Repealing Insurers’ Antitrust Exemption Under McCarran-Ferguson: Less There Than Meets the Eye?

Tim Greaney, Saint Louis University School of Law

The House Judiciary Committee’s vote (20-9) to send H.R. 3596 , to the floor has been heralded by proponents as providing a significant spur to competition in health insurance. Sorry to rain on this parade, but there is less here than meets the eye.

The bill  would repeal, but only in part,  the McCarran-Ferguson Act’s limited exemption from antitrust law for health and malpractice insurers. The bill narrows McCarran’s reach, providing that “nothing in that act shall be construed to permit  insurers “to engage in any form of price fixing, bid rigging, or market allocations in connection with the conduct of the business of providing health insurance coverage or coverage for medical malpractice claims or actions.” A Senate bill with broader effect was the subject of hearings by the Senate Judiciary Committee last week.

Although, as I’ve argued elsewhere, competition in health insurance markets has been less than robust, the case law reveals only a handful of instances in which the exemption protected anti-competitive conduct in the health care sector. The most prominent example, Ocean State Physicians Health Plan, Inc. v. Blue Cross & Blue Shield of Rhode Island, 883 F.2d 1101 (1st Cir. 1989), involved an HMO’s challenge to the exclusionary effect of the dominant insurer’s pricing policy and its offering a rival HMO product. Ironically, this conduct would not appear to be covered by H.R. 3596 and hence would remain immune from antitrust scrutiny.  In addition, the Supreme Court has narrowly interpreted McCarran-Ferguson requirement that only the “business of insurance” is exempt; hence insurers’ actions vis a vis providers is not exempt.  Moreover, it appears that health insurers do not engage in the kind of activities that are most clearly protected by McCarran-Ferguson, viz. joint forecasts of future medical costs and cooperative ratemaking.

Despite these reservations, repeal is not altogether a bad idea.  Most antitrust authorities agree McCarran-Ferguson is not needed to protect pro-competitive conduct, which already is well-insulated under modern antitrust doctrine.  For example, the Antitrust Modernization Commission (a blue ribbon –and very mainstream– panel that examined antitrust policy a few years ago) concluded that McCarran-Ferguson immunity was unnecessary to accomplish the Act’s goal of allowing insurers to collect, aggregate, and review data on losses so that they can better set their rates to cover their likely costs. Insurance companies, it found, “would bear no greater risk than companies in other industries engaged in data sharing and other collaborative undertakings.” When insurers engage in anti-competitive collusion “they appropriately [should] be subject to antitrust liability.” Moreover in insurance lines other than health, such as property/casualty, the exemption may protect collective price fixing with few offsetting benefits for consumers.

It is also noteworthy that the Department of Justice stopped short of endorsing repeal.

Assistant Attorney General Varney testified as follows:

In sum, the Department of Justice generally supports the idea of repealing antitrust exemptions. However, we take no position as to how and when Congress should address this issue. In conjunction with the Administration’s efforts to strengthen insurance regulation and states’ role in setting and enforcing policies, the Department supports efforts to bring more competition to the health insurance marketplace that lower costs, expand choice, and improve quality for families, businesses, and government.

This carefully-worded statement (”in conjunction with …efforts to strengthen insurance regulation and states role in setting and enforcing policies“) seems to signal that the Justice Department is worried about hamstringing state regulatory efforts by allowing parallel antitrust scrutiny of insurance industry practices.  But I would have expected the Antitrust Division to take precisely the opposite position.  Perhaps the strongest argument for repeal of McCarran-Ferguson (and also redefining the state action doctrine) is that a system that relies on extensive state-based insurance regulation (and perhaps state-run exchanges) risks undermining the consumer benefits of competition should regulators become beholden to insurer or provider interests. If history is a guide, this is a legitimate concern.

The Broken Health Care “Marketplace”

While Mitch McConnell goes on Meet the Press to praise free enterprise in American health care, he ignores the market concentration that gives us vastly more expensive care than comparable countries. As Blue Dogs and other Dems start to tap on the brakes of health reform efforts, they would do well to consider the work of Tim Greaney and David Balto. Both have recently delivered Congressional testimony that indicates just how far health care is from a well-functioning, competitive market.

Balto is hardly a leftist on antitrust matters; for example, he has aggressively defended some Google initiatives now under scrutiny by the DOJ. But even he is alarmed by the extraordinary trends toward concentration in health care:

Few markets are as concentrated, opaque and complex, and subject to rampant anticompetitive and deceptive conduct. As the health care debate progresses, many advocate for limited reform of the health insurance system. Their belief is that it is a fundamentally sound market and with a little dose of additional regulatory oversight, all the ills of the market will be cured. They could not be more mistaken.

As a former antitrust enforcement official, I strongly believe the mission of the Federal Trade Commission and Antitrust Division of the Department of Justice is vital to protecting consumers and competition. However, in the past administration, the priorities of those enforcement agencies were not effectively aligned with the critical priorities in the health care market, with the result that there is substantial anticompetitive and fraudulent activity that raises prices and costs for consumers and the American taxpayer, especially conduct by certain health care intermediaries—Health Insurers, Pharmacy Benefit Managers, or PBMs, and Group Purchasing Organizations, or GPOs.

The full testimony appears here. Balto argues that “the Bush administration did not bring a single case challenging anticompetitive conduct by insurance companies,” while it “spent a hugely disproportionate amount of time, money and effort prosecuting relatively small groups of doctors.” By the end of the testimony, it almost appears that Balto has made his case too well, given the limited resources of current antitrust enforcers. It is hard for me to imagine them investigating even a fraction of the schemes and situations he describes, though perhaps some high profile cases (and partnerships with state attorneys general) would have an in terrorem effect.

Tim Greaney’s testimony before the Senate Commerce Committee paints a similarly grim picture. Greaney notes that, “by 2003, ninety-three percent of the nation’s population lived in concentrated hospital markets.” He quickly identifies the core problem in an increasingly sickly health care antitrust jurisprudence: courts’ short-sighted failure to understand the unconventional economics of medicine:

Legal decisions approving mergers of competing acute care hospitals have been roundly criticized. The judicial missteps can be traced to the courts’ tendency to oversimplify antitrust analysis by adopting plain vanilla, Chicago School assumptions about markets while failing to incorporate the effects of market imperfections in their analyses. Most of these decisions found extraordinarily large geographic markets for basic acute care hospital services as they ignored the heterogeneity of demand for care and the fact that consumers exhibit different preferences for [and ability to] travel.

Other cases refused to recognize supply side heterogeneity, failing to appreciate that mergers of “must have” hospitals may give rise to anticompetitive effects. To right the ship, the FTC has brought two recent hospital merger cases and undertaken retrospective reviews of the outcomes of several hospital mergers. Unfortunately, developing legal precedent takes time and effort and mergers may be attractive to the hospital industry during a period of legal uncertainty and regulatory change. An important priority for the FTC therefore should be to undertake close scrutiny of all horizontal consolidations by hospitals– including joint ventures involving physician-controlled specialty hospitals and outpatient facilities, none of which have been challenged to date.

Greaney also notes substantial failures in antitrust enforcement against physicians, health insurers, and PBM’s.

While Balto and Greaney focus on improving competition policy, I’m left wondering: can this market be saved? Greaney argues that “the nation’s competitive infrastructure — provider and payor markets — is not well designed to produce cost savings if reform proposals simply turn over the job to the private market. . . . [and] this quandary lends strong support to the idea of having a public plan option to nudge private insurers toward more vigorous competition and to serve as a backstop where markets fail.” A highly concentrated health care marketplace has neither the means nor the motive to discipline costs–external competition has to prod it in that direction. Well-designed health insurance exchanges will be key to success here.

Paying Attention to Competition: Payors, Providers and the Public Plan

Paying Attention to Competition: Payors, Providers and the Public Plan

Thomas (Tim) Greaney
Professor of Law and Director Center for Health Law Studies
Saint Louis University School of Law

Count me as a member of the Bill Sage School of Health Care Reform. Writing in Health Affairs, Professor Sage, a physician, law professor and Vice Provost for Health Affairs at the University of Texas, offered a slogan that should be on every Congressman’s wall: “It’s the delivery system, stupid.”

Somewhat overlooked in the debate over inclusion of a public plan option as part of the health reform legislation is the proposal’s potential to help deal with delivery system problems. There are a number of sound policy arguments favoring the public plan option. For example, it offers the promise of stability, choice, and innovation that may not be readily forthcoming in an unrestricted private market. Frank Pasquale and Ezra Klein have pointed to the “benchmark” function of such a plan, especially in exposing the various “gotcha” or “capricious” practices common in today’s less-than-transparent insurance business. But without cost control there is no reform at all. As the outline of legislation comes into focus it seems clear that in order to persuade law makers that costs will not continue to escalate, there needs to be some assurance that vigorous, efficient and competitive markets will emerge. Critical to achieving that goal are two things: putting in place a regulatory infrastructure to correct market failures and developing structurally competitive provider and insurance markets. As to the first issue, much depends on the scope of regulatory authority vested in insurance exchanges, for example, whether they will have the authority to set rules standards for health plans inside and outside the exchange. As to the structure of the market, there are reasons for serious concern. My view is that the public plan option can offer significant help in dealing with structural defects that have been a long time in the making.

If there is one thing that that finds almost universal agreement among health economists, it is that in America, health care “delivery” (we should abandon the misnomer ‘system’) is a fragmented hodgepodge of autonomous doctors, hospitals, facility owners, and vendors of technology, pharmaceuticals and equipment. Their lack of interconnectedness and coordination is at the core of most of the quality and cost problems Congress is now confronting. Add to that the fact that “consumer” decisions are filtered through a triple layer of agency (i.e. their employers, doctors, health plans). Moreover, as a result of lax antitrust enforcement and providers’ relentless efforts to gain “leverage”, many hospital and physician markets are now tight oligopolies or de facto monopolies. And one more: information on quality, outcomes and cost is scarce, and in some cases, unobtainable.

So its more than a little bit remarkable that conservative blogs and political operatives ignore the fundamental economic problems that reform must address: overcoming market failure and improving the competitive marketplace. Perhaps it is understandable. Their preferred solution, “consumer directed health care” which heroically assumes that individuals can and will effectively shop for low cost high quality care given the appropriate incentives (high deductible plans with health savings accounts), has been excoriated in the academic and policy literature. Looking at the uninsured market–the one place today where individuals shop on their own for insurance and services–Mark Hall and Carl Schneider put it well: “the market for uninsured medical services is a calamity.” Left to compare price, quality and outcomes under consumer directed model, Americans face overwhelming informational and practical hurdles. Uwe Reinhart’s colorful depiction of the defects inherent in consumers shopping for health services is apt :

Suppose, purchases of shirts by individuals were partly prepaid from collective funds assembled for large groups of shirt purchasers, although the individual buyer might also have to pay a part of the price. Suppose next that prospective buyers of shirts were led into a store stocked with boxes marked “Shirt.” The consumer would have free choice of boxes, although only the most vague idea of what actually was in each of the myriad of boxes. …Once a box with a shirt in it had been accepted by the consumer, he could not return it for a refund. A month or so after having received the box, the buyer would be sent a nearly indecipherable statement whose only comprehensible line is: Pay $56.95. It is only then that the buyer knows what the shirt has cost him or her. The shirt, by the way, may or may not fit.

But perhaps equally disconcerting is the apparent reluctance of Congressional reformers to tackle delivery reform head on. For better or worse, it appears likely that under reform legislation a reconstituted health insurance industry will do the heavy lifting of controlling cost and monitoring quality, tasks it has been disinclined to tackle in the past. The apparent logic is that by removing insurers’ perverse incentives to chase only good risks (healthy insureds) and create bureaucratic traps for providers and consumers, plans will have little choice but to do the right thing. This of course vests enormous faith in the regulatory mechanisms the new system will deploy: risk adjustment, community rating, the insurance exchange, standardized benefit packages, and so on.

Which brings us to the public plan option. Does it correct the myriad market failures and assure an efficient health delivery system emerges? Not by itself. However, if we are going to rely on the market interplay between insurers and providers in many hundreds of markets around the country (like politics, most health services and health insurance are local), then we need some assurance that each market will have vigorous intermediaries negotiating for consumers. Unfortunately, our experience with private health insurance over the last twenty years does not fill one with confidence that this kind of vigorous negotiation will emerge. First there is the behavior of insurers. As noted it has been more profitable to obtain good risks and in some case engage in questionable behavior (slow pay to providers; hassling their insureds, etc). The landscape of extraordinary health insurance profits, premiums increasing at rates far exceeding other sectors of the economy, and an inability or unwillingness to control health expenditures does not describe an industry which is benefiting consumers through vigorous competition.

But maybe that will change. The real question here is one of incentives. We’ve learned that most local insurance and provider markets are concentrated: dominant hospital systems of specialty services have formed single specialty groups. Economic studies reveal that increasing hospital concentration resulted in higher prices which in turn cause higher insurance premiums (and in fact increased disparities in access to care). Although research regarding insurance markets is less well developed, there is some evidence that insurance market concentration has resulted in higher premiums. Where dominant insurers face dominant providers–what economists call bilateral monopoly–the outcome depends on the strategic interactions of the parties. In the case of the now notorious “market covenant” involving Partners Health Care and Blue Cross of Massachusetts, the parties reached a mutually beneficial understanding to maintain hight premiums and high hospital charges.

In oligopolistic markets (only a few sellers) the dynamic in the health insurance industry suggest behavior consistent with self interested coordination rather than aggressive competition and price rivalry. Urban Institute economists John Holohan and Linda Blumberg summarized these propensities :

Dominant insurers do not seem to use their market power to drive hard bargains with
providers, [while]small insurers do not aggressively compete over price. Rather, rising
premiums and increased profitability of nondominant firms13 provide indirect evidence
of shadow pricing by smaller insurers; that is, smaller insurers do not seem to compete on
premiums to gain market share but rather seem to follow the pricing of the dominant insurer.

What might a public plan add to the mix? First, it will likely enjoy cost advantages associated with the infrastructure and experience of federal payment under the Medicare program. This can spur its rivals to emulate its methods and, well, just try harder (an old adage is that a benefit of monopoly is leading the “quiet life”). However, the principle competitive significance of the public plan may well lie in its independence. Although such plans will almost certainly be required to “float on their own bottom” (i.e. not receive federal subsidies), they should also be allowed to chart a course that does not necessarily maximize revenue as rivals do that engage in anticompetitive practices or collusive coordination. In this respect, the public plan should act as what economic theory calls the “maverick” competitor: one that breaks away from the closely-knit band of rivals. A second benefit might accrue from the public plan’s willingness to sponsor innovations in payment and delivery (such as those being developed by CMS for Medicare). In health insurance some cost control innovations are not routinely developed where reluctant to adopt because they cannot capture the long term benefits of efficient innovations. In short, the expectation is that the public plan will have the incentive and the market leverage to insist that providers change their ways.

There is no quick and easy way to change health care delivery arrangements that are deeply embedded in institutions and habits. The radical course, I would think, would be to subsidize a vast expansion of health insurance without putting in place institutions capable of improving a badly broken system.

Health Insurance, Competition & the McCarran-Ferguson Act

A post by Jordan Cohen on June 17 raised a very important point:  “what [do] we currently know about the role of competition in the health insurance market [?]” As Mr. Cohen makes the connection between cost and competition and another relating to slowing the rate of growth of health care expenses generally, his caveat raises an important concern that the information supporting conclusions in this regard may be less than optimum. One factor to consider is that competition, or the lack thereof, in the insurance industry is subject to the distortions of a wide, if not dizzying, array of often conflicting state regulation.

The McCarran-Ferguson Act (”the Act”) exempts the “business of insurance” from federal antitrust law. Which is to say that federal antitrust law applies only to the extent that “the business of insurance” is not regulated by state law.  The Act goes so far as to permit price fixing — joint ratemaking — if permissible under state law.  Hovenkamp Antitrust Hornbook, at 732.  In one case, Mackey v. Nationwide Insurance Co., 724 F.2d 419 (4^th Cir. 1984) (Superseded by Regulation as Stated in Home Quest Mort. LLC V. American Family Mut. Ins. Co., 340 F. Supp.2d 1177 (D.Kan. Oct. 12 2004), the Act even protected the practice of redlining on the reasoning that it “related to the particular types of risks [the] company [was] willing to insure against.”  State of Maryland v. Blue Cross and Blue Shield Assn., 620 F. Supp. 907, 916 (D.C. Cir. 1985) (referring to Mackey).

While the lack of competition in the health insurance industry may well have other causes, which may or may not be cured through a public plan, the Act, with its exemption from federal antitrust law has not helped.  Private competition may have more to offer than currently realized in the McCarran-Ferguson environment.  Repealing the Act coupled with increased antitrust enforcement would seem a relatively affordable first step if competition, with the ultimate goal of benefiting the consumers/patients, is the goal.

I believe the repeal of McCarran-Ferguson will happen and that  Professor Greaney is correct that increased antitrust enforcement and better antitrust laws in the health care industry generally should be forthcoming– but I am somewhat more optimistic than he that this will happen sooner rather than later. While in the Senate, then Senator Obama “introduced legislation to repeal the McCarran-Ferguson Act for medical malpractice insurance.”  Furthermore, his picks of Christine Varney as assistant attorney general for the Antitrust Division and Jonathan Leibowitz as chairman of the FTC are said to have members of the insurance industry concerned about greater antitrust enforcement as well as the elimination of the McCarran-Ferguson exemption. I would suggest that AIG’s self-destruction at taxpayer expense does not bode well for the Act either.

Greaney on the Public Plan

Is genuine health reform possible? Several recent developments are promising. President Obama’s big Congressional majorities (plus the Specter defection) are reminiscent of the Johnson-era milieu that led to Medicare and Medicaid. Key interest groups are less “Harry and Louise” and more “try to appease.” Most importantly, the failures of managed care, consumer-directed health care, and other artifacts of the “ownership society” are now self-evident. As unemployment rises, lack of insurance spikes, compounding the misery of many of those unlucky enough to get thrown out of work.

What could derail real health reform? Most likely, fake health care reform, particularly the kind that assumes there is something near a “free market” in operation now. As health care antitrust scholar Thomas Greaney argued yesterday, markets for health care are often very concentrated or riddled with barriers to entry:

The unfortunate fact is that a majority of the country is served by a few dominant insurers. (In 16 states, one insurer accounts for more than 50 percent of private enrollment; in 36 states, three insurers have more than 65 percent of enrollment). Likewise, because of lax antitrust enforcement, most markets are characterized by dominant hospital systems and little competition among high-end physician specialists.

In these circumstances, which economists call ‘bilateral monopoly,” the players often reach an accommodation in which they share the monopoly profits rather than compete vigorously. A prime example is the experience in Massachusetts, where Blue Cross/Blue Shield, the dominant insurer, reached an understanding with the dominant hospital system, Partners Healthcare, that entrenched higher prices for health insurance and hospital care.

Some might hold out hope that the Obama administration’s new emphasis on antitrust enforcement might solve that problem, but I would not hold my breath. After losing seven hospital merger cases in a row, the government is not exactly in a position to go storming into health care markets to demand competition. Only new antitrust laws are likely to accomplish much in that direction, and even if they were by some miracle adopted this year, I can’t imagine them having much effect within any reasonable time frame.
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