Antitrust Law

March 23, 2017

Repeal of Antitrust Immunity for Insurers: What Does It Mean?

By Lisl J.Dunlop, Partner, Antitrust and Competition

Insurers are among a handful of industries, including Major League Baseball, that have a special exemption from the federal antitrust laws, the so-called "McCarran-Ferguson" antitrust exemption. The exemption has survived many repeal attempts, but—with the current focus on the high cost of health insurance and the need for greater competition in the healthcare industry generally—it appears finally to be reaching the end of its nine lives.

On February 28, 2017, the House Judiciary Committee voted to send to the full U.S. House of Representatives the Competitive Health Insurance Reform Act of 2017, H.R. 372, which would repeal the McCarran-Ferguson exemption. The House is expected to vote on the measure this month, ahead of the vote on the legislation to repeal and replace the Affordable Care Act (ACA). The article below discusses the genesis and scope of the McCarran-Ferguson exemption and what the repeal might mean for the healthcare industry.

Why Was the McCarran-Ferguson Exemption Created?

In 1944, the U.S. Supreme Court ruled that insurance companies were subject to the federal antitrust laws (since they acted in interstate commerce), and could therefore be prosecuted for anticompetitive conduct such as sharing competitively sensitive information with each other. Up until that time, insurance companies had regularly shared information to help determine risk levels and set appropriate premium prices on insurance policies.

In response to the Court's decision, Congress passed the McCarran-Ferguson Act in 1945, creating a limited exemption from the federal antitrust laws to allow insurance companies to share information with each other without the risk of antitrust liability. Under the law, regulating insurance company practices was left primarily to the individual states.

What Does the Exemption Do?

The McCarran-Ferguson Act grants an exemption from the federal antitrust laws to "the business of insurance" to the extent it is regulated by state law, unless the conduct involves an agreement or act to "boycott, coerce, [or] intimidate." Theoretically, under the exemption, insurers may be able to meet, share information and agree on pricing for premiums. Most states prohibit price-fixing by insurers, although enforcement has been uneven.

The law does not bar the federal government from regulating insurers or the industry entirely. The Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice (DOJ) remain responsible for antitrust enforcement involving mergers and acquisitions, as evidenced by the DOJ's challenges of Anthem's bid for Cigna and Aetna's offer for Humana. The DOJ also has challenged other conduct of insurers that may violate the federal antitrust laws, such as Blue Cross Blue Shield of Michigan's use of most-favored nations clauses that allegedly foreclosed rival health plans.

The principal activity that currently takes place under the exemption is the collection and pooling of claims data from different companies by "rating bureaus." Such information allows insurers to predict more accurately how much they might end up paying out to customers. These mechanisms are frequently used in industries such as property and casualty insurance.

Why the Repeal?

Proponents of the exemption, such as the Insurance Information Institute (III), say that the exemption is necessary to allow insurers to pool historic loss information, so they are better able to project future losses and charge an actuarially-based price for their products, as well as to allow for the joint development of policy forms. They argue that the sharing of such historical and trending data is needed, especially by smaller insurers that otherwise would be unable reasonably to assess risk and compete effectively. In the view of III, repeal of the exemption could result in increased premiums, as well as increase the risk of antitrust challenges and corresponding defense costs.

Proponents of repeal say that the legislation would spur competition among insurers and bring down costs for consumers. Further, proponents say that most of the activities conducted under the exemption—notably sharing of historical information to allow for risk assessments—would likely be permitted under the antitrust laws today. For example, collaborations in which data sharing takes place are assessed by antitrust enforcers and the courts under a rule of reason analysis that would fully consider the potential procompetitive effects of such conduct and condemn it only if, on balance, it was anticompetitive. To the extent that the activities are anticompetitive (such as premium price-fixing), such conduct should be condemned because it likely increases premiums in the marketplace.

How Would the Exemption's Repeal Impact the Healthcare Industry?

Many of those supporting repeal have focused on the healthcare industry as the major beneficiary. Reps. Tom Perriello, D-Va., and Betsy Markey, D-Colo., who are sponsoring the bill, said in a press release that it would "end special treatment for the insurance industry that allows them to fix prices, collude with each other, and set their own markets without fear of being investigated." House Judiciary Committee Panel Chair Rep. Bob Goodlatte, R-Va., said that the proposed law would "assist in Congress's larger goal of restoring competition to the healthcare industry and reversing the trend of rising payments and market consolidation."

It is unclear, however, whether the exemption has played a significant role in the health insurance business to date, and what impact repeal would have on competition in health insurance markets and health insurance premiums. An analysis by the Congressional Budget Office (CBO) estimated that repealing the antitrust exemption for health insurers "would have no significant effects on either the federal budget or the premiums that private insurers charged for health insurance."

Because there is such strong state regulation in the insurance arena, the repeal of the exemption may not have much practical effect. Further, if insurers lobbied the states, they could obtain the same or similar protections through state action, which can also act to shield conduct from the reach of the federal antitrust laws.

Conclusion

The repeal of the exemption continues to be the subject of debate, with some believing that it will boost competition and others arguing that it will have no real impact. A vote is imminent, and Manatt Health will continue to monitor the result, as well as the implications for healthcare, and keep you updated.