Why Are Insurers Exempt From Antitrust Laws?

Just had a quick chat with Sen. Chuck Schumer, which didn't offer up enough for an interview transcript, but did yield an interesting nugget on the effort to strip insurers of their antitrust protection. I asked Schumer what would actually happen if the amendment passed. "At the hearing today," he replied, "Christine Varney indicated there could be real enforcement of the antitrust laws in states where one insurer dominates the market." Varney is the government's top antitrust lawyer, and her testimony is here (pdf). This is the crucial bit:

The McCarran-Ferguson Act antitrust exemption is very expansive with regard to anything that can be said to fall within “the business of insurance,” including premium pricing and market allocations. As a result, “the most egregiously anticompetitive claims, such as naked agreements fixing price or reducing coverage, are virtually always found immune.” Concerns over the exemption’s effects are especially relevant given the importance of health insurance reform to our nation. There is a general consensus that health insurance reform should be built on a strong commitment to competition in all health-care markets, including those for health and medical malpractice insurance. Repealing the McCarran-Ferguson Act would allow competition to have a greater role in reforming health and medical malpractice insurance markets than would otherwise be the case.

The history here is that prior to the 1940s, insurance regulation was considered the sole province of the states. A Supreme Court case by the name of United States v. South-Eastern Underwriters appeared to call that into question, in part on grounds of antitrust. As Varney explains in her testimony, "the McCarran-Ferguson Act was designed to return the legal climate to that which existed prior to South-Eastern Underwriters by specifically delegating to the states the authority to continue to regulate and tax the business of insurance."

Insurance, however, is much more national now than it was then. The companies, for one thing, operate across many different states. They offer plans in competition with the national Medicare program. The House health-care reform bills contemplates quasi-national exchanges, the Senate Finance bill contemplates national health insurance plans, and all the bills contemplate interstate compacts that would allow insurers to sell a single product across an array of states. These moves are all likely to increase competition and make it less likely that antitrust enforcement is necessary, but they also make the presence of the exemption more dangerous.

McCarran-Ferguson, in other words, is obsolete, and potentially damaging. Tyler Cowen, however, is upset by the timing of Democratic threats to repeal the provision: "Everyone who cares about American democracy and rule of law should be complaining about Harry Reid, Patrick Leahy and their allies in this move," he writes. I'm not convinced.

For one thing, Leahy has been trying to repeal this provision for years. He's been consistent on this. But more broadly, this is a case where a particular industry got its friends in Congress to do it a favor, convinced its friends in Congress to protect that favor, and now that it's losing its friends, that favor looks unlikely to survive. When an industry gains by spending countless millions effectively lobbying Congress, it opens itself to losing by spending countless millions ineffectively lobbying Congress.

