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COST: Senate Judiciary Committee Looks to End Insurer Antitrust Exemption

Much of the debate in Congress right now still centers on the public plan, and the need to make sure there is adequate competition in the new insurance exchanges that would be established under health reform.  We have also written several times about fresh approaches to dealing with malpractice reform, which President Obama has said is overdue.

Senate Democrats recently revisited an old idea that could potentially address both of these challenges -- ending the exemption that medical malpractice companies and health insurers currently enjoy from antitrust laws.

Earlier this week, the Senate Judiciary Committee held a hearing to discuss Judiciary Chairman Patrick Leahy's (D-VT) Health Insurance Industry Antitrust Enforcement Act of 2009. Currently, insurance companies -- including health and medical malpractice insurers -- are exempt from a limited number of antitrust laws. Leahy's legislation would narrow the exemption by prohibiting plans from engaging "in any form of price fixing, bid rigging, or market allocations." Yesterday's hearing featured testimony about how the insurance industry got the exemption in the first place, and whether the exemption should be eliminated.

There are three sets of laws involved here; 1) the federal antitrust laws; 2) the state laws that regulate the insurance industry; and 3) the federal law passed in 1945 called the McCarran-Ferguson Act. The antitrust laws promote competition, and states have a long tradition of regulating insurance practices for their citizenry. The McCarran-Ferguson Act doesn't regulate insurance or prohibit certain anticompetitive behavior, but it does allow federal and state governments to regulate insurance and makes clear when antitrust laws do and do not apply to the insurance industry.

The McCarran-Ferguson Act exemption from the antitrust laws has long been criticized as giving an unwarranted exception to the insurance industry. Health care providers, in particular, complain the exemption is unfair, particularly because they are subject to frequent antitrust investigations and challenges to their conduct. The reason why we are hearing about this now is because the McCarran-Ferguson Act immunizes health plans from federal antitrust laws when they engage in certain insurance business activities -- like premium rate setting. And Democrats have decided to take a shot at revoking this immunity, now that health insurers are publicly attacking the federal health reform proposals. It's a tit-for-tat.

This is not the first time Congress has tried to revoke health plan's antitrust immunity. In 2007, a bipartisan group of senators (former and current Senate leaders Leahy, Lott, Reid and Landrieu) introduced the Insurance Industry Competition Act of 2007 to repeal the 60 year old McCarran-Ferguson Act's partial antitrust exemption for the insurance business. Leahy pushed it again this Congress, to no avail -- until just now.

Leahy and others accuse health insurers of dominating the markets they do business in, prohibiting competition that could bring down premium prices. According to the AMA, 94 percent of insurance markets in the U.S. are highly concentrated. The median share of the largest insurance carrier in a region is about 47 percent, and in 16 markets the largest carrier had a 50 percent share or higher, reports BusinessWeek, citing a GAO study from 2002. If the McCarran-Ferguson exemption is repealed, the argument goes, competition would help to lower costs and expand choice in the health and medical malpractice insurance markets.

BNA reported Senator Leahy saying that there "is no justification for health insurers engaging in egregious anticompetitive conduct to the detriment of consumers."

As always, there are two sides to this coin: if it is true that the antitrust law exemption allows insurers to dominate a market, won't repealing the exemption shift power to doctors, hospitals and other health-care providers, encouraging them to demand a higher rate of reimbursement -- which would lead to higher premiums? Some experts think so, according to The Washington Post.

Elimination of the antitrust exemption in the McCarran-Ferguson Act could increase antitrust scrutiny (investigations and litigation) of regulated collective insurer activities -- like the joint development of standardized insurance policy language and collective trending of shared historical data. This would have the negative effect of increasing administrative costs of plans (which would likely figure into premium rates). Others who have considered the repeal of the exemption warn that medical liability insurers would no longer be able to share data as they traditionally do, which would likely result in a lack of credible information to assist in making cost determinations -- a risk that most entities will not expose themselves to. (See Towers Perrin consulting actuary James Hurley's testimony before the Senate Judiciary Committee for more information).

What we wonder is whether repealing the antitrust exemption would lead to increased competition and lower prices. The key is whether market allocation is considered the "business of insurance" -- because if it is, then the antitrust exemption applies. An activity must satisfy three prerequisites, actually, to be exempt under McCarran-Ferguson, (it must: (a) constitute the business of insurance; (b) be regulated by State law; and (c) not constitute an act of boycott, coercion, or intimidation) but whether it is considered the "business of insurance" is a question the courts have wrestled with for years. The Supreme Court developed a three-part test to figure it out: (1) whether the activity has the effect of transferring or spreading a policyholder's risk; (2) whether the activity is an integral part of the policy relationship between insurer and insured; and (3) whether the activity is limited to entities within the insurance industry. Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 129, 102 S. Ct. 3002, 3008 (1982).

Notably, the government's position and the pervailing view is that mergers of insurance companies do not constitute the business of insurance, and therefore do not fall under the exemption. One would think that this would be the primary way an insurer could dominate a market -- by merging with the competition. But they are subject to antitrust scrutiny for proposed mergers and acquisitions just like every other economic sector.

In fact, a review of cases addressing what constitutes the "business of insurance" shows that the McCarran-Ferguson exemption has been judicially narrowed in the 60 years since its enactment. Health plans' provider contracting actions, for example, have been ruled outside the "business of insurance" and therefore are not considered exempt from antitrust laws. But there was a case in Rhode Island that involved allegedly anticompetitive behavior by a dominant health plan that had an exclusionary effect on a smaller health plan, where the court held that the exemption applied. So, if market domination is at issue, whether the exemption applies may be a case-by-case determination.

This leads us to our last query: Is it better to repeal or not to repeal? We have not done enough exhaustive research to give a full-throated answer. We do note that the people who have looked at this conclude that numerous lawsuits would follow a repeal to determine which insurance practices constituted antitrust violations. 

Stay tuned -- this development is now part of the "to have a public plan or not" conversation -- because competition is typically a good way to bring down costs. Public plan advocates think the antitrust exemption is another reason why we need a public plan to compete with private insurers. Whether repealing the antitrust exemption for health insurer is the best way to create competition, though, is unclear.