Michigan legislators are considering reforming the state’s automobile insurance laws in order to save drivers money while still providing robust coverage. As it is, ill-conceived state mandates cause Michigan drivers to pay among the highest insurance costs in the nation for the coverage they receive.
The Citizens Research Council recently released a study examining why the system is so expensive. The details are complicated, but in the end it comes down to basic economics.
Michigan is unique among states in requiring personal injury protection coverage for all drivers, allowing those injured to sue at-fault drivers for bodily injury, and paying out unlimited medical benefits through catastrophic claims coverage (the next highest is New York, which limits payouts to $50,000).
More Claims, More Money
The report found Michigan residents make more claims requesting more money while medical providers charge auto insurers more for care. This leads to higher prices.
“Accounting for both higher prices and higher usage, medical claims in Michigan cost auto insurers 57 percent more than claims for similar crashes in other states; consequently, automobile insurance premiums are 17 percent higher on average,” the study stated. Holding price and medical care constant, the CRC said the average auto injury claim in Michigan should be $12,885; instead, it is $20,229.
Because of the state mandate for coverage, plus the fact that auto insurers are unable to negotiate the rates they are charged, incentives are distorted across the state’s insurance system. CRC found the claims from Michigan health providers are 24 percent higher than in other states, which inevitably leads to insurance companies paying more and passing the higher price on to consumers.
Claimants from the Michigan Catastrophic Claims Association more than doubled between 2002 and 2012, meaning insurance rates are heading upward and expected to skyrocket in the coming years.
Similar Care, Higher Prices
For every medical category, CRC found that compared to other state health care reimbursement programs, the medical costs associated with Michigan’s no-fault coverage are higher. That is, health providers charge much more for the same care. To take one extreme example: In Detroit, the reimbursement for no-fault insurance is 352 percent higher than Medicare and 227 percent higher than workers’ compensation insurance for an emergency room visit. In addition, for the 15 most common medical charges, no-fault insurance paid on average 190 percent more in Lansing and 193 percent more in Grand Rapids than Medicare, and 93 percent and 95 percent more than workers’ compensation, respectively.
The report covers many areas and is fairly complex, but it makes clear the reason for high costs: Since coverage is mandatory and insurers cannot negotiate on price, incentives for consumers shopping for insurance and medical providers requesting pay are distorted. Properly aligning the costs and benefits of Michigan’s insurance market will require reform laws by the state legislature.
Jarrett Skorup ([email protected]) is a research associate at the Mackinac Center for Public Policy.
“Medical Costs of No-Fault Automobile Insurance,” Citizens Research Council of Michigan: http://heartland.org/policy-documents/medical-costs-no-fault-automobile-insurance