Competition and Health Insurance

During his weekly radio address last Saturday, President Obama attacked health insurers for allegedly making excessive profits and paying excessive bonuses, for spreading "bogus" misinformation about the impact of Democrats' reform agenda on the cost of health insurance, and for "figuring out how to avoid covering people." He opined that health insurers are "earning these profits and bonuses while enjoying a privileged exemption from our antitrust laws, a matter that Congress is rightfully reviewing."

Mr. Obama's comments followed hearings by the Senate Judiciary Committee last week. In an unusual move, Majority Leader Harry Reid testified as a witness, alleging that "exempting health insurance companies [from antitrust] has had a negative effect on the American people" and that "there is no reason why insurance companies should be allowed to form monopolies and dictate health choices."

Such populist rhetoric might exert additional pressure on insurers to fall (back) into line behind the Democratic reform agenda. But there is no evidence that their antitrust exemption has contributed to higher health insurance costs, premiums or profits, or, as implied by Sen. Reid, of "health insurance monopolies . . . making health-care decisions for patients."

If the goal were to promote robust concentration in private health insurance, Congress would focus on reducing impediments to competition.

The legislative basis for the insurance antitrust exemption is the 1945 McCarran-Ferguson Act, which also codified state insurance regulation as national policy. This statute exempts the "business of insurance" from federal antitrust law provided that the activities are (1) regulated by state law and (2) do not involve boycott, coercion or intimidation. Its passage followed a 1944 Supreme Court ruling that insurance was interstate commerce and therefore subject to federal antitrust law--a ruling that cast doubt on states' exclusive regulatory role, and the legality of then typical agreements among property and casualty insurers to use rates developed jointly by state or regional insurance rating organizations.

Most states responded to McCarran-Ferguson by enacting or modifying laws giving regulators authority over property/casualty insurance rates, including those developed by rating organizations. The next several decades saw a steady erosion of the role of collective pricing systems in conjunction with increased price competition, less price regulation, and a significant narrowing of the antitrust exemption's scope by the courts.

The traditional debate about the antitrust exemption involved property/casualty insurance and medical malpractice liability coverage. Subject to state regulation or prohibition, property/casualty rating organizations collect and analyze loss costs and disseminate projections of future losses. And insurers, subject to state law, can incorporate these forecasts in their ratemaking.

In principle, this system helps produce more accurate rates, thus improving financial stability. More important, it reduces entry barriers for small insurers or insurers entering new markets. Small property/casualty insurers are particularly strong supporters of the antitrust exemption, which allows the sharing of loss projections.

None of this is germane to health insurance, where insurers do not jointly develop forecasts of future medical costs for use in pricing. The antitrust exemption also does not prevent review and challenge of mergers of health insurers by the Department of Justice, which, for example, challenged the 2005 merger of UnitedHealth Group and PacifiCare, and obtained a consent decree requiring the divestiture of certain portions of PacifiCare's commercial health business.

Mergers and acquisitions of health insurers also are generally subject to approval by state regulators. Earlier this year, Pennsylvania Insurance Commissioner Joel Ario derailed a proposed merger between the state's two largest health insurers, Highmark and Independence Blue Cross.

Repealing the antitrust exemption for health insurers would not significantly increase competition, and it would not make health-insurance coverage either less expensive or more available. There is no evidence that the exemption has increased health insurers' prices or profits or contributed to higher market concentration.

Repealing the antitrust exemption would also not lower the cost of malpractice insurance, or prevent future malpractice insurance crises, such as those that occurred in the mid-1970s, mid-1980s, and earlier this decade. It would instead tend to reduce rate accuracy and undermine competition in already fragile malpractice markets.

In other words, the insurance industry's antitrust exemption is inconsequential to the health-care reform debate. It just distracts attention from important issues and further demonizes private health insurance.

Rhetoric about monopoly notwithstanding, Congress's reform proposals are not designed to increase competition in private health insurance. The House bill proposes a government-run insurer. The Senate Finance Committee proposes creation of quasi-public cooperatives. Both bills (and the Senate HELP bill) include restrictions on health insurance underwriting, pricing, profitability and policy design that would essentially turn private health insurers into regulated public utilities.

If the goal were to promote robust concentration in private health insurance, Congress would focus on reducing impediments to competition. It could do so by allowing consumers to buy insurance across state lines at terms that do not require them to subsidize other buyers or to buy coverage for state-mandated benefits they are unwilling to pay for. Congress could also eliminate tax and regulatory rules that favor employment-based coverage over individual coverage.

In short, the rationale for repealing the insurance antitrust exemption is--to borrow a word used by Mr. Obama in his radio address--bogus.

Scott Harrington is an adjunct scholar at AEI.

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