Automobile managed care: beware the newest scheme.

The insurance industry has failed to substantially and permanently reduce auto insurance rates under a managed care system.

Today, one of the highest priorities of the insurance industry is to push managed care into automobile insurance coverage. This system is designed to enhance industry profits et the expense of the consumer.

Under automobile managed care, the policyholder agrees to use a designated preferred provider organization (PPO) or other health maintenance organization (HMO) for all nonemergency health care that results from an auto collision.

APPO provides health care through a network of hospitals and health care providers. An injured policyholder who requires emergency care is allowed to use an emergency facility not within the PPO network. But after the insurance company and the treating physician determine that the person's condition has stabilized, the insurance company has the right to transfer the person's care to a PPO physician.

Under a managed care system, the policyholder agrees that the named policyholder, resident spouse, resident relatives, and any other person operating the policyholder's car with consent will seek nonemergency treatment or care for bodily injury only through the PPO the insurance company designates. The policyholder must agree that the company and/or its designated health care review agency will preauthorize, monitor, and review the appropriateness of health care services covered under the policy.

These independent companies or in-house panels decide how much hospitalization and specialized care a patient should receive. The insurance company will pay only for services approved by its review agency.

In most PPO and HMO plans, network services not rendered directly by the insured's participating primary care physician require either a physician's authorization or approval from an insurance clerk. The insured may see a specialist or go to a hospital for a nonemergency condition only after receiving a referral from this physician or clerk. The primary care physician or insurance clerk serves as the "gatekeeper" for specialist and hospital services. Insureds may be charged with penalties, deductibles, or

co-payments if they obtain care outside the plan.(1)

Proponents of the managed care option assert that it saves drivers money by

* providing a reduction in insurance rates for those drivers who sign up for the option,

* reducing the costs of the personal injury protection (PIP) part of a policy, and

* reducing excessive medical treatment and thus decreasing the costs of providing medical care for injured motorists.

Drivers, however, should be wary. Managed care is only the insurance industry's first step at limiting injured motorists' access to choosing their own physician and to receiving full medical care.

In Colorado, for example, shortly after the legislature allowed Colorado insurance representatives to begin selling PPO policies in 1991, the industry recommended that a proposal to implement "fee schedules" be given further study. Although this proposal has not been adopted, it would have enabled insurers effectively replace a cap on how much they would have to pay for specific medical services. Such proposals would essentially force insureds to make up the difference between what their insurer pays and what their physician charges.(2)

What do you know?

Another problem is that provisions of the managed care option are often not fully explained to insureds. A 1993 survey, conducted by the Kaiser Family Foundation and the chairman of the Harvard School of Health Policy and Management, found that only 31 percent of consumers even know what managed care is.(3) Those who have bought or are contemplating buying the PPO option for auto insurance should inquire into whether the alleged cost savings are realistic when considering the reduced quality of care that may result.

Under automobile managed care,

* premium reductions for the managed care option do not significantly affect the total premium charged,

* cost savings realized are not being passed on to policyholders,

* below-average drivers are rewarded financially more than good drivers,

* rights of injured motorists to hold careless drivers accountable are restricted,

* policyholders sustaining traumatic injuries do not receive appropriate medical care, and

* medical providers working for managed care networks are given financial incentives as a means of controlling costs.

Although the insurance industry push to provide health care through HMOs and PPOs has been seen in several states, only four have enacted some variation of managed care for first party auto insurance benefits: Colorado, Florida, Hawaii, and New York.

Effective July 1, 1991, Colorado was the first state to enact legislation that provided for managed care under the PIP coverages of auto policies.(4) In 1991, Florida legislators enacted a managed care option that allows insureds to opt for managed care after being injured in an auto collision.

In 1993, Hawaii implemented a mandatory automobile managed care system for treating auto accident-related injuries. Although this kind of legislation was passed in New York in 1993, full approval of an insurance company to offer auto managed care was delayed until spring 1996.

In Massachusetts, the managed care system is pending after the insurance commissioner initially approved an insurer's bid to offer this option. The commissioner approved the plan without any public hearing and by circumventing the legislative process. An action was brought against the commissioner because of her methods.

Typically, changes of this caliber must be handled by the legislature, and they can occur only after legislators have had an opportunity to study the proposed plan.(5) If the Massachusetts commissioner succeeds at by-passing legislative consideration and sneaking auto managed care in through the back door, legislators and consumers should anticipate this tactic in other states.

New Jersey Insurance Commissioner Elizabeth Randall recognized the necessity of including the legislature in the decision-making process. After allowing a managed care proposal to expire, she said, "A change in the law rather than a change in a regulation is necessary."(6)

Although Florida, Hawaii, and New York have also implemented auto managed care systems, this article primarily focuses on data from Colorado to determine whether the managed care option significantly affects insurance costs.

Since Florida's law allows policyholders to opt for managed care after they are involved in an accident, while Colorado's law requires that policyholders select the option when applying for insurance, Florida's law does not appear to be a model for the scheme currently being pushed by the industry.

Hawaii's managed care system, unlike these other systems, is mandatory and implements medical fee schedules. Since New York only fully approved a system in the spring of 1996, the data available will not yet reflect the impact of this system on insurance figures. Because Colorado's law fits the current model and has been in effect long enough to affect insurance figures, its data appears to be more valuable.

Dramatic overall savings?

Premium reductions for the managed care option do not significantly affect the total premium charged.

When consumers are told that by choosing this option they will receive a "15 percent reduction" in their insurance costs, they believe this reduction will save them 15 percent of their entire auto insurance premium. In actuality, however, any reduction is applied only to the PIP or med-pay part of their total auto insurance costs.

Generally, the PIP part of the costs accounts for as little as 5 percent of the total premium.(7) Obviously this reduction will not significantly lower the total premium that is charged.

In Colorado, the proponents of auto managed care asserted that implementing this system was necessary to reduce the spiraling costs of auto insurance in the state. Are Colorado drivers now paying substantially less for auto insurance?

The part of the premium covering PIP benefits was initially reduced by 10 percent to 25 percent.(8) However, most insurers ended up raising rates (including PIP premiums) within a few months of passage of the law. Thus, real savings either never occurred or lasted only a few months.

According to the National Association of Insurance Commissioners (NAIC), despite the alleged savings from the managed care option, Colorado's total auto insurance rates are now higher than the national average.(9) In 1990, Colorado drivers paid an average of $333.04 for auto insurance, 107 percent below the national average. In 1994, those same drivers paid $475.52 for insurance, 113 percent more than the national average. This is an approximate 220 percent increase from 1990 to 1994.(10) From this evidence, it can only be deduced that the insurance industry has failed to substantially and permanently reduce auto insurance rates under a managed care system.

Likewise, in Hawaii, although legislators approved auto managed care in 1993 with the intent of reducing insurance costs, recent data from the NAIC shows that in 1994, the year after the system was implemented, Hawaii had the highest annual average premium rate for private passenger auto insurance at $741.(11)

Cost savings are not being passed on to policyholders.

For consumers to realize savings under a managed care system, the industry must guarantee that savings will be passed along to drivers in reduced insurance costs. Before enacting auto managed care, Colorado insurers resumed about 68 percent of premiums to their policyholders in the form of increased benefits or decreased premium costs. In 1994, however, NAIC data reveal that three years after managed care had been fully implemented, the percentage of premiums resumed to policyholders as benefits declined to about 48 percent.(12)

From 1990 to 1994, there has been more than a 25 percent decline in the amount returned to policyholders.(13) If the savings are not being passed on to policyholders, where are they going?

Physicians participating in a PPO program will likely be reluctant to testify for their patients for fear that the PPO will harass or discharge them

Evidence shows that while the insurers are cutting the costs of medical care to policyholders and while physicians' salaries are declining, the insurance managed care industry is getting richer.

One financial report states that CEOs of managed care organizations earn about 62 percent more than other industry CEOs with similar responsibilities who work at comparably sized companies.(14) The report indicates that shareholders of managed care companies are also profiting, performing collectively at the 84th percentile in shareholder returns.(15)

Although insurers are bringing in more money, physicians' salaries declined an average of 3.8 percent in 1994. In a recent study, the American Medical Association (AMA) reports that this is the first decline since 1982. The study says that based on the data, this is "the first evidence that a health care system dominated by managed care is lowering physicians' income."(16)

The profitability of auto insurers in Colorado has increased significantly since the managed health care plan was introduced. NAIC reports that from 1990 (the year before enactment of auto managed care) to 1994, Colorado insurers' profits on the private passenger auto line increased about 74 percent.(17) When will these savings be passed on to the consumer?

Below-average drivers are rewarded financially more than good drivers.

In Colorado, drivers are categorized as preferred (good drivers), standard (average drivers), and nonstandard (below average drivers). Under auto managed care programs, careless drivers receive greater financial savings than safe drivers.

NAIC reports that in Colorado, the average annual savings per policyholder for the PPO options ranges from $23.01 per auto in a preferred program (good drivers) to $129 per auto in a nonstandard (below-average drivers) program.(18) This translates to a savings of less than $2 a month for a good driver, but a savings of almost $11 a month for a below-average driver.

Consumers should ask two questions when considering managed care: (1) Why in a society that values accountability are bad drivers rewarded more than good drivers? (2) Should good drivers give up their freedom of choice to pick their own physician for a savings of only $2 a month?

Rights of injured motorists to hold careless drivers accountable are restricted.

Although Colorado legislators might not have realized that enacting this program would enable insurers to serve as gatekeepers at the courthouse door, consumers should be informed of this consequence. Under the law, a person injured in an auto collision can go to court only after medical costs reach a "threshold" of $2,500.

By controlling a policyholder's medical expenses so that they do not reach this threshold, insurers can effectively guarantee that injured drivers do not reach the courthouse.

Although state legislators rejected a State Farm-sponsored bill in 1992 that would have raised Colorado's "threshold" to $50,000, the industry can still theoretically accomplish its goal of limiting injured policyholders' access to court by simply controlling and minimizing medical expenses under auto managed care.(19)

Policyholders who sustain traumatic injuries in auto accidents do not receive appropriate medical care.

Although many individuals question whether managed health care may hold down the costs of routine health care services, no such question exists when it comes to care other than routine care.(20) To hold down the overall costs of medical care, managed health care focuses on prevention. This philosophy, however, does not apply to the delivery of emergency care or long-term health care.

Here is an example that illustrates this point. A woman with a chronic hip problem is currently being treated by a provider through her HMO. Because she is too young for a hip replacement, her physician determines that the necessary treatment should be conservative.

As a passenger in her husband's car, however, her hip is further injured when the car is broadsided by a tractor trailer. Because her husband has chosen to enroll in the managed care plan offered by his automobile insurance carrier and because the wife's current physician is not on the auto insurer's provider list, this woman will be forced to seek care from a new physician, unfamiliar with her medical history, for the first part of her care before she is transferred back to her own doctor.(21)

Medical providers are given financial incentives as a means of controlling treatment costs.

The insurance industry has built in financial incentives for physicians to minimize medical care. Physicians, in the role of gate-keepers, are authorized to determine patient accessibility to diagnostic tests and hospital care, for example.(22)

One incentive is a "capitated" reimbursement system. A physician is given a fixed amount of money to provide medical services to a policyholder. (generally, a physician who provides care for less than the amount initially designated can keep all or part of this amount. A physician who spends more than the designated amount, however, will be held financially responsible for some or all of that amount.(23)

Physicians who seek prior approval from the insurer before administering medical care receive financial incentives.

On the other hand, physicians who fail to alert the Minnesota Blue Cross & Blue Shield insurance company before administering medical care to a patient have their payments cut by 25 percent.(24)

Physicians are also financially motivated to spend as little time as possible with each patient. Because they receive a specified amount for each patient, the more patients they see, the greater the profit for physicians each day.(25)

Finally, physicians participating in a PPO program will likely be reluctant to testify for their patients for fear that the PPO will harass or discharge them. Physicians who recognize this conflict and who truly have their patients' interests at heart are afforded no protection.

A patient's freedom of choice and right to informed consent should not be curtailed by an industry motivated to minimize expenses and maximize profits.

Unsound policy

This analysis shows the importance of examining the value of auto managed care. From the data available, the alleged cost savings that the industry promises are not being passed on to drivers.

Further, managed care is not suitable for the emergency treatment that is often required in connection with auto accidents. And managed care driven by a profit incentive is not suitable for the long-term care often associated with the type of injuries auto accident survivors suffer.

So far, two conclusions can be drawn from the experience of managed care: (1) Managed care is designed to limit consumer options with respect to choice of doctors and medical facilities, and (2) the primary purpose of the insurance industry has to be recognized as conducting business in which the ultimate goal is profit.

The question that needs to be addressed is whether it is sound public policy to place the management of automobile policyholder health care needs in the hands of an industry that places profit before people.

Notes

(1.) Robert M. Ferm & Alan J. Schmitz,Managed Care Option Cuts Auto Insurers' Costs, BEST'S REV., Oct. 1995, at 65, 66.

(2.) Andy Van De Voorde, Playing Doctor, WESTWORD, Jan. 6-12, 1993, at 8.

(3.) Spencer Rich & Thomas B. Edsall, GAO Report Finds Little Evidence of Savings in Managed Health Care, WASH. POST, Oct. 20, 1993, at A8.

(4.) Van De Voorde, supra note 2.

(5.) Testimony of Kathleen M. O'Donnell, President, Massachusetts Academy of Trial Attorneys, before the Massachusetts Division of Insurance, Docket No. R96-39, Aug. 15, 1996, at 1.

(6.) FED. & ST. INS. WK., Sept. 16, 1996, at 5.

(7.) L. Wayne Hicks, Auto Insurers Drive Bargain with Managed Care Providers, DENV. BUS. J., May 29-June 4, 1992, at 7.

(8.) Ferm & Schmitz, supra note 1, at 66.

(9.) NAIC, STATE AVERAGE EXPENDITURES & PREMIUMS FOR PERSONAL AUTOMOBILE INSURANCE IN 1994 (Jan. 1996).

(10.) Id.

(11.) Id.

(12.) Id.

(13.) NAIC, REPORT ON PROFITABILITY BY LINE BY STATE 1994 (Nov. 1995); INSURANCE SERVICES OFFICE, INC., FAST TRACK MONITORING SYSTEM CLAIM COST AND FREQUENCY (1995). The REPORT ON PROFITABILITY percentage of "losses incurred" times the average premium information from STATE AVERAGE EXPENDITURES equals the part of the average premium that is returned to the policyholder.

(14.) Graef S. Crystal, Managed Care CEOs: `It's Great to Be King!' MED. BENEFITS, Mar. 15, 1996, at 5.

(15.) Id at 6.

(16.) Managed Care and Physicians' incomes, ST. HEALTH NOTES, Oct. 14,1996, at 5.

(17.) NAIC, REPORT ON PROFITABILITY, supra note 13.

(18.) Christel L. Szczesniak, Cost Containment Under Personal Injury Protection, NAIC RES. Q., Jan. 1996, at 4.

(19.) Van De Voorde, supra note 2, at 8.

(20.) Rich & Edsall, supra note 3 (Report finds that there is no conclusive evidence that managed health care provides cost savings to policyholders because HMOs tend to enroll healthy people who are less expensive to treat.).

(21.) Testimony of Kathleen M. O'Donnell, supra note 5, at 19.

(22.) Marc A. Rodwin, Consumer Protection and Managed Care: issues, Reform Proposals, and Trade-Offs, 32 HOUS. L. REV. 1321(1996).

(23.) John Petrila, Symposium:Ethics, Money, and the Problem of Coercion in Managed Behavioral Health Care, 40 ST. LOUIS L.J. 359 (1996).

(24.) Insurers v. Doctors: Who Knows Best? BUS. WEEK, Feb. 18, 1991, at 64.

(25.) Rodwin, supra note 22, at 1326.

Annette Wencl is ATLA's director of state affairs. Roselyn Vacante is state research counsel for the association.