Popular but Pointless: Subjecting Health Insurers to Federal Antitrust Laws Would Avoid, Not Achieve, Reform

Key Points

Despite widespread media claims, health insurers are not “exempt from antitrust laws.” Instead, the McCarran-Ferguson Act allows state laws to supersede federal laws with respect to all lines of insurance – not just health insurance.
The McCarran-Ferguson Act was passed because of a 1944 Supreme Court decision, which overturned precedent and determined that insurance was interstate commerce. McCarran-Ferguson immediately restored insurance to state regulation, as it had always been.
Market concentration in health insurance is not significantly different than it is in other lines of insurance. Nor have states failed to regulate insurers’ solvency. States enthusiastically regulate all aspects of insurance.
A federal intrusion into insurance regulation would be redundant, adding another layer of bureaucracy to an already heavily regulated activity.

With the federal government’s takeover of Americans’ access to medical care on life-support, the majority faction appears eager to pull something digestible from the obese, 2,000-page-plus bills passed late last year by the House and Senate. The latest rumors suggest that the majority is crafting a bill focused on one narrow objective: eliminating health insurers’ so-called “exemption” from antitrust laws. This is already incorporated in the House’s legislation (H.R. 3962 § 262) and could easily be re-introduced as a small bill.

Although this would be a crowd-pleasing bill, ready for sound bites on the campaign trail, it would achieve nothing to improve patients’ control of their health care. Fact is, health insurers enjoy no “exemption” from antitrust laws. Instead, federal law ensures that state antitrust and other consumer-protection laws dominate the field of insurance regulation. And this goes for all lines of insurance, not just health insurance. The law that limits the federal government from pre-empting state antitrust laws is known as the McCarran-Ferguson Act (15 U.S.C. § § 1011-1015), which Congress passed soon after a surprising decision by the U.S. Supreme Court in 1944.

Until then, courts had held that insurance was not interstate commerce, as defined by the U.S. Constitution. That changed when the U.S. Supreme Court, in U.S. vs. South-Eastern Underwriters’ Association, asserted that insurance was interstate commerce, and therefore fell under congressional competence. Overturning its own precedent, the high court sent a shock through the insurance industry, Congress, and the state legislatures.1 In a fairly unique legislative action, Congress (while not explicitly rejecting the court’s finding) decided to leave the regulation of insurance to the states. In essence, the McCarran-Ferguson Act signals Congressional acceptance of the Supreme Court’s decision, but then turns around and responds: “Thanks, but no thanks.”

Congress passed the McCarran-Ferguson Act years after it had begun imposing federal antitrust laws. This makes it easy for opportunistic politicians to lead people to believe that McCarran-Ferguson was designed to “exempt” insurers from those laws. On the contrary: If the Supreme Court had not decided U.S. vs. South-Eastern Underwriters’ Association the way it did, McCarran-Ferguson would not have happened, because legislation and jurisprudence prior to 1944 had confirmed that Congress had no authority to govern insurance.

Furthermore, McCarran-Ferguson had little to do with health insurance. The lawsuit which led to its passage concerned a fire insurer. Health insurance barely existed at the time. A little more than 30 million Americans had coverage, in a population just under 140 million.2 So it’s noteworthy that the majority on Capitol Hill today is focused solely on exerting federal control of health insurance, but not other lines of insurance. It was not always so.

In the 1980s, a liability insurance crisis drove up premiums for commercial general liability. Markets for certain lines, such as pollution liability, dried up entirely. This resulted in a push to repeal McCarran-Ferguson, based on the (incorrect) belief that state insurance commissioners were not able to prevent collusion by insurers. Opponents of McCarran-Ferguson asserted that rate service organizations, particularly the leading rating bureau, Insurance Services Office (ISO) facilitated collusion by insurers. The rising premiums, however, were more a product of out-of-control tort litigation than collusion, and nothing came of the drive to federalize insurance regulation. ISO continues to pool claims data for property and casualty (P&C) insurers and forecasts trends. Until 1990, ISO also published so-called advisory rates, which P&C insurers often just used to set their own proprietary rates, without amendment.3

Despite periodic crises, states retain their sovereign role in the regulation of insurance, a situation that has persisted since the founding and currently causes no public outcry. Nor are there any grounds for believing that health insurance needs a federal regulator, while other lines of insurance function satisfactorily under state regulation. (Or, at least, if they do not function adequately in a given state, the problem is limited to that state!)

Note that a national market can exist without federal regulation. Life insurance is the most obvious example of a line of insurance that is guaranteed renewable from year to year and portable from state to state, but it is still regulated by individual states. Most life insurance is owned by individuals, whereas health insurance is owned either by employers or government (for people on Medicare, Medicaid, or other public plans). Tax reform that gives individuals the same tax break that their employers get for buying health coverage would lead to a national market in short order, as insurers and state legislatures responded to Americans’ demands for guaranteed renewable, portable, health insurance.

Unfortunately, the majority and its supporters refuse to consider such a reform. This results in the spectacle of advocates for government control of our access to medical services lobbying to impose federal antitrust laws based on measurements of intrastate concentration of health insurers.4 Obviously, state laws are perfectly competent to deal with concentration within each state. Indeed, concentration of health insurers within states is not significantly worse than concentration of insurers in other lines of business, generally speaking. Table 1 shows the market share of the top five carriers for four lines of P&C insurance in California, according to the California Department of Insurance, as well as for the top two health insurers, according to a publication by Health Care For All Now!, a self-styled advocacy organization. There is nothing remarkable about the market shares in health insurance versus the other lines.

Nor is there any reason to believe that a federal law is necessary to address the solvency of insurers, which is always a concern. State laws establish guaranty associations, which assess funds from insurers in order to meet the claims of insurers which become insolvent. Well before health insurance (as we know it) existed, thousands of insurers in other lines of business failed during the 19th and early 20th centuries. Although New York established a guaranty fund for life and health insurers in 1941, no other state followed suit for more than two decades. However, between 1965 and 1990, states passed legislation to establish guaranty associations to mitigate the risks of such failures to policyholders.

Although guaranty associations for property and casualty insurers came about first, the National Association of Insurance Commissioners (NAIC) passed model legislation for life, disability, and health insurers in 1970. Crisis arrived in 1983 when the Baldwin-United insurance group entered rehabilitation proceedings and 300,000 policyholders were left at risk. Two of the companies were domiciled in Arkansas, which still had no guaranty association for life insurers. In 1990, Executive Life, domiciled in California, another state with no guaranty association at the time, headed into liquidation with $10 billion in liabilities. Unsurprisingly, a concerned public prompted lawmakers to act quickly. By 1992, guaranty associations for life and health insurers had been legislated nationwide.6 There is no reason to believe that there are cracks in this web of regulation of insurers’ solvency. Indeed, with respect to the largest insurance failure in the current crisis, AIG, the former insurance commissioner of New York, Eric Dinallo, recently asserted unequivocally that AIG’s state-regulated insurance subsidiaries were solvent, despite the distress of the holding company.7

Congress did not fully abandon the field of antitrust, with respect to insurance. Explicitly, McCarran Ferguson does not pertain to an “agreement to boycott, coerce, or intimidate, or act of boycott, coercion, or intimidation.” Nevertheless, policymakers at all levels have concluded that competing insurers should be allowed to share information which the law would normally forbid. Specifically, insurers are allowed to share their historical claims data. As noted above, P&C insurers do this primarily through the ISO. Although not entirely uncontroversial, allowing insurers to share claims data derives from the key economic understanding that insurance is different from other goods and services in an important respect.

Most trade relies on well informed parties, whereas insurance markets rely on parties’ ignorance of a certain future state. Further, in medical services, consumers surely know much more about their health status than insurers do, leading to moral hazard.8 If insurers were not allowed to pool claims data, they would be hopelessly mismatched against customers who would seek to buy health insurance only for conditions from which they shortly expect to suffer.

Although health insurers do not benefit from ISO, other businesses aggregate health claims for the purpose of calculating “usual and customary charges.” However, this line of work will soon be under state control.

Last October, New York Attorney General Andrew Cuomo announced a settlement with health insurers about their use of Ingenix (the market-leading data vendor) to calculate usual and customary charges for reimbursing patients who use out-of-network providers.9 The settlement prevents health insurers from using a private vendor to calculate these charges, and imposes a government-chartered monopolist instead. By the end of this year, Ingenix will be out of the business. The state-chartered monopolist, called FAIRHealth, is established at Syracuse University and received $100 million in start-up funding from the settlement. Needless to say, this gives the state of New York great power to fix prices for the purpose of controlling Americans’ access to medical services.

There is no evidence whatsoever that states lack the power, capacity, or will to regulate health insurers. For better or worse, they do it enthusiastically. Congress’ expressed desire to take over this regulatory function is nothing more than a misdirection, which does nothing to give Americans more choice and control over their access to health insurance that suits their needs.

Endnotes

1 Charles D. Weller, “The McCarran-Ferguson Act’s Antitrust Exemption for Insurance: Language, History, and Policy,” Duke Law Journal, vol. 1978, no. 2 (May 1978), pp. 587-643.

2 Robert Cunningham III and Robert M. Cunningham Jr., The Blues: A History of the Blue Cross and Blue Shield System (De Kalb, IL: Northern Illinois University Press, 1991), pp. 58-59, and references.

3 Patricia M. Danzon, “The McCarran-Ferguson Act: Anticompetitive or Procompetitive?” Regulation: Cato Review of Business and Government, vol. 15, no. 2 (Spring 1992), pp. 38-47.

4 Health Care for America Now!, Premiums Soaring in Consolidated Health Insurance Markets (Washington, DC: Health Care for America Now! May 2009).

5 California Department of Insurance, 2008 California P&C Market Share Report: Market Share by Line, by Group Written Premium (Sacramento, CA: California Department of Insurance, April 30, 2009).

6 Spencer L. Kimball and Noreen J. Parrett. “Creation of the Guaranty Association System,” Journal of Insurance Regulation, vol. 19, no. 2 (Winter 2000), pp. 259-272.

7 Eric Dinallo, “What I Learned At The AIG Meltdown,” Wall Street Journal (February 2, 2010). Available at https://online.wsj.com/article/SB10001424052748704022804575041283535717548.html

8 Kenneth J. Arrow, “Uncertainty and the Welfare Economics of Medical Care,” American Economic Review, Vol. 53, No. 5 (1963), pp. 941-973.

9 Office of the Attorney General of New York, “Attorney General Cuomo Announces Historic Nationwide Reform of Consumer Reimbursement System for Out-of-Network Health Care Charges,” press release, October 27, 2009.