No-fault 'savings' have a high cost.

The federal "choice" no-fault proposal is being sold as a tax cut by its proponents, because, they claim, huge savings would result from it. The premise of the "choice" no-fault bill is that drivers would choose between being covered by their state's current system or by a new, untested no-fault scheme. The "choice" mechanism in the bill was discussed in the May 1997 "Washington Focus" column.

Since that article was written, the bill was reintroduced on April 22, and members of ATLAS's Motor Vehicle Coordinating Committee and ATLA staff have analyzed the legislation searching for the source of the supposed savings. Unfortunately for those hoping for an auto insurance tax cut, the savings are illusory.

Even if the plan actually delivers lower premiums -- which would be contrary to the experience of states that have enacted no-fault plans -- the savings will occur mainly by shifting auto collision injury costs from the person at fault to the health care system and by eliminating noneconomic damages. This cost-shifting mechanism is explicit in the bill, but it is also inherent in the structure of no-fault. The bottom line is that, rather than saving drivers money through reduced insurance premiums, the plan would end up costing everyone more.

The bill explicitly authorizes no-fault insurers to offer their insurance as secondary to any health, disability, or accident coverage, making these sources primary coverage in case of an auto collision. This provision is the Trojan horse from which any "savings" in the bill will emerge. No-fault insurers will tailor their policies to exclude any expenses that could be paid by health, disability, or accident policies. This might indeed reduce the costs of auto insurance, because, in most instances, the insurers will never have to pay claims. The cost will be borne, in the end, by consumers, who will be left wondering why health and disability coverage premiums are going up while auto coverage is going down.

If this provision were not enough, the bill requires that no-fault benefits be reduced by the amount of workers' compensation benefits paid under federal or state law. This stronger, mandatory reduction provision may have been included to prevent states from enacting laws to ban shifting costs to the already overburdened workers'compensation system.

These provisions mirror a compelling incentive to shift costs that result from the structure of no-fault insurance itself.

The biggest difference between the traditional tort system and no-fault insurance is in who receives the benefit of the insurance. In traditional tort systems, drivers buy insurance to take care of those they injure in an auto collision. In such a third-party system, the protection afforded to the person covered by the insurance is protection for those they injure.

A first-party system like no-fault is based on a different concept. Drivers buy insurance to cover their own injuries, regardless of who caused the collision. Under the "choice" bill, liability for damages is extremely limited for no-fault drivers, since all drivers must first seek compensation from their own first-party coverage.

What would be the consequences of changing to a first-party system rather than a third-party system? The answer is shifting responsibility from those who cause an injury to everyone else.

No-fault insurance shifts costs to everyone who buys health or disability insurance. This burden would eventually be reflected in higher rates for these kinds of insurance. Since many Americans receive their health care and disability coverage through their employers, this system will shift costs away from the person responsible for an injury and onto the rest of us. Unlike traditional tort coverage, no-fault gives drivers an incentive to shift costs to coverage subsidized by their employers.

Drivers will contract for a no-fault policy akin to "medigap" insurance. The policy would pay for copayments, deductibles, and costs if the drivers run their health coverage dry, but no-fault would be secondary to their primary health and disability coverage. The no-fault policy would be cheap, mainly because it would only be used to pay the remaining amount of a major claim after other sources like health, workers' compensation, and disability coverage were exhausted.

But what might seem like a good deal really is not, as a matter of economics and of public policy. Shifting the real costs of auto collision injuries to the health care system places a new and expensive burden on an already overtaxed system. No-fault drivers might pay less for auto insurance, but the cost of their coverage would be passed on to everyone who pays for health insurance.

What's more, that cost will end up being passed on to the taxpayers. Millions of Americans rely on federal or state health care like Medicare and Medicaid as their primary source of health care. Currently, by law, Medicare and Medicaid coverage must be secondary to any auto liability payment.

This proposal would make Medicare and Medicaid primary coverage for auto collision injuries. Where will the money to pay for these additional costs to the Medicare and Medicaid system come from? When no-fault policies transfer liability for economic costs of auto collision injuries to the government, everyone pays.

The liability system promotes accountability. When one person's carelessness causes another's injury, fairness demands that the careless person pay to make the injured person whole. This no-fault proposal stands this principle on its head by shifting the cost of one person's carelessness to everyone else. This is legally, morally, and ethically indefensible.