THE BLOG

Democrats Retreat On AutoCare Reform

03/23/2010 05:12 am ET | Updated May 25, 2011

America has the most expensive and least effective AutoCare system in the world, but is incapable of changing it.

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% of GDP to auto repair, much more than any other country. However, on average our cars worse. They stall, break down, and malfunction more than countries spending half as much.

America has the most expensive and least effective AutoCare system in the world, but is incapable of changing it.

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% of GDP to auto repair, much more than any other country. However, on average our cars 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 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 costs repairs.

AutoCare pays for all repairs but not for new cars or preventative maintenance. Therefore consumers choose to keep repairing old cars regardless of cost, and neglect of preventative maintenance. Costs have skyrocketed as the auto repair industry produced 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% of total repair costs occur in the last year of a car's life.

As costs have escalated, private insurers scrambled to remain profitable and attempt to insure only the healthiest cars avoid the clunkers. To control costs, they review and routinely deny claims. They spend over 30% 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 run down 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.

Since reforming AutoCare was President Obama's highest domestic priority, he naturally let Democratic Congressional draft the legislation. This energetic and innovative group (the average of the three House committee chairman involved was over 70) decided to:

1. Cover the uninsured

2. Do little else for fear of hurting anyone's feelings.

Obtaining 60 votes in the Senate required compromise after compromise, jettisoning structural change such as instituting a single payer system, eliminating fee for service, or providing a public option. The final legislation provided little that would change the incentives and basic economics of AutoCare.

Nonetheless, Republicans, using the scare tactics of "socialized AutoCare" and "faceless government bureaucrats meddling with automotive repairs," and "Junkyard panels condemning your 1949 Studebaker," were united in their opposition, claiming AutoCare reform would threaten existing government AutoCare programs that Republicans previously opposed.

3. Save money.

Since this sounded fishy to the voters of Massachusetts, AutoCare reform is probably dead.

Therefore, industry will continue to develop expensive new technologies. Fee for service mechanics and specialists will recommend costly tests and procedures. Consumers will continue to act like someone else is paying the repair bill. Any attempt at real change will be meet with cries of AutoCare rationing and socialized repair.

Meanwhile, I am off to the AutoCare MegaCenter. My 1942 Packard Clipper is in the ICU getting its weekly carburetor dialysis.