Make the Market Work: Eliminate the Antitrust Exemption for Health Insurance

If anything is clear from the months of healthcare debate, it is that health insurance markets are broken.  A number of Congressional hearings documented how health insurance markets are highly concentrated, there is a tremendous lack of transparency, and there is a lack of effective regulation.
Lack of competition has led to supracompetitive profits, an escalating number of uninsured, an epidemic of deceptive and fraudulent conduct, and rapidly escalating costs. Over 47 million Americans are now uninsured, and premiums have risen over 120 percent in the past decade for those who do have coverage.  And meanwhile, 10 of the largest health insurers saw their profits balloon from $2.4 billion in 2000 to $13 billion in 2007.
Inexplicably, the health insurance industry has enjoyed an exemption from the federal antitrust laws.  The exemption was enacted by Congress in 1945 and has long outlived any utility.  Indeed, health insurers cannot point to any type of procompetitive conduct that they are able to engage in because of the exemption.  Exemptions to the antitrust laws are rare and indeed only insurance and baseball have an antitrust exemption. 
Last week, Representatives Perriello and Markey introduced legislation to repeal the health insurance industry’s long-outdated antitrust exemption.  Eliminating this exemption is a necessary first step to restoring competition to these markets.
Why is eliminating this exemption important?
First, an antitrust exemption is absolute.  Under the current law, health insurers could engage in numerous forms of price fixing, market allocations, or other forms of collusive activity, and they may.  To a certain extent they do not have to because most metropolitan markets are dominated by one or two insurers, and when a firm is a monopolist there is no need to collude.
Second, the health reform bills that have passed the House and Senate are designed to create a more competitive and consumer-friendly insurance market place.  Insurance exchanges, market reforms and new transparency requirements on coverage and cost-sharing structures will help consumers find and purchase cost-effective, high-quality coverage.  Allowing an out-dated antitrust exemption to undermine these important reforms would be a terrible mistake.  If this exemption continues to exist, insurance companies can easily kill any forms of new competition – through market allocations, price fixing, or other collusive arrangements.
Third, eliminating the exemption is necessary for the type of substantial antitrust enforcement that is long overdue in health insurance markets.  Unfortunately, there has been very little state or federal antitrust enforcement.  Neither the Justice Department, State insurance commissioners or State attorneys generals have not brought any significant cases against anticompetitive conduct by health insurers in the past several years.  The McCarran-Ferguson exemption may be an obstacle to increased enforcement; as Assistant Attorney General Christine Varney has noted “‘the most egregiously anticompetitive claims, such as naked agreements fixing price or reducing coverage, are virtually always found immune [under the exemption].’”
Fourth, the McCarran-Ferguson exemption appears to be an obstacle to federal consumer protection against health insurers.  State Departments of Insurance currently have jurisdiction over consumer protection violations by the health insurers in their states.  Unfortunately, only a handful of states are equipped to address these practices.  In a study of 33 states' Departments of Insurance's enforcement activity regarding health insurers, I found that the vast majority of consumer protection actions were from only five states.  Over a third of states examined had taken no significant consumer protection actions, and in six of the seven most concentrated markets for health insurance, the state insurance commissioner had taken no significant consumer protection actions. The most competitive markets for health insurance – California and Florida – also had the most active regulators.  State enforcement of these violations is erratic at best, and a federal enforcer should instead be charged with regulating health insurers.
The FTC has been remarkably effective at protecting consumers from deceptive and fraudulent activity in practically every other market.   For too long, the FTC’s involvement in health care markets has been limited to marketers of sham products, such as deceptive weight-loss drugs.  This is unfortunate.  The FTC should focus its consumer protection and antitrust enforcement efforts on industries where there is the most consumer harm.  If the health care debate has accomplished nothing in the past year, it certainly has taught us that the health insurance market is riddled with consumer neglect and competition is sorely lacking.   The FTC’s enforcement power needs to be focused on health insurers where fraudulent and deceptive practices are legion.
Fifth, the McCarran-Ferguson exemption does not assist consumers in any fashion.  Typically, the exemption is used by life insurers to share historical loss data to assess risk.  Health insurers do not use the exemption to engage in this type of information sharing.  Nor can health insurers point to any other type of activity they engage in because of the exemption. Simply there is nothing procompetitive that will be lost from the elimination of the exemption.
This is an important point.  Antitrust exemptions are extraordinary and have typically been permitted only where industries demonstrate some compelling market failure to make the exemption necessary.  The burden of preserving the exemption should be placed on the health insurance industry and to date they have failed to present a single justification for the exemption.
Health insurance markets need a tremendous infusion of competition and transparency to help eliminate deceptive, fraudulent, and egregious practices. The antiquated McCarran- Ferguson Act leaves antitrust and consumer protection enforcement to the states, which frequently lack sufficient resources to reign in powerful national insurers. Consumers are consequently left to the mercy of dominant insurers. Restoring competition and consumer protection enforcement is essential to meaningful reform. Eliminating the McCarran-Ferguson exemption is an important first step to allowing the lodestar of competition to guide health insurance markets.

Balto is a Senior Fellow at the Center for American Progress focusing on competition policy, intellectual property law, and health care.