The Impact of Michigan’s No-fault Auto Insurance on Health Care Costs

Currently, the Michigan legislature is considering legislation that would reduce medical costs related to no-fault auto insurance (namely, HB 4612).  CRC’s new report Health Care Costs in Michigan: Drivers and Policy Options examines various health care cost drivers and solutions, including those for no-fault auto insurance.  Medical costs related to no-fault auto insurance are being driven by several factors including unlimited lifetime medical benefits, greater use of medical services by auto accident victims, and the payment structure for these medical services.

A study by the RAND Institute for Civil Justice looked at data over a 25 year period and found that auto accident related medical expenditures were higher in states with no-fault auto insurance systems compared to tort-based systems.  Auto accident victims in no-fault states utilize more medical services, and specifically, more specialty services.  However, more concerning is that medical cost inflation appears to be higher in no-fault states, which means that while more services are being used, residents in no-fault states are on average paying higher prices for those services.

The higher price inflation in no-fault states is correlated with, and not necessary caused by, no-fault auto insurance.  One explanation could be that under no-fault systems, auto insurers are the primary payers for medical care related to auto accidents and they tend to pay higher prices than health insurers for the same services.  Health insurers often negotiate prices with providers, and auto insurers may either have not enough experience in these negotiations or not enough market power to obtain lower prices.  Therefore, they end up paying higher prices than health insurers for the same medical services.

Several policies may circumvent these issues.  Policy can either intervene to make the health insurer the primary payer for auto accident related medical claims or require that the prices paid to providers are the same, regardless of the payer.  The impact of either of these changes should be lower auto insurance premiums.  In the either case the cost savings for auto insurance companies and auto insurance consumers will likely materialize in other markets or be shifted to other payers.

In the case where the health insurer is the primary payer, health insurance premiums may rise to cover these new medical expenses.  However, because health insurers are paying lower prices for the same services when compared to auto insurers, the subsequent rise in health premiums prices should theoretically be smaller than the savings in auto insurance premiums- resulting in a net consumer savings.  In both policy cases, providers will now receive less revenue.  In making up for lost revenue, providers may raise prices overall, or for a specific group of payers, typically private insurers (this practice is known as cost-shifting).  If cost-shifting occurs in this case, health insurance premiums may rise even more.  Whether or not any net benefit for consumers who have lower auto insurance premiums remains is difficult to ascertain.

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