by TOM PAGONIS, DDS, MS
For the past 20 years, the American Dental Association has gone to great lengths to repeal the McCarran-Ferguson Act of 1945. This federal law provides an exemption for the “business of insurance” from most federal regulations most notably an exemption from federal antitrust laws with the caveat that the exemption is nullified in cases of boycott, intimidation or coercion (1,2). Health insurance companies are therefore not legally bound to comply with provisions of the Sherman Act (1890) and the Clayton Act (1914) which regulate and promote competition among businesses for consumer benefit. Specifically, antitrust laws i) prohibit independent groups from joining and colluding, ii) restrict mergers and acquisitions which decrease competition and iii) prevent the formation of monopolies (3).
The McCarran-Ferguson Act does not regulate the insurance industry but provides broad authority for state regulation. If viewed through the lens of federal regulations it appears that health insurance companies can freely exchange information and agree to fix prices. How did this ever become law and why hasn’t it yet been repealed? How does the insurance industry exert so much influence over Congress?
The insurance industry was virtually unregulated until the mid-1850s. Insurance supervision primarily in the form of state commissioners was established in almost every state by 1871, but very little regulation took place (3). However in 1944, then Attorney-General Francis Biddle an appointee of Franklin Delano Roosevelt brought suit against the Southern-Eastern Underwriters Association charging the group with multiple counts of antitrust violations under the Sherman Antitrust Act (4). The indictment included charges of premium rate price fixing on certain fire insurance policies and monopolizing fire insurance policy sales in Alabama, Florida, Georgia, North Carolina, South Carolina, and Virginia. The case went to the Supreme Court. Incredibly the defendant insurance alliance argued that insurance was not a business (5):
"the business of insurance is not commerce, either intrastate or interstate" ... "is not interstate commerce or interstate trade, though it might be considered a trade subject to local laws either State or Federal, where the commerce clause is not the authority relied upon”.
Their fundamental argument was that the Commerce Clause did not apply to them and they were therefore not subject to Federal law. The Commerce Clause which is listed in the U.S., Constitution (Article I, Section 8, Clause 3) empowers the federal government to regulate commerce “with foreign Nations, and among the several States, and with the Indian Tribes." In essence, this alliance of insurance companies claimed that the Sherman Act did not apply to them and that they were free to continue to fix prices (or rates) and to form monopolies (6). Fortunately, the Supreme Court ruled in favor of the government. The 4-3 decision written by Justice Hugo Black held that the Sherman Act applied in this situation and was intended to cover unfair acts of the underwriters' alliance. The decision also ruled that transaction across state lines was “commerce among the states” which therefore permitted Congress to regulate under the Constitution. Soon after the ruling came down, and after some intense lobbying by insurance executives and unwarranted fears by state regulators on the possible federal takeover of the insurance industry, Democratic Senator Pat McCarran of Nevada, a historically controversial figure, joined Republican Senator Homer Ferguson of Michigan to co-author the controversial McCarran-Ferguson Act. Unfortunately, after congressional approval, the legislation was signed into law by President Roosevelt in 1945 (3). Even with the Supreme Court ruling (and Justice Black’s opinion), the McCarran-Ferguson Act still exempts insurance companies from federal antitrust laws that would routinely apply to most businesses. States' limited resources and jurisdiction make it difficult to regulate a regional health insurance company let alone a national behemoth. That’s why this law remains such a lightning rod among health care providers as it creates relatively obscure and ineffective state oversight rather than strong federal regulation.
Where we are we today
The past decade has seen significant legislative progress towards repealing or modifying the McCarran-Ferguson Act. In January of 2017, a House of Representatives Bill was introduced by Representative Paul Gosar, Republican of Arizona to amend the McCarran-Ferguson Act in order to authorize the Justice Department to regulate health insurance companies by enforcing existing federal antitrust laws. The House Bill passed by a bipartisan vote of 416-7.
The Bill was welcomed by the American Dental Association and prompted ADA president Jeffrey Cole to comment: “If health insurance companies had to observe the antitrust laws when setting rates and designing coverage, they would have to compete more aggressively with each other for both individual customers and purchasers of a large group”. Dr. Cole went on to say “currently when health insurers overcharge or take advantage of consumers, the consumers’ only course of action is to file a complaint with their state’s insurance commissioner, who often have very limited resources and rarely act” (7,8). Remarkably, on February 16, 2017, in a Statement Before the U.S. House of Representatives Judiciary Committee Subcommittee on Regulatory Reform, Commercial and Antitrust Law, the Independent Insurance Agents & Brokers of America also known as the Big “I” strongly supported the status quo and state insurance regulation. The Big “I” went on to say that the health insurance exemption was vital to the competitiveness of state insurance markets (9).
The group even maintained that amending the McCarran-Ferguson Act would, in fact, increase rather than decrease costs!
Concurrently, on February 6, 2019, a bipartisan Senate Bill called the Competitive Health Insurance Reform Act was introduced by Senators Steve Daines, Republican of Montana and Patrick Leahy, Democratic of Vermont. This Senate Bill which was very similar to the House Bill also called for the Justice Department to regulate health insurance by enforcing the federal antitrust laws (8). Of course, the central aim of this legislation is to regulate health insurance companies against price-fixing and other unfair practices.
Lobbying by well-funded groups has stalled much-needed legislation to correct the unfair exemption of health insurance companies from federal antitrust laws. Recent legislative efforts and accomplishments are much welcome and will usher in a level playing field of competition with federal oversight for consumer benefit.
1. "McCarran-Ferguson Act of 1945"
2. The McCarran-Ferguson Act: A History of Insurance (May 23, 2009), Daily Kos
3. Senate Committee on the Judiciary (1960). "Hearings before the Subcommittee on Antitrust and Monopoly". 86th Congress, 1st Session
4. "State Regulation of Property and Casualty Insurance Rates". Ohio State Law Journal. 1967 28 (4): 669–734, at 683
5. Donovan, James B. (1950). "Regulation of Insurance under the McCarran Act". Law and Contemporary Problems. 15 (4): 473–492
6. Bork, Robert; Troy, Daniel E. (2002). "Locating the Boundaries: The Scope of Congress's Power to Regulate Commerce". Harvard Journal of Law & Public Policy. 25: 849, 861–62
7. ADA News, January 7, 2019, Vol 50 No.1
8. ADA News, February 18, 2019, Vol 50 No.4
9. Webb, Jennifer, March 23, 2017, IA Magazine