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Barring some sort of last extension Medicare, Medicaid and SCHIP Extension Act (MMSEA) of 2007 will require all property casualty insurers to report all settlements, awards and judgments that involve a Medicare beneficiary to the Centers for Medicare and Medicaid Services. Essentially the MMSEA turns subrogation rules on their head by requiring the defendant to notify a third-party if the plaintiff might owe them money. Under subrogation rules a third-party insurer with an interest in a case, think a health insurer who wants to be reimbursed by a defendant for the injuries caused to the insurer’s beneficiary, would have to join the case which of course would require finding out about the case in the first place.

Why would CMS want this information from third-party insurers? According to CMS the new requirement is to provide the government with the information it needs to enforce the provisions of the Medicare Secondary Payer (MSP) Act of 1980. Essentially MSP requires that whenever there is an insurance policy to cover medical treatment, the private insurance carrier is the primary payer for that treatment in cases where the claimant was also eligible for Medicare. Yet it has provided very difficult for CMS to collect from third-party insurers. The reasons for the low collection are complicated (see Rick Swedloff of Rutgers University’s article on the issues surrounding the rule) but the reason for requiring defendant’s insurers to report is easy to figure out. The Medicare Trust Fund is going broke quickly and this is a source of money. Actually it is a large source of money. A GAO study released 1999 found that for workers’ compensation systems alone, $40-43 billion paid by Medicare during 7 year period that should have been paid by primary payers. If we assume that similar amounts could be recovered from the tort system then recovery from secondary payers would have an impact on the Trust Funds solvency.  Moreover after health care reform, states and the federal government will be looking for revenue sources to pay for the newly insured. I suspect third-party insurance will look quite attractive.

 There are some big concerns about the MSP when applied to tort. First and foremost in my mind is that CMS is not bearing any of the risk of litigation in the way an insurer who subrogated a tort claim would. In effect CMS is treating tort claims as if they were first party insurance in which payment doesn’t require proof of negligence or at least causation. There are rather large penalties for noncompliance which suggests that starting very soon CMS will have a comprehensive database of payments made by third-party insurers. 

 Leaving aside my concerns about the policy and its impact on the tort system, I suspect MMSEA will fundamentally change the politics of tort reform as they have evolved over the last 35 years. In general those politics have seen Republicans for limitations on tort with Democrats being for expansions of the tort system. That’s clearly an overgeneralization but one reason it’s been largely true is that Republicans and their constituents get very little from tort while paying much of the costs (think doctors and corporations) while Democrats and their constituents receive most of the benefits (think contingent fees and campaign contributions). I suspect the payments to plaintiffs are pretty evenly distributed across the political spectrum. But if MMSEA turns out to be a revenue source for the government that calculation changes.  Perhaps I’m just a cynical public choice scholar but it doesn’t seem very hard to imagine that if MMSEA revenues declined some future Republican congress would defend an individual’s right to sue and quietly take the money rather than raise taxes.

Stigler’s casket

Eric Helland —  25 August 2010

Today’s Wall Street Journal has an article tailor made for anyone wishing to defend free-markets from overreaching regulation. The story details the legal battle between the monks of St. Joseph Abbey in Louisiana with the Louisiana state funeral regulatory board.  As is typical with such boards, the Louisiana version is dominated by the industry. Of course this is just what Stigler would have predicted 40 years ago in his classic article on regulatory capture.  Two things struck me about the story however.  First is how the “captured” funeral board doesn’t even make a pretext of some sort of health or safety motivation for its actions.  In what might be the most honest statement ever made by a cartel member to a newspaper one of the monks’ competitors states,

 “They’re cutting into our profit,” says Leonard Dunn, the owner of Serenity Funeral Home, located a short drive from the abbey. He adds. “I don’t think the monks are actually making the caskets—I think it’s a marketing gimmick.”

 Much as I admire the monks’ struggle and am rooting for them I suspect that their efforts will not end the cartel. As with so many things, Stigler had this one right. Few of us are repeat customers of the funeral industry and hence have little incentive to lobby for regulatory change. By contrast the industry is quite lucrative.  A more likely candidate to break the cartel, mentioned briefly in the story, is Wal-Mart and internet competition. As economist David E. Harrington of Kenyon College has documented (here, here and here) the costs of this cartel for consumers are substantial and caskets seem to be critical to the cartel.

“Greater competition in casket markets might also spill over to funeral markets if the price of caskets [are]  the best place to conceal the economic rents of funeral homes.”

 Good luck to the monks of St. Joseph Abbey.