No-Fault Automobile Insurance's Fall from Popularity Caused by Increased Medical Costs
February 15, 2010
No-fault automobile insurance, once seen as a way to limit court costs and lower premiums, has declined in popularity among both insurers and consumers because it largely has failed to accomplish either goal, according to a new study issued today by the RAND Corporation.
While no-fault insurance was intended to lower the cost of compensating people involved in automobile accidents by taking most cases out of the court system, it actually increased costs because medical claims rose sharply instead, according to the study.
"No-fault insurance is a classic example of the law of unintended consequences," said James M. Anderson, the study's lead author and a researcher at RAND, a nonprofit research organization.
The study gives an overview of the United States' experience with the boldest experiment in the history of automobile insurance: no-fault systems in which automobile accident victims seek recovery from their own insurer instead of from another driver.
In the 1970s, many policymakers and analysts believed that no-fault automobile insurance was a superior innovation that would displace conventional, tort-based automobile insurance policies. Today, however, no-fault has lost much of its popularity among insurers and consumer groups, according to the report. Currently, 29 states have tort-based policies, three states allow drivers to choose between less expensive "limited tort" insurance or more expensive "full tort" insurance, and the remaining states have some form of no-fault insurance. These numbers have remained fairly steady over the past decade.
No-fault insurance has three components: a restriction on the right to sue other drivers for being at fault for an automobile accident; a restriction on receiving payment for pain and suffering or other non-economic damages; and mandatory insurance so anyone involved in an accident can recover his or her economic losses, including medical costs, from their own insurance company.
Policymakers believed no-fault insurance would minimize litigation and administrative costs, more fairly compensate victims of automobile accidents and be less expensive than tort-based insurance. In practice, however, premium cost reductions never materialized, in large part because of increased medical costs.
Injury costs under no-fault were only 12 percent higher in 1987 relative to tort-based insurance, but by 2004 costs were 73 percent more expensive under no-fault plans. In addition, those states that restricted lawsuits against other drivers actually had higher claim costs than states that permitted lawsuits.
Anderson said he and his colleagues believe medical costs increased largely because consumers who have no fault policies tend to use more specialized types of medical treatment and because medical costs may be more likely to be covered by auto insurance rather than medical insurance in no-fault states. There also is evidence of greater medical cost inflation in no-fault states.
Support for no-fault also has eroded in the political arena. In many states, opponents of no-fault insurance—particularly trial lawyers—were able to tap into a deeply rooted suspicion of insurance company motives. One non-cost argument that resonated with consumers was that no-fault would unfairly exempt bad drivers from the consequences of their driving.
However, despite the waning insurance and consumer group support for no-fault insurance, there are few signs that it will be repealed in most states where it now exists. In some states, there is consumer support for a modified form of no-fault, "choice," that lets consumers forgo their right to sue other drivers in exchange for lower premium rates.
Anderson said further research is needed to determine exactly why medical costs grew so dramatically under no-fault insurance and to evaluate reforms introduced in no-fault states to control the growth of medical costs. The study did not evaluate the extent to which no-fault shifts costs between auto insurers, medical insurers and medical providers, for example.
The study, "The U.S. Experience with No-Fault Automobile Insurance: A Retrospective," can be found at www.rand.org. Other authors of the study are Paul Heaton and Stephen J. Carroll.
Research for the study was conducted within the RAND Institute for Civil Justice, an independent research program within the RAND Corporation. The mission of the institute is to improve private and public decision-making on civil legal issues by supplying policymakers and the public with the results of objective, empirically based, analytical research.