Is Repealing McCarran-Ferguson Health Reform?

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.