Using the Federal ‘Affordable Care Act,’ or ‘Obamacare,’ as a model, Michigan should implement an 80/20 loss ratio rule to lower the cost of auto insurance
Here’s an idea: the problem with our No Fault system in Michigan isn’t with No Fault. It’s the profit margins of the insurance companies that sell No Fault to the public. And Michigan needs an “Affordable No-Fault Act that would lower the price of no fault insurance but would keep intact the nation’s best no fault insurance system to protect Michigan drivers who are seriously injured in car accidents.
To bring about such “affordability” and put an end to Michigan’s persistently high auto insurance prices, the Michigan Legislature and Gov. Rick Snyder need only do the following:
Require Michigan’s No-Fault auto insurance companies to spend most of their insureds’ premium dollars on their insureds’ No Fault benefits.
Require Michigan’s No-Fault auto insurance companies to refund their insureds’ premium dollars in the form of rebates.
When the Federal Government enacted the “Affordable Care Act,” also known as “Obamacare,” it imposed those exact same requirements on the insurers that would be providing the health insurance coverage mandated by the ACA.
Like Michigan’s No-Fault Law, which mandates that Michigan drivers purchase No-Fault auto insurance, the ACA mandates that most American individuals purchase health insurance. (“The individual mandate requires most Americans to maintain ‘minimum essential’ health insurance coverage.” National Federation of Independent Business v. Sebelius (U.S. Supreme Court, 6/28/2012))
To ensure that mandated health insurance would be available to individuals at an “affordable” price, the Affordable Care Act states:
- Insurers must spend at least 80% of their insureds’ premiums on their insureds’ healthcare costs. Consequently, no more than 20% of their insureds’ premiums can be spent on such non-healthcare-related items as insurance company profits and/or insurance executives’ salaries.
- Non-compliant insurers must refund money to their insureds in the form of “rebates.”
The ACA’s spending requirement is called the “80/20 rule” or “Medical Loss Ratio rule” and its purpose was to “make [mandated] health insurance more affordable” and make “sure consumers get better value for their health care dollars,” according to HealthCare.gov, a federal government website managed by the U.S. Department of Health & Human Services.
80/20 loss ratio rule
The Affordable Care Act’s “80/20 rule” or “Medical Loss Ratio rule” requires that the insurers providing the mandated health insurance coverage “must spend at least 80% [to 85%] of annual premiums they take in on health care costs … as opposed to profits and administrative cost, including executive salaries, overhead and marketing,” according to HealthCare.gov, a federal government website managed by the U.S. Department of Health & Human Services.
Additionally, the Affordable Care Act provides that any “insurer that does not spend enough of its premium dollars on health care must provide a rebate to the insured individual or to the policyholder,” according to HealthCare.gov.
What is a ‘loss ratio’?
The “loss ratio” determines how much of insureds’ premium dollars are being returned to the insureds through payouts on the insureds’ claims.
It is calculated by dividing the amount of money that an insurer pays to its insureds in the form of payouts on its insureds’ claims (i.e., the “loss” portion of the loss ratio), by the amount of money the insurer collects from its insureds in the form of insurance premiums. (“The ‘loss ratio’ is the ratio of money paid out in claims, compared to the money taken in through insurance premiums.” 2005 report from the Michigan Office of Financial and Insurance Services (OFIS), which is now called the Office of Financial and Insurance Regulation (OFIR))
In the context of the Affordable Care Act, the 80/20 loss ratio rule means that, for every premium dollar that a health insurer collects from its insureds, the insurer would spend $.80 to $.85 on health care costs for its insureds.
And, in the context of Michigan’s No-Fault Law, an 80/20/loss ratio rule would mean that, for every premium dollar a Michigan No-Fault auto insurance company collects from its insureds, the No-Fault insurer would spend $.80 to $.85 on No Fault benefits for its insureds.
Of course, in calculating a Michigan No-Fault insurer’s payouts for No-Fault benefits, the insurer would be prohibited from including payouts for catastrophic claims that have been or will be reimbursed by the Michigan Catastrophic Claims Association.
In its 1978 opinion in Shavers v. Attorney General, where it ruled that Michigan’s 1973 No-Fault Law was constitutional, the Michigan Supreme Court said the following about Michigan driver’s constitutional rights to “fair and equitable” No Fault auto insurance rates:
“In choosing to make no-fault insurance compulsory for all motorists, the Legislature has made the registration and operation of a motor vehicle inexorably dependent on whether no-fault insurance is available at fair and equitable rates. Consequently, due process protections under the Michigan and United States Constitutions … are operative. … We therefore conclude that Michigan motorists are constitutionally entitled to have no-fault insurance made available on a fair and equitable basis.”
Plan B: Abort No-Fault
After the November election in 2012, the Michigan Supreme Court remains strongly pro-insurance company. In fact, the record going into the election was a 100% average in favor of the insurance companies over consumers and injured individuals. So if our activist, pro-insurance company Supreme Court continues the trend of whittling away at vital No- fault protections like attendant care and excess replacement service economic loss claims, and next year returns Michigan to a much tougher injury threshold that injured auto accident victims would be required to meet before they could recover money for pain and suffering compensation, then the other option is to repeal No-Fault entirely.
It was a great thing that was killed by the Republicans, who dismantled the grand bargain behind it by giving the insurance companies everything they wanted and gradually made this system meaningless. As a No-Fault insurance lawyer who passionately cares and believes that No-Fault offers the best medical care for the seriously injured, I would personally hate to see it come to this. But if our activist, pro-insurance company Supreme Court continues to abrogate one legal protection after another under our current No-Fault law, then our No-Fault system only becomes a profit-making machine for the insurance companies.
And if (when) that happens, the only option left will be to get rid of our law and return Michigan to a pure tort state. This would reduce No-Fault premiums by at least 50%, and offer Michigan drivers at least some legal protection if they are seriously injured due to another person’s negligence.