Health Insurer Competition and Democratic Saber Rattling

Last week, after the industry association America’s Health Insurance Plans released a study showing that premiums would rise 18 percent under the Senate Finance Committee’s reform proposal, top Democrats took to the airwaves to condemn the industry for standing in the way of health care reform.  President Obama used his Saturday radio address to accuse the industry of using “deceptive and dishonest” attacks to derail reform legislation.  And Obama and congressional Democrats threatened to repeal the McCarran-Ferguson Act, which exempts insurers from most federal regulation, including antitrust laws.

It is true that a handful of states have highly concentrated markets.  In Hawaii, Rhode Island, and Alaska, for example, 95 percent or more of the health insurance market is served by just two insurers.  But, federal intervention would do nothing to address this problem.  After all, insurers are still governed by state competition law, which prohibits anticompetitive practices.

The main benefit insurers get from McCarran-Ferguson is antitrust immunity for sharing the actuarial data on which firms individually base their premiums.  Ordinarily, information sharing of that kind of  would be a big no no, since it suggests pricing collusion.  But, state insurance laws permit it because it helps small insurers gain access to a sufficiently large pool of information to set premiums at an appropriate level.

The only way federal antitrust enforcement could significantly reduce market concentration would be to break up the firms into smaller pieces—think of the dissolution of John D. Rockefeller’s Standard Oil trust, or the break up of AT&T’s local service monopoly into seven regional Baby Bells.  But, as Boston University health economist Austin Frakt  notes:

“Taxpayers will be best served by insurers with sufficient market power to bargain down provider rates, but with not quite enough power to keep the savings (“rents”) for themselves.  … How to balance the power of insurers and providers is far from simple. Many have pointed to the alleged dominant market position of insurers as a substantial source of high health care costs. However, the health economics literature supports the notion that recent increased market power of insurers does not lead toward monopolistic pricing, but rather it provides a counter-balance to the power held by hospitals and provider groups.”  (Hat tip, Tyler Cowen.)

Democrats know this of course.  And, in the end, it’s not clear that they really do intend to repeal McCarran-Ferguson, or if they’re just sending a signal to health insurers and other dissenters that “this is how we deal with people who stand in our way.”  As my wife said yesterday, they’re playing Chicago hard ball now.  They’ll do whatever it takes to win.