Montana Viewpoint

Jim Elliott

REGULATION OF THE HEALTH INSURANCE BUSINESS

Well, you can learn something new every day if you’re not careful. While I was doing research for this article about the exemption from federal government regulation that insurance  companies enjoy I discovered that my long held assumption about the reason for that exemption was wrong. I had thought that insurance companies were the ones who had fought for state regulation of their industry because state regulation would be weaker. In  fact, it was the states which wanted it that way. It wasn’t as bad as finding out that Santa Claus wasn’t for real, but it has required some spiritual adjustment on my part.

I thought that during the national obsession with health care reform that it would be instructive to let my readers know why the insurance business is largely exempt from federal  anti-trust laws. (So is Major League Baseball ,but that’s another story.) It is indeed instructive, as I found out, and if I ever read this article after I write it I hope I will have a better understanding of the issue.

The reason for the anti-trust laws, beginning with the Sherman Anti-trust Act of 1890, was to protect the public from artificially high prices created either by a business monopoly  or by price fixing engaged in by several independent companies. The classic example of this is the total control that the railroads of the late 1800s had on setting freight rates. They could, and did, charge farmers artificially high rates for shipping grain  because there was no competition. Incidentally, many farmers think that is the case in Montana today.

The earliest insurance in America was against loss by fire. The companies were, and still are, chartered by the individual states. The states had started regulating insurance companies  as early as the 1850s without getting any grief from either the Feds or the insurance companies, largely because the companies were local, and only did business in one state. But insurance companies grew, and companies based in one state began selling polices  in other states. Wisely enough, the state insurance commissioners began looking at the financial dealings of those companies in their home states to determine their solvency, leading the insurance companies to cry foul.

The companies said that because insurance was commerce, states did not have the right to regulate it when it crossed state lines—interstate commerce— because the Constitution gives  that power to the federal government. That’s spelled out in the Constitution’s Commerce Clause. The dispute wound up in the Supreme Court, and in 1868 the Court ruled that insurance companies were not subject to the Commerce Clause because an insurance contract  didn’t constitute commerce, and the states could continue their regulation of out-of-state firms.

But in 1944 both the insurance companies and the court reversed their positions. By that time insurance companies were sharing information with each other and using the information  to set rates. The Attorney General of Missouri and the U. S. Attorney General thought this was price fixing, and took the largest of these rate setting associations, the South Eastern Underwriters Association, to court claiming they were violating federal  anti-trust laws. This time around the insurance folks claimed that they were immune from federal antitrust laws because selling insurance was NOT commerce (35 states sided with the insurance companies in court). To even things out, this time around the Supreme  Court said it WAS commerce, and that Congress had jurisdiction to regulate insurance if it wanted it, but it would have to pass a law saying one way or the other.

The states wanted to retain jurisdiction, and Congress  passed the McCarran-Ferguson Act in 1945. That Act spelled out that the insurance business was exempt from federal anti-trust legislation.

And so we come to the present time and the reason I was going to write this article in the first place. Now it seems that Congress is likely to repeal the anti-trust protection  in the McCarran Act, but only for health insurance providers. This time the states seem to side with Congress. If a major reason of anti-trust legislation is to encourage completion in business, which hypothetically lowers prices, then health insurers are  a case in point. Nine states have only one insurance company that controls three quarters of the market, and in 39 states over half of the market is controlled by only two companies.  That means there are apparently only two states that have any kind of competitive insurance market.

Many believe that bringing health insurance under federal anti-trust regulation will increase competition in the industry; we may soon find out.

So that’s the abbreviated saga of insurance regulation in America. Now we both know something new about the history of the regulation of health insurance companies.