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Thursday, 20 October 2016 17:25

NABR: CDI's New Proposed Labor Rate Survey Regs Not Good for Industry

Written by Sam Valenzuela, President, NABR

We’ve all heard the phrase, “too little, too late.” But in the case of the recently revised proposed regulations for labor rate surveys from the California Department of Insurance (CDI), and the apparent pressure to get the regulations implemented quickly, this could end up as a case of “too much, too soon.”

In our opinion, these new regulations are not good for shops, can be unfair to insurers, and are a disaster for consumers—a triple play in the wrong direction. To push these overly bureaucratic, complex, and costly regulations through too quickly would hurt more than it would help. (We would prefer it more if the new regulations simply eliminated the current ones altogether and added a directive to let the free market take care of it.)

Yes, the proposed regulations are clearer and more defined than the current regulations and do offer some improvement over the currently vague regulations that have enabled some rather poor quality “surveys,” if you can call them that. However, NABR finds that the proposed regulations will not achieve the “fair and equitable settlement of automobile repair insurance claims” that is a stated goal of the Department.

Further, the regulations do not align with industry trends and risk being obsolete soon after they are implemented; they will probably be in place for at least another decade before they are addressed again; and perhaps most importantly, they do not help move the industry to a higher standard of performance, for the ultimate care and safety of the consumer.

Our list of concerns is too long for this article, so here are four key issues that we have with the proposed regulations:
-They perpetuate the flawed concept of a “prevailing rate.”
-The survey is missing the critical component of measuring shop repair capability, beyond some basic requirements.
-The distance-based definition of a market will drive unintended consequences of paying unfair labor rates (both too high and too low) to various body shops.
-The regulations are silent on the use, allowance, or acceptability of an independent survey standard.


The Prevailing Rate concept is flawed.

We don’t have the space to write a full article on why using “prevailing rate” in regulations, as a basis for insurer payment to collision repairers is a bad idea. So we’ll highlight a few key problems instead.

First, there is a major problem with the prevailing rate concept itself, and the CDI proposal continues to use the outdated prevailing rate idea. Prevailing rate calculations, including the CDI-defined prevailing rate, produce only one number, the one rate intended to be the rate that shops get paid by insurers. That’s like giving everyone the same shoe size. Clearly, that does not make sense. Collision centers are different and charge different prices, just like auto manufacturers and insurers do. One price does not fit all.

A better solution is to define a range of rates based on various criteria such as location, relevant competition, and most importantly a shop’s repair capabilities, largely linked to the investment a shop has made in their business—training, tooling, equipment, facilities, and certifications. That would enable highly certified shops to collect rates commensurate with their capability and investment in their business, while the majority of shops who have not made these large investments would appropriately collect relatively lower rates.

Even the California courts agree that a range of prices is more appropriate. In describing the prevailing rate concept in a California case from 2009, the judge stated, “There’s no one set reasonable charge. It’s not $80. It’s not $98. It’s not $117. It’s that range. The $98 fell within it. … It’s a range of prices. It’s not just one number. It can’t be just one number. It’s what is a reasonable charge.”

Next, the CDI definition of prevailing rate uses a “simple majority” rule that creates additional problems.

Here’s how it works: basically, for any one shop, the prevailing rate is defined as the simple majority price of the qualified shops within a certain distance from that shop, when you line up those shops’ prices from lowest to highest. For example, if six shops’ labor rates are $60, $61, $63, $65, $75, and $80, then the prevailing rate is $65 because 4 out of 6 shops (the simple majority) charge $65 or less.

First, the simple majority rule enables insurers to pay an overall effective rate lower than the prevailing rate, because shops priced at or below the prevailing rate get paid their lower rate, while shops priced higher than the prevailing rate are capped at the simple majority price. So in the example above, the first four shops would get paid $60, $61, $63 and $65, while the top two shops get paid $65 each. That computes to an effective rate of $63.17, which is below the prevailing rate of $65. This is good for insurers, fair to lower priced shops because they are getting paid the price they’re asking for, but unfair to the higher priced shops that are likely the very shops that deserve higher prices.

In our experience, the shops charging $75 and $80 in this example usually have invested more in their business—training, equipment, certifications, etc.—than the lower priced shops. Their higher prices reflect that value and are needed economically both to fund their investments and to earn a necessary and fair return.

Thus, higher end shops with higher labor rates effectively get penalized because the regulated “prevailing rate” caps out at the simple majority price. So if your shop needs $75 or $80 per hour economically, because of the considerable investment you’ve made in your business, too bad so sad. Insurers would only be required to pay you the prevailing rate of $65, and you’re on your own for the remainder.

Further, the higher priced shops in the minority group have zero effect on the prevailing rate. The most highly trained, highly equipped shop charging $80 in this example, could have charged $70, $95, or $150, it would have made absolutely no difference to the prevailing rate. It seems strange that up to 49% of prices (shops in the minority) in any market would not be considered in any way whatsoever when determining the going rates for that market.

Therefore, if you are a highly certified shop with higher prices, or a shop that aspires to earn more certifications and raise your price to reflect your value, these regulations are bad for you. Yet, certified shops that have the right facilities, the right equipment, and are highly trained to repair today’s increasingly advanced and complex vehicles are good for the industry and good for consumers. The CDI regulations will not help, and may even stand in the way of the industry advancing to a higher standard of collision repair, for the ultimate care and safety of the consumer.

Shop repair capability is missing.

Auto manufacturers are increasingly producing more and more vehicles with new technologies, new construction and manufacturing techniques, and advanced materials. The vehicles may require new collision repair procedures using new equipment as well. For proper repairs and especially for consumer safety, it is increasingly important that body shops are highly trained, and have the right knowledge, tools, equipment, facilities, and certifications to repair these increasingly advanced vehicles. And to most consumers, certifications matter.

For a shop to be legitimately included in a labor rate survey, the proposed CDI regulations require that shop to meet some basic repair capability criteria such as having equipment to make structural pulls, having a spray booth, and having access to vehicle information for structural and wheel alignment specifications. Anything else they either don’t need to have or can use a sublet provider. Is that a shop you want to take your new Ford F-150 to? Or your Audi, BMW, Mercedes, Tesla, or any other luxury vehicle? Or some of the new vehicles from Honda?

Clearly, collision centers that earn certifications for these and other brands have higher requirements and standards put on them, and have spent considerable money to achieve their repair capabilities. And these capabilities are probably the single strongest justification for charging higher labor rates. Yet the CDI survey regulations completely ignore certifications and many other important repair capabilities when measuring and determining proper labor rates. This does a disservice to certified collision centers and can be misleading to consumers, who could be led to believe that labor at certified centers costs the same as at non-certified centers.

Because certified shops are the vast minority of collision centers (less than 10% overall, and less than 2% for luxury brands), the result of the CDI proposal will be that so-called “prevailing rates” in California will continue to be driven and dominated by lower priced, non-certified shops, making it even more difficult for certified shops to collect the higher rates they need to support their certified repair capability and keep consumers safe.

“Geographic Area” definition will unfairly penalize and reward the wrong shops.

To make it more clear which shops can be included when surveying any particular market, the CDI created a definition for the “geographic area” that determines which shops are included in the prevailing rate determination. Similar to the prevailing rate definition, the geographic area definition creates new problems.

Basically, the CDI defines the survey area for any one shop as that shop plus the 5 nearest shops, then it adds 1 mile beyond the farthest of those 5 shops and includes all the additional qualified shops that are in the extra 1-mile range.

It’s worth noting that the only criterion for determining which shops get counted is distance. It does not matter whether any of these shops are alike, whether they have similar capabilities, or if they have any of the same certifications. It’s simply that these shops are close to each other.

The first problem this creates is a collusion temptation among shops in the same geographic area to establish a prevailing rate that would be abnormally high compared to usual competitive conditions. Or, even without collusion, lower priced shops could artificially inflate their rates closer to the higher prices of certified shops near them, thereby collecting a higher rate that they may not deserve, simply because they are next door to a Porsche certified collision center, for example, that charges $95 per hour. That’s not fair to insurers or consumers to pay higher rates to a shop without getting those higher levels of training and certifications in return.

In combination with the simple majority approach to prevailing rates, the geographic area definition effectively penalizes higher end certified repairers to receive a lower prevailing rate just because their shops are located near other repairers who are not highly certified. Conversely, the rule unfairly rewards lesser-certified shops to get a higher prevailing rate just because their shops are located near other repairers who are highly certified.

All of this is driving the exact opposite effect of what the collision industry needs. Highly trained, highly equipped, highly certified shops deserve higher labor rates than other collision centers who have not made these investments in their business and are less trained, equipped, and certified. Yet, the CDI’s approach to prevailing rates and geographic area reduce these higher quality shops’ opportunity to collect the higher rates they need, while enabling lower priced shops to raise prices and collect more than they should.

No Independent Standard.

Lastly, the CDI regulations make no allowance for an insurer and collision center to agree on a different way to do things, such as using an independent, third-party to conduct surveys. What if both parties want to do an apples-to-apples comparison for that shop to establish a labor rate, so that it fairly gets compared with other similarly capable shops within the general market area? What if both parties agree to use a simple average rate for all shops within 5 miles? What if both parties want to use an independent, third-party survey that’s not performed by insurers or shops? Under the CDI regulations, that freedom has been taken away from you. So the only way to do a survey in California is for the government to tell you how to do it, whether it makes sense or not, whether it helps or hurts.

We recognize and respect that considerable effort went into crafting the new proposed regulations and that they provide more clarity than the current ones. Yet we think that they will not produce fairer labor rate payments and claims settlements when all the dust settles; will unfairly penalize higher-end, higher priced shops; and will unfairly enable lower priced shops to collect higher prices by exploiting their proximity to higher priced collision centers. (Not to mention the lack of freedom to have an independent survey.) We don’t think that’s good for insurers, shops, consumers, or the collision repair industry.

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