How Big Is the Price Tag for Excess Auto Injury Claims?
Access to General Damages Provides Incentive to Excess Claiming
First, they analyze the incentives to submit inflated or invented claims for various types of injuries provided by different insurance systems:
- Under the tort liability system--the set of legal rules governing
compensation for automobile injuries in about three-quarters of the states--an
injured individual may seek compensation for both the economic loss incurred as
a result of that injury (e.g., medical costs) and for noneconomic losses or
general damages--hurts such as "pain and suffering" not directly measured in
- In 1988, when the data used in this study were collected, eleven states had
adopted dollar threshold no-fault insurance systems, under which an automobile
accident victim is allowed to seek compensation for general damages only if his
or her medical costs exceed a specified amount.
- Florida, Michigan, and New York had adopted verbal no-fault systems. In
these states the law contains an explicit list of injuries--usually quite
serious--for which an accident victim is allowed to seek general damages.
- Modifying our insurance systems. (Verbal no-fault systems appear to
eliminate the incentives that drive excess claiming for soft injuries, while
dollar no-fault systems appear to exacerbate them.)
- Establishing a schedule for general damages based on the nature of the
injury, as in disability policies.
- Changing the rule governing admissibility of medical cost information in
courts. Modifying this rule could reduce the incentive to inflate that
Characteristics of Injuries also Affect Ability to Exaggerate ClaimsThe opportunity for exaggeration is also influenced by the nature of the injuries themselves. The researchers distinguish soft injuries, such as sprains and strains, from hard or objectively verifiable injuries, such as fractures and loss of limbs. Examining the incentives embedded in the insurance systems and the ease or difficulty of exaggerating injuries, they predicted what patterns of excess claiming for injuries might occur.
Testing Analytic PredictionsThe authors draw on a large database of individual closed claims developed in previous ICJ research to test these analytical predictions. Their results support the predictions about the extent of excess claiming that will occur in certain insurance environments.
Figure 1 illustrates their findings. It shows the number of soft injury claims per hard injury claim in every state. The horizontal black line indicates the average value for Michigan and New York, which is used as a baseline in the study. (Certain features of Florida's verbal no-fault system precluded its inclusion in the baseline.)
Soft injury claimants will obtain general damages in dollar no-fault states if the medical claim can be pushed over the threshold; thus the possibility of general damages offers an incentive to claim nonexistent soft injuries in these states. The eleven dollar no-fault states in Figure 1 are scattered, and ten have ratios above the baseline. But all cluster toward the lower end of the distribution.
Because general damages can be obtained for even a small medical claim in the tort states, the study predicted that comparatively more claims for nonexistent soft injuries would occur in these states. The result: Only one of the 36 tort states falls below the baseline. And the 35 tort states that have comparatively high ratios of soft to hard injury claims tend to cluster toward the high end of the distribution. All of the highest 18 states in Figure 1 are tort states.
The study uses the extent to which the ratio of soft claims to hard claims in each state exceeds the corresponding ratio for Michigan and New York as the measure of the degree to which claims are being submitted for nonexistent soft injuries in that state.
The study goes on to analyze the amount of medical costs claimed on either soft or hard claims, using methods similar to those described above to estimate the degree to which accident victims are building costs on real injury claims to leverage larger insurance settlements.
Figure 2 provides an example of the analysis. It shows the distributions of medical costs for soft injury claims in Hawaii, a dollar threshold state, and New York. Dollar threshold states provide strong incentives to build costs on soft injury claims because pushing the claim over the threshold allows access to general damages. The vertical line in the figure shows Hawaii's threshold. The average cost of a soft injury claim in each state is adjusted for interstate differences in medical costs and treatment patterns. The horizontal axis in the figure is a logarithmic scale so that equal intervals show equal percentage differences.
Figure 2--Hawaii's Distribution of Medical Costs for Soft Injury Claims Peaks Just Past Dollar Threshold
Hawaii's distribution also rises sharply, then flattens out. It begins to decline at a relatively low level of medical costs, then turns up again and rises sharply through the threshold. The Hawaii distribution peaks above the threshold, and finally falls off.
A substantial fraction of Hawaii's soft injury claims are for medical costs above the threshold. Compared with New York, the distribution of adjusted medical costs in Hawaii is shifted substantially to the right, as one would predict given the incentives built into the state's insurance system.
The Price Tag for Excess ClaimingThe researchers use their empirical analysis of the extent of excess claiming to estimate that between 34 and 40 percent of the automobile injury medical costs submitted to insurers appear to be excess. In 1994, these questionable medical claims would have added roughly $13 to $16 billion to the nation's total automobile insurance bill, or about $100, on average, per policy. These excess claims also stimulated $4 billion in excess health care consumption.
Policy DirectionThere are no easy solutions to the problem of excess claiming, but the study suggests one possible policy direction: Break the connection between medical costs and general damages. Ways to accomplish this include
RAND research briefs summarize research that has been more fully documented elsewhere. This research brief describes work done in the Institute for Civil Justice and published as The Costs of Excess Medical Claims for Automobile Personal Injuries, by Stephen Carroll, Allan Abrahamse, and Mary Vaiana, RAND DB-139-ICJ, 25 pp., ISBN: 0-8330-1649-0, which is available from National Book Network (Telephone: 800-462-6420; FAX: 301-459-2118) or from RAND on the Internet (firstname.lastname@example.org). RAND is a nonprofit institution that helps improve public policy through research and analysis; its publications do not necessarily reflect the opinions or policies of its research sponsors.
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