When asked about the legislative session-long effort of theinsurance industry to convince lawmakers either to abandon thestate's auto personal injury protection insurance or repeal theprogram, Andy Martinez of Nationwide bluntly summed up the finaloutcome, “There was no reform bill.” Martinez had at least one highprofile to back him up, namely Gov. Jeb Bush, who vetoed nearly$1.1 million in funding to increase efforts to reduce fraud in thesystem. Bush offered little explanation for the veto, remarkingonly that “there's an obvious reason,” for striking the funding.The industry now expects Bush to veto the PIP bill in its entirety,which will force lawmakers, attorneys, and physicians back to thedrawing board next year.

Under the bill, lawmakers had decided to sidestep the issue byextending a sunset provision that would automatically end theprogram from October 2007 until January 2009, while kicking in anadditional $1.2 million to beef up the state's resources to combatfraud. But it appears that Bush, along with others, felt the billwould do little to reform the PIP system and reduce policyholders'rates. If the veto comes as expected, the January 2009 date will bestruck down giving the legislation one more legislative session todebate the issue.

Why this outcome? Roughly speaking, by the time the bill passedit was so watered down that it would have no positive financialeffect on the industry. Representing the American InsuranceAssociation, Cecil Pearce openly lobbied Bush to veto the bill andlet PIP expire. “The reforms necessary to make PIP a viablecoverage — a medical fee schedule, medical utilization controls,attorney fee and bad faith reforms, and strengthening the tortthreshold — did not pass this year,” he said in a letter to thegovernor. “Therefore, we believe the sunset to be the bestsolution.”

The outcome also had much to do with the fact that when adivided auto insurance industry goes up against the troika oflawyers, doctors, and hospitals, it usually loses. But perhaps thebigger obstacle was the fact that there is no outcry on the part ofconsumers to reform the PIP system. Under the no-fault system, therate of uninsured drivers has decreased from 31 percent in 1992 toits current level of around six percent.

Martinez said that in addition to battling the considerableinfluence that the doctors and lawyers have in the legislature,consumers see their auto rates as acceptable, especially given theaggressive rate increases in their homeowners' insurance. “This isa quiet crisis,” said Martinez. “People don't realize they arepaying too much.”

Background

When Florida became just the second state in the country toenact a no-fault auto insurance scheme in 1972, it was viewed as ameans to rein-in carriers' legal defense fees and speed upreimbursements to policyholders, health-care providers, andclaimant attorneys. Florida has 14.8 million licensed drivers thatoperate nearly 14 million passenger cars and trucks within thestate. The no-fault system is somewhat similar to workers'compensation in that it is a mandated coverage, which is designedto be self-executing by guaranteeing accident victims certainbenefits in exchange for the victims not suing another driver.

Under current state law, all policyholders must carry at least$10,000 in PIP coverage, which pays up to 80 percent of medicalexpenses, 60 percent of lost income, and a $5,000-per-person deathbenefit. Set at monetary levels designed to cover the majority ofphysical injuries resulting from an accident, the benefits are paidirrespectively of whom is at fault. The law also prevents lawsuitsagainst at-fault drivers for non-economic damages, like pain andsuffering, except in cases of a permanent injury. What is known asthe “verbal threshold” is when a policyholder, in order to file asuit, must allege his injury caused significant and permanentscaring or disfigurement, resulted in the significant loss of animportant bodily function, or was fatal. The law also allowspolicyholders to sue in cases where there is no scaring ordisfigurement if the injury is determined to be permanent within areasonable degree of medical probability.

For years insurers have complained that the PIP system is ripewith fraud and too often enriches health providers and lawyers atthe expense of policyholders and their carriers. Insurerrepresentatives argued all session long that too many specialinterest groups profit from the auto insurance system, includingdoctors, attorneys, hospitals, and even more esoteric groups likeacupuncturists. Among other things, the insurers said that withoutany price controls, the guaranteed $10,000 in medical coverage hasfueled a cottage industry of clinics and doctors that do littlemore than PIP cases. This is especially in metro areas such asMiami, Fort Lauderdale, and Tampa.

An often-quoted 1999 grand jury described PIP fraud as “rampant”in Florida. And in recent years, state prosecutors have been busybreaking up rings that staged accidents and ran multiple driversand passengers through these clinics to bill for treatment. As aresult, lawmakers in 2001 and 2003 enacted a series of majorreforms designed to reduce fraud and even many insurers concede thelegislation has had a positive effect.

Division in the Ranks

In recent years, the insurance community has done much to settleits differences behind closed doors and present a unified voicebefore the legislature. But in the case of PIP, this proved not tobe the case.

The insurers came down into three groups: the first wanted torepeal the no-fault system, the seconded wanted to retain thesystem predicated on lawmakers enacting major reforms, and thethird wanted to retain the system in its current form. For example,no-fault law was extended over the objections of State Farm,Allstate, and Nationwide, which wanted to eliminate the law sayingit adds at least $250 to every auto insurance premium. They wereready to scrap the law because they didn't think the current systemcould be fixed. But smaller, Florida-based insurers that servehigh-risk drivers say they'll be hurt if the state abandonsno-fault coverage.

Given the division in the industry, even the Florida InsuranceCouncil was forced to take a neutral position on whether to retainthe no-fault system. In fact, State Farm recently left the council,and the difference in opinion on auto reform was one factor. StateFarm spokesperson Chris Neal said the council represented largernational companies and smaller companies, which had divergentgoals. He said sometimes the association had more focus oncompanies that were trying to please investors. State Farm is amutual insurance company meaning it is owned by its 2.8 millionpolicyholders.

Neal said the industry has been trying for at least a decade topass significant reforms with little success. “We didn't think thesystem could be reformed and the proof is what happened in thelegislature this year,” he said.

Without hope for meaningful reforms, Neal said the state isbetter off going back to a tort system where parties sue each otherto collected damages. While that system may appear to be moreexpensive because of more people going to court, it actually wouldbe cheaper because health providers and attorneys would not beguaranteed payment in non-legitimate insurance cases. As it is, hesaid, too many special interest groups rely on the no-fault systemto feed themselves. He noted that when Colorado did away with itsno-fault system in 2003, auto rates fell by average of 31percent.

Allstate spokesman Adam Shores echoed State Farm's position,saying that extending the sunset repeal of the no-fault system justpostpones the issue. “We think a repeal of no-fault is best forconsumers,” said Shores.

Lawmakers Pass Over Reforms

For the industry, the real driving forces behind the increasedPIP costs is the over utilization of medical services and the levelof attorney involvement. Critics say that unless some controls areplaced on those services, PIP costs will continue to rise. Withthose goals in mind, critics turn to the state's workers'compensation system for answers. Both PIP and workers' comp aremandated coverages that provide policyholders with benefits inexchange for placing limits on their right to sue. And both systemsinvolve the same interested parties including carriers, health careproviders, and attorneys.

What makes the state's workers' comp system an appealing modelto those supporting PIP reform is that workers' comp has a highdegree of certainty, which allows carriers to project losses. Amongother things, workers' comp has detailed criteria that workers mustmeet to collect various benefits including the ability of injuredworkers to qualify for permanent disability benefits. In the 2003workers' comp reforms, lawmakers created a standard that linked aninjured worker's ability to qualify for permanent injury benefitswith the injured worker's ability to work. There was also uniformsupport for introducing a medical fee schedule. Workers' comp hasprovider reimbursement manuals for doctors, hospitals, and alliedhealth care workers, which are based on the federal Medicare feeschedules.

Neal noted that the PIP system is the only insurance system thatdoesn't have set of cost guidelines. As a result, carriers oftenare stuck with medical bills two to three times the rates theyshould be and they have no recourse but to pay, he said. Butdespite the fact that the House Insurance Committee and the SenateBanking and Insurance Committee spent hours debating these issues,in the end they walked away without making any moves toward aresolution, which would have satisfied the industry.

Instead, lawmakers extended the sunset provision and made fairlyminor changes in the area of fraud. One reform that made its wayinto the final bill is that crash reports must now containinformation such as the date, time and location of crash, adescription of the vehicles involved, names and addresses ofparties involved, and names and addresses of all drivers andpassengers. The reports must also contain names of all witnesses,names of all law enforcement agencies involved, and names ofinsurance companies for those in the crash. The additional detailsare an attempt to combat fraud from people who try to stageaccidents in hopes of collecting insurance money.

The hospitals counted this year's battle over PIP as a majorlegislative victory since they avoided a cap on reimbursements inthe manner of Medicare, Medicaid, workers' comp, and group healthplans. Bill Bell, general counsel of the Florida HospitalAssociation, said the no-fault system that requires motorists tobuy $10,000 worth of PIP coverage is sometimes the only moneyhospitals get when they treat patients in auto accidents. He addedthat emergency room costs have become a drain on hospitals becauseso many people who go there have no health insurance and thehospitals are bound by federal law to screen and treat everyoneregardless of ability to pay. “Without PIP, hospitals many timeswould get no payment at all,” Bell said.

The Academy of Florida Trial Lawyers also claimed victory in theauto insurance battle. But the lawyers think the bill will stillcome back again before October 2007.Glenn Klausman, an academyboard member, accused the industry of manufacturing a crisis tohelp large carriers like State Farm. He said if insurers want tooffer lower rates for consumers they should take money out of theirprofits. “The auto insurance market has never been better,”Klausman said.