Health Insurers’ Anti-Trust Exemption

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Richard Evans


February 3, 2010

Health Insurers’ Anti-Trust Exemption

  • We see fair odds that Congress passes a law eliminating health insurers’ Federal anti-trust exemption, but see zero effect on earnings.
  • Insurers’ Federal anti-trust exemption only applies in cases where insurers are under state regulation – i.e. the Federal exemption does not allow insurers to engage in activities that constitute anti-trust.
  • The net effect of repealing the exemption is to grant Federal regulators anti-trust authority over insurers without regard to the matter of whether or not states are regulating the insurers – which all states are.
  • Insurers’ anti-trust exemption is very tough for Republicans to defend, thus our view that the repeal legislation may pass. However, in that insurers’ earnings are independent of the exemption, Congress’ work on the measure effectively releases health-insurer-directed political energy in a manner that causes no harm to insurers.
  • The measure may well allow Congress to turn the page from healthcare to other topics, thus our potentially counter-intuitive view that its passage is of benefit to insurers.

Background / Practical Effects

Speaker Pelosi yesterday announced her intention to have the House vote next week on repealing health insurers’ antitrust exemption. We presume she means for the house to vote on H.R. 3596.

As brief background, until 1944 states carried the sole responsibility for regulating insurance; in that year the Supreme Court ruled[1] that regulation of insurance was within the authority of Congress – thus making insurers subject to Federal anti-trust laws. In 1945, Congress passed the McCarran-Ferguson Act, which effectively returned regulatory authority over insurers back to the states, effectively exempting insurers from Federal anti-trust regulation, provided: 1) the activity under consideration is “the business of insurance,” 2) that the activity is regulated by the state(s); and, 3) that the activity does not constitute boycott, coercion, or intimidation. Quoting from the bill, the purpose of H.R. 3596 is: “to ensure that health insurance issuers and medical malpractice insurance issuers cannot engage in price fixing, bid rigging, or market allocations to the detriment of competition and consumers.”

Be that as it may, the effect of H.R. 3596 is to allow Federal anti-trust regulators to challenge the activities of health insurers, without regard to whether or not the insurers’ activities are regulated by the state(s) in question. Thus the question of whether H.R. 3596 affects insurers’ earnings is a matter of 1) whether insurers’ earnings rely on activities that would not be allowed under Federal anti-trust law; and, 2) if the answer to 1 is ‘yes,’ whether the states have been ineffective in their regulation of insurers. We believe the answer to both question is no, and that the bill would have little if any effect. CBO’s scoring is similar; excerpts from the score are below:

“CBO estimates that implementing H.R. 3596 would have no significant cost to the federal

government. Enacting the bill could affect direct spending and revenues, but any such

effects would not be significant …”

“Based on information from the Department of Justice and insurance industry experts, CBO expects that H.R. 3596 would apply to a small number of offenders, however, so any increase in costs for law enforcement, court proceedings, or prison operations would not be significant …”

“To the extent that insurers would otherwise engage in the prohibited practices and be

prevented from doing so by enactment of this bill, premiums might be lower. (That effect

is likely to be small because state laws already bar the activities that would be prohibited

under federal law if this bill was enacted.) To the extent that insurers would become

subject to additional litigation, their costs and thus their premiums might increase. Based

on information from the Justice Department, the Federal Trade Commission, the National

Association of Insurance Commissioners, consumer groups, and private attorneys, CBO

estimates that both of those effects would be very small, and thus that enacting the

legislation would have no significant effect on the premiums that private insurers would

charge for health insurance ..”

Politics / Prospects for Passage

H.R. 3596 gives Congress an opportunity to appear tough on insurers in the wake of failing to pass broader health reforms. And, by narrowing to a very specific topic that on its face is very difficult to oppose – i.e. regulating insurers like everyone else – the bill has reasonable odds of becoming law. More specifically, Republicans may have something to lose – and nothing to gain — by opposing the measure, thus its reasonable prospects of passage. Add to this support by the White House and the Department of Justice.

From insurers’ perspective, we recognize that no industry wants to face more regulators. Nevertheless, we believe the bill actually benefits insurers by allowing Congress to show at least some action on healthcare – without having any negative effect. In a sense, the anti-trust exemption is to insurers what re-importation is to branded pharmaceuticals – a political shock absorber.

  1. United States v. South-Eastern Underwriters Association
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