H.L. Mencken once observed that for every human problem, there is a solution that is “neat, plausible, and wrong.” Exhibit A is the “Health Insurance Industry Fair Competition Act” – also known as H.R. 4626. This bill seeks to repeal the antitrust exemption granted to health insurance companies by the McCarran-Ferguson Act. The Obama Administration has thrown its support behind the proposal, and it passed the House of Representatives two days ago by an overwhelming bipartisan vote of 406-19.
The stated purpose of repeal is to increase competition in the health insurance market and thereby lower premiums. Thus, Senate Majority Leader Harry Reid argued that “there is no reason why insurance companies should be allowed to form monopolies and dictate health choices.” Rep. Betty McCollum asserts that repeal “will save every family in America who purchases health insurance at least 10 percent” on their premiums. Representative Tom Perriello, one of the sponsors of H.R. 4626 stated at a press conference last week that “Americans deserve to know who stands with them against the price gouging of middle-class and working-class folks.” In October, 2009, Senator Charles Schumer stated that the exemption “is one of the worst accidents of American history, [and] it deserves a lot of the blame for the huge rise in premiums that has made health insurance so unaffordable.”
Professor (and former Secretary of Labor) Robert Reich argues in the New York Times that exemption is “why a handful of insurers have become so dominant in their markets that their customers simply have nowhere else to go.” At the health reform summit yesterday, Speaker Nancy Pelosi stated that the overwhelming vote to repeal the exemption was “a very strong message that, yes, the insurance companies need to be reined in.”
Some background is helpful in evaluating the merits of these claims, and assessing the likely impact of repeal, assuming the Senate follows the House’s lead. In 1944, the Supreme Court overturned prior case law and held that the sale of insurance was interstate commerce. This decision, which was clearly correct, meant that the federal antitrust laws suddenly applied to insurance. Congress responded with the McCarran-Ferguson Act, which created a limited exemption from federal antitrust law for the “business of insurance.” To qualify for the exemption, each state had to engage in oversight of its insurance market. States responded by creating insurance commissioners and regulating insurer conduct and mergers pursuant to state insurance law.
The logic of the exemption was that prior to 1944, insurance had been regulated by the states anyway. No one felt any compelling need for intrusion by the federal government into this area. In addition, antitrust law (at least the version of antitrust law that prevailed in 1944) cast serious doubt on the legality of insurers sharing information on claims experience. Since insurers can more accurately price risk if they can share information on their actuarial experience, the potential chilling effect of antitrust on such sharing was thought to be a big problem. This is less of a problem for a big insurer, which has enough information to do its own pricing, but it is potentially quite significant for a small or mid-size insurer.
In response, McCarran-Ferguson created a safety zone for insurers to share information without worrying about private antitrust exposure — while still subjecting them to regulatory oversight at the state level, and to federal antitrust scrutiny for matters that don’t involve “the business of insurance.” This means, for example, that states can directly regulate premiums, other terms of coverage, and mergers. Contrary to Senator Reid’s claim, the federal government also scrutinizes mergers for anticompetitive consequences and it has brought several challenges, including a 2008 case in Las Vegas (in Senator Reid’s home state of Nevada) that resulted in structural relief (divestiture).
What should we expect if the exemption is repealed? With states already regulating insurer conduct and mergers, and the feds able to challenge mergers, adding federal antitrust exposure for “the business of insurance” doesn’t seem likely to result in much change – and what change there will be may not be for the better. Thus, the Congressional Research Service recently noted the possibility that removal of the exemption could actually reduce competition, if enough small and mid-size insurers decide they can’t enter (or remain in) the market without the ability to share information, so they either exit or consolidate.
To be sure, it isn’t clear how many health insurers are in the “sweet spot” of “too small to have enough information to do risk rating themselves, but big enough to want to enter or stay in the market as long as they can share information.” This will also be a bigger problem if Congress also decides to repeal the exemption for malpractice and property and casualty insurers, which are much more reliant on information sharing than health insurers are; for the moment, Congress is focusing on health insurers.
What about the promises of lower prices and increased competition? The Congressional Budget Office concluded that repeal “would have no significant effects on either the federal budget or the premiums that private insurers charged for health insurance.” Professor Scott Harrington of the University of Pennsylvania says, “This is just barking up the wrong tree…It might sound good, but I can think of very few things …that would be less consequential for consumers of health insurance.” Professor Austin Frakt of Boston University notes, “Repeal of the exemption is popular, but like a lot of things done in anger, it isn’t particularly wise and won’t be very effective.” Dr. Paul Ginsburg, of the Center for Studying Health System Change asserts that “I don’t think this will have much effect. This is strictly political posturing.”
Repeal seems likely to result in increased private litigation, at least some of which will be the equivalent of “strike suits.” It will cost money to defend those cases – although how much remains to be seen. If the exemption is repealed, insurers will also have to deal with an additional (federal) regulator. This will result in increased expenditures, including lobbying and campaign contributions to Congressmen serving on committees with oversight over the federal regulator. At least some of these expenditures will be “new” expenditures that were not previously being spent at the state level.
To be clear, the exemption doesn’t make much sense, as a matter of antitrust law. Both the ABA and the Antitrust Modernization Commission have recommended repeal. I teach insurance law, and spent three years at the FTC, so I’m on both sides simultaneously – and I come down on the side of repeal. But there just isn’t much evidence that doing so will increase competition in the market for health insurance, or reduce health insurance premiums.
Why then is there such enthusiasm for repealing the exemption? The bill serves three distinct political (as opposed to policy) purposes.
First, the legislation is payback for an October 2009 report by the health-insurance lobby finding that the Democrats’ legislation would result in higher premiums. A bill to repeal the exemption has been a hardy Washington perennial, but it only got serious traction after the report was released. Consider a contemporaneous press release by Sen. Charles Schumer (D-NY) that announced, “Two days after health insurance lobby tried to sucker-punch health care reform effort…Schumer [says] revoke health insurance industry’s antitrust exemption.”
Second, the bill satisfies the desire of Democrats to “do something” on health reform — and to be seen as doing something. Voters are rationally ignorant of the details of the McCarran-Ferguson Act, and its impact. Why not pick on an unpopular group (insurance companies)? Pharmaceutical companies were cast as the black hats during the Clinton health reform initiative. Now it’s insurers turn.
Finally, the effort serves purely partisan objectives. The Nation framed the proposal as a “litmus test” on whether Congress serves ordinary voters or powerful insurance companies. Congressional Democrats were clearly hoping that the Republicans would line up in favor of insurers, allowing them to be labeled as “a wholly owned subsidiary of the insurance industry,” in the words chosen by Representative Anthony Weiner on the floor of the House earlier this week.
To summarize, the Health Insurance Industry Fair Competition Act serves a variety of symbolic and political purposes. But, it isn’t health reform, and it won’t have a material impact on the performance of the health insurance market, or on the serious problems that beset American health care.
Update: For those who are interested, this is an expanded version of a op-ed that appeared here.
Eric Rasmusen says:
Is the current state of the industry that state agencies can block entry and the incumbent companies are free to agree with each other not to lower prices? If so, I’d expect high prices even if the regulators are also free to set price ceilings. (If the regulators set price floors, a fortiori.)
February 26, 2010, 1:27 pmMCM says:
I found it highly amusing that you decided to quote the CBO as saying, “would have no significant effects on either the federal budget or the premiums that private insurers charged for health insurance”, yet declined to quote the CBO regarding litigation costs in your very next paragraph, despite the CBO saying,
Somewhat disingenuous in my opinion. And of course, the CBO also said,
February 26, 2010, 1:28 pmsureyoubet says:
But this could create jobs in the antitrust legal field.
February 26, 2010, 1:38 pmTatil says:
The only drawback of the repeal of the anti-trust exemption in your post seems to be additional restrictions on information sharing about the “claims or actuarial experience.” Considering many companies in many industries share a lot of information, (including credit histories for individually identifiable people, not just statistical data) what makes it so hard for insurance companies to share statistics, publish them in a technical journal, sell that data or buy them if they wish? In any case, is there really a lot of desire on the part of insurance companies to share data to begin with? Wouldn’t they regard the detailed statistics of any market to be a competitive advantage?
February 26, 2010, 1:38 pmJohnF says:
Subjecting insurers (or anybody) to further regulation will increase costs. This will without question subject the insurance industry to more criticism, the only “solution” to which, will, of course, be greater government regulation, or its logical conclusion, government-run health insurance.
We must keep in mind that in the long run all governments in general, and our current administration in particular, will take steps to increase the power of government. Subjecting the business of insurance to federal antitrust regulation is just nature at work.
February 26, 2010, 1:50 pmDilan Esper says:
A lot of good laws are enacted for bad motives. For instance, in a related area of law, the repeal of various anti-trust exemptions for professional sports leagues (good policy) has always been the result of congressional shakedowns after professional sports leagues have failed to do what Congress wanted (bad motives).
February 26, 2010, 2:06 pmBruce Hayden says:
On the one hand, I would be extremely happy if passing this ended the rush towards health care and health care insurance “reform”.
But I do wonder about the ramifications. In particular, I wonder if this may open up a way for someone to, essentially, defraud insurance companies by lying on their applications about their health care history. Then, when it turns out that they have a major illness that they knew about, and then lied about, the insurance company wouldn’t know about the previous claims made on it with other insurance companies.
I am not, btw, suggesting that this is the case, but rather, wondering.
February 26, 2010, 2:07 pmSteve says:
If small insurers have such difficulty staying in business without access to actuarial information from the big insurers, why the heck do the big insurers share it with them? Are they just good sports who enjoy extra competition?
February 26, 2010, 2:25 pmCharles says:
It looks like the CBO has said that the negative/ zero-sum is one of many possibilities. Another possibility being that under this exemption cooperation “could dampen” competition and reduce consumer benefit.
February 26, 2010, 2:34 pmGuest14 says:
This explains why the passage of the Sherman Act was the high-water mark for American prosperity.
February 26, 2010, 3:00 pmEric Rasmusen says:
Do commentors really think it desirable that insurance companies be allowed to form cartels, agreeing by contract with each other to keep prices high? Allowing them to do so would certainly lower the antitrust enforcement and litigation costs that the companies would face. But I don’t think their prices would end up falling.
February 26, 2010, 3:13 pmDarel Finkbeiner says:
Now if they would just eliminate the restrictions on buying health insurance across state lines, we might have an actual, functional market.
February 26, 2010, 3:30 pmRoscoe says:
My understanding of M-F (and please don’t make me look this up) is that cartels would still be illegal. The exemption applies to things like sharing risk information.
February 26, 2010, 3:51 pmCharles says:
I think Eric overstates the point, but in insurance cases risk sets the price so risk-sharing information could lead to collusion, though it could also lead to propre pricing.
February 26, 2010, 4:46 pmRowerinVA says:
This misunderstands the exemption. Such hard-core cartel behavior is already illegal under federal law. Moreover, it’s illegal under state law, and both private and public (State AG) plaintiffs would be suing, and have occasionally sued, for such behavior.
It’s no mystery. Roscoe is right. Look it up: 15 U.S.C. §§ 1011-1015, which says:
Congress’s actions aren’t going to meaningfully change the degree to which competition laws, or even the federal antitrust laws, apply to the business of insurance. They will harm the states’ ability to demand and regulate risk-data pools, which help smaller insurers that don’t have sufficient data of their own, but they aren’t going to lead to a huge cartel busting operation. I very much doubt that the repeal of M-F will lead to any reduction in rates.
What WOULD lower health-care costs (and, as a result, insurance costs) would be to remove the anticompetitive arrangements that health care providers spend millions of dollars imposing. Certificates of need, cost-shifting from Medicare to private payors, etc. Certificates of need are just outrageous — competitors can block new medical facility entrants based on the competitors’ view that more competition isn’t “needed.” Wow. That would be a criminal, per se violation of the antitrust laws if it were not laundered through state action! Neither Congress nor the states seems to have any interest, however, in taking on the medical lobby.
February 26, 2010, 4:49 pmRowerinVA says:
If only our antitrust agencies would do a report exposing how the lack of competition keeps prices high in the medical industry, including the miserable practice of certificates of need (CON).
Oh, wait, they did. In 2004. 300 pages of it: http://www.justice.gov/atr/public/health_care/204694.pdf
The agencies pulled their punches a bit (politics and all that) but it’s good reading, particularly about CONs (see Chapter 8).
Betcha didn’t know CONs even existed. They should be criminal violations, really. It’s a scandal that they continue to exist.
February 26, 2010, 5:01 pmbyomtov says:
Now if they would just eliminate the restrictions on buying health insurance across state lines, we might have an actual, functional market.
Well, we already have a market in state legislators, but I suppose it would grow, and prices would rise.
February 26, 2010, 6:37 pmDilan Esper says:
Now if they would just eliminate the restrictions on buying health insurance across state lines, we might have an actual, functional market.
Or more likely, we’ll have every health insurer incorporate in Delaware or South Dakota or whatever state lets them get away with anything they want to and immunizes them from liability for denying care to patients.
Seriously, is there a single more ANTI-INTELLECTUAL idea in all of politics than this one? We all know what a market looks like where states are preempted from imposing regulations on out-of-state entities– that’s what the credit card industry is (or was, perhaps). And we all know what happens in such a market– the providers make off like bandits, unfair practices cannot be stopped, consumers get the shaft, and if any state threatens to impose even minimal controls on the worst behavior, the providers threaten to decamp en masse to another state that doesn’t impose the controls.
The only reason anyone would ever actually advocate this as anything other than a dishonest talking point to be deployed against Obamacare is if the person defined the health care crisis as the inability of insurance companies to completely screw over their customers.
February 26, 2010, 7:02 pmArthur Kirkland says:
Next up: Eliminating ERISA-related immunity.
February 26, 2010, 7:09 pmRoscoe says:
In the health care field, ERISA is not entirely a bad thing. Yes you can’t get consequential damages, but it does prevent the HMO from imposing an arbitration requirement, and it does permit a prevailing plaintiff to recover attorney fees.
If you have a $20,000 claim under state law with an arbitration agreement, good luck finding an attorney to take it on a contingency. The arbitration costs could quickly consume the value of the claim. Under ERISA, on the other hand, if the denial is really (really) bad, you could afford to litigate it.
February 26, 2010, 7:44 pmbyomtov says:
What Dilan Esper said.
To which I would add, who is going to bail out these companies, or, more important, their customers, when it turns out that the state regulations, if any, fail to make sure they can actually pay off?
February 26, 2010, 8:43 pmloki13 says:
I am going to third Dilan (and second byomtov). There’s a lot of stupid & idiotic vitriol and nonsense being flug around by both sides i nthis debate, like warring tribes of monkeys with inexhasitble supplies of feces, but the whole:
Now if they would just eliminate the restrictions on buying health insurance across state lines, we might have an actual, functional market.
line of reasoing is the biggest, worst, feces-ist of the lot. Everytime you hear that, ask yourself two questions:
1. Do I, in general, like the way that credit cards companies operate wrt. consumers? Are they consumer friendly? Do I get a good rate of interest?
2. Why am I sending my payments to South Dakota?
February 26, 2010, 9:28 pmJohn Moore says:
There may be another unexpected consequence of this.
Medical insurance companies share data on potential customers. If they cannot do that, there will be more cases where customers dishonestly fail to list pre-existing conditions, or worse, cases where they don’t realize they have not provided added information. The result can be a sudden cancellation of the insurance policy, for perfectly valid reasons, when the company discovers the discrepancy, most likely when reviewing the medical information from a big claim.
The result, the honest (or dishonest) consumer who thinks he has insurance suddenly, in a crisis, loses it.
February 26, 2010, 9:41 pmJohn Moore says:
A co-worker of mine attended a meeting a one of the largest credit card issuing banks in which they discussed the best way to improve the probability of people making their payments late. The answer was to keep track of the delivery record of the USPS, and send statements from wherever they would arrive the latest, and require payments to where they would arrive the latest (not necessarily the same place).
February 26, 2010, 9:43 pmbyomtov says:
John Moore,
What, what?
You mean the free market doesn’t prevent that sort of skulduggery?
I’m amazed.
February 26, 2010, 10:21 pmjcp370 says:
Right, we’ll have every health insurer incorporate in Delaware or South Dakota or whatever state lets them get away with anything they want just like what has happened with auto insurance carriers who sell policies across state lines.
Oh wait, that hasn’t happened, has it?
I live in PA and buy my auto insurance from Liberty Mutual which is headquartered in Massachusetts, Progressive is in Ohio, Geico’s corporate headquarters is in Maryland. Where the corporation is domiciled does not negate or pre-empt the individual states’ regulations or state laws relative to benefits (minimums set by states), rates, financial requirements, etc. Of course whether national carriers will want to sell policies in states that mandate onerous minimum benefits that include things like in-vitro fertilization, athletic trainers, or oriental medicine is another story.
Anyway, it looks to me like the competition for auto insurance is intense judging by the constant stream of advertisements and TV commercials. And it seems to me that competition is a good thing. But then again, what would an “ANTI-INTELLECTUAL” like me know? I guess it’s much better to rely on government “experts” or politicians; they’re always looking out for our best interests after all.
February 26, 2010, 11:03 pmloki13 says:
jcp-
We’ll go slow here. In car insurance, because the car is licensed in the state, the laws of the state where you are purchasing the insurance matter greatly. In other words, there is no “race to the floor” because while there can be some protection for the headquarted of a company being located in a certain place (or for the issuing documents etc.), your policy is being regulated by the state in which you purchase the insurance.
So if your argument is actually-
I would like to be able to buy insurance across state lines, so long as my own state gets to set the rules for the insurance… well, that would be different. But how would that be different than what we have now?
February 26, 2010, 11:14 pmOff Kilter says:
loki: Thanks for going so slow. Here’s what I’d like. The ability to buy insurance with mandates less onerous and extensive (and therefore less expensive) than that of the state in which I live. Which is to say, mandates that are clearly acceptable to the millions of people that live in the state I’m trying to buy the insurance from. But I’d like to do that without actually having to move to that state, much like I can now buy Belgium chocolate without actually having to move to Belgium.
Could you slowly go over for me what laws currently prohibit that, and why you find them good public policy? Words of two or less syllables would be most helpful, since, like jcp above, I’m clearly anti-intellectual.
February 27, 2010, 1:54 amcommon_sense says:
Personally, I like my credit cards. I get thousands of dollars in unsecured credit for historically low rates. I have a credit card from a bank in Texas that gives me 24-hour phone support, extensive on-line tools, great fraud protection, and has rapidly dealt with any problem I’ve ever had. I also have an AmEx blue card. I would be very happy if my health insurance company reacted to a complaint with half the speed of AmEx. Yes, some credit card companies use really bad practices, but there are so many out there and so many really good ones that I don’t understand why people continue to use bad credit cards.
February 27, 2010, 9:23 amSandy MacHoots says:
When you see Congress voting overwhelmingly for something, it’s because the BIG MONEY PLAYERS WITH HEAVY INFLUENCE IN CONGRESS in the field approve it. It’s the big insurance companies who love this bill, because they don’t want to share info with smaller competitors. “Please don’t throw me in the briar patch, Bre’r Fox!”
The credit card complaints seem to be strange to me. The private market gave me credit cards that cost me nothing when I pay them off regularly; that protect me from bad deals by allowing me to dispute charges; that give me access to cash instantly on just about any street corner in the developed world . . . .
February 27, 2010, 10:47 amRichard Johnston says:
I must disagree. ERISA preemption is entirely a bad thing as it relates to insurance companies (as distinguished from self-funded trust plans). By gutting recoverable remedies the insurers are incented to act badly, and they know they can get away with anything up to and including outright fraud or wrongful death with no meaningful consequence. And why should a denial have to be “really (really) bad” in order to be judicially remedied? Why can we not overturn denials which are merely incorrect?
February 27, 2010, 11:36 amDilan Esper says:
Thanks for going so slow. Here’s what I’d like. The ability to buy insurance with mandates less onerous and extensive (and therefore less expensive) than that of the state in which I live. Which is to say, mandates that are clearly acceptable to the millions of people that live in the state I’m trying to buy the insurance from.
The thing is, that isn’t what the Republicans mean when they say “sell insurance across state lines”. Their actual proposal is the credit card model (preempt ALL state regulations) rather than what you might propose, which is to preempt only those regulations that go to minimum coverage.
I wouldn’t support the latter proposal either, but just to be clear, it isn’t the one that is under discussion.
February 27, 2010, 8:32 pmjcp370 says:
So, if that’s the case, you don’t want me to be able to buy a cheap health insurance policy from another state that covers me for basic or catastrophic illness? You’d rather I keep paying $750 a month for a policy in PA with a $5,000 deductible from one of the two health insurance carriers that still write in my area with mandated coverage for chiropractors, autism, mental health parity and other miscellany that lobbyists have sold to the Democrat state legislature? Or perhaps if this healthcare bill goes through, a policy with even more federal mandates brought to us via K Street?
Again, I’m an ANTI-INTELLECTUAL so it’s really hard for me to understand this stuff. Maybe if the Constitutional Law scholar who didn’t know why his car wasn’t covered under his auto policy could explain it to me a half-dozen more times the light bulb might go on. Bot i cen’t promiz enyfing.
February 28, 2010, 5:25 pmDilan Esper says:
So, if that’s the case, you don’t want me to be able to buy a cheap health insurance policy from another state that covers me for basic or catastrophic illness?
It’s complicated. There are actually many catastrophic care proposals that I might support as an improvement over the current system. But those would involve some form of universal catastrophic care. I don’t think that would be nearly as good as simply going to single payer or a national health service, but it would be a big improvement over what we have now.
The problem with saying that you can purchase a policy without mandated benefits across state lines, however, is that it would undermine the regulatory choices made by states while at the same time not doing anything about the universality problem. And as a result, it would pull healthy young people out of the insurance risk pools in one state, leaving only sick people to buy the more full-featured insurance with mandated coverages. You do that, you destroy the risk pool.
As for “anti-intellectual”, you are (I think deliberately and dishonestly) pretending to miss the point here. The idea that “selling insurance policies across state lines” will insure the 47 million people without health insurance or deliver security to the millions who worry that they will lose their current coverage is what is anti-intellectual, because there’s no way that turning the insurance industry into the credit card industry will do any such thing– indeed, it will obviously make things worse.
March 1, 2010, 1:04 am