Repeal the Insurance Industry’s Antitrust Exemption

by Ralph Stone on October 29, 2009

President Barack Obama spoke at Texas A&M University on October 16. He said health insurance companies are trying to kill healthcare reform, no matter the cost to the country. Now is the time to repeal the repeal McCarran- Ferguson Act, the federal antitrust exemption currently enjoyed by the insurance industry. This would be a first step toward bringing more needed competition to the insurance industry, especially the health insurance industry, which in turn may bring down the cost of insurance.

On October 16, President Obama attacked the insurance industry, accusing it of airing “deceptive and dishonest ads” to derail his healthcare legislation and threatened to strip the industry of its longstanding exemption from federal anti- trust laws. The Senate Judiciary Committee recently held a hearing on legislation to repeal the Act. And in September, Senator Patrick Leahy (D-Vt.) introduced legislation to repeal the exemption established in the McCarran- Ferguson Act.

The health insurance industry enjoy obscene profits while consumers pay more for less coverage. Profits at ten of the country’s largest publicly traded health insurance companies rose 428 percent from 2000 to 2007. One of the main reasons for such high profits is the growing lack of competition in the private health insurance industry, which has led to near monopoly conditions in many markets.

Any comparative analysis of health care systems indicates that the greater the role of private, for- profit health insurance companies in the delivery of health care, the higher the cost. This is why the United States has the most expensive health care system in the world but trails well behind on crucial indicators of public health, such as infant mortality, longevity, and death of women in childbirth. These facts provide compelling evidence for repeal of the McCarran- Ferguson Act and the inclusion of a public health insurance plan option to provide some healthy competition, which in turn will provide the greatest amount of choice possible for consumers.

The McCarran- Ferguson Act of 1945 gives states the authority to regulate the “business of insurance” without interference from federal regulation, unless federal law specifically provides otherwise. The Act provides that the “business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation or taxation of such business.”

Congress passed the McCarran- Ferguson Act primarily in response to the Supreme Court case of U.S. v. South- Eastern Underwriters Ass’n. Before the South- Eastern Underwriters case, the issuance of an insurance policy was not thought to be a transaction in commerce, which would subject the insurance industry to federal regulation under the Commerce Clause of the U.S. Constitution. In South- Eastern Underwriters, the Court held that an insurance company that conducted substantial business across state lines was engaged in interstate commerce and thus was subject to federal antitrust regulations.

Within a year of South- Eastern Underwriters, Congress enacted the McCarran-Ferguson Act in response to states’ concerns that they no longer had broad authority to regulate the insurance industry in their individual states. Thus, the McCarran- Ferguson Act provides that the Sherman Anti- Turst Act of 1890, the Clayton Act of 1914, and the Federal Trade Commission Act of 1914, apply to the business of insurance only to the extent that such business is not regulated by state law.

The Act does not define the “business of insurance.” In the 1982 decision of Union Labor Life Insurance Co. v. Pireno, the Supreme Court set forth three factors when determining whether a particular commercial practice constitutes the business of insurance: whether the practice has the effect of transferring or spreading a policy- holder’s risk, whether the practice is an integral part of the policy relationship between the insurer and the insured, and whether the practice is limited to entities within the insurance industry.

The business of insurance include laws aimed at protecting or regulating the performance of an insurance contract, the relationship between insurer and insured, the type of policies issued, and the policies’ reliability, interpretation, and enforcement.

The chances of repealing the antitrust exemption for the insurance industry appear favorable. President Obama’s selection of Christine Varney as assistant attorney general for the Antitrust Division and Jonathan Leibowitz as chairman of the Federal Trade Commission, the two primary federal agencies charged with enforcing the federal antitrust laws, have the insurance industry concerned about greater antitrust enforcement as well as the elimination of the McCarran- Ferguson exemption. Also, American International Group’s “liquidity crisis” and subsequent $85 billion bailout does not bode well for the antitrust exemption either.

While the lack of competition in the health insurance industry may well have other causes, which may or may not be cured through a repeal of the McCarran- Ferguson Act and the inclusion of a public plan in a health plan reform legislation, the insurance exemption from federal antitrust law has not helped. Repealing the Act coupled with increased antitrust enforcement is a relatively simple first step if the ultimate goal of reining in health care costs and providing health care to the largest number of consumers.

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