No-fault auto insurance, which was designed to lower auto insurance rates, has actually increased costs because medical claims in these cases are rising “sharply,” according to a new study.

Injury costs under no-fault were only 12% higher in 1987 relative to tort-based insurance. But in 2004, medical costs were 73% more expensive under no-fault plans, according to RAND Corp., a nonprofit research organization.

James M. Anderson

The study found that states that restricted lawsuits against other drivers actually had higher claim costs than states that permitted civil suits.

“No-fault insurance is a classic example of the law of unintended consequences,” said James M. Anderson, the study’s lead author and a researcher at RAND, in a statement.

Anderson said he and his colleagues believe medical costs increased largely because consumers who have no-fault policies tend to use more specialized types of medical treatment and because medical costs may be more likely to be covered by auto insurance rather than medical insurance in no-fault states. There also is evidence of greater medical cost inflation in no-fault states, RAND found.

Since the 1970s, the no-fault system, which had accident victims seek recovery from their own insurer, not the other driver, was seen as a major method of reforming the tort-based system they blamed for rising auto insurance costs.

Now, 29 states have tort-based policies, three states allow drivers to choose between less expensive “limited tort” insurance or more expensive “full tort” insurance, and the remaining states have some form of no-fault insurance, according to RAND. These numbers have remained fairly steady over the past decade.

No-fault insurance has three components: a restriction on the right to sue other drivers for being at fault for an automobile accident; a restriction on receiving payment for pain and suffering or other non-economic damages; and mandatory insurance so anyone involved in an accident can recover his or her economic losses, including medical costs, from their own insurance company.

Policymakers believed no-fault insurance would minimize litigation and administrative costs, more fairly compensate victims of automobile accidents and be less expensive than tort-based insurance. In practice, however, premium cost reductions never materialized, in large part because of increased medical costs.