AUTO MANAGED CARE

Auto Managed Care Pennsylvania’s Act 6 of 1990 Chet Szczepanski Chief Actuary Pennsylvania Insurance Department

Agenda n Review economic and social background leading to Act 6 n Review legislative background leading to Act 6 n Review specifics of Act 6 n Examine loss cost saving effects of medical cost containment features implemented by Act 6 n Examine impact on loss development and reserving

Economic & Social Background n Climate of the 1970’s and 1980’s: –High rates of inflation throughout period, especially medical inflation –Society becoming increasingly litigious, particularly in large population centers such as Philadelphia

Economic & Social Background (continued) n Insurance Marketplace in the 1970’s and 1980’s –Persistent rate increases outpacing rates of inflation –Rate increases consistently in the double digits in Philadelphia –Considerable public discontent –Clamor for increased regulatory scrutiny & control

Legislative Background n July 19, 1974: Legislature enacts Pennsylvania No-Fault Motor Vehicle Insurance Act –Key Features: n Unlimited Medical Coverage n $750 Monetary Threshold to Bring Suit

Legislative Background (Continued) –Inflation quickly erodes effectiveness of $750 monetary threshold –Ineffective threshold and unlimited medical coverage are catalyst for increased suit activity and, in turn, excessive medical usage to perfect claims

Legislative Background (Continued) n October 1, 1984: Pennsylvania Legislature repeals No-Fault Motor Vehicle Insurance Act and enacts Motor Vehicle Financial Responsibility Law n Key Features: n Tort System with add-on First Party Benefits n Medical Coverage now limited (minimum limit $10,000 Medical Benefits)

Legislative Background (Continued) n To compensate for such severely reduced Medical Benefit coverage, Automobile Catastrophic Loss Trust Fund established –Coverage from $100,000 to $1,000,000 –A State Fund (Not a private sector program) –Mandatory Participation –Funded on a pay as you go basis –initial “Fee” $5.00 –Fee paid with annual automobile registration –As “Fee” increases, considerable discontent –As Fee hits $25.00, Letter to the Editor states: “I don’t have a cat, what do I need a Cat Fund for?”

Legislative Background (Continued) n Quite possibly worst possible system from a cost perspective: –Tort system without limit to suits combined with add-on first party benefits –Mandatory uninsured/underinsured motorists coverage, which courts rule can be stacked n Combined effects of increased suit activity and accelerating inflation leads to even greater and more frequent rate increases

Legislative Background (Continued) n Governor Robert P. Casey takes office in January, 1987 n A populist governor, he makes auto insurance reform one of his major legislative goals

Legislative Background (Continued) n Governor Casey introduces a comprehensive auto insurance reform package in early 1988 –No-Fault system with $10,000 monetary threshold –80% of bodily injury claims have associated medical costs less than $10,000 n Casey’s proposal fails to gain substantive support from any constituency

Legislative Background (Continued) n Constituencies (Depending on the reform package, they can be either obstacles or facilitators) –The Public –The Legislature –The Insurance Industry –The Trial Bar –The Medical Community

Legislative Background (Continued) n December 12, 1988: Pennsylvania Legislature Repeals Automobile Catastrophic Loss Trust Fund n Institutes runoff of current claims to be funded by surcharge on driving violation fees n Mandates that insurance marketplace offer Extraordinary Medical Benefit Coverage for voluntary purchase n Coverage similar to original Cat Fund n Initial actuarial cost $45.00

Legislative Background (Continued) n February 7, 1990: Governor Casey signs into law Act 6 of 1990 which substantially modifies the Motor Vehicle Financial Responsibility Law n A “Choice No-Fault” System

Act 6 of 1990 n Key Features –Policyholders can voluntarily restrict their ability to seek recovery for non-economic damages, such as pain and suffering, to only those cases resulting in death, serious impairment of bodily function, or permanent serious disfigurement. –Policyholders are prohibited from recovering for economic damages under other insurance coverage, such as Accident & Health Insurance

Act 6 of 1990 n Key Features (continued) –Increased uninsured motorist detection efforts –Increased anti-fraud measures n Penalties for insurance fraud stiffened from a misdemeanor to a third degree felony

Act 6 of 1990 n Key Features (continued) –Auto insurers’ medical benefit payments are controlled by generally limiting providers to 110% of the prevailing fee available under Medicare. –Insurers must contract with peer-review organizations to more effectively evaluate the reasonableness and necessity of medical services and treatment.

Act 6 of 1990 n Key Features (continued) –MANDATORY RATE ROLLBACKS!

Constituencies (Revisited) –The Public –The Legislature –The Insurance Industry –The Trial Bar –The Medical Community

Effects of Act 6 Medical Cost Containment Features n A picture is supposed to be worth a 1000 words n Hopefully the following 4 are worth considerably more!

First Party Benefits Arising Claim Frequency

First Party Benefits Average Paid Loss

Medical Incurred Development

Medical Paid Development

CONCLUSIONS n Act 6 enacted because a successful coalition of constituencies formed n Act 6, especially Choice Features and Medical Cost Containment Features, a big success n Such law changes have substantial effects on actuarial analyses