - in essence, being forced to buy two plans; one for themselves, and one for potential accidents victims.
The injured person's insurer pays out the first $500,000 for medical treatment; and the MCCA reimburses any amount above this threshold. The average PIP claim in Michigan is $45,000, according to the Insurance Institute of Michigan, much higher than any of the other 11 no-fault states; and the situation has now reached a tipping point, with premiums increasing by 40-50% for many Michigan drivers over the last two years alone.
Red Lining by Zip Code * The City Where No One Has Car Insurance
Two factors have converged amidst this witch's brew of industry concoction. Michigan has one of the highest uninsured driver rates in the nation, with an estimated 19% of motorists going without insurance; and the rate in poor urban areas like Detroit is even higher, with some estimates as high as 60%.
And depending upon the zip code that you are registered to vote within, your insurance rates may triple. According to an analysis of rates from six major car insurance carriers, the average rate for a 40-year old driver with full coverage on a 2012 Honda Accord is about $4500 a year. Move a ZIP code or two outside the city and those rates drop by half or more. And that's for a driver with a clean record. Poor credit or violations drive that number up considerably.
Indeed, an ancillary manifestation of this phenomenon is witnessed with voter registration. According to Vincent Keenan, executive director for Publius, a voter-education non-profit in Michigan, increasing numbers of people are registering to vote in the suburbs where car insurance is cheaper. They use an address outside the city to renew their driver's licenses and register, then report that address to insurers. “It is effectively a poll tax,” notes Keenan.
Not to mention the way this phenomenon can shape elections.
Poorest Pay the Most * Reigning in the Medical Industry
Detroit is one of the poorest cities in the country with median income in 2011 at $25,193, about half the national average. Consequently, many residents 'drive dirty' because they simply can't afford car insurance.
To add fuel to this fire, the MCCA catastrophic fund limits keep rising. Initially the state required that insurance carriers are subject to the first $250,000 for medical claims and beyond that a claimant would go to the MCCA fund. But over the last few years that fund limit went to$350,000 and then $480,000 and now it is at $530,000. Not surprisingly, the MCCA Board of Directors is comprised of insurance industry representatives.
Another systemic problem is that many people will simply purchase insurance on a monthly payment plan and pay for a one month premium so they can obtain their driver's license and then drop the insurance. These 'birthday' policies result in a guy paying $150.00 down on his auto insurance, dropping the insurance, and then getting into an accident and suffering a close-head injury. While people driving uninsured do not receive benefits under no-fault, if they become quadriplegic or on the dole, they eventually become Wards of the State. So ultimately, we all pay and they still get covered.
Moreover, a majority of fraud with medical billings is centered in auto insurance PIP billings by health providers, with an estimated 5% of claims deriving from double-billings. When billing codes and fees are submitted to the MCCA, because insurance adjustors are not medical people, claims are paid when appropriate; however, many people already on kidney dialysis, for example, are billed twice through the MCCA even though they have a pre-existing condition, simply because the new claim is not caught by the adjustor.
Gov. Rick Snyder and some Republican lawmakers have been pushing for reform in an effort to curb these out of control rising insurance costs, but not surprisingly, the medical community and accident victims staunchly oppose proposals to limit PIP benefits.
Lawmakers last session proposed legislation to let drivers choose the maximum personal injury protection coverage, ranging from a maximum of $500,000 to $5 million; and Sen. Virgil Smith (D-Detroit) and Joseph Hune (R-Hamburg) have sponsored a bill to simply cap the PIP coverage at $50,000. The bill would also dissolve the MCCA once its liabilities are paid; but again, faces an uphill battle with fierce opposition from the medical community and accident victims to limit PIP benefits.
And similar to the case with the 'birthday policy' payer, if given the option of electing lower levels of coverage, should a driver get into an accident and use their limits of coverage, they would be quickly back to the State applying for Medicare or depleting other funds.
Addressing the Issues
As a partner at Great Lakes Bay Insurance Agency, located across from the County Building on North Michigan in Saginaw, Jason Kutchinski has extensive experience dealing with auto-related claims on many varied levels.
One proposal that he views as a solution to address this current mess with escalating rates is to simply have The Secretary of State offices throughout Michigan collect the MCCA charge up-front when a driver goes into the office to renew their license.
“Right now the State has the insurance company collecting money for the MCCA fund, probably because they don't want it to look like an extra tax on top of paying for a license renewal,” he explains. “But presently you also have a lot of 'birthday policies' with people paying 1/12th of their premium with no intention of making a second premium payment, so many drivers are not paying into this fund. But if they were required to pay their $186.00 directly into the MCCA fund at the Secretary of State's office, suddenly you would have everybody covered and every driver obtaining a license paying their fair share into the fund. This to me seems like a straightforward, simple, and effective solution.”
“Collecting MCCA funding through the insurance company is an inefficient way to collect,” he continues. “The fund is solvent right now, but collecting at the Secretary of State would control that number. Insurance companies have no control over that fund because it is state run.”
Adds Jeff Scott, also a partner at Great Lakes Bay Insurance, “The average person's car sits for maybe 20 hours per day and they might spend 30 hours a month driving. I'm seeing medical costs on car insurance going up to $250 to $275 per month, so they're paying almost as much for an auto policy as they would for a personal primary medical insurance policy. This only underscores the need for the State to take some action and relieve the situation, because it is definitely spiraling out of control. Driving a car is not a right it's a privilege, so it makes sense to have this PIP coverage paid for at the outset when a driver renews his license.”
“Right now the system is grossly unfair,” adds Scott. “People are working minimum wage and paying $170 per month for auto insurance if they have clean driving records. Recently I quoted somebody $1500.00 for a six month policy, which amounts to $3,000 per year. What are they going to do? Not buy auto insurance? It's either that or not have a car; and the fewer cars you have, the fewer gas stations, the fewer people paying into the MCCA fund. It's a downward spiral.”
“In Flint 28% of the cars driving on the road are not insured and in Saginaw its at 17%,” continues Scott. “That means for every 100 cars you see driving down the road 17 do not have insurance except for the day or month when they renew their plates. It all adds up. The higher these costs spiral out of control, the fewer people will be able to afford or carry insurance.”
“It's a volatile issue because its so political and because everybody drives, but its becoming unaffordable so we need to fashion changes,” concludes Scott. “It isn't limited to the MCCA fund, either. If a catscan is ordered a primary carrier might pay $1400 for it; but it might be charged at twice that level if an insurance company pays it out. There isn't any cost containment involved and we need a system whereby we have fixed rates for what we pay health providers for their services. We need to contain medical costs and the legislature could do that.”
“Right now if you have primary health insurance you get a $20.00 discount on your auto PIP coverage, but there should be a bigger discount than that to offer relief to consumers.”
Attorney Steven Gursten is head of Michigan Auto Law and agrees with this assessment. “Drivers who are uninsured and get injured in car accidents are not allowed to seek any compensation from at-fault drivers, even if the at-fault drivers were drunk or texting while driving,” he says. He also says he gets calls weekly about innocent people who suffered catastrophic injuries but were uninsured.
“I can't tell you how many people just lost their husband or wife in an accident and there's nothing I can do for them. I think it's a civil justice and a civil rights issue and the key problem is with excessive profit margins. I would like to see a state law that would empower the state insurance commissioner to consider profit margins in regulating car insurance rates.”
The industry, not surprisingly, disagrees, citing data from the Insurance Information Institute that shows Michigan dead last among states for insurer's 10-year average return on net worth on personal auto insurance from 2001 to 2010.
Four Plans for Solving the Problem
1) Pay the Annual PIP MCCA Fund charge at the Secretary of State Office During License Renewal. As discussed earlier, this would alleviate the pressure on responsible drivers now covering increases in the fund limits and also make sure that the PIP fund is fully funded by all licensed drivers on the road. If the cost for the fund is now $186 per year, this is what you would pay when renewing your license.
The argument that it is more efficient for the insurance companies to collect this fund does not hold water; plus if a person sold their car, yet have their plates for one year, a credit could be issued back to the insured driver.
2) Put Teeth Into Enforcement and Funnel Penalties Into the MCCA Fund. Right now if a person buys a car and gets their insurance and claims three days later their car does not work and they don't need insurance and consequently fail to continue with their premium payments, they end up 'driving dirty'. The Legislature needs to add teeth into verification and enforcement of auto insurance coverage by leveling penalties and fines against the offending driver that would be targeted to go directly into the MCCA fund, thus holding down costs. This would help reduce the numbers of people not paying into the fund and if the driver were pulled over by law enforcement and found not to have insurance, the courts could get an administrative fee, but all penalties should be targeted for the MCCA fund in order to take the pressure off the responsible driver. After all, every driver on the road forms the 'pool' for this fund.
3) Enforce Cost Containment on Fraudulent Medical Charges. The Michigan House Insurance Committee passed a bill (HB 4612) out of committee earlier this year designed to put in place cost controls and roll back the price of insurance by $125 per vehicle in the first year alone, but the proposed legislation is still waiting for a vote on the House floor.
“This should be another wake-up call to the Michigan legislature to act on no-fault reform when they return to session in the fall,” said Kurt Gallinger, Chair of the Michigan Insurance Coalition. “Something has to be done to end the gouging of Michigan drivers by Michigan hospitals and others in the medical community who are charging auto accident patients three to five times higher rates than anyone else. They are responsible for driving the cost of auto insurance through the roof.”
For 14 years, the mandated cost for providing unlimited health benefits through the MCCA has increased from $5.65 per car to $186.00 per car.
“Michigan's no-fault system is the last blank check in the U.S. healthcare system,” says Dr. Robert Hartwig, President of the Insurance Information Institute. HB 4612 would limit provider's charges to the same price paid by private insurers like Blue Cross, provide up to $1 million in medical coverage through their auto insurance and establish a fraud authority to combat auto insurance fraud.
But another reason the legislature needs to act on this is because cost containment was already tried by AllState when their adjustors made billing codes for every medical service and zip code and established 'reasonable and customary national charges' for various medical services and procedures. They were sued in a class action lawsuit spearheaded by Henry Ford Hospital out of Detroit claiming the insurance industry could not set the fee schedule for all the hospitals in the Detroit area; and the hospitals won the case in court. Therefore, it will take action by the legislature to establish that health providers must all use Blue Cross fee schedules to create uniformity and eliminate fraud.
4) Uniform Credit Rating. Governor Jennifer Granholm issued an Executive Order to ban the calibration of credit scores when determining auto insurance rates, given the adverse penalties leveled to lower income drivers. State Farm, Auto Owners and many large insurance companies spent lots of money on their infrastructure to set up a rating structure based on points of interest. But everybody should have the same protocol when credit scoring. 70 points of interest from one company can comprise 30 percent of the pie, depending upon how the individual companies weighs and calibrates its merits.
The insurance industry challenged this Executive Order and moved the jurisdiction of the court to Hastings, Michigan; where the court ruled that the Governor could not legislate from her seat. But now the legislature needs to act and ban credit scoring with auto insurance rates. If everyone had the same criteria and same formula for credit scoring this would offer much needed relief, especially to younger drivers attempting to establish their credit scores.