How can auto insurance in Detroit be affordable?

May 09--Detroit drivers face the highest average insurance rates for cars and other vehicles in the country, often more than $3,000 a year for a single automobile.

A Detroit Free Press investigation finds that runaway medical bills, disability benefits payouts and lawsuits under Michigan's one-of-a-kind, no-fault insurance system play a key role in driving up costs for drivers.

Find out what's behind the high cost of auto insurance in Detroit -- and what steps could be taken to help fix the problem.

Critics and even many supporters of Michigan's no-fault system agree that changes to it are needed to help lower Detroit's highest-in-the-nation auto insurance premiums.

But reform is a thorny task. While costs are high across Michigan, auto insurance is much more expensive in Detroit. Motorists often see their premiums cut in half if they move across 8 Mile and leave the city.

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So policy changes aimed at fixing Detroit's insurance issues by reducing benefits at the statewide level can be a tough political sell.

"Don't throw out the baby with the bathwater and get rid of no-fault," said Oakland County Executive L. Brooks Patterson, a vocal defender of the current no-fault system.

The challenge is finding a strategy that can rein in the runaway medical bills and benefits costs that are ballooning car insurance premiums in Detroit -- and exerting pressure on rates across the state -- while inflicting minimal harm on accident victims who truly need the system's benefits.

"The tragic truth is that no-fault was a noble experiment with the best intentions to help accident victims and to reduce lawsuits, and it has gone off the rails," said Mark Bernstein, president and managing partner at the Sam Bernstein Law Firm, one of Michigan's most visible personal injury firms, who favors some reform ideas.

"How do we eliminate bad actors and still protect the legitimate interests of injured people? It's a very difficult balancing act," he said.

The Free Press looked at past reform strategies in several of the nation's 11 other no-fault states, particularly New Jersey and Florida, that have achieved results.

These strategies included:

* Placing monetary caps on no-fault benefits. (Michigan has no cap.)

* Establishing "fee schedules" of maximum prices that doctors and clinics can charge for no-fault procedures and services. (Michigan already has a fee schedule for workers' compensation.)

* Moving routine disputes between medical providers and insurance companies over reimbursement out of court to speedier and less-costly arbitration.

* Restraining lawyer compensation in legal disputes over bills with insurance companies.

* Introducing deductibles and co-pays for no-fault medical benefits.

* Shortening the time limit for starting treatment after an accident. (Michigan generally allows one year.)

* Aggressively pursuing fraud.

Since the 1970s, no state has switched to a system with unlimited no-fault benefits like Michigan's. No-fault reform efforts have generally added restrictions or lowered caps on benefits.

Nevada, Georgia, Connecticut and Colorado completely dropped no-fault in response to rising costs. With the possible exception of Nevada, where little rate information is readily available from their 1980 repeal, these former no-fault states all saw significant drops in average car insurance premiums following repeal, according to a report by the RAND Corp. public policy think tank.

D-insurance plan

Detroit Mayor Mike Duggan presented his proposed solution to the city's rates problem two years ago. His D-Insurance plan initially called for allowing just Detroit residents the option to buy cheaper no-fault policies with $250,000 caps on medical benefits for critical care (emergency room procedures) and a $25,000 limit for post-acute coverage, such as physical therapy, in-home care and follow-up surgeries.

Under a D-Insurance plan, if a crash patient exhausts the benefit limits, then his or her regular health insurance -- including Medicare or Medicaid -- would take over. That is how things generally work in the other 11 no-fault states with caps on benefits.

Of course, regular health insurance doesn't offer the same safety net and array of benefits that no-fault does, such as lost wages, in-home attendant care, long-term physical therapy and coverage for making a vehicle or home accessible.

Duggan stressed that D-Insurance would simply give Detroiters another option for car insurance; no one would be forced to buy it. Those who preferred to keep full no-fault coverage could still do so.

A D-Insurance plan could save Detroit drivers about $600 to more than $2,000 a year compared to their current no-fault policies, according to projections by Pinnacle Actuarial Resources that were commissioned by the city. That would significantly cut the $3,400 price of the typical Detroit yearly premium.

But D-Insurance required state legislation to be enacted and it ultimately stalled in Lansing.

A version of the bill that did pass the Senate's Insurance Committee would have opened D-Insurance beyond Detroit to any Michigan city where at least 35% of drivers are uninsured. It also would have allowed insurance companies offering D-Insurance plans to restrict patients to provider networks of specific hospitals and clinics for post-acute care -- a common cost-containment strategy -- and require pre-approval for treatment procedures.

The general concept behind D-Insurance of offering motorists a choice in levels of no-fault coverage is supported by the conservative Mackinac Center for Public Policy think tank.

"If you think it's really important to have unlimited medical benefits because you are very concerned about being in an auto accident and needing those benefits, that's fine," said Michael Van Beek, the Mackinac Center's director of research. "But don't force everybody else to pay for that."

D-Insurance's critics -- including now-former state Rep. Brian Banks, D-Harper Woods, and the powerful lobby of medical providers, accident attorneys and disability advocates known as the Coalition Protecting Auto No-Fault -- argued the plan would coerce Detroiters into buying "second-class" insurance that would prove insufficient after a serious accident.

Steve Gursten of Michigan Auto Law was among the personal injury attorneys who voiced opposition to D-Insurance. In an interview after the bill's introduction, he warned that those who buy such policies but lack good commercial health insurance and get into a bad crash "are going to be trapped in that same really vicious downward spiral of people in pure tort states," he said.

"They're going to blow through their personal savings, they're going to get pushed onto Medicaid, and they're probably going to end up declaring personal bankruptcy because of incredible medical debt," Gursten said. "Is that the system that we want?"

Jersey caps no-fault

New Jersey has made many changes to its no-fault system that have had significant effects. Attorney John Sakson has been representing accident victims in the Garden State since the 1970s, back when New Jersey, like Michigan today, mandated that everyone purchase unlimited no-fault benefits with their car insurance.

But in response to escalating insurance premiums, New Jersey lawmakers put a $250,000 cap on no-fault benefits in 1990. They made more changes in 1998 and set the minimum purchase level for no-fault's personal injury benefits at $15,000 while giving the option to buy higher levels of coverage.

All New Jersey policies, however, must still offer a minimum $250,000 in emergency room coverage for significant auto accident injuries.

Sakson said those who exhaust their no-fault benefits can fall back on their regular health insurance -- provided their health plan covers auto accidents. They also can try a negligence lawsuit against the other driver if their injuries were severe.

Still, there are instances in New Jersey where a catastrophically injured person uses up his or her no-fault benefits and then burns through their personal assets paying for in-home care and assistance. These individuals can end up in Medicare nursing homes, he said.

"That's always been an issue in Jersey since they put the cap on PIP," said Sakson of Stark & Stark Attorneys at Law, referring to no-fault's personal injury protection (PIP) benefits. "There is no provision for catastrophic. I wouldn't call that the biggest problem in our system personally, but when it happens -- it's bad."

New Jersey's 1990s reforms also introduced patient deductibles for no-fault medical coverage and added a 20% co-pay for expenses between the deductible and $5,000.

And to rein in medical service prices, New Jersey started a fee-schedule system of maximum charges that providers can bill no-fault insurance for various procedures. Emergency room trauma services are exempt from the fee schedule.

The fee schedule rates are set by state government and vary by region. Under the fee schedule, the cost of a single MRI in an outpatient center in the more expensive northern region of New Jersey ranges from about $664 to $846 to $1,033, depending on body area.

Michigan already has a similar fee schedule system for workers compensation, which state officials say pays medical providers about 130% of Medicare rates for each service or procedure.

Andrew Blair, a New Jersey attorney who represents medical providers in disputes with auto insurers, recalled how before New Jersey started its fee schedule system, insurance companies had to pay whatever price for services or procedures that was deemed "usual and customary."

"When I first start doing this, it was the Wild West," Blair said. "We used to just show proofs of what our usual and customary was. And doctors were charging $20,000 for an injection, where now, with the New Jersey fee schedule, they get $1,200, and some of them are even less.

"So they really reined a lot of the costs in by fee scheduling almost everything. The only thing that doesn't have a fee schedule on it is emergency room treatment in a hospital."

Yet even with these restraints, New Jersey drivers still pay some of the highest auto insurance premiums in the country: an average of $1,379 a year in 2014, according to the latest National Association of Insurance Commissioners data. That was slightly more than Michigan's $1,350 average, although well below the typical Detroit rates around $3,400. Idaho drivers enjoy the cheapest insurance at $673 a year.

New Jersey officials attribute their high insurance premiums to their state being one of the most densely populated with a lot of busy roadways and accidents.

In Michigan, no-fault legislation with variations of the fee schedule idea have been voted out of committees but never passed the House and Senate. A much-discussed 2015 bill would have tied reimbursement rates for auto accident patients to 150% of Medicare rates.

Health care providers and accident victims came out against that bill, contending that fee schedules are a bad idea because accident victims often need specialized, intensive care that is expensive. Although Michigan hospitals often profitably treat Medicare patients, the bill's opponents said payments at 150% of Medicare would be insufficient.

Efforts to rein in no-fault's costs are often seen as threats to medical providers' bottom lines. The higher insurance reimbursement rates that providers get from no-fault patients, among other things, help to subsidize the lower rates they receive treating Detroit's many low-income Medicaid patients. Hospitals often lose money on procedures under Medicaid, which reimburses below Medicare rates.

End of first-party lawsuits

The New Jersey reforms more or less brought an end in that state to first-party accident lawsuits, the type of lawsuit now clogging court dockets in Wayne County in which a motorist or the motorist's medical providers sue an auto insurer for no-fault benefits.

These type of disputes haven't disappeared, but now go to arbitration. New Jersey attorneys say the arbitration process resolves disputes faster than going to court and typically takes just over six months start to finish.

Crucially, arbitrations allow medical providers to keep all money they collect from insurance companies for unpaid bills without the need to share a cut with lawyers.

Insurance companies in New Jersey are now responsible for picking up lawyer fees for the doctors or clinics that prevail in arbitration cases. These fees are determined by each case's arbitrator, who is to consider the complexity and size of the case, among other factors.

The average no-fault arbitration award in New Jersey was $5,420 in the fourth quarter of last year: $4,581 for no-fault benefits and $839 for attorney fees, or 15% of the total award, according to the New Jersey Department of Banking and Insurance.

In Michigan, attorneys who file first-party lawsuits against auto insurers can get a full 33% cut of the insurance settlements paid out for medical providers' billings and patients' benefits.

"We don't get paid a lot, but it's kind of a volume-based business," said Blair, who was the first New Jersey attorney to start filing no-fault arbitration cases.

There are nearly 50,000 no-fault arbitration cases a year in New Jersey and roughly 90% of them are initiated by medical providers, rather than people who were in accidents, according to state data and practicing attorneys.

"Everybody has kind of gotten very comfortable with the arbitration mechanism," said Joseph Di Donato, vice president of the No-Fault Personal Injury Protection Program in New Jersey with Forthright Solutions, a company that administers the arbitration program for the state. "What we've found in New Jersey is the doctors prefer arbitration anyway. So right now there are hardly any (no-fault) cases at court."

Florida tackles fraud

Even as it offers the most expansive no-fault benefits, Michigan is one of the few no-fault states without a dedicated watchdog for auto insurance fraud. The Michigan Department of Insurance and Financial Services is not tasked with rooting out auto insurance claim fraud and the Michigan Attorney General's Office hasn't undertaken any recent state-level prosecutions.

Michigan's own Wild West now prevails in the no-fault treatment business -- possibly even worse than that in Florida before lawmakers there added restrictions in 2012 to address fraud and unnecessary medical costs.

Florida's reform did not change the state's $10,000 cap on no-fault benefits, but specified that those benefits could only be available if a doctor verified that the person in the accident had an emergency condition. Otherwise, only $2,500 is available. And massage and acupuncture are no longer reimbursable under no-fault at all. (Massage and acupuncture are covered under Michigan no-fault.)

Florida accident victims are now required to seek medical treatment within 14 days of their crash to be eligible for no-fault benefits. In Michigan, people generally have up to a year to seek treatment.

Another key strategy was assigning teams of dedicated no-fault fraud investigators and prosecutors to the state's major metro areas, according to Lynne McChristian, a Florida representative for the Insurance Information Institute.

Bill Newton, deputy director of the Florida Consumer Action Network, said his group generally prefers to see law enforcement go after fraudsters, as they did in Miami, Orlando and Tampa, rather than have lawmakers add restrictions on no-fault to achieve the same goal.

"Our position as a consumer group is that consumers shouldn't lose benefits to criminals, but rather the criminals should be put out of business," he said in an e-mail.

Newton noted how there is currently movement among some Florida lawmakers to repeal no-fault completely amid lingering concerns of fraud and high costs. Florida's average premium was $1,208 in 2014, according to the National Association of Insurance Commissioners.

"Trial lawyers, accused of wanting the fraud, now want to do away with (no-fault) too, and favor the 'everybody sues' bodily injury paradigm," Newton said. "I'm not so sure about that. I'm concerned that we're giving in to criminals and it may lead to higher health insurance premiums and less funds for indigent care."

No watchdog in Michigan

Why there is no dedicated no-fault fraud watchdog in Michigan is a matter of debate.

The auto insurance industry blames the Coalition Protecting Auto No-Fault lobby. For its part, the coalition has said it supports rooting out fraud but wants any watchdog to also scrutinize the adversarial and sometimes fraudulent behaviors of insurance companies.

George Sinas, the coalition's legal counsel, said something must be done about auto insurers that seek to reject legitimate claims through bad-faith use of physicians who do "independent medical examinations" of no-fault patients. Accident lawyers commonly refer to these types of physicians as "cut-off doctors."

Some of these doctors have admitted in depositions to making more than $500,000 a year seeing patients on behalf of auto insurance companies, according to Sinas, who said he thinks Michigan needs a standardized vetting system for these examiners to ensure impartiality.

"These doctors routinely give the insurance companies exactly what they want to hear," he said last week.

Sinas emphasized that he believes no-fault fraud should be aggressively pursued. But the existence of no-fault fraud isn't a reason to ditch no-fault.

"There are a lot of doctors in big cities who have been found guilty of Medicare fraud, but you don't hear Congress talking about cutting Medicare because some doctors are committing fraud," Sinas said.

Peter Kuhnmuench, executive director of the Insurance Alliance of Michigan, said insurers use these medical examinations to provide unbiased evaluations and contain unnecessary costs.

"Insurance companies owe it to their customers to make sure that they are paying reasonable, necessary and legitimate claims," Kuhnmuench said.

Credit scores and rates

Proponents of keeping no-fault's unlimited medical benefits, such as the newly formed Detroit Alliance for Fair Auto Insurance, place significant blame for Detroit's high insurance rates on the insurance industry practice of using a version of motorists' credit scores to help set rates.

But credit scoring isn't the underlying problem as even Detroiters with high credit scores and low points on their driver's license are saddled with exorbitant rates, such as $300 or more a month to insure a vehicle.

Insurance companies contend that credit scoring is fair because a person's history of paying bills on time is relevant to safe driving and a predictor of their likelihood of filing claims.

Insurers also use ZIP codes when setting rates to contain the costs of benefits, thefts and crashes to the geographic areas where those who generated the claims live. Before they used ZIP codes, insurers had a territorial rating system that essentially forced some non-city dwellers to pay higher rates to subsidize artificially lower Detroit rates.

Bernstein calls for reform

Attorney Mark Bernstein said he sees a need for legislative changes in Lansing that can preserve no-fault's safety net for accident victims while reining in the system's high costs.

He said a proposal containing "reasonable fee schedules" and "reasonable limitations" on in-home attendant care might be something that his family's law firm could support.

"This has put us at odds with many trial lawyers. But we believe this is the right course," said Bernstein, who is also chairman of the University of Michigan Board of Regents. "The rhetoric about how this would destroy medicine in Michigan is simply untrue. There are 49 other states, most of which do not have no-fault, where there are hospital systems that are thriving."

Bernstein said the fact that car insurance is unaffordable to so many in Detroit means there are fewer eligible plaintiffs for the negligence lawsuits that his firm specializes in. That is because uninsured drivers aren't allowed to sue, even if they were seriously injured in a crash that wasn't their fault.

"Making no-fault more sustainable and affordable is in everyone's best interest," Bernstein said.

MINIMUM PURCHASE REQUIREMENT FOR PERSONAL INJURY PROTECTION (MEDICAL) IN THE 12 NO-FAULT STATES

Michigan: unlimited medical

New York: $50,000

Minnesota: $40,000

North Dakota: $30,000

New Jersey: $15,000 * (All plans must have $250,000 for emergency room care)

Florida: $10,000

Hawaii: $10,000

Kentucky: (optional no-fault) $10,000

Massachusetts: $8,000

Pennsylvania: $5,000

Kansas: $4,500

Utah: $3,000

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