AUTO MANAGED CARE

1. AUTO MANAGED CARE

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

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

4. Economic & Social Background • 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

5. Economic & Social Background(continued) • 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

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

7. 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

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

9. Legislative Background(Continued) • 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?”

10. Legislative Background(Continued) • 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 • Combined effects of increased suit activity and accelerating inflation leads to even greater and more frequent rate increases

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

12. Legislative Background(Continued) • 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 • Casey’s proposal fails to gain substantive support from any constituency

13. Legislative Background(Continued) • 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

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

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

16. Act 6 of 1990 • 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

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

18. Act 6 of 1990 • 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.

19. Act 6 of 1990 • Key Features (continued) • MANDATORY RATE ROLLBACKS!

20. Constituencies (Revisited) • The Public • The Legislature • The Insurance Industry • The Trial Bar • The Medical Community

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

22. First Party BenefitsArising Claim Frequency

23. First Party BenefitsAverage Paid Loss

24. Medical Incurred Development

25. Medical Paid Development

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