The story begins with antitrust. In 1944, Attorney-General Francis Biddle, appointed by FDR, brought a case against the South-Eastern Underwriters Association under the Sherman Antitrust Act. The government accused the insurance alliance, among other things, of price fixing. That case,United States vs. South-Eastern Underwriters, was decided in favor of the government by the Supreme Court in 1945. The underwriters alliance made an amazing argument:

Sustaining the demurrer, the District Court held that "the business of insurance is not commerce, either intrastate or interstate"; it "is not interstate commerce or interstate trade, though it might be considered a trade subject to local laws either State or Federal, where the commerce clause is not the authority relied upon."

Thats right. The insurance industry argued that insurance was not a business, therefore not subject to regulation by the Federal Government under its Commerce Clause powers. Therefore, the Sherman Act did not apply to them. They were free to form monopolies and fix prices as they pleased. It's laughable on its face, but that was their argument. The Supreme Court dismissed that foolishness. But the Court also made a very important finding in its opinion. Justice Hugo Black wrote for the 4-3 majority:

Any enactment by Congress either of partial or of comprehensive regulations of the insurance business would come to us with the most forceful presumption of constitutional validity. The fiction that insurance is not commerce could not be sustained against such a presumption, for resort to the facts would support the presumption in favor of the congressional action. The faction therefore must yield to congressional action and continues only at the sufferance of Congress

The morning after that, the lobbying on Capitol kicked in full force. The courts ruling came down on June 4, 1944. Senator Pat McCarran of Nevada, a batshit crazy nativist and anti-communist who also wrote the vile, McCarthyite, and ultimately unconstitutional McCarran Internal Security Act, came to the rescue. (Just so you know the kind of guy McCarran was, note that he was one of the few Democrats who opposed the New Deal. He is also thought to be the model for the corrupt Senator in the Godfather.) Senator Homer Ferguson, Republican of Michigan was the co-author. The new law passed on March 9, 1945 and was signed by an ailing President Roosevelt. In my gut, I know a vigorous FDR would have vetoed it.

Title 15, Chapter 20 of the U.S. Code implements the McCarran Act. Here is its key provision:

No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance: Provided, That after June 30, 1948, the Act of July 2, 1890, as amended, known as the Sherman Act, and the Act of October 15, 1914, as amended, known as the Clayton Act, and the Act of September 26, 1914, known as the Federal Trade Commission Act, as amended [15 U.S.C. 41 et seq.], shall be applicable to the business of insurance to the extent that such business is not regulated by State Law.

This is why you have obscure state insurance commissioners rather than a federal regulatory body. It's why companies like AIG can operate far outside the boundaries of federal securities law. States' limited jurisdiction make it difficult effectively regulate an international insurance company. With states and the federal government limited in their ability to regulate them, there is nobody to stop big insurance.

There have been numerous attempts to regulate insurance, both by court review and by act of Congress. Each time, the industry has managed to slither out of trouble and emerge relatively unscathed. I believe that is due to this:



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Last year, Congressman Pete DeFazio introduced the Insurance Industry Competition Act and watched it die in Barney Frank's finance committee. It is likely it died because of little chance of movement in the Senate and a likely veto by President Bush. DeFazio has re-introduced his bill this year, and it now sits in the committee. This bill would repeal the McCarran-Ferguson provision that prevents antitrust enforcement and would allow the administration to go after the insurance companies. (I discussed the administation's antitrust policy in this diary. A part 2 is forthcoming.) Using the leverage of an antitrust prosecution is exactly the sort of stick that will get the insurance companies moving in the right direction with respect to federal regulation.

If you want to take some action on healthcare, call your congressperson and tell them to support or cosponsor Pete DeFazio's bill H.R. 1583. This legislation has the insurance lobby tossing and turning at night and waking up in cold sweats. Only when the good citizens of this country are heard will the money of the insurance lobby seem less persuasive to our leaders.