Monday, August 3, 2009

How To Inject Real Competition Into the Health Insurance Market

Liked Competition

Pretends to Like Competition

The Richmond Times Dispatch editorial board has identified (yet) another contradiction in President Obama's plans for health care reform. On the one hand, the President and his supporters claim that they want to inject more "competition" into the nation's health insurance markets, by creating a so-called "public option." At the same time, none of the bills proposed by President Obama's allies in Congress would amend laws that both exempt insurance companies from federal antitrust laws --- which are supposed to encourage competition --- and empower states to block competition that might take place across state lines. The brief editorial, which is worth reading in full, can be found here.

The chief culprit here is the McCarran-Ferguson Act, which Congress passed in 1945 in response to the Supreme Court's decision in United States v. South-Eastern Underwriters, 322 U.S. 533 (1944). Southeastern Underwriters held that the Sherman Antitrust Act (named for its sponsor, Senator John Sherman, R-Ohio, pictured above) applied to the business of insurance and banned a horizontal price fixing agreement between insurance companies selling insurance across state lines. The decision was correct and made perfect sense. However, in its infinite wisdom, Congress responded to the decision by passing the McCarran-Ferguson Act, which, among other things, granted antitrust immunity to insurance companies who are regulated by state insurance authorities. The only exceptions to such immunity are for instances in which the company engages in "boycott, coercion or intimidation." McCarran-Ferguson was one of several New Deal-era federal statutes that undermined competition by encouraging price fixing and creating barriers to entry. Another classic example is the Motor Carrier Act of 1935, which required anyone wishing to transport goods across state lines in a truck to obtain a federal license to do so. The Act also empowered the Interstate Commerce Commission to sets prices for such transportation and pass on truckers' applications to serve particular routes. Put another way, the Act empowered the ICC to engage in Central Planning of the trucking industry.

Thus, so long as insurance companies are subject to state oversight, they may engage in the sort of horizontal price fixing that would be a felony if practiced by, say, automobile manufacturers. They may also engage in exclusionary tactics that do not rise to the level of "boycott, coercion or intimidation." Moreover, such companies can merge with one another with impunity, thereby producing concentrated markets without regard to whether such concentration is necessary to produce efficiencies. As the Times-Dispatch editorial notes, 94 percent of state insurance markets are "concentrated" if one applies Department of Justice Merger Guidelines. The problem is compounded in this context, where, because of McCarran-Ferguson, insurance companies can agree on the prices they will charge consumers without any threat of liability under Federal law.

Ordinarily, concentration itself it not necessarily a problem, since the threat of new entry can sometimes prevent firms in concentrated markets from raising prices above the competitive level. If, say, Dominos and Pizza Hut agree on the price of delivered pizza, Papa Johns and others can enter the market and defeat the cartel. However, McCarran-Ferguson empowers a state to prevent entry by out-of-state insurance companies into the state's own market, thereby preventing consumers in, say, Virginia from seeking health insurance from firms based in New York. In the end, then, McCarran-Ferguson is a sort of one-two punch: insurance companies may agree on prices they will charge consumers in a particular state, and consumer may not seek to avoid such price fixing by seeking insurance elsewhere.

There are various ironies here. The Obama administration and its allies generally support, or claim to support, aggressive enforcement of the antitrust laws. At the same time, they have made no effort to undo the pernicious anti-competition effects of McCarran-Ferguson. Moreover, some arguments for the so-called "public option" rest on the assumption that the Federal Plan will become so large that it will have bargaining leverage over providers of health care, an assumption in tension with a professed desire to enhance competition.

There is final irony. President Obama and his allies claim that failed markets justify additional government involvement in the health care industry. In this case, however, the problem seems to be failed government. To quote the Times-Dispatch:

"The market gets blamed for a lot these days, but it is absurd to pin high health insurance premiums on markets when excessive regulations are much more culpable. Any health care overhaul should repeal the ban on interstate health insurance shopping."

Enough said !