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2009-10-15

Time to bring out the big stick: Who’s afraid of McCarran-Ferguson?

OK, so what is “McCarran-Ferguson” and what does it have to do with health care reform or the law?

The McCarran-Ferguson Act*, codified in part at 15 U.S.C. § 1012, allows the U.S. Congress to supersede State regulation of insurance.

15 U.S.C. § 1012(a) specifically delegates to States the regulation of the “business of insurance”; 15 U.S.C. § 1012(b) allows Congress to supersede State regulation of insurance, so long as the Act of Congress “specifically relates to the business of insurance”. But doesn’t Congress already regulate health care insurance? To some extent, yes, but there is still a lot of room for improvement.

For the past six decades, Congress has generally spoken softly with McCarran-Ferguson, typically exercising its power under § 1012(a), i.e., to do nothing. Congress has swung the big stick of § 1012(b) for Medicare, Medicaid, and HIPAA, among other issues, but generally, Congress holds the big stick still and leaves insurance regulation to the States—to the seemingly ambivalent delight of health insurance companies (i.e., good for the bottom line, not so good for consumers or their health).

In a recent editorial, Michael Tanner of the Cato Institute deftly laid out several issues that he sees as limiting the potential effectiveness of current health reform efforts in Congress. Among other issues, Tanner noted that current regulatory systems “limit competition between insurers and providers by, for instance, prohibiting people from buying insurance across state lines”, which prohibition, he implied, could be contributing to increased health care insurance costs.

Kudos to Tanner for so publicly airing this ugly open secret. Tanner neglected to note, however, that the offending regulatory systems, are, by and large, State regulatory systems. His editorial implies that Congress may have the power to do something about this problem and it suggests the admirable goal of a “consumer-oriented free market” health insurance scheme. Tanner did not—understandably, for a variety of unstated reasons—propose a specific course of action for Congress to achieve this goal. At my peril, I’m going to get specific and try to do so. Back to McCarran-Ferguson.

A responsible and effective swing of § 1012(b)’s big stick would accomplish at least the following: 1) Prohibit States from regulating certain aspects of health insurance (e.g., pricing and interstate sales); and 2) Forbid health insurance companies from offering separate “group” and “individual” policies. In a future post, I’ll dive into why these two provisions are essential to meaningful reform (and perhaps how they could be implemented without causing people to storm Capitol Hill with pitchforks and torches).

UPDATE - 2009-10-15, 20:02: This article suggests that the McCarran-Ferguson Act can exempt insurance companies from federal antitrust regulation and refers to some movement to repeal the Act in its entirety. I do not know much the repeal movement, but what the Act does is slightly more complex than suggested in the article. Based upon my reading of the Act, Congress does not need to repeal the Act to make health insurers fully subject to antitrust law, although it must take out of States’ hands any competition-related aspects of health insurance industry regulation. Specifically, 15 USC § 1012(b) provides that federal antitrust laws do apply to insurance companies (since 1948 in any case), but only “to the extent that such business is not regulated by State Law”. Thus, I have amended point 1 above from “Require States to allow insurance to be sold across State lines” to read as it does now.

At the risk of horrendously mixing metaphors, even a liberty-focused organization such as Cato could rationalize this course of action: this use of § 1012(b) would be chemotherapy for the anti-competitive cancer of a fragmented health insurance market; CABG for the clogged arteries of health insurance that are strangling the heart of our economy; a machete cutting through the brambles that impede our progress as a 21st -century nation; Congress courageously doing what needs to be done, rather than what is politically expedient; or, in the alternative: Justice through economic rationality.

Comments are welcome below. In the next installment we’ll take a swim in the “risk pool”. (In the meantime, you may want review this rather lengthy post from another blogger—“Jay” does an excellent job of laying out the framework of many of the underlying issues).

*I would read this article for a history of the Act, not necessarily an accurate analysis of the Act or the court cases giving rise to it.

© 2009 Alex M. Hendler. All Rights Reserved.