Lawmakers Agree Car Insurance Too Expensive — But Not On How To Fix It

Since its enactment in 1973, Michigan’s no-fault automobile insurance law has been blamed for steep increases in premiums paid by drivers. Michigan car insurance premiums are twice the national average.

Previous efforts to reform the law failed to gain a consensus, but several legislators are pursuing changes they claim will bring automobile insurance costs more in line with the $1,325 per year national average. The average cost of insurance for Michigan motorists is $2,738 per year. Proponents of these changes argue that more affordable premiums would reduce the number of uninsured drivers in the state.

At present, nearly 20 percent of Michigan drivers are uninsured, many because they cannot afford the cost. An estimated 50 percent of Detroit drivers are uninsured, according to 2012 statistics provided by the National Association of Insurance Commissioners. The association reported that the average premium for drivers was $3,400 in Detroit but $1,700 in neighboring communities.

Policymakers and analysts generally agree that Michigan’s mandatory and unlimited personal injury protection (PIP) is the main culprit behind the high costs. Insurers and studies contend that the mandate allows hospitals and other health care providers to extract higher medical care reimbursements for auto crash victims.

“Michigan doesn’t have the highest auto insurance rates in the country, but unlimited benefits for personal injuries should get them there at some point,” said Alan Smith, a senior fellow at the R Street Institute, a nonpartisan policy research organization that has conducted state-by-state research into automotive insurance.

“Every other major payer in the health care system operates under some form of fee schedule, and this would be helpful [if adopted for Michigan automotive insurance],” said Smith. “Otherwise you will continue to have two Michigan accident victims in hospital beds on the same hall with identical injuries. But the guy who fell down the stairs will be paying half or a third as much per day as the woman whose vehicle contests space with a large tree.”

Senate Bill 313, introduced last year by Sen. Marty Knollenberg, R-Troy, would impose price controls on medical services provided by hospitals and doctors to patients covered by PIP.

In the House, Rep. Jason Sheppard, R-Temperance, is advocating a different approach in legislation he has yet to introduce. Under current law, vehicle owners must pay an insurance assessment to a reinsurance entity called the Michigan Catastrophic Claims Association, which pays crash victims' medical claims once they exceed $540,000. Sheppard’s preference is to let drivers buy personal injury coverage in a tiered fashion, with benefit caps of either $250,000 or $500,000.

Sen. Joe Hune, R-Fowlerville, authored SB 248, which passed the Senate in April 2015 and is under review in the House of Representatives. If passed into law, the bill would replace the catastrophic claims association with a state agency. It would also impose new assessments on insurers (and indirectly their customers) to pay for expanded anti-fraud efforts.

“As the cost of auto insurance continues to rise, I took action to provide reasonable reforms that will ensure Michigan drivers have access to good benefits at a lower cost,” said Hune. “We have passed legislation to address the out-of-control insurance costs in the Senate and we await the House to take action to deliver this important reform bill to the governor’s desk.”

Gary Wolfram, the William E. Simon professor of Economics and Public Policy at Hillsdale College and a member of the Mackinac Center for Public Policy Board of Scholars, also blames unlimited PIP coverage for Michigan’s high premiums. Wolfram notes other states cap PIP insurance at $50,000, including New York, which is second only to Michigan in PIP requirements. “We are the only state with unlimited PIP,” he said. “You’d think if it were a net positive, other states would follow suit. But they haven’t.”

Wolfram explained that unlimited PIP encourages doctors to order tests and procedures that aren’t necessary. He continued: “If I fall off a ladder and injure myself, the type of treatment I’d receive in a hospital would be entirely different from the treatment I’d receive in the same hospital for similar injuries incurred in an automobile accident.”

Smith concluded that Michigan’s no-fault insurance problems will take far less time to fix than they did to develop. “Every form of unlimited benefit will eventually be abused, and the folks in Michigan have had more than 40 years to figure out how to do it,” he said. “Not necessarily by dishonesty, just overuse of a system beyond its original design. A medical fee schedule is what preserved the auto insurance system in Pennsylvania when they got rid of the last other unlimited medical no-fault auto insurance system over 30 years ago. This should be tried in Michigan.”