Busted Trust

Democrats to health insurers: “Nice little antitrust exemption you’ve got there. Wouldn’t want anything to happen to it.’

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Now they’ve done it. After the health-insurance lobby released a report trashing the Senate finance committee’s health care bill and started airing granny-scaring TV ads, the Democrats decided playing defense isn’t enough. Time to go afterthe insurance industry’s antitrust exemption.

By happy coincidence, the Senate judiciary committee already had scheduled an Oct. 14 hearing to consider a bill sponsored by Sen. Pat Leahy, D-Vt., that would partly repeal the antitrust exemption by outlawing insurance-industry price-fixing, bid-rigging, and market allocations. (Previously Leahy tried and failed to repeal the exemption altogether.) “There is no reason why the insurance companies should have exemption from antitrust laws,” testified Senate Majority Leader Harry Reid, D-Nev. Sen. Chuck Schumer, D-N.Y., a member of both the finance and judiciary committees, pledged to amend the health reform bill on the Senate floor to incorporate Leahy’s bill, and made clear this was payback for the insurers’ assault on health reform.

Perhaps you’re wondering how the insurance industry got itself exempted from antitrust law in the first place. Historically, insurance companies were regulated by the states. Back in the 19th century, insurers considered this a nuisance. (They have since changed their tune.) But their bid to supplant a patchwork of state regulations with federal regulation was rejected by the Supreme Court, which ruled in Paul v. Virginia (1869) that insurance was not an activity governed by the Commerce Clause of the Constitution, which gives Congress the right to regulate trade between the states. Twenty-one years later, when the Sherman Act invented antitrust law, Paul v. Virginia shielded the insurance industry from it. But during the 1930s and 1940s the Supreme Court came to embrace a more expansive interpretation of the Commerce Clause, and eventually it reversed Paul v. Virginia in United States v. South-Eastern Underwriters Association (1944), which explicitly placed the insurance industry under Sherman Act jurisdiction.

That didn’t sit well with Sen. Pat McCarran, D-Nev., best remembered today as the author of the McCarran-Walter Act (1952), which barred U.S. entry and sped deportation of foreign-born individuals deemed subversive under a ludicrously broad definition. McCarran, who took a hard line on Communists and a soft line on mobsters (he turns up in The Godfather: Part II as “Sen. Pat Geary“), teamed up with Sen. Homer Ferguson, R-Mich., the man who shoehorned “under God” into the Pledge of Allegiance, to block the Supreme Court’s encroachment on states’ rights. Passed in 1945, the McCarran-Ferguson Act allowed states to pre-empt federal antitrust regulation of insurance companies, effectively eliminating such regulation altogether. McCarran-Ferguson, which remains the law of the land, helps explain why, in 64 percent of all metropolitan areas, a single health insurer commands a market share of at least 50 percent.

Not even McCarran and Ferguson envisioned that their bill would block federal antitrust prosecution of insurance companies forever. What they had in mind was a temporary halt. Believing that was all the bill did, President Franklin Roosevelt signed it into law. But its language had been muddied sufficiently in House-Senate conference that courts subsequently interpreted it to block federal antitrust regulation permanently. Both Democrats and Republicans came to regret its passage; Gerald Ford’s Justice Department and Ronald Reagan’s Federal Trade Commission each called for McCarran-Ferguson’s repeal. At the Oct. 14 judiciary committee hearing, Assistant Attorney General Christine Varney said that whatever justifications were made on the law’s behalf in 1945 “are no longer valid today.”

The insurance industry, of course, disagrees; in a May 2009 press release, America’s Health Insurance Plans stated, “Health insurance plans operate in highly competitive markets.” But, of course, if that were true, the insurers would have little to fear from federal antitrust oversight. The only practical justification lately for keeping McCarran-Ferguson in place has been that, at a time when Congress is trying to reform health care, it doesn’t make much sense to start an unnecessary fight with the insurance industry.

Now that the fighting is already under way, this logic no longer applies. Democrats are free to repeal McCarran-Ferguson, though the smarter move might be to trade it for the industry’s silence (support would be asking too much) regarding the public option. Repealing McCarran-Ferguson would affect the entire insurance industry, while enacting a public option would affect only health insurers. Might the other sectors of the insurance industry be called upon to exert a little influence? Time for health insurers to take one for the team?

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