Private health insurers have become so concentrated that there are only one or two major carriers competing in most states today. In spite of increasing demands on our financially stretched health sector, private insurers are not held to the same antitrust standards as other commercial businesses. That needs to change.
Health insurers enjoy a unique exception for the so-called "business of insurance" under the McCarran-Ferguson Act of 1945 (MFA). Passed at the end of World War II, this law gives states the residual authority to regulate the business of insurance without interference from federal regulation, unless there is a specific federal antitrust law to the contrary. Under the MFA, certain private health insurance company activities are exempt from the same federal antitrust rules that apply to other businesses in the free market.
The general purpose of antitrust law as a whole is to protect and promote competition in the marketplace. In essence, the antitrust law sphere focuses on the problem of market power -- when sellers or buyers can profitably keep their prices above or below competitive levels for an extended period of time. Ultimately, uncompetitive prices decrease consumer welfare. Health insurers are both buyers of medical services (from providers) and sellers of health insurance (to consumers and employers), and they can raise both monopsony and monopoly concerns.
The notion underlying the MFA's business of insurance exception is that it is desirable public policy for insurance companies to cooperate in setting their rates so premium prices are largely consistent across companies. The exception is thought to encourage companies to maintain open channels of communication without fearing federal antitrust audits. This line of thought is based on the premise that the only way insurers can effectively spread risk and make predictions about the cost of future claims is via risk pool data collaboration. As long as health insurers are communicating about what is deemed the business of insurance, the exception means they will not face federal antitrust violations for collusion or market monopolization. All activities considered outside the bounds of the exception's protections are subject to the full weight of federal antitrust law.
For the MFA's exception to apply, a health insurer must prove three elements: that the challenged conduct constitutes the "business of insurance;" that the state regulates this business of insurance activity; and that the acts in question do not constitute "boycott, coercion, or intimidation." In determining whether certain conduct falls within the parameters of the "business of insurance," courts have traditionally examined whether the conduct transfers or spreads policyholder risk. They also consider whether the conduct is an integral part of the relationship between the insurer and its insured and whether it is limited to communications with individuals within the health insurance industry alone. The MFA's exception does not encompass all business aspects of an insurance company, rather, it only involves risk allocation activities. Specifically, this includes spreading known risks across multiple demographics to prepare for the event that an insured will suffer a financial loss and require healthcare products or services.
Agreements between health insurers and their participating providers do not constitute the business of insurance, although contracts between insurers and their insureds do. The Supreme Court has clarified that the statutory language of the MFA does not exempt the "business of insurance companies," in and of itself, from the scope of the antitrust laws -- the case law draws distinction between the "business of insurance" and the "business of insurers." The latter would include, for example, contracts between an insurer as a third-party payer and all agreements the insurer uses to reduce its costs in fulfilling its underwriting obligations.
Though not all states statutorily define what "business of insurance" means, the state courts have produced fairly consistent common law definitions. Most agree that it entails the shifting of risk, for the payment of a fee, from an insured to an insurer who is able to assume that risk by pooling together the payments received from all individuals, thereby spreading the risk among a defined population. Historically, state courts have recognized the distinction between general "business risks" and specific "insurance risks."
Supporters of the exception have long maintained that the only way health insurers can collect the large amounts of data necessary to assess risk is to work together. Insurers argue that no single company generally has enough information assess an entire population on its own. Therefore, it is asserted, the unencumbered sharing of claims information and analyses helps accurately predict the likelihood of future losses and claims and properly spread risks to minimize the danger that all policyholders will have losses at the same time. Opponents of the business of insurance exception argue that it enables health insurers to work together to determine the prices that they charge for health insurance, which allows insurance premiums to continue to rise without meaningful competition or price controls in a largely consolidated marketplace.
Using modern communications, population datasets, and computer algorithm software, today's insurance underwriters are able to gauge risks in ways that were unimaginable when the MFA exception first went into effect nearly seven decades ago. Because there are no statutory or de facto barriers to prevent insurers from safely pooling risk, there is no practical need for the MFA exception. Provided commercial health insurers are not engaging in dubious antitrust practices, intercompany communications can continue as usual once the antiquated and fear-based business of insurance exception is taken off the books. As long as no foul play is involved, health insurers face no credible threat of legal action and cannot reasonably argue they would be unduly burdened by the possibility of antitrust violation investigations without the MFA exception in place.
Though the Congressional Budget Office plainly identifies healthcare spending growth as one of the "central fiscal challenges" facing our federal government, Congress has allowed America's health insurance industry to become too consolidated. It is in the best interest of the American public for Congress to reinvigorate full antitrust enforcement and restore true competition in the commercial marketplace for the purchase of health insurance services. Basic economic principles dictate that increased competition will help to lower premium rates for consumers or, at least, prevent future price spikes.
Annemarie Kelly is a professor of legal studies at Kaplan University and a practicing attorney licensed in Illinois and Iowa.