By Cory Bilton
Open enrollment for health insurance offered by the Affordable Care Act (“ACA”) recently wrapped up. Initial reports indicate 7.1 million people have signed up for health insurance through the exchanges since the ACA enrollment started. Many personal injury lawyers, myself included, are curious to see what effect the ACA will have on our clients. Back when open enrollment first started, I made a number of practical predictions about how the ACA will affect our clients and practice. Last week, the nonprofit, nonpartisan RAND Corporation issued a new report predicting the effect the ACA will have on different types of liability insurance, such as automobile insurance. While some of the information in the report is insightful, much of the analysis has limited application to the DC metropolitan area.
Before I start summarizing the report, it is important to remember that healthcare costs are like a long balloon that a magician uses to make animal shapes. The balloon contains a specific amount of air. Squeezing one segment can make it smaller, but it simultaneously makes another segment larger. For healthcare costs, the segments are (a) consumers, (b) medical care providers, (c) health insurance companies, (d) liability insurance companies that pay for injuries, and (e) the government. Giving one segment a benefit will impose a cost on at least one other segment. For example, reducing the price that consumers pay for a doctor’s visit causes the doctor’s revenues to decline. Broadly speaking, the RAND report discusses how the ACA will inflate, or deflate, the liability insurance segment of the healthcare cost balloon. Deflating the liability insurance segment does not mean that the costs disappear, just that they are borne by another balloon segment.
RAND Report Summary
The report breaks the ACA’s effect into five main mechanisms which may impact liability insurance (all numerical estimates refer to national averages):
1. Individual Substitution Effect:
The report defines this as the tendency for an uninsured person to “use liability coverage as a vehicle for (1) untreated conditions unrelated to the accident in question or (2) related conditions made worse by lack of health insurance.”
The average predicted change in liability insurance costs due to Individual Substitution Effect is:
Auto (1st party): -0.6 % Auto (3rd party): -0.4 % Workers Comp: -0.6 %
2. Collateral Source Effect:
Some states have eliminated the collateral source rule and thus allow reduction of the injured person’s damage award by the amount of other insurance benefits the injured person received. Since the ACA encourages individuals to buy health insurance, the RAND researchers argue that this will reduce liability insurance payments in states that do this.
The average predicted change in liability insurance costs due to the Collateral Source Effect is:
Auto (third party): -1.0 % Medical Malpractice: -0.6 %
3. Provider Treatment Effect:
Health care providers (e.g. doctors and hospitals) are more likely to treat patients that have health insurance, and are more likely to provide a greater quantity of treatment to patients with health insurance. If more accident victims have health insurance under the ACA, then liability insurance payouts will likely increase because doctors will provide them with more care, thus increasing the total cost of the treatment, which increases the damages paid.
The average predicted change in liability insurance costs due to the Provider Treatment Effect is:
Auto (third party): + 0.4
4. Direct Fee Effect:
Some types of liability insurance pay medical expenses directly. In some states, liability insurers are able to use Medicare rates as the basis of the fee the liability insurer pays directly. Since Medicare rates are being reduced under the ACA, this rate reduction will have some spillover effect on liability insurance.
The average predicted change in liability insurance costs due to the Direct Fee Effect:
Auto (first party): -0.8 % Auto (third party): -0.7 % Workers Comp: -1.5 %
5. Medical Malpractice Volume Effect:
Since more people will have health insurance under the ACA, more people will visit doctors. Increased contact with doctors and hospitals is likely to increase the frequency of medical malpractice claims.
The average predicted change in medical malpractice insurance costs due to this effect: 3.4 %.
Overall Effect:
The RAND report predicts the combined impact of these five mechanisms on liability insurance costs as:
Auto (1st party): -1.4 % Auto (3rd party): -1.7 % WC: -1.4 % Med Mal: 2.4 %
What About Washington, DC, Virginia, and Maryland?
The RAND report does not publish detailed predictions for each state. However, since the report identifies the mechanisms that could drive changes in liability insurance costs, we can consider whether those mechanisms will produce a similar effect in the Washington, DC area. My predictions only relate to auto insurance and medical malpractice insurance. I have no familiarity with workers compensation insurance, so I make no predictions about the ACA’s effect on it.
1. Individual Substitution Effect in DC, Virginia, and Maryland
For the individual substitution effect, the analysts that produced the RAND report proceeded with the assumption that for people without health insurance, 20% of all treatment paid by liability insurers for auto injuries was unrelated to the accident (compared with 10% for those with health insurance). Without this assumption, the Individual Substitution Effect would have had no effect on liability insurance prices. Hypothetically speaking, if unrelated medical expenses are included in a claim and paid by mistake, the 20% figure seems to indicate excessive sloppiness on the part of insurance adjusters and lawyers on both sides. Instead of a mistake, if this mechanism is estimating the amount of intentionally fraudulent claims, that assumes pretty frequent and widespread insurance fraud.
Washington, DC, Virginia, and Maryland probably don’t differ much from the rest of the country in terms of insurance fraud. Committing insurance fraud may make both the claimant and the attorney liable for criminal or civil penalties. So it is a very serious matter. Estimating that 20% of medical expenses paid by liability carriers are fraudulent seems a very high estimate, particularly if that’s just an assumption. Insurance companies are often quick to throw around the word fraud, because characterizing payments as fraudulent is the easiest way to cast them as harmful or criminal. (Let’s face it, any payment is a loss for the insurance company, even for meritorious claims.) From my experience, it is flatly wrong to say that 20% of medical expenses our clients incur are intentionally fraudulent. My estimate of the Individual Substitution Effect on liability insurance in the Washington, DC area: 0% (or negligible).
2. Collateral Source Effect in DC, Virginia, and Maryland
Washington, DC, Virginia, and Maryland all adhere to the collateral source doctrine. The doctrine states that a liable party should not benefit from the injured victim’s foresight in procuring other benefits such as health insurance. Simply put, the wrongdoer shouldn’t get a discount because the injured person’s hospital bills were paid by the victim’s own health insurance. The RAND report included this effect because some states have abandoned the collateral source doctrine. Since it is still in effect in our three jurisdictions, there is no collateral source effect locally. My estimate of the Collateral Source Effect on the Washington, DC area: 0%.
3. Provider Treatment Effect in DC, Virginia, and Maryland
This effect says that doctors are willing to provide more treatment to people with health insurance because the doctor knows she will be paid for her efforts. For just a single visit, the doctor is probably not aware of the patient’s insurance status, so it probably has no effect. However, for repeated visits or ongoing treatment, I imagine that doctors are more willing to provide treatment for those with health insurance. In this respect, doctors and hospitals in the DC metropolitan area are no different than doctors anywhere else in the country. Therefore, for the local forecast I’ll defer to the RAND report’s estimate on the Provider Treatment Effect: + 0.4 %.
4. Direct Fee Effect in DC, Virginia, and Maryland
It is unusual for fault-based liability insurance to directly pay for an injured person’s medical treatment in the Washington, DC area. As mentioned above, since the collateral source rule prevents the defendant’s insurer from getting a discount on medical care because of the injured victim’s foresight, there is no reason for the liability insurer to be paying the medical bills directly. Liability carriers may try to argue that the charges are unreasonable, but this would be only tenuously related to the prices affected by the ACA.
By contrast, first party insurance for injuries (“no fault” insurance), such as PIP and MedPay, sometimes does pay doctors and hospitals directly. For this type of insurance, there are local laws and practices that come into play. In DC, PIP insurers are only required to provide coverage when there is no other insurance coverage. Fisher v. GEICO, 762 A.2d 35 (DC 2000); DC Code § 31-2406(g). Therefore, as more DC residents gain health insurance, DC PIP insurers should see reduced claims. There are some unique coordination issues between Maryland PIP and health insurers that I’ve posted about before. But as a general matter, Maryland PIP insurers are on the hook for the reasonable and necessary medical expenses, even if the expenses have been paid by a person’s health insurer. See Maryland Insurance Code § 19-507(a). Therefore, Maryland PIP insurers will not experience much of an impact because of increased health insurance coverage. Lastly, Virginia Med Pay insurers are only required to pay for medical expenses that have been “incurred.” If the injured person has health insurance, then the amount incurred is the amount that the health insurer paid plus any co-payment or deductible paid by the individual. See State Farm v. Bowers, 500 S.E.2d 212 (Va. 1998); Virginia Code § 38.2-2201(A)(3)(b). Because previously uninsured Virginians will be more likely to have health insurance under the ACA, Med Pay insurers are likely to see reduced costs for medical expenses.
My prediction for the ACA’s impact on local liability insurers is therefore: Auto (third-party) 0 %; Auto (first party) – 0.8 %.
5. Medical Malpractice Volume Effect in Washington, DC, Virginia, and Maryland
The basic idea behind the Medical Malpractice Volume Effect is just that uninsured people that don’t visit doctors don’t make malpractice claims. Uninsured people that get health insurance will likely get more health care than when they were uninsured. These new contacts with doctors will most likely result in some new malpractice claims. There is nothing that stands out in our local laws that would make this effect any different here than for the rest of the country. Therefore, for this mechanism, I will again defer to the RAND report estimate: Medical Malpractice 3.4 %.
Conclusion
By first taking the framework established in the RAND report and then doing my own predictions for Washington, DC, Virginia, and Maryland, the total effects are:
Auto (3rd party): + 0.4 % Auto (1st party): – 0.8 % Medical Malpractice: + 3.4 %
Maybe these predictions bear out, and maybe not. The reasoning in this post and the RAND report makes serious assumptions based on little hard data. However, in thinking about how the ACA will affect liability insurance, some interesting aspects of our local laws come into focus. As I mentioned in my original post on the ACA’s effect, the biggest benefit will be one that the RAND report did not discuss: better outcomes for injured victims. Without a doubt, individuals with health insurance fair better physically, mentally, and financially in the aftermath of an accident. Since an individual can’t predict when she will be involved in an accident, the ACA’s health insurance mandate provides a benefit to everyone.
Please read my disclaimer.