There are two schools of thought about how to analyze a benefits system. The first is to look at its overall function and how the various parts interrelate. The analysis is concerned generating revenues to match benefits paid, so there is sustainability in the balance of inputs and outputs. 

The other (increasingly common) approach is just to figure out how to maximize payouts for claimants. This approach does not focus on balance or sustainability. It’s the same basic approach one takes when finding a tax advantage or the shortest line in the grocery store. 

The quintessential system to illustrate the intersection of interests by these two schools of thought is workers compensation. Labor and management are there to work out the balance and the plaintiffs’ bar is there to maximize individual recoveries.

Michigan is considering reform of another no-fault system – the most generous auto accident reparations system in the country, and perhaps the world. From an actuarial perspective, it is not a balanced or sustainable system. The scam artists have turned the nation’s only remaining unlimited medical benefit system into a cornucopia, currently ranking third in the nation in the number of questionable medical claims.

The attendant care benefit, which allows relatives to provide home care, has been subject to abuse, and auto insurers are paying several times what health insurers do for identical treatments and care. 

As a free-market think tank, we see nothing wrong with providers negotiating rates based on competition. However, legislation may be needed to prevent a situation where one entire type of insurance has become a revenue escape value for limits on other kinds of insurance. Health, workers’ comp and auto personal injury coverage should not operate at a substantial discount from one another. The differences in fees should be based on competition in providing medical services, not on whether the patient drove into a tree or fell down the stairs.

It is the unlimited nature of the coverage for medical treatments and rehabilitation that has convinced Michigan residents that they have a great deal, which they find difficult to bargain away for any short-term rate rollback or future avoidance of substantially higher costs. 

In many ways, the timing of auto insurance reform in Michigan is advantageous. It may be trumped, however, by the enhanced fear regarding health care financing beget by the partisan war going on all around us over the new federal law. People have written online comments to Michigan newspapers declaring their opposition to any diminution in auto PIP (medical) coverage because of the high cost of expensive cancer treatments. Of course, cancer generally isn’t a result of auto accidents.

In policy terms, the solution proposed by the governor and his party is a comprehensive step toward a workable reparations system for treatment of auto accident victims.  Of course, any system where the average payment for medical claims exceeds $45,000 – more than twice as much as the next highest no-fault state— has lots of things wrong with it and will probably get worse. 

Gov. Snyder’s plan would establish a fraud agency, which has worked exceedingly well in similar states.  The industry would be assessed up to $21 million to fund it, and expects to save at least that much by wringing improper payments and a few criminal enterprises out of the system. 

A $1 million dollar limit for medical payments would continue coverage in the handful of serious injury cases that need lifetime care, before handing them over to regular health insurance. This is twenty times the amount currently required in any other state in the union.

When Pennsylvania shed its unlimited benefit system in the 1980s, they also instituted a $1 million dollar catastrophic injury fund for injuries that exceeded $100,000, but ultimately made it optional. Today, one can buy coverage for medical payments as low as $5,000 in Pennsylvania.

The Michigan Catastrophic Claims Association would be phased out, as claimants already in the system are compensated with lifetime benefits and a new non-profit association with increased transparency and stabilized funding would continue to pay for catastrophic claims.

All of these are valuable tools to preserve the Michigan auto insurance system, and worthy of enactment on their own. Michigan residents could have and should want a system which offers the protection they need for a long time into the future.

It is not irrational to hang on to something you value and are willing to pay for when the alternative seems risky and the proposed reform looks like giving up more than you are getting in return.  On the other hand, if the emotional arguments win the day and result in no legislation, the math gets a lot worse. 

Insured drivers are already faced with covering one in five drivers on Michigan roads who are uninsured, including nearly half of the drivers in large Michigan urban areas.  Responsible drivers in the Wolverine state are already paying a price that hardly anybody else is paying, including the nation’s highest percentage of their personal income for auto insurance. 

The representatives of the people should consider this set of options carefully, and talk to experts.  The opportunity before Michigan lawmakers is truly historic, albeit tough in the current environment. 

Of course, if you spend much time watching legislatures these days, you get the feeling that most of the easy stuff has already been done.

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