Health Care Costs in the Property/Casualty Insurance Industry
December 1993
Executive Summary
The Clinton Administration has embarked on an ambitious program to reform the nation's health care system. Changes in the system could have far-reaching consequences for many industries, businesses, and individuals. The property/casualty insurance industry plays an important role in the current health care system and is among those potentially affected.
The interaction between property/casualty insurance coverages and those of health care insurers is sometimes complex as a result of the social, economic, and legal climate that has evolved. To help interested parties assess the impact of potential changes in the health care system on property/casualty insurers, this analysis by Insurance Services Office, Inc. (ISO) reviews the various types of health care compensation systems in the United States and places property/casualty coverages in the context of those systems. The analysis finds that:
- Liability insurers generally bear ultimate responsibility for health care costs in cases where an insured is legally responsible for injury to another, even if a health insurer first compensates the injured party. In the case of workplace injuries, workers compensation insurers bear the cost. For automobile injuries where personal injury protection (no-fault) insurance applies, automobile insurers bear the cost.[1]1. State laws vary. Personal injury protection coverage is generally limited to a specific dollar amount. Losses above these limits could be compensated by health and/or liability insurance.
- The various types of health care compensation mechanisms in the United States carry different incentives to control costs. If moving responsibility for these costs from one mechanism to another changes the economic incentives to control costs, overall costs could increase or decrease as behaviors realign.
- Cost containment measures could reduce costs in the future. If reforms curtail fraud, or eliminate or limit redundant benefits, overall health care costs could be reduced.
The study also estimates current health care costs in property/casualty insurance. [2]2. This study excludes business reported by property/casualty insurers as "accident and health" on property/casualty Annual Statement lines of business 13, 14, and 15. Business reported on these lines is primarily health care insurance rather than "property/casualty" insurance. The "all-lines" figures in this study refer to all property/casualty lines of insurance and exclude these coverages. Therefore, all percentages of health care costs to industrywide losses are lower than they would be if data for the "accident and health" lines were included. A.M. Best reports that in 1992 these lines accounted for $4.0 billion in incurred losses on property/casualty Insurers' Annual Statements. Some of the important findings of this analysis are:
- In 1992, approximately $29 billion, or 20% of the industry's incurred losses, were attributable to health care costs. [3]3. Unless otherwise noted, the figures in this study are based on experience for private insurance carriers only, and exclude data from workers compensation state funds and alternative insurance mechanisms. The percentage ranges from 1% for farmowners to 47% for workers compensation.
- The percentage of workers compensation losses attributable to health care increased from 40% in 1987 to 47% in 1992.
- Health care costs account for an estimated 30% of countrywide personal automobile liability, personal injury protection (no-fault), medical payments coverage, and uninsured/underinsured motorists losses combined; and an estimated 20% of all personal automobile losses.
- The portion of the industry's loss adjustment expenses (LAE) and other expenses associated with health care is lower than the corresponding percentage of losses. While expense data is not available in sufficient detail to quantify this portion, many of the activities that generate these expenses would continue in the absence of health care losses.
The study finds a number of reasons why the effects of health care reform on property/casualty insurance are uncertain. Unresolved issues related to health care reform include:
- how cost control incentives may change
- which system will carry the ultimate responsibility for certain health care losses
- what (if any) health care deductibles and copayments property/casualty insurers may have to fund
- what specific health care procedures might not be covered under a national program
Several possible indirect effects of health care reform on property/casualty insurance are difficult or impossible to quantify. These effects include possible changes in litigation patterns and in the costs of health care procedures themselves.
Limitations in the available data complicate assessing the cost of health care in the current liability coverages. Since liability settlements and court awards are normally not broken down by type of damage (medical, loss of income, pain and suffering, and the like), there is no reliable way to separate precisely the portions of liability losses related to health care.
Since ISO does not take positions on public policy issues, the report does not argue for or against any of the myriad health care proposals that have emerged to date. The number of such proposals, and the likelihood of further changes in those proposals before any is enacted, also preclude comprehensive analysis in this study.
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