Comprehensive health reform now seems dead. But at a press conference last week, House Speaker Nancy Pelosi said that Democrats would pursue easier-to-pass incremental legislation during the coming weeks and put off comprehensive reform for later. A Pelosi aide indicated that one of the first priorities might be to repeal a 60-year-old law that exempts health and medical-malpractice insurers from federal antitrust laws.
Democrats have long blamed the McCarran-Ferguson Act of 1945 for aiding insurance industry consolidation and coordinated pricing. So, last year, Rep. Sheldon Whitehouse, Rhode Island Democrat, and Sen. Patrick J. Leahy, Vermont Democrat, introduced a bill that would repeal the limited antitrust exemption. The measure was incorporated into the House health care bill, but was dropped at the last minute from the Senate version. Democrats seem intent on reviving it now in order to punish the insurance industry for opposing the comprehensive legislation.
Mr. Leahy and Mr. Whitehouse claim the exemption "has served the financial interests of the insurance industry at the expense of consumers for far too long." And Sen. Charles E. Schumer, New York Democrat, insisted that Congress repeal the exemption to punish insurers for trying to "sucker-punch health care reform."
There is no evidence that McCarran-Ferguson has resulted in higher premiums or profits, however. So, not only is federal intervention unnecessary for ensuring fair competition, it could actually hurt consumers by eliminating practices that help small insurers compete and drive down costs.
The law gives states the primary role in regulating "the business of insurance," and exempts insurers from most federal regulation, including antitrust laws, as long as the states have laws governing the same conduct.
But where critics see only dominant market power and higher premiums, a closer look reveals a careful balancing by the states that helps promote competition and keep costs in check. As the Congressional Budget Office concluded in October, repealing the exemption would have little or no effect on insurance premiums because "state laws already bar the activities that would be prohibited under federal law if this bill was enacted."
It is true that a handful of states have highly concentrated markets. In Hawaii, Rhode Island and Alaska, 95 percent or more of the small-group health insurance market is served by just two insurers. But the McCarran-Ferguson Act only shields activities that are integrally related to providing insurance and unique to the insurance industry, and consolidation isn't one of them.
Practices that are not inherent to underwriting insurance, such as firm mergers, bundling and tying arrangements, agreements to allocate geographic market shares, and many other allegedly anti-competitive activities are, even under current law, subject to federal antitrust enforcement and actively policed by the Federal Trade Commission. So, additional federal intervention would have no effect on insurance industry consolidation.
What would be newly subject to federal enforcement is a variety of ongoing collaborative practices among health and medical-malpractice insurers that are now permitted by the states because they have pro-competitive effects.
At the state level, insurers actively share loss-experience data and related information through rating bureaus, so that each firm has a large enough pool of information to accurately price risks and set aside reserves. In some states, industry-run rating bureaus aggregate this underwriting data and calculate "target" or "advisory" rates under the supervision of state regulatory authorities. Many states also permit insurers to create joint underwriting associations that help insurers pool difficult-to-manage risks and share in the associated profits or losses.
This kind of collaborative activity tends to lower costs, promote insurance industry solvency, and help small insurers compete with bigger firms. Although the Leahy-Whitehouse bill would permit a limited amount of data sharing, the other practices would be subjected to federal antitrust enforcement. That would, ironically, further strengthen the power of the biggest insurers and disadvantage smaller competitors.
Even aside from these important collaborative practices, federal antitrust law would still be a bad fit for the insurance industry. When faced with a market containing two or three dominant firms, a typical antitrust enforcer's response is to break up the firms into smaller pieces - think of the dissolution of AT&T's local service monopoly into seven Baby Bells.
But as Boston University health economist Austin Frakt has noted, limiting the size of insurers would also limit their ability to negotiate down prices with health care providers. On the whole, economics research "supports the notion that recent increased market power of insurers does not lead toward monopolistic pricing, but rather it provides a counterbalance to the power held by hospitals and provider groups."
There are, however, other ways to promote competition in the health insurance market. One change Congress should consider is to permit individuals and business purchasers of health insurance to buy their policies from any willing provider in any U.S. state.
Under current law, an insurance firm registered in one state may not cover individuals in another without registering in the second state and being subject to all of its taxes and laws. This raises the cost of doing business across state lines and prevents many smaller and midsize companies from entering new markets to compete. Allowing consumers in Alabama, for example, to escape Blue Cross-Blue Shield's 83 percent market share in that state by shopping for an insurance policy in neighboring Florida's highly competitive market would increase competition significantly. And it would do so without jeopardizing important pro-competitive business practices that help keep costs in check.
If congressional Democrats genuinely wanted to help consumers, they would seek ways to reduce burdensome regulations on the insurance industry that raise health premiums. Instead, if their effort to "get tough" on the insurance industry succeeds, they would do more harm to consumers than good.