AUTO MANAGED CARE

Auto Managed Care

Pennsylvania’s Act 6 of 1990Pennsylvania’s Act 6 of 1990Chet SzczepanskiChet Szczepanski

Chief ActuaryChief Actuary

Pennsylvania Insurance DepartmentPennsylvania Insurance Department

Agenda

Review economic and social background leading Review economic and social background leading to Act 6to Act 6

Review legislative background leading to Act 6Review legislative background leading to Act 6 Review specifics of Act 6Review specifics of Act 6 Examine loss cost saving effects of medical cost Examine loss cost saving effects of medical cost

containment features implemented by Act 6containment features implemented by Act 6 Examine impact on loss development and Examine impact on loss development and

reservingreserving

Economic & Social Background

Climate of the 1970’s and 1980’s:Climate of the 1970’s and 1980’s:– High rates of inflation throughout period, High rates of inflation throughout period,

especially medical inflationespecially medical inflation– Society becoming increasingly litigious, Society becoming increasingly litigious,

particularly in large population centers particularly in large population centers such as Philadelphiasuch as Philadelphia

Economic & Social Background(continued)

Insurance Marketplace in the 1970’s and Insurance Marketplace in the 1970’s and 1980’s1980’s– Persistent rate increases outpacing rates of Persistent rate increases outpacing rates of

inflationinflation– Rate increases consistently in the double Rate increases consistently in the double

digits in Philadelphiadigits in Philadelphia– Considerable public discontent Considerable public discontent – Clamor for increased regulatory scrutiny & Clamor for increased regulatory scrutiny &

controlcontrol

Legislative Background

July 19, 1974: Legislature enacts July 19, 1974: Legislature enacts Pennsylvania No-Fault Motor Vehicle Pennsylvania No-Fault Motor Vehicle Insurance ActInsurance Act– Key Features:Key Features:

Unlimited Medical CoverageUnlimited Medical Coverage $750 Monetary Threshold to Bring Suit$750 Monetary Threshold to Bring Suit

Legislative Background(Continued)

– Inflation quickly erodes effectiveness of Inflation quickly erodes effectiveness of $750 monetary threshold$750 monetary threshold

– Ineffective threshold and unlimited medical Ineffective threshold and unlimited medical coverage are catalyst for increased suit coverage are catalyst for increased suit activity and, in turn, excessive medical activity and, in turn, excessive medical usage to perfect claims usage to perfect claims

Legislative Background(Continued)

October 1, 1984: Pennsylvania October 1, 1984: Pennsylvania Legislature repeals No-Fault Motor Legislature repeals No-Fault Motor Vehicle Insurance Act and enacts Motor Vehicle Insurance Act and enacts Motor Vehicle Financial Responsibility LawVehicle Financial Responsibility Law

Key Features:Key Features: Tort System with add-on First Party BenefitsTort System with add-on First Party Benefits Medical Coverage now limited (minimum limit Medical Coverage now limited (minimum limit

$10,000 Medical Benefits)$10,000 Medical Benefits)

Legislative Background(Continued)

To compensate for such severely reduced To compensate for such severely reduced Medical Benefit coverage, Automobile Medical Benefit coverage, Automobile Catastrophic Loss Trust Fund establishedCatastrophic Loss Trust Fund established

– Coverage from $100,000 to $1,000,000Coverage from $100,000 to $1,000,000

– A State Fund (Not a private sector program)A State Fund (Not a private sector program)

– Mandatory ParticipationMandatory Participation

– Funded on a pay as you go basisFunded on a pay as you go basis

– initial “Fee” $5.00initial “Fee” $5.00

– Fee paid with annual automobile registrationFee paid with annual automobile registration

– As “Fee” increases, considerable discontentAs “Fee” increases, considerable discontent

– As Fee hits $25.00, Letter to the Editor states: “I don’t have As Fee hits $25.00, Letter to the Editor states: “I don’t have a cat, what do I need a Cat Fund for?”a cat, what do I need a Cat Fund for?”

Legislative Background(Continued)

Quite possibly worst possible system from a cost Quite possibly worst possible system from a cost perspective:perspective:

– Tort system without limit to suits combined Tort system without limit to suits combined with add-on first party benefitswith add-on first party benefits

– Mandatory uninsured/underinsured motorists Mandatory uninsured/underinsured motorists coverage, which courts rule can be stackedcoverage, which courts rule can be stacked

Combined effects of increased suit activity and Combined effects of increased suit activity and accelerating inflation leads to even greater and accelerating inflation leads to even greater and more frequent rate increasesmore frequent rate increases

Legislative Background(Continued)

Governor Robert P. Casey takes office Governor Robert P. Casey takes office in January, 1987in January, 1987

A populist governor, he makes auto A populist governor, he makes auto insurance reform one of his major insurance reform one of his major legislative goalslegislative goals

Legislative Background(Continued)

Governor Casey introduces a comprehensive Governor Casey introduces a comprehensive auto insurance reform package in early 1988auto insurance reform package in early 1988

– No-Fault system with $10,000 monetary No-Fault system with $10,000 monetary thresholdthreshold

– 80% of bodily injury claims have 80% of bodily injury claims have associated medical costs less than associated medical costs less than $10,000 $10,000

Casey’s proposal fails to gain substantive Casey’s proposal fails to gain substantive support from any constituencysupport from any constituency

Legislative Background(Continued)

Constituencies (Depending on the Constituencies (Depending on the reform package, they can be either reform package, they can be either obstacles or facilitators)obstacles or facilitators)– The PublicThe Public– The LegislatureThe Legislature– The Insurance IndustryThe Insurance Industry– The Trial BarThe Trial Bar– The Medical CommunityThe Medical Community

Legislative Background(Continued)

December 12, 1988: Pennsylvania Legislature December 12, 1988: Pennsylvania Legislature Repeals Automobile Catastrophic Loss Trust FundRepeals Automobile Catastrophic Loss Trust Fund

Institutes runoff of current claims to be funded by Institutes runoff of current claims to be funded by surcharge on driving violation feessurcharge on driving violation fees

Mandates that insurance marketplace offer Mandates that insurance marketplace offer Extraordinary Medical Benefit Coverage for Extraordinary Medical Benefit Coverage for voluntary purchasevoluntary purchase

Coverage similar to original Cat FundCoverage similar to original Cat Fund Initial actuarial cost $45.00Initial actuarial cost $45.00

Legislative Background(Continued)

February 7, 1990: Governor Casey February 7, 1990: Governor Casey signs into law Act 6 of 1990 which signs into law Act 6 of 1990 which substantially modifies the Motor Vehicle substantially modifies the Motor Vehicle Financial Responsibility LawFinancial Responsibility Law

A “Choice No-Fault” SystemA “Choice No-Fault” System

Act 6 of 1990

Key FeaturesKey Features– Policyholders can voluntarily restrict their ability Policyholders can voluntarily restrict their ability

to seek recovery for non-economic damages, to seek recovery for non-economic damages, such as pain and suffering, to only those cases such as pain and suffering, to only those cases resulting in death, serious impairment of bodily resulting in death, serious impairment of bodily function, or permanent serious disfigurement.function, or permanent serious disfigurement.

– Policyholders are prohibited from recovering for Policyholders are prohibited from recovering for economic damages under other insurance economic damages under other insurance coverage, such as Accident & Health Insurancecoverage, such as Accident & Health Insurance

Act 6 of 1990

Key Features (continued)Key Features (continued)– Increased uninsured motorist detection Increased uninsured motorist detection

effortsefforts– Increased anti-fraud measuresIncreased anti-fraud measures

Penalties for insurance fraud stiffened from a Penalties for insurance fraud stiffened from a misdemeanor to a third degree felonymisdemeanor to a third degree felony

Act 6 of 1990

Key Features (continued)Key Features (continued)– Auto insurers’ medical benefit payments Auto insurers’ medical benefit payments

are controlled by generally limiting are controlled by generally limiting providers to 110% of the prevailing fee providers to 110% of the prevailing fee available under Medicare.available under Medicare.

– Insurers must contract with peer-review Insurers must contract with peer-review organizations to more effectively evaluate organizations to more effectively evaluate the reasonableness and necessity of the reasonableness and necessity of medical services and treatment.medical services and treatment.

Act 6 of 1990

Key Features (continued)Key Features (continued)– MANDATORY RATE ROLLBACKS!MANDATORY RATE ROLLBACKS!

Constituencies (Revisited)

–The PublicThe Public

–The LegislatureThe Legislature

–The Insurance IndustryThe Insurance Industry

–The Trial BarThe Trial Bar

–The Medical CommunityThe Medical Community

Effects of Act 6 Medical Cost Containment Features

A picture is supposed to be worth a A picture is supposed to be worth a 1000 words 1000 words

Hopefully the following 4 are worth Hopefully the following 4 are worth considerably more!considerably more!

First Party BenefitsArising Claim Frequency

0.0000

0.5000

1.0000

1.5000

2.0000

2.5000

3.0000

3.5000

Year & Quarter

Fre

qu

en

cy

Pennsylvania Arising Claim Frequency Countrywide Arising Claim Frequency

First Party BenefitsAverage Paid Loss

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

Year & Quarter

Avera

ge P

aid

Lo

ss

Pennsylvania Average Loss Countrywide Average Loss

Medical Incurred Development12 24 36 48 60 72 84 96 108

1977 1978 1979 1980 1.02681981 1.0365 1.06611982 1.0212 1.0716 1.04881983 1.0115 1.0645 1.0738 0.99031984 1.0976 1.1936 1.1243 1.0318 0.99951985 1.0685 1.1233 1.0635 0.9796 0.9856 0.94101986 1.2164 1.1604 1.0562 1.0259 0.9908 1.0134 1.00631987 1.9811 1.2022 1.1074 1.0371 1.0196 1.0109 0.9975 1.06101988 1.9144 1.2666 1.0920 1.0301 1.0382 0.9920 1.0017 0.99951989 1.6970 1.2441 1.1039 1.0478 1.0153 1.0006 1.0061 1.01041990 1.8667 1.1970 1.1231 1.0346 1.0643 1.0089 1.0172 1.00731991 1.8786 1.2042 1.0627 1.0190 1.0203 1.0117 1.0277 1992 1.9160 1.1091 1.0638 1.0197 1.0294 1.0062 1993 1.4730 1.1389 1.0554 1.0285 1.0049 1994 1.7146 1.0540 1.0574 0.9995 1995 1.5063 1.1199 1.0464 1996 1.5621 1.1011 1997 1.4729

Medical Paid Development12 24 36 48 60 72 84 96 108

1977 1978 1979 1980 1.03021981 1.0318 1.02221982 1.0331 1.0388 1.04241983 1.0179 1.0427 1.0277 1.03501984 1.0758 1.0723 1.0596 1.0735 1.04521985 1.1110 1.0670 1.0495 1.0361 1.0345 1.00651986 1.2004 1.1145 1.0689 1.0650 1.0639 1.0491 1.01781987 2.0837 1.2111 1.1031 1.0763 1.0751 1.0545 1.0243 1.01951988 2.3803 1.2223 1.1415 1.1081 1.0816 1.0331 1.0288 1.01661989 2.0436 1.2819 1.1850 1.1002 1.0420 1.0289 1.0234 1.01441990 2.5618 1.2834 1.1544 1.0604 1.0346 1.0296 1.0212 1.01901991 2.3714 1.2319 1.0809 1.0457 1.0362 1.0248 1.0235 1992 2.2078 1.1483 1.0741 1.0428 1.0379 1.0284 1993 1.7344 1.1516 1.0794 1.0496 1.0296 1994 1.8878 1.1573 1.0840 1.0603 1995 1.7767 1.1451 1.0778 1996 1.7839 1.1621 1997 1.6956 1998

CONCLUSIONS

Act 6 enacted because a successful Act 6 enacted because a successful coalition of constituencies formedcoalition of constituencies formed

Act 6, especially Choice Features and Act 6, especially Choice Features and Medical Cost Containment Features, a Medical Cost Containment Features, a big successbig success

Such law changes have substantial Such law changes have substantial effects on actuarial analyseseffects on actuarial analyses