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The McCarran-Ferguson Act of 1945: Time to be Repealed

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For the most part, I have found the congressional debate over health insurance reform largely dispiriting and depressing. But every now and then, an event occurs that temporarily adds a bit of levity to the process. While all too infrequent, sometimes the political posturing is instructive on many levels. The release of the health insurance industry’s study, conducted by PricewaterhouseCoopers, showing that the Baucus bill would substantially increase the cost of health insurance for the average American family, is the most recent distraction.

After bludgeoning the public option and driving a sweetheart deal with the White House, it’s not surprising that the insurance industry would respond negatively to any aspect of the proposed legislation that would undermine its hegemony (and I use the word deliberately) over health care delivery. Once the Senate Finance Committee voted to relax the penalty for not purchasing mandated insurance coverage, the insurance industry’s rationale for supporting the legislation lessened.

In response, the controversial PricewaterhouseCoopers study was released, demonstrating that the Baucus legislation would raise the cost of health insurance substantially. In part because the study ignored aspects of the bill that might reduce health insurance costs, the study garnered generally dismissive reviews. The White House, for instance, dismissed the study as flawed and deceptive. Even PricewaterhouseCoopers backed away from its conclusions after widespread criticism. Whatever the study’s sponsor, America’s Health Insurance Plans (AHIP), may have intended, the resulting furor was probably not high on its list.

In contrast to industry expectations, Democrats stuck back quickly, threatening to enact legislation to remove the industry’s immunity from federal antitrust enforcement, codified in the McCarran-Ferguson Act of 1945. To protect state regulatory authority over insurance markets, McCarran-Ferguson prevents the Federal Trade Commission and Department of Justice from initiating antitrust litigation against health insurers. One result has been the secular trend toward consolidation of health insurance markets, where one or two large insurers dominate local markets.

Is repealing McCarran-Ferguson a good idea? Would federal antitrust enforcement of the health insurance industry lead to less consolidation and reduce the potential for abusive practices (such as rescission of insurance benefits and unexplained coverage denials)? Certainly, the incentive for states’ attorneys general to initiate antitrust litigation against health insurers is low. For one thing, the cost of such litigation is high. For another, they may view it as a political issue best left to the legislature because the likelihood of new competitors entering the market is unknown.

Whether the incentives for federal antitrust action would be any different are equally unknown. More importantly, the question of whether a successful antitrust action against insurers would reduce market consolidation and provide a more competitive market at the state level is speculative. But at a minimum, the threat of federal antitrust activity may act as a sentinel against some of the more abusive insurance practices that states seem unwilling to challenge.

To be sure, robust antitrust enforcement over time could well reduce consolidation in the health insurance market with a corresponding erosion in political power (similar to what organized medicine, especially the American Medical Association, has experienced over time) and facilitate the introduction of increased competition. For its part, the industry maintains that competition in health insurance markets is already robust, though evidence for that position seems thin. In any event federal antitrust enforcement, combined with a robust public option, would certainly introduce more competition.

Thus, I support repeal of McCarran-Ferguson as a mechanism that has the potential to induce needed changes in the health insurance industry. Whatever its justification in 1945, the Act has long since outlived its usefulness. While I’m still skeptical that it will be repealed, if AHIP’s gaffe actually results in repeal, the health insurance will have unexpectedly lost a major battle. If it is not repealed, this episode will no doubt be a mere sideshow (if mentioned at all) when the history of health reform 2009 is written. Even with repeal, the health insurance industry is so powerful right now that its market dominance will not be substantially weakened any time soon.

Still, there are a couple of lessons to consider. First, it was always naive for policymakers to believe that the health insurance industry would make concessions that matter. Second, what should we make of the PricewaterhouseCoopers study and its release? Some interesting tactical and ethical issues might be considered. When should a consultant advise the client that presenting a worst-case scenario could backfire? If the client rejects the advice, should the consultant just walk away from the study? Walking away seems very unrealistic given the stakes involved, and it is unlikely that either AHIP or PricewaterhouseCoopers will suffer anything more than a short-term “black eye” from this episode. Yet the potential for losing the industry’s antitrust exemption is not a trivial setback.

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  • Mark Hall says:

    Earlier this week, I was surprised to read in the papers and hear on NPR when I awoke that the insurance industry was threatened with losing its “antitrust exemption.” I consider myself well-versed in the basics of insurance law, and reasonably up to speed on antitrust law, and I had never heard about a sweeping “antitrust exemption.”

    But, then it dawned on me that the media must be referring to McCarran-Ferguson. Recall what it does: it exempts the “business of insurance” from any federal oversight, so that federal law does not pre-empt traditional state insurance regulation. Sure, antitrust is part of this anti-federal-preemption statute, but it’s not mainly about antitrust.

    Also, remember that courts have construed the exemption narrowly, by bearing down on what exactly it means to regulate the business of insurance. This is one reason that ERISA pre-emption is so broad — because the same narrow definition of insurance is used to construe ERISA’s insurance-regulation “savings clause” (the clause the preserves state authority to regulate insurance).

    Essentially, the McCarran-Ferguson exemption focuses mainly on the core areas of underwriting and risk-spreading, and thus does not include larger business questions such as mergers. Accordingly, DOJ review of market consolidation among insurers is already in place.

    Thus, I agree with Peter that this is mostly a sideshow, put on partly for political reasons. Still, the bold move strikes squarely at the basic federalism principles that motivated McCarran-Ferguson. National health care reform will surely shift the balance of state-federal responsibilities over health insurance, and amending McCarran-Ferguson is one logical component of that shift.

  • Steve says:

    Federal assumption of insurance industry governance could potentially remove rapid public access needed to correct localized insurance company abuse or error. Varying from state to state, the OIC’s have typically provided both early warning mechanisms and corrective instruction for and on behalf of the consumer. It is hard to imagine a federal mechanism that could better serve the insurance buying public in a more efficient manner. Should that happen, it’d be a first. Any modification of the M-F act should leave primary insurance carrier oversight within states jurisdiction.

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