To frame today’s AutoCare debate let’s review the history.
Prior to World War II, most people paid for automobile repairs out of their own pocket. In this simpler world, mechanics made house calls or fixed cars at a local garage. To bypass wage controls during WW II, businesses gave employees a new benefit, auto repair insurance, called AutoCare. Under such plans, employees were not taxed on the insurance premiums but businesses could deduct them. As part of the Great Society legislation, President Johnson extended AutoCare to the elderly and the indigent.
The financing of AutoCare created perverse incentives and disappointing results. America devotes 18 percent of GDP to auto repair, much more than any other country. However, on average our cars are worse. They stall, break down, and malfunction more than countries spending half as much.
Few insured consumers understand the complexities of automobiles. They are not capable of making rational decisions regarding the costs and benefits of repairs. Moreover, they do not directly pay the cost of repairs. Insurance companies do. Therefore insured consumers seldom worry about repair costs and usually rely on the advice of their mechanic and specialists.
Mechanics are professionals who study for at least four years in graduate school. Specialists in fields such as transmissions and timing belts must take additional postgraduate training. Mechanics often graduate owing over $200,000 in school debts. Mechanics and specialists are paid on a fee-for-service basis. Therefore, they are paid, not to keep cars in good shape, but to service them when they break down. They have no incentive to control costs. In fact, they benefit from delivering more and higher-cost repairs.
AutoCare pays for all repairs but not for new cars nor preventative maintenance. This has caused, first, consumers to choose to keep repairing old cars regardless of cost, and second, a neglect of preventative maintenance, and third, an explosion of expensive new technology to keep old cars running. New procedures such as a double piston bypass, disc brake transplants, Johnson rod surgery, are usually performed by specialists in an ICCU (Intensive Car Care Unit) and cost between $9,000 and $15,000 per day. The costs of repair rise as the cars get older. Roughly 30 percent of total repair costs occur in the last year of a car’s life.
As costs have escalated, private insurers scramble to remain profitable. As marketers they attempt to insure only the healthiest cars and to avoid the clunkers. To control costs, they review and routinely deny claims. They spend over 30 percent of their revenues on marketing and administration.
The uninsured simply drive their cars until they break down on the highway and then receive costly emergency treatment. The amount of money spent on AutoCare distorts the American economy. Go to any city in the country and you will see rundown schools, dilapidated hospitals, but gleaming new AutoCare centers. AutoCare is the only industry in the nation that continued to grow throughout the present recession.
While everyone agrees we have most expensive AutoCare system with the worst outcomes, the politics of change are difficult. With one-sixth of the economy involved in AutoCare, entrenched interests resist change. The scare tactics of “socialized AutoCare” and “faceless government sending your 1949 Studebaker to the junkyard” scuttled prior attempted reforms.
Although reforming AutoCare is President Obama’s highest domestic priority, real reform appears impossible. The only thing all players agree on is that each should get more money. Therefore, we can expect to see an increase in coverage and spending with no change in incentives and outcomes.
Meanwhile, I have to go the AutoCare MegaCenter. My 1942 Packard Clipper is in the ICU getting its weekly carburetor dialysis.
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