Cost shifting and your auto insurance premium

By Ryan Hurlbert on February 3rd, 2011

According to Insurance Industry Institute (III) data, while the number of bodily injury claims has declined, down about 20 percent between 2000 and 2009, the cost of those claims is up 27 percent over the same period.

One of the causes cited for this increase is hospital cost-shifting. Cost shifting is the practice of charging auto insurance companies more for procedures than they would charge others. Hospitals could be doing this to make up for the limited reimbursements from Medicare and Medicaid, and the practice may be driving up the cost of auto insurance.

Checking insurance reimbursements against the Maryland model

Hospitals deny this, but there is strong evidence from a recent study by the Insurance Research Council (IRC), "Hospital Cost Shifting and Auto Injury Insurance Claims," that says otherwise. In Maryland, hospital charges are regulated and all users of hospital services pay about the same price for those services. This eliminates virtually all cost shifting because everyone pays the same rate for the same service.

Bodily injury auto claims filed in 38 states in 2007 were compared with the average hospital charges for bodily injury liability claims in Maryland. The IRC estimates that in 2007 hospitals over-charged auto insurance carriers by $1.2 billion. Yes, that's billion with a "B" and that extra reimbursement money is probably causing you to pay higher auto insurance rates.

Cost shifting has long been suspected, but this is the first study to quantify it. How much of your premium is being used to pay for a Medicare hip replacement surgery? Does this violate the basic tenant of insurance, which spreads risk over a large number of people to allow for the compensation of losses to be shared? I have looked at my policy, and there is no provision in there for the coverage of hip replacements!

But does cost shifting really exist?

While this IRC study draws conclusions based on expenditures, it does not prove that the practice of cost shifting exists. I think it does raise enough suspicion to warrant further investigation. I have always had a problem with charging different rates for the same procedure, depending on who is paying the bill, and it would be nice if the practice could be stopped. It would be even nicer if ending this practice resulted in a lower auto insurance bill.

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