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MASSACHUSETTS MAY CHANGE AUTO INSURANCE REGS

SHOULD ANYONE ELSE CARE?

YES, THE DESIRE FOR UNIVERSAL INSURANCE CHANGES EVERYTHING

by Mitch Rofsky, President, Better World Club

The Democrats recently took over the Massachusetts state government. What’s the first thing they do? Why, adopt an auto insurance plan generated by the prior Republican administration, of course.

Admirable bi-partisanship? A demonstration that the proper policy is still the proper policy regardless of the party who initiates it?

Desirable answers both. However, that doesn’t mean that they are correct.

The Romney plan to establish a more competitive auto insurance market sounds nice, but the Patrick Administration is not only approving questionable auto insurance procedures, it is also creating a precedent that may come back to haunt anyone interested in universal health insurance.

Yes, auto insurance isn’t health insurance, but it is insurance.

By establishing a precedent in auto insuranceand treating price as the most important issue--it becomes more difficult to devise and advance health insurance reform

For auto and health coverage share one critical characteristic: our desire for universality.

There are numerous forms of insurance that we don’t desire to be “universal”, of course. I don’t care whether you insure your jewelry. You probably don’t care whether I insure my next vacation.

Then, there are coverages that are debatable. We may not care whether everybody carries auto collision or theft coverages or home fire or flood - or we might.

But substantial majorities of Americans want every driver to have auto liability insurance, which protects other drivers and pedestrians, just as they want every American to enjoy medical insurance. 47 states have laws requiring all drivers to purchase auto insurance

Much has been written about certain underwriting flaws in the new Massachusetts system, but these analyses haven’t addressed a more fundamental point: the good must subsidize the bad. While generally true of insuranceafter all, if you never have a claim, you don’t get your money back--it is the key “iron law” of universal coverage. In any universal system, the bad risks will never pay enough to cover their costs. Yet, the push for a free market in auto insurance seems to derive from a desire to reduce the premiums of our best drivers.

It comes down to this: What value do we place on universality?

Under a “universal” auto system, there is room for price differences of course. Under the existing Massachusetts regulatory plan, the worst drivers usually pay 4x as much as the best. But, perhaps the market would have said 10x. Under the new plan, the poor drivers may be required to pay that increase.

The result is sure to be an increase in uninsured drivers. Under the current insurance regulations, Massachusetts has the second lowest rate of uninsured drivers in the countryand the lowest among states with large urban areas. Depending on how far the new plan goes at eliminating the cross-premium subsidy, this is now at risk.

This is another way of saying that auto coverage will be less universal. Is this really what Massachusetts drivers want - to be exposed to an ever increasing pool of bad, uninsured drivers? Is it what Americans want for health insurance?

For the concept of universality draws into question not just insurance premium pricing, but many of the ways our private sector insurance industry operatesand the implications for health insurance are even greater. It even, and this is written despite our own participation in the insurance industry through our agency, Better World Insurance; it even draws into question the concept of private sector underwriting.

For when we want coverage to be universal, then the principal specialty of the insurance underwriter - assessing, pricing, and, spreading (often, shifting) risk - is called into question. We are not interested in insurance companies rejecting bad risks if we truly want the coverage to be universal.

What other benefit is there from private insurance companies and would it apply to medical care? Well, health insurers do help control costs. But, government can hire the same actuaries as the insurance underwriters. They could even contract with insurance companies to handle this task if this proved most efficient.

The final role that we would like insurance companies to play is one of innovation, the most compelling argument for free enterprise. Our principal MA auto underwriter, Plymouth Rock Assurance, has been innovative in the way that it gets vans to the insured to resolve claims quickly. Well, that’s something…but is it enough?

On the medical insurance side, coming up with innovation is no less difficult. Is the insurance industry innovating sufficiently to justify the billions committed to administrative costs, huge upper management salaries, and shareholder returnsdollars that could cover the uninsured and more?

We’re talking real money here. Just administrative costs amount to 31% of US health spending compared to 16% in Canadawith ours growing more rapidly than our neighbor’s.

The potential administrative savings of nearly 50%, or roughly $300 billion annually, could:

· Offset the cost of covering the uninsured (estimated at $100 billion)

· Cover all out-of-pocket prescription drugs costs for those over--and under65. In other words, all Americans (estimated at $53 billion in 2003).

· Make substantial improvements in coverage and quality of care for U.S. consumers who already have insurance

There would even be $20 billion left over to fund retraining and job placement programs for insurance workers who could lose their jobs under such a program.

Just to be clear: this is not an argument for government control in any other part of the medical industry. No government ownership of drug companies or doctors’ offices. But this is a lot to lose for the refusal to recognize the lack of a meaningful role for insurance underwriters under universal insurance. The potential administrative savings are equivalent to about $7.000 for each of the 45 million uninsured Americans more than enough to pay for health coverage. Massachusetts, which has very high per capita health administrative spending, could save a total of $9 billion a year, making available$16,000+ per uninsured person.

Maintaining the role of the insurance underwriters will lead to additional problems. For one thing, higher taxes than necessary will be inevitable, with increased resentment toward government. And, some of the health proposals don’t require individuals to obtain health insurance. Even if the requirement exists, some won’t meet it, just as with auto insurance - so the uninsured problem will continue to exist.

In conclusion, our desire for the least expensive auto insurance and personal health insurance must be carefully considered. It’s either that or reject the concept of universality itself.

The debate shouldn’t be framed as whether the government has a role in providing insurance for everyone. Rather, the debate should be over which coverages we want to be universal and government provided and which we want to be elective and provided by privately owned insurance companies.

Do any of the Presidential candidates or the Governor of Massachusetts--have the courage to lead that debate? Not so far.