Auto Insurance Reform Must Tackle Fraud

Published November 1, 2011

Motown’s home state is rocketing up the wrong sorts of charts these days. A recent survey from shows Michigan jumped over Louisiana in 2011 to take first place as the state with the nation’s highest average annual auto insurance premiums.

The main reason is simple: Michigan, unique among the 50 states, insists all consumers must purchase unlimited coverage for medical expenses. Improving this situation without gutting Michigan’s uniquely generous auto insurance benefits is going to require some real policy changes.

Last year, the price of auto insurance in the state jumped $443, to an all-time high of $2,541, nearly $1,000 more per year than the national average of $1,561. In most states, auto claims never get to be as big as they do in Michigan because most individuals rely on private health insurance and government programs to pay the most expensive medical claims.

Most states also allow consumers a choice of auto coverage types. Under proposals pending before both houses of the Michigan legislature, consumers would be allowed to choose levels of protection that would range from $500,000 to $5 million instead of the one-size-fits-all policy foisted on everyone in the state today. Those levels would still dwarf the $250,000 requirement in New Jersey, the state with the next-highest mandatory medical benefits level. Nonetheless, consumers who opted for the lower coverage could save big on auto insurance.

The state also can and should bring medical costs under control. According to a study by the Rand Institute for Civil Justice, Michigan insurers pay 57 percent more to settle an auto crash injury claim than insurers in other states. Unlike private health insurers and the heavily regulated workers’ comp system, Michigan auto insurers still have to pay, basically, whatever hospitals decide to charge rather than following a fee schedule. That leads to higher costs.

The lack of cost controls isn’t the only concern–fraud is probably a bigger problem. Some of the medical bills involve procedures that were never done–there are fly-by-night clinics all over the state–and even more are “up-coded” to reflect more expensive treatments to people who have reasonably simple injuries. According to the National Insurance Crime Bureau, a nonprofit insurance industry group that looks into fraud, one in every 10 claims in the state is fraudulent, costing Michigan policyholders $3 billion annually. The NICB reports Michigan ranked first in per-capita questionable medical claims submitted–and such claims have risen by nearly 200 percent in the past year.

As lawmakers look to improve Michigan’s auto insurance environment, it is important that they examine the full gamut of solutions to bring down costs. Although all the proposals before the legislature–more choice for consumers and fee schedules among them–deserve consideration, efforts to fight fraud should come first.

One option is to create something similar to the state’s Auto Theft Prevention Authority, which has been successful in catching $59 million of fraudulent auto theft claims since 1996, to fight other forms of auto insurance fraud as well. A similar fraud authority established in Pennsylvania has prevented almost $115 million in losses.

Reform of Michigan’s auto insurance system is bound to be controversial, and with good reason. No one wants to see consumers exposed to risks they cannot afford to bear. But with an estimated 17 percent of the state’s drivers currently uninsured, the existing system clearly does not offer the kind of protection Michiganders deserve.

R.J. Lehmann ([email protected]) is deputy director of The Heartland Institute’s Center on Finance, Insurance and Real Estate.