If the insurance industry thought its early support for health care reform would earn it some points with Democrats, it recently got a rude awakening.
After America’s Health Insurance Plans, the industry association representing health insurers, released a study showing that premiums would rise 18% under the Senate Finance Committee’s reform proposal, President Obama accused the industry of waging "deceptive and dishonest" attacks to derail reform legislation.
To retaliate, the president and other top Democrats are now moving to strip the industry of its long-standing exemption from federal antitrust laws.
Democrats, eager to do whatever it takes to win, are using Chicago hardball tactics now. That includes eliminating an important feature of state health insurance regulation in order to punish the industry for pointing out some inconvenient truths.
But there is no evidence that the insurance industry’s antitrust exemption or recent merger activity has resulted in higher premiums or profits. Not only is federal intervention unnecessary for ensuring fair competition, it could actually make the situation worse by eliminating practices that help small insurers compete and drive down costs.
On Oct. 21, the House Judiciary Committee voted to overturn parts of a 1945 law called the McCarran-Ferguson Act, which reaffirms the primary role of states in regulating the insurance business. The act exempts insurers from most federal regulation, including antitrust laws, as long as the states have laws governing the same conduct.
The Senate Judiciary Committee has already held hearings on the matter and seems set to follow suit. Sen. Charles Schumer, D-N.Y., said the health insurance industry was trying to "sucker-punch health care reform," and he insisted Congress should repeal the act and "restore the federal government’s power to curtail price-fixing, collusion and other anti-competitive practices."
But where critics see only dominant market power and higher premiums, a closer look reveals a careful balancing by the states that helps to promote competition and keep costs in check.
After all, insurers are exempt from federal oversight only to the extent that state governments have filled the void, and every state in the union has antitrust laws that forbid anticompetitive practices.
It is true that a handful of states nevertheless have highly concentrated markets. In Hawaii, Rhode Island and Alaska, 95% or more of the health insurance market is served by just two insurers. Interestingly, in eight of the 10 most concentrated states, the single biggest insurer is a nonprofit Blue Cross-Blue Shield plan. Moreover, federal intervention could do nothing useful to reduce market concentration or promote competition.
The primary conduct that federal antitrust enforcers would seek to address is the ongoing practice among insurers of sharing the underwriting data on which firms individually base their premiums. Critics see this kind of information-sharing as a big red flag suggesting pricing collusion.
But when it comes to insurance, state laws expressly permit this practice because it has pro-competitive effects. It helps small insurers gain access to a sufficiently large pool of actuarial information to set premiums at an appropriate level. Without it, small competitors would be flying blind, and the result would be less-robust competition and higher prices for consumers.
Even aside from the data-sharing practices, federal antitrust law would still be a bad fit for the insurance industry. When faced with a market containing just two dominant firms, a typical antitrust enforcer’s response would be 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 counter-balance to the power held by hospitals and provider groups."
There are other ways to promote competition in the health insurance market. One constructive change that 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% 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.
Subjecting insurers to an antiquated and unsuitable system of federal antitrust oversight is no way to promote real competition. If President Obama and congressional Democrats genuinely wanted to increase competitiveness, they would seek ways to reduce burdensome regulations on the insurance industry that disadvantage smaller firms. Instead, seemingly out of spite, Democrats are trying to punish the industry, even though the result would do more harm than good.