Does McCarran Matter?

We have argued that increased enforcement of competition laws against insurers without similar efforts against providers could have perverse consequences without a public option. And we’ve also observed that absent the threat of a public option, there is no reason to believe insurers would pass on to consumers the benefits of any market power they are allowed to maintain. In today’s companion post, Austin elaborates on the relationship between insurer market power and a public option.

In each instance, our remarks have been occasioned by Democratic efforts to repeal, in whole or in part, the 1945 McCarran-Ferguson Act, which provides a partial antitrust exemption that insurers currently enjoy. But they have not been premised specifically on the proposition that the exemption itself contributes to increased concentration in the health insurance market, or that such concentration would be diluted by repeal. I consider that question now.

The McCarran-Ferguson Act exempts from federal antitrust laws most aspects of “the business of insurance” to the extent regulated by the states. The exemption for “the business of insurance” applies to activities like issuing policies, underwriting risk, and setting premiums. But it does not apply to “the business of insurers” – for example, purchasing services from providers or engaging in mergers and acquisitions, in most circumstances. Nor does the exemption protect “boycott, coercion, or intimidation” from federal antitrust scrutiny.

Roughly, the exemption tracks the risk-spreading relationship between insurer and insured that has traditionally been the subject of state regulation, while mostly subjecting insurer-provider relationships and other non-insurance activities to federal scrutiny.

So what sorts of potentially market-concentrating conduct are left to exclusive state regulation after the exemptions to the exemption? Agreements to fix prices and to divide up markets are generally considered to be within the exemption’s scope. While the former type of agreement would not enhance the power of participants to bargain with providers, the latter surely could. If, for example, two insurers in a state were allowed to agree that one would market policies in one part of the state, while the other would take the rest, then each would have greater leverage over providers in its allocated region.

The same would be true in market segments, such as for large group, small group, and individual policies, that were the subject of an exempt agreement. Of course, state regulators are free to police such arrangements. But even weak policing is enough to displace federal regulation under McCarran-Ferguson.

Anticompetitive agreements are not the only conduct exempt from federal antitrust oversight. Some partial repeal proposals would still commit all manner of exclusionary conduct by individual insurers seeking to maintain or acquire monopoly to potentially lax state oversight. Federal law, for example, would still not reach a predatory pricing scheme in which a monopoly insurer lowered prices below its costs to deter entry by a new competitor in the expectation that it could recover its losses after successfully defending its monopoly. While there is much skepticism about the feasibility of predatory pricing outside markets with large economies of scale or scope, or high barriers to entry, the health insurance market has these features.

In short, there are reasons to believe, in theory, that the current antitrust exemption does promote lax regulation of practices that could lead to increased concentration in the health insurance market. Certainly, that market has come to be characterized by a high degree of concentration in recent years. While other factors have no doubt contributed to that concentration, it is not implausible that the antitrust exemption has contributed as well, whether through the conduct that it clearly allows, or the vagueness that it brings to enforcement against conduct that is not clearly outside its scope.

We don’t condone or promote the type of conduct that the antitrust exemption allows or encourages. But going easy on such conduct may be the price of maintaining the balance of power between insurers and providers if we do not enact a robust public option.

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