Why Resurrect the Public Option? The Competition Canard

Dan Balz of the WaPo asks “What brought the public option back to life?” Balz argues that while “liberal advocates of the public option . . . [see] it as the holy grail of the debate . . . [f]ew experts see it that way.” While the 39+ academics and others listed at Campaign for America’s Future Health Experts Bureau may not consider the public option akin to a chalice of eternal life, most of us are comfortable calling it a key element of reform. So while Balz focuses on the chess game of Washington politics to explain the public option’s resurgence, I detect deliberative democracy at work here.

As Congressional committees have begun to specify exactly how “competition” among insurers would lower costs, they’ve realized that we need to do a lot more than up the regulatory ante and add more insurers to the mix. Rather, just as Medicare took care of elderly persons unlikely ever to be profitably covered by private insurers, a new option is needed to address the needs of impoverished or sick citizens unlikely ever to pay profitable premiums to Aetna, Cigna, and their ilk.

Why wasn’t this apparent earlier? I think that closer scrutiny for a proposal to repeal the “antitrust exemption” for insurers has led to more serious consideration of what competition can and cannot do in the health care industry. As co-blogger Tim Greaney explains, “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.” Lack of antitrust enforcement–and the market competition it’s supposed to bring–can’t fully explain insurers’ failures here. Even more alarmingly, enforcing antitrust laws aggressively against insurers, while failing to balance that effort with similar scrutiny of providers, could lead to even higher health care costs. Do we really expect piecemeal antitrust enforcement, played out in fragmented and uncoordinated courts, to manage such balance? It is often the case that both providers and insurers are concentrated, powerful, and earning supracompetitive profits–whatever “supracompetitive” means in a realm so thoroughly marbled with regulation, subsidy, and barriers to entry.

Moreover, insurers are competing in many markets–but they’re doing so in ways that are socially unproductive. As I have noted before, there are effective competitive strategies that produce no (or negative) value for society as a whole. Insurers who put hurdles in front of preventive care, or scramble to drop diabetics or CHF patients, are doing just what a competitive marketplace rewards. They also exacerbate the coverage crisis that necessitates health reform in the first place.

Genuine health reform will provide incentives for insurers to do things that actually improve individual and public health–programs such as transparent physician rating, preventive and chronic care programs, and intensive data analysis to promote evidence-based medicine. Like the V.A., a public option can be ordered to do such things. Moreover, it can be required to cover the costly or unprofitable individuals that private insurers won’t touch. The government might “require” private health insurers to do the same, but I would not count on overwhelmed regulators to enforce such laws adequately.

Sadly, even when competition is exposed as an empty vessel, our language of discussing health care tends to gravitate back to it as an ideal. Fortunately, Daniel Callahan’s recent essay on the “common good” as a justification for health reform provides a richer vocabulary of evaluation. Callahan has no illusions about transforming the current debate, but his words are worth pondering:

I have not painted a hopeful picture about the common good in American health care. That simply does not seem possible. An abiding suspicion of government, a belief in the free market as an engine of prosperity (and thus, by an illogical leap, as an engine of good health care), and the majority’s fear that they may lose the benefits they already have—all this leaves little room for an embrace of the common good. Solidarity, the value behind European health-care systems, seems to me the best basis for universal care, better than justice or rights. But the sense of solidarity required for serious health-care reform cannot be wished into existence. It was the solidarity of the British people in defense of their country during World War II that afterward helped get the National Health Service off the ground in 1946: they had all been in it together during the war, and now they needed to be together in insuring health care for all. We do not have that kind of history, and it shows.

Suffering, disease, and death are our common lot. They ought to be dealt with as our common problem. It is a shame that the kind of empathy and mutual support that Adam Smith understood to be a requirement of morality have not, in our culture, been extended to health care—extended to one another in the recognition that we all have bodies that go awry and fail. Instead we are offered a consumer model, a national Walmart of medical choice where we are all sharp-eyed purchasers getting the best possible deal for ourselves. A construal of the common good as the freedom of consumers to get what they want, indifferent to the fate of others, is a cheap substitute for the real thing.

Callahan here is too pessimistic about the viability of an appeal he’s helped craft. As Catherine Arnst has argued, a moral case for health reform–as either compassion for others or self-interest properly understood–is essential in current debates. Even the most self-centered person can imagine losing a job, a spouse, or other sources of insurance. It seems paradoxical to expect the very companies that deny such coverage to offer it under government fiat. A public option is a logical response to our market–and moral–failure to separate the experience of illness from anxiety over financial ruin. As the band Muse might put it (in the closing track of their album The Resistance) “let’s start over again” — “this time we’ll get it right.” Hope springs eternal.

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.

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.