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A Test Drive for Obamacare

Michigan’s auto insurance nightmare.

Nov 21, 2011, Vol. 17, No. 10 • By ELI LEHRER
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When Sam Howell woke up a year after a car accident left him in a coma, doctors believed the St. Charles, Michigan, man would never walk, talk, or eat solid food again. They were wrong, the Saginaw News reports. With care from his mother, a nurse, and a team of specialists, the 25-year-old can now walk, throw a shot put (he holds a record for disabled athletes), and even dance a bit.

Photo of car crash

The medical bills for his complex rehabilitative care totaled more than $700,000 for the first three months, and thanks to Michigan’s unique automobile insurance system, his ordinary auto insurance policy covered all of them. If his mother had wanted to be paid for her time caring for her son, the state insurance fund would even have sprung for that. 

It’s a story with a happy ending. As Republicans in the Michigan legislature consider bills to change the state’s auto insurance system, its defenders haven’t been shy about trotting out Howell and others like him. But such stories don’t speak to the system’s serious problems. 

For all the genuine good it does for people like Howell, Michigan’s auto insurance system has collapsed entirely in parts of the state. Major causes of the system’s ills—exploding costs, the failure of an “individual mandate” to provide universal coverage, and the high prevalence of fraud—serve as portents for the direction of the nation’s health care system and rejoinders to favorite shibboleths of both left and right.

Some background on Michigan’s system first. Like 11 other states, Michigan requires all auto insurance to be offered on a “no fault” basis, and, like all states, it imposes an individual mandate to buy coverage or otherwise show financial responsibility for the consequences of one’s driving. When individuals or their cars sustain damages in auto accidents, Michigan residents file claims with their own auto insurance companies rather than trying to bill the at-fault party’s insurer or filing a tort claim. (This is the way health insurance works too.) 

Unlike auto policies sold in other states, which rarely cover more than $100,000 in medical bills before asking private health insurance, families, and government programs to pick up the tab, Michigan requires all auto insurance policies to include unlimited medical coverage, just as all U.S. health care policies will have to do starting in 2014. Insurers aren’t directly on the hook for unlimited benefits since a special tax on each policy, currently $145 per year, goes into a fund that covers claims above $480,000.

Michigan statutes and case law force the system on everyone. Paying into an uninsured motorists’ fund or posting a bond can’t substitute for auto insurance in Michigan, as it can in some other states. The state’s very high bar for tort cases, raised even further by a 2004 state supreme court decision, means that almost no one injured in an auto accident can even have a day in court. (People who have serious or costly injuries in other “no fault” states can almost always sue in practice.) 

Not surprisingly, this system costs a lot even though it operates largely without the trial lawyers who are the bête noire of insurers everywhere else. The website finds that in 2011 Michigan auto insurance quotes averaged $2,541 a year. This was the highest, by far, among the country’s big states and more than individual health insurance policies cost in some areas. 

With that said, not everyone ends up worse off under the system. In a lightly populated part of Berrien County—a southwest Michigan locale that’s home to the appliance maker Whirlpool, apple orchards, and many Chicagoans’ summer cottages—a benefits-loaded, unlimited-medical-expenses two-car policy runs about a hundred dollars less than one with much scantier coverage in Northern Virginia.

But where crime, accidents, and fraud are bigger problems, the costs soar. The Insurance Information Institute reports that a typical single-car policy in Detroit costs more than $5,100, more than a third of the city’s per capita income of $15,000. Rates in Flint and other similarly distressed cities are almost as high. As a result, the insurance market has collapsed in some parts of the state. The state’s biggest auto insurer has 10 agents in Detroit (population 713,000) and 50 in more prosperous Grand Rapids (population 188,000).

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