13 minute read
Should Insurance Industry Cost Containment Standards Even Exist?
Since the 1970s, the insurance industry in Massachusetts has been required to adhere to certain “cost containment” standards, i.e. standards that insurers need to meet to supposedly keep claims costs low. Notably, it was not the insurance industry itself that developed these standards. Rather, it was the Massachusetts legislature and the Division of Insurance (DOI) that imposed them.
The incentive for developing these standards was the fact that in the 1970s, Massachusetts had among the highest – if not THE highest – auto insurance premiums in the country at the time, and the insured public was not happy about those premiums. One of the major reasons that premiums were so high was that Massachusetts also had among the highest auto claims costs in the country. The idea was that, if claims costs could be reduced, then insurance premiums could be reduced as well. (Of course, if Massachusetts drivers had learned to drive better, and if Massachusetts roads had been maintained better, that might have had a much bigger impact on claims costs.)
In response, the legislature enacted statutes that required the DOI to develop standards that the insurance industry would need to meet to keep claims costs low. These statutes also required the organization responsible for administering the state plan for insuring high risk drivers (Commonwealth Automobile Reinsurers, or CAR) to make sure that their individual participating insurers would have plans in place to keep claims costs low.
The insurance industry initially was quite resistant to being forced to adopt specific standards. Insurers did not want the government telling them how to run their businesses or to set rules about how they should make individual choices regarding how much to pay for claims or individual elements of those claims. After all, they were the ones in the auto insurance business, and most of them had been for many decades. They did not want regulators micromanaging their claims payment decisions.
Nevertheless, the DOI hit hard with cost containment standards. At the time, the DOI set uniform premiums that Massachusetts insurers charged for private passenger auto insurance – all auto insurers in the state were required to charge the exact same premium for all mandatory auto insurance coverages. In order to set those premiums, the DOI held lengthy premium rate setting hearings every year in which the state insurance industry needed to try to establish what they needed to get as a fair premium for various auto coverages. When the cost containment legislation was passed, the DOI developed regulations that required the insurance industry to separately show every year what they were doing to contain costs as part of the annual premium rate setting hearings.
The regulations mandated that insurers address various aspects of claims costs, including costs of personal injury claims and individual insurer claims administration costs, as well as making sure that insurers were doing enough to detect claims fraud. For the collision repair industry, the part of the regulations that became most important were those that dealt with individual aspects of auto damage claim payments. As part of the rate setting hearings, the insurance industry needed to show that they had plans in place to make sure that they were not paying too much for body shop Labor Rates, for too many labor hours, for parts prices, for towing, for storage and for total losses.
Initially, insurers attempted to show that they had adequate plans in place, while balancing that against their understanding that they were reliant on the auto repair business and that insurers needed to pay enough to keep quality repair shops in business; however, for the first several years, the DOI would not accept that insurers were doing enough to keep the individual elements of claims cost low, and the DOI punished the insurance industry by reducing the amounts that they would allow the insurers to charge for premiums. As a result, insurers found themselves trying to get body shops to accept lower Labor Rates, to reduce repair hours and to accept discounts on parts prices. The insurers expected the collision repair industry to resist, so that they could go back to the DOI and say that they had tried…but had been unsuccessful.
What actually happened was the collision repair industry essentially caved to the insurers’ demands. And the result was that claims costs were reduced – at least temporarily – and that insurers had to go back the next year and tell the DOI that their plans had been effective. An unintended result was that the collision repair industry found itself sinking into a deeper and deeper hole, where many quality collision repair shops had to make difficult decisions about how to repair cars, how to pay their help and how to stay in business.
In addition to the annual premium rate setting hearings, CAR set its own performance standards that required individual insurers to demonstrate that they had plans in effect that met the same standards that were set by the DOI. If they could not, then the individual insurers were punished by assessment of penalties. Notably, CAR was established to regulate only the “assigned risk pool” of high risk drivers and to spread the risk among all auto insurers writing business in Massachusetts. But statutes require that insurers treat their assigned high risk drivers in a non-discriminatory basis, i.e. the same as they treat the rest of their insureds. The result is that CAR rules regarding claims standards for high risk drivers are applied to ALL drivers – whether they personally pose a high risk or
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not – and that the CAR cost containment performance standards therefore apply to ALL auto claims, not just claims for high risk drivers.
In the 2000s, the DOI abandoned the setting of uniform premium rates in favor of a system of “managed competition,” allowing insurers to compete and charge individually set rates, subject to some restrictions. As a result, the DOI also abandoned the annual rate setting hearings and the requirement for insurers to demonstrate their cost containment efforts every year. The collision repair industry breathed a sigh of relief, believing that they would no longer be subject to what they perceived to be arbitrary limits on what they could charge for their services; however, that sigh of relief was short lived since CAR did not abandon their performance standards, meaning that Massachusetts auto insurers still must establish that they have the same cost containment plans in place.
But, does cost containment really serve a purpose, and should it exist?
In my opinion, cost containment standards as implemented by the DOI and CAR are shortsighted and even dangerous, for multiple reasons:
Does it really make sense to force insurers to abide by claims costs standards set by third parties (i.e. the DOI or CAR)? At what cost are those reductions made? If the insurance industry is truly supposed to be competitive, then why should any third party care how much individual insurers pay for individual claims costs? Isn’t it really the essence of competition to allow each company to make its own decisions about how to run its own business? Insurers are big businesses, run by educated and experienced personnel who know how insurance works. Shouldn’t insurers be able to make individual decisions about how to best settle their claims?
As most members of the collision repair industry in Massachusetts know, the effect of the insurance industry cost containment standards on body shops has meant hard decisions about how to best repair vehicles and still be able to make a living. It has meant holding down wages for employees, which in turn has meant a shortage of qualified techs in the industry. It has meant the proliferation of unqualified repair shops and of shops willing to cut corners in order to make a buck. It has meant that many of the best and most qualified shops may not be able to compete for business on a level playing field.
By the same token, cost containment standards may have had a negative effect on qualified insurance appraisers too, since the appraisers are under tremendous pressure from their supervisors to comply with the standards. Even when an appraiser knows that a particular procedure or the use of a particular part may be the best way to effectuate repairs, or that more time will be needed to make a particular repair, they are under pressure to tell shops “that’s all I can pay for.”
Then what happens? Ill feelings arise between the repair shop and the appraiser. The appraiser finds himself or herself having to come back to the shop for multiple supplement requests. Repairs are taking longer, leaving claimants upset about how long repairs are taking, causing insurers to pay for excess substitute transportation costs, leaving appraisers unhappy about their jobs and dreading having to face repair shops multiple times. Repair shops and insurance appraisers are playing games as they try to find ways for shops to get paid what they need, while leaving the insurance appraisers with appraisals that will pass muster with their bosses. For no good reason, costs have been arbitrarily shifted to some element of the repair that does not fit into the ambit of the specific cost containment standards set by CAR.
Worse, some shops are accepting what is initially offered and taking shortcuts on how they perform repairs. That, of course, results in more unsafe vehicles traveling on Massachusetts roads with perhaps more resulting accidents and more injuries being suffered in those accidents.
These are the true results of cost containment standards.
Conclusion
It appears to me that cost containment standards were improperly and unnecessarily forced upon the Massachusetts auto insurance industry, and the result has been disastrous. It is time for Massachusetts regulators to abandon insurer cost containment standards altogether, so insurers can spend more time concentrating on the business of insurance, so repair shops can spend more time concentrating on the business of repair, so repair shops can properly repair vehicles the way they know they are supposed to be repaired without jumping through hoops, so repair shops and insurance appraisers do not have to play games in negotiating what goes into the cost of a repair, and so that the insured public can be better assured that they are going to get better, quicker and safer repairs to their damaged vehicles.
PROTECTING CONSUMERS AND THE COLLISION INDUSTRY
MASSACHUSETTS
Attorney James Castleman is a managing member of Paster, Rice & Castleman, LLC in Quincy, MA. He can be reached at (617) 472-3424 or at jcastleman@prclawoffice.com.
[LOCAL] NEWS
continued from pg. 12
Moving on to the long-awaited complaint review, ADALB was presented with 20 complaints to discuss. One had been withdrawn, four were dismissed, and the remaining 15 were tabled for the next meeting, scheduled for May 17.
AASP/MA members are strongly encouraged to listen to the recording of the March 15 meeting in the Members Only section of aaspma.org for a glimpse into the inner workings of the ADALB. The original proposed revisions can be found on the March meeting agenda, available at bit.ly/ADALB0322. More detailed coverage of this meeting appears in the April issue of the Damage Report members only newsletter.
such an incentive. Instead, we challenged existing employees to speak to family and friends about finding people to join our team, and we offered a $1,500 bonus to both the employee and the new hire, to be paid out in three quarters. Our three new young team members are now in their fourth month!
RS: As long as this industry cannot be competitive with wages and benefits, we will continue to struggle to attract and retain qualified technicians. For what a technician needs to know, continue to learn and invest in tools, I can't think of one profession that is nearly as undercompensated as the collision industry.
NEAR: The million-dollar question…How do we fix it? How do we solve the tech shortage dilemma?
AP: Career development is vital. Shops are often so focused on throughput that we don’t make time to focus on our people’s development. We need to demonstrate that there are many avenues within this industry and within our organizations. Can we create a track for somebody who doesn’t want to continue to be a painter? Maybe they can learn to be a repair planner instead. Creating new openings and opportunities is hard, but it’ll benefit us in the long run.
GC: The most effective way to attract and retain more techs is simple: Pay them. There needs to be a major overhaul of this entire system, but we’ve been doing it this way for so long that most people are afraid to upset the apple cart. We allow insurance companies to dictate the repair, even though they’ve never fixed a car in their entire life. We need to shake things up because the way we’ve been doing it isn’t working. Things are on the verge of collapse, and who will fix vehicles when the current technicians age out?
JM: We created a training program within the shop where we partner a student or new hire side by side with a seasoned technician. We measure their efficiency and knowledge growth on a regular basis, plus we provide them with a free tool box if they stay in the program for two years.
RS: Shops will continue to struggle to attract and retain employees until reimbursement rates paid by insurers grow drastically, allowing auto body employees to receive the same salaries and benefits enjoyed by their counterparts in other trades. It is bad enough that the collision industry can't compete for entry-level help with companies such as Amazon which require no specialized training for entry level positions or the investment in tools that those entering the collision industry must invest in. I think that the day will come that the insurance industry will finally reap what it has sown, and repair professionals will finally be driving the bus. I just hope that I am around long enough to witness it.
Engaging with students may seem like a daunting - and exhausting - task, especially in a business environment where it can be difficult just to process the existing workload. Fortunately, organizations like the Collision Repair Education Foundation offer ways for collision professionals to support local schools with minimal effort. Discover how you can get involved at collisioneducationfoundation.org.
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