An Unholy Alliance: The insurance and litigation industries

A friend of mine recently commented that health insurance is a weird model for the insurance industry to follow, and I very much agree. His comment was a comparison between doctor visits and automotive maintenance, and the fact that you wouldn’t file an insurance claim for bringing your car in for scheduled maintenance.

My first response to that would be to note that some consumers can never afford general maintenance on their cars, so end up paying very big bills for things that wear out catastrophically, while other consumers either perform the maintenance, or pay somebody else to do so (I’m a chronic purchaser of maintenance), and don’t spend a lot on major maintenance. I think that the health insurance industry notices that it spends less on catastrophic care if customers get routine care. Since it is paid enough to support the risk of short term catastrophic care among the client base, any money saved by reducing cost of that care is money in the pocket. Simple economics, complicated by the uncomfortable fact that Blue Cross doesn’t really want to get out of the business of catastrophic care, because it’s a hugely profitable business – they want to get paid for covering and administering every catastrophic medical situation in the country.  My second response would be that my Toyota RAV4, no matter what damage has been done to it, isn’t going to cost $200K to fix. Repairing me is in an entirely different economic stratus.

The insurance industry as a whole has the risk of each medical transaction covered both ways, just like the neighborhood bookie (for those neighborhoods that have bookies. Mine doesn’t have a bookie – just an insurance broker). I pay an insurance company to cover my costs if I break my leg, or develop cancer; my doctor pays an insurance company to cover his costs if he either screws up my care, or if nature takes its course and I die, then some ambulance chaser convinces my wife in her grief that I shouldn’t have died; and I pay an insurance company to cover my costs if a moose wanders into my car on the road; the body shop which repairs my car pays an insurance company in case one of their guys forgets to replace a bolt, the bumper falls off, and takes out my exhaust system.

I’ve wanted to talk about the unholy alliance of the insurance industry and the Personal Injury lawsuit industry for some time. It’s become clear to me, though, that Insurance is an across-the-board contributor to escalating costs in virtually any market that it invades.

One secret that the insurance industry holds is pretty simple. Charge people a reasonable amount per year for whatever they want to be protected from, then, when disaster strikes, pay whatever the provider wants to charge. In a short time, years or decades, the provider will be charging far more for its service than a normal person can afford. THEN, everybody must buy insurance to use that service. Once providers are no longer subject to any market forces, it’s safe to crank up the premiums, because consumers can no longer pay for the service directly. I’m reasonably convinced that this isn’t done by any sort of conspiracy, but the insurance industry has a habit of destroying market forces.

Another secret: Lawyers add fun and profit to both sides of the insurance game. A friend got into a moderate to severe, no-fault, traffic accident. His major automotive insurance company was aware that he had military medical, so low-balled him on handling his care, as well as totaling his car out for about half the blue-book value. He paid a lawyer a few hundred dollars to draft a letter from a law office. The insurance company woke up. Lawyers had become involved, and they wanted to settle this amicably (read, for about thirteen thousand more than they would have paid my friend for the claim, otherwise). It’s awe inspiring the way purses open once the real blood-suckers have become involved. I say this not in disapproval, but in admiration. Once I get past the fact that J.Q public gets low-balled by default, by many major insurance companies, I admire the way they clean up their acts fast once they start to see shark-fins in the water. When it really becomes fun to read about is when the claim becomes large enough that both sides muscle up and get the lawyers aworkin’ the case.

A drunk carrying passengers runs a red-light in downtown Atlantic City, circa 1993. His car gets hit in the side by some commuter who has the nerve to actually go through a green light without stopping to look for crazy drunks in the middle of the afternoon. The uninsured drunk is effectively penniless, and his passengers have been injured (no fatalities.) A Personal Injury law-firm takes on the case, and starts looking for deep pockets, meanwhile sending the passengers, and the drunk, out to specialists to determine how much care will be required. Injuries, bad dreams, damage to goods. The PI firm (my wife was working for them at the time) settles on the municipality as the only available deep pockets. The city does a rough calculation, based on effectiveness of the particular PI firm, and various other factors, and settles the case for about $32K in cash, and rehab for the drunk. I say about because the final take was sealed, but that was about the amount the PI firm needed to take a third of in order to turn a profit, and they did turn a profit, but not a drinking champagne profit. The PI firm’s claim was that the light had turned red too quickly (yellow light too short in duration) and that the drunk wouldn’t have had time to stop if he’d been sober. The fact that the intersection didn’t generally produce an unusual amount of accidents just never weighed into the equation. The factor to consider was court cost to defend the city, verses immediate layout to make the case go away. It was cheaper to pay out than it would have been to spend a couple days in court while the PI company rolled out its display of expert witnesses and crying victims. That PI company had a very good record of success, so the municipality folded before a single witness was heard, or even a jury empanelled. I can’t say for sure, but the odds are pretty good that the fully insured driver of the other car got less recompense for the incident than did the drunk who jumped out in front of him.

At that time, NJ was the most litigious state in the country, so that sort of consideration probably came into play more often there than in other places, but the concept is pragmatic reality in modern litigation. But where does that leave me? As a member of the general public, I need to be insured against being hit by uninsured drivers, because that is a separate insurance from liability, wherein the other guy gets paid for accidents that are my fault, or comprehensive, where the insurance company will pay for my damage if I screw up. It’s that middle ground, where I’m not at fault, but somebody else is. Lots of insurance companies demand that I file the claim for those against the other driver, and if the other driver hasn’t got a  sou, I’m SOL unless I’m paying for that special “underinsured driver” rider. If I have got the uninsured driver rider, then my insurance company becomes one of the deep pockets in the litigation dance.

If I ever end up in the cross-hairs of a PI firm, I’m all in. A 30K finding against me would probably bankrupt me and put me into foreclosure anyway, so I’m gonna be loading up for bear (hiring a lawyer), and engaging in the fight – regardless who is at fault. Those legal fees mount up fast as all get-out, but if I can get the thing laid to rest in the opening movements, I’m better off paying a few thousand dollars for that service than if I try to handle it myself. As my friend from the no-fault accident learned, even the people on my side of the argument are more forthcoming if I prove to have a pet shark on call.

So, without really believing there is a conspiracy, I have to note that the insurance companies and the litigation industry prop each other up. Insurance always has deep pockets, PI litigators can always find somebody who’s either been hard done by, or is simply pitiable and will look good in court. It’s cheaper to pay off the litigant and his lawyer than it is to fight the case in court, and take a chance that the poor drunk of the people will fare better with a jury of his peers than will the insurance company with it’s three piece suits and expert witnesses.

Here’s a bit from the National Association of Personal Injury Lawyers:

Personal Injury Settlements

Settlements occur before, during or after any lawsuit is filed. Experienced personal injury lawyers almost always seek this course first as it the fastest and easiest way to reach an acceptable conclusion for both parties. Negotiations will take place between personal injury lawyers who will then present the proposed settlement terms to both parties.

Now, here’s a bit from Monohan Law Practice, showing that personal injury cases are way down:

Payouts in Personal Injury Cases are way down too. The median payout for all personal injury cases dropped 56% between 1992 and 2001. The median inflation adjusted payout in all personal injury cases dropped by 56.3% in those same years to $28,000, according to the Bush Administration’s own study.

Oops.  Lawsuits are “way down” and payouts are only $28K, at median. Actually, formally filed lawsuits are way down. My phone book is still chockablock with yellow pages adds for lawyers who’ll take PI cases on spec. They ain’t going broke. I have no way to determine how many PI/insurance settlements are reached each year, because Google isn’t playing nice on those two questions, but I’m betting that the numbers are real healthy. A 28K PI settlement would pretty much put me out of my house, but I guess I’ll have to live with that risk.

The thing to notice though, is that whether it’s an insurance payoff or liability law-suit, the amount of money that changes hands, even when the defendant is completely innocent, would generally bankrupt me. If PI lawyers only had people like me to go up against, they would go broke. But insurance companies settle even questionable cases out of hand for amounts that would bankrupt me, and consider it cost savings.

Health care reform – my second rant.

Health care is the elephant in the room that nobody wants to see, even when they’re generally happy to see elephants in the room. President Obama is probably a one term president because he insisted on recognizing that fact, and the odds are very good that the next administration will float in on promises to ignore that fact. They’ll promise to cancel the Obama health care plan, and to bring things back to status quo, and people will vote for them in droves, with nothing but vague assurances to look into the issue sometime in the future – just like 1993. But health care is so expensive now that it crushes median income families.

I just looked up a large sampling of health care plans available to private citizens in Alaska. As non-smokers, my family of four could plan on paying out a minimum of $6.000 per year, plus copays, with a family cap of about $50,000 out of pocket for medical care. Hey, that’s more money than my family makes! That’s right. If somebody in my family were to come down with cancer, I could look forward to spending more money than I make, on medical care, before my plan would take up the rest of my medical costs. Of course, I have to keep up payments on the plan, even during that medical emergency that might go on for a couple years.

That’s assuming that I could get that plan. Since I have hardware holding my back together, and have had high blood pressure and cholesterol since the accident that caused me to go bionic, a lot of those plans would either not let me join, or specifically exclude orthopedic and coronary care from my coverage.

So, if I didn’t already have a plan provided through my military retirement, the health care that I could afford would cost $6k per year, and I’d go bankrupt if anybody in my family suffered a catastrophic illness …

A better plan, which would have a lower deductible, and a much lower maximum payout for my family, would cost us $12,000 per year up front, and would still have substantial copays, deductibles, and individual care caps in the thousands per year. How many families of four in the Anchorage area can pay out $12,000 per year on medical insurance, plus an out of pocket limit of $4500? This is one of the best plans to have if you actually come down with a catastrophic illness, but my actual take home pay right now, from two jobs and my military retirement, comes out to … Well, let’s just say that $12K per year would bite right into the feeding the kids budget, even though we’re doing a lot better than several of the families in my neighborhood.

The median household income in Alaska for 2009 was supposedly $63,505 After a fashion, I accept that. I actually know a few people who make that amount or more. My family falls slightly below the median. 11.3% of Alaskans live below the poverty line, even though we have lower unemployment than most states. Supposedly, median family income describes that point where half of families earn more than that amount, and half of families earn less. But, I don’t actually know very many families who will acknowledge earning the median, and health insurance isn’t based on household income. If we were buying our own health care plan today, and my family were at the median, we’d be paying almost 19% of our total before tax income into our health care prepay. Dental care not included. Not including extra costs for my preexisting conditions.

I’d joke that only death, taxes, and health care costs are sure things, but I don’t have to pay $1 for health care. I can choose to die of my next major illness.

What is becoming increasingly clear, and increasingly true, is that only rich people get to have reliable health care plans. The status quo cost of medical care, before Obamacare, was taking up a larger percentage of our incomes every year, excluded a larger percentage of Americans from access every year, and grew faster than household income or any other aspect of the American cost of living. Returning to status quo will renew that cycle.