Keeping Auto Insurance Market Competitive Through PIP Reform [New Jersey Business (NJ)]

Auto insurers, healthcare providers, lawyers and millions of insured drivers in the state are awaiting a final decision concerning the New Jersey Department of Banking & Insurance's (DOBI) proposed changes to Personal Injury Protection (PIP) coverage, which were introduced in August.

The proposed changes to PIP, which provides medical benefits coverage to those injured in auto accidents, regardless of fault, were made to get rid of a system of abuse that "threatens the viability of the state's competitive [auto insurance] marketplace," said Douglas A. Wheeler, former director of the Division of Insurance within DOBI, at an October 6 hearing of the Assembly Financial Institutions and Insurance Committee (Wheeler left his post at the end of October to join New York Life Insurance Co.). In what Wheeler said is a pro-consumer move, the proposed changes would expand the list of CPT (current procedural terminology) codes on fee schedules covered by PIP by some 1,000 medical procedures, for an estimated total of 2,500. If adopted, the expanded list is intended to improve predictability of medical expenses, help control future increases, and reduce the amount of arbitration cases that are negatively impacting the auto insurance market in the state.

The number of arbitrations filed in recent years has almost doubled from 34,000 in 2005 to more than 61,000 last year, adding $1 billion in insurance costs each year.

According to DOBI Commissioner Thomas Considine, who spoke on the topic at a recent New Jersey Business & Industry Association "Meet the Decision Makers" event, these costs are adding to auto insurance rate increases. "Ninety-seven percent of [typical] rate increases were driven by PIP costs." He explained that the PIP loss ratio is 123 percent. This means that for every $1 in PIP premium, auto carriers pay out $1.23 in PIP claims.

With that loss, New Jersey went from being the 12th most profitable state for auto insurance carriers to 50th last year, a big drop from when auto insurance reforms last took place in 2003 during the McGreevey administration.

"When you are the 50th least profitable state in the union, that is when carriers start to leave. That is what we are facing and something needs to be done," Considine said.

With respect to arbitration awards, Wheeler said attorneys [representing healthcare providers] have every incentive to file a case against an insurance company because even if they win a small fraction of the amount in question, they get their attorney's fee paid for by the auto carrier. In one example, a medical provider was seeking more than $4,000 for a procedure. The actual amount awarded by the arbiter was just $17 above what the auto insurer was willing to pay. Meanwhile, the insurer had to pay the provider's attorney's fee of $1,500, in addition to paying for its own lawyer.

Michael Van Wagner, vice president of legislative affairs for New Jersey Manufacturers Insurance Company (NJM), West Trenton, believes the situation would be more equitable if the insurer pays the provider's attorney only when the award is at least 50 percent of the amount in dispute, and if the attorney's fee is never greater than the actual award. As an example, if an insurer reimburses $1,000 for a procedure but the provider wants $2,000, the provider's attorney's fee would be paid if the amount ordered by the arbiter was $1,500, and that attorney fee could be no more than $500. The attorney's fee is decided by the arbiter. On average, it is in the $1,200 range regardless of the amount of the award, according to Van Wagner.

"Don't forget," Van Wagner adds, "These charges are ultimately paid by our policyholders, through their premiums."

The proposed regulations also impact PIP arbitration in the area of medical necessity. Under current rules, in certain instances, a provider must obtain precertification by the insurance carrier before a patient undergoes a medical procedure. If the carrier denies the procedure, the matter can be arbitrated. With the proposed regulations, healthcare providers will be given just five days to appeal the insurance carrier's denial decision. If they miss the deadline, they may again file a precertification for the same procedure.

Dennis S. Brotman, a personal injury trial lawyer at Fox Rothschild who represented the New Jersey Association for Justice at the Assembly committee hearing, tells New Jersey Business the proposed five-day appeal time "prejudices the rights of the injured person" since the timeframe is so narrow. He believes this aspect of the change may also undermine the two-year statute of limitation the injured person has to personally petition the denial.

Discussing the rise in the number arbitrations, he says that insurers lose 90 percent of the time. "Wouldn't they be saving money by returning to a rate of 20,000 denials instead 61,000?" he asks. "If protocols were established that were more reasonable and less likely to lead to reversals of [insurers] decisions, insurers would save an awful lot of money ... probably more than what the reforms are suggesting."

NJM's Van Wagner, however, says the current PIP arbitration system is neither fair nor efficient, with the only true "winner" being the petitioner attorneys who are awarded counsel fees when their "win" is only a fraction of their demand. "It would be far better to have the predictability of an expanded fee schedule, even at DOBI's proposed fees which are much higher than what health insurance companies pay for the same services, than to arbitrate these cases one by one. This predictability would benefit consumers, insurance companies and medical providers alike," Van Wagner says.

The proposed regulations would also include hospital outpatient services (surgeries) on the fee schedule, the same as ambulatory surgery centers and physician office-based procedures. Inpatient hospital services have been left untouched. This means that individual hospitals can continue to negotiate contracted rates with insurers for emergency and trauma services as they have been doing.

For hospitals across the state, this is a good thing. According to Randy Minniear, senior vice president of the New Jersey Hospital Association, "The PIP system has been set up in a way that supports the state's trauma system. To its credit, DOBI was conscious not to do anything that would erode that system in the state."

"What DOBI has done is identify certain practices in the delivery system it believes need to be brought under control, and that is why it felt certain specific types of outpatient surgeries needed to be controlled in terms of costs," Minniear adds.

Jeffrey Shanton, chair of the advocacy & legislative affairs, committee for the New Jersey Association of Ambulatory Surgery Centers and director of business management at Journal Square Surgical Center, comments that the proposal does not adversely affect ambulatory surgical centers (ASCs). However, he says it does combine three separate entities - ASCs, hospital outpatient departments (HOPDs) and physician office-based procedures - on one fee schedule, mirroring the Centers for Medicare and Medicaid Services 2011 ASC fee schedule.

In doing this, certain procedures are dropped from the three respective areas (ASC, HOPD and physician office-based). "What we are telling DOBI is that it hasn't gone far enough. There are about 50 codes that you have to add if you are serious about saving money," Shanton says.

In 2004, nearly 98 percent of New Jersey policy holders chose at least $250,000 in coverage. Last year that number decreased to 81 percent. "People prefer the higher coverage, but unless we fix the system, $15,000 PIP coverage will increasingly become the norm," said Wheeler.

Gary S. Schaer (D-36) chair of the Assembly Financial Institutions and Insurance Committee, said the hearing was to ensure New Jerseyans are paying the least amount possible for auto insurance coverage. "Much of what you are paying for in auto insurance is PIP coverage," he said. "New Jersey has an affordability problem. We recognize that ... we need to drive those costs down."