Austin Frakt and Ian Crosby on the insurance antitrust exemption

He writes:

Taxpayers will be best served by insurers with sufficient market
power to bargain down provider rates, but with not quite enough power
to keep the savings (“rents“)
for themselves. That is, we want low provider rates to translate into
low premiums. Though liberals may be skeptical that this balance is
achievable, it is not at odds with their objectives in principle. After
all, one of the arguments for the public option is that it would be a
large insurer with commensurately large negotiating power but would use
that power on the behalf of consumers.

How to balance the power of insurers and providers is far from
simple. Many have pointed to the alleged dominant market position of
insurers as a substantial source of high health care costs. However,
the health economics literature
supports the notion that recent increased market power of insurers does
not lead toward monopolistic pricing, but rather it provides a
counter-balance to the power held by hospitals and provider groups.

Moreover, insurance companies are partially exempt from federal
antitrust law for an important reason: so they can share rate-making
data. This function actually benefits small insurers who would not
otherwise have sufficient data to properly adjust premiums.
Paradoxically, removing the legal cover for data sharing would harm
small insurers more than large ones.

Read his whole post, which also has a good public choice analysis of the recent threat to repeal the exemption.


Probably worth pointing out that this particular problem is much more tractable in view of Williamson's classification of transactions costs into frequency, specificity, and uncertainty. The first and last do not change with the antitrust exemption. Specificity, however, does; and this is Frakt's point about "balance of market power."

Austin states [McCarran-Ferguson]..."actually benefits small insurers who would not otherwise have sufficient data to properly adjust premiums." Did he mean ..."actually benefits small insurers who would not otherwise have sufficient data to properly adjust premiums quickly enough to avoid some economic downside associated with finding out about a particular (or set of) rate adjustments recently instituted by a large competitor."?

Also this; "Paradoxically, removing the legal cover for data sharing would harm small insurers more than large ones." Is this an a priori claim, somehow safe from scrutiny?

He asks "It is not unreasonable to worry that providers might try to use the ACO structure to lobby Congress and negotiate more favorable Medicare payments and regulation?" I'm convinced it is unreasonable. Know your opponent and prepare for his threats. When possible, block them.

There's a catch-22 here, isn't there?
The logic behind a public option is that it allows a large pool of customers that reduces premiums. And yet the larger the private insurers get the more attractive targets they become to apply antitrust measures to.
Why not allow them to get as large as they want but regulate prices in the same manner we do utilities?

My response is that there is nothing wrong with profit in the insurance industry. Profit leads to a variety of virtuous outcomes. So why be distressed about profits?

Sorry, but the person you posted doesn't know what he is talking about when he describes McCarran-Ferguson.

This is pathetic. I'm an antitrust lawyer and have expertise in the McCarran-Ferguson Act.

The McCarran-Ferguson Act does not, repeat does not, permit insurance carriers to agree among themselves as to what they would pay doctors, hospitals or anyone else. The McCarran Act exempts activities that are the "business of insurance" and the US Supreme Court has ruled the business of insurance does not include procurement or agreements among insureds to boycott or refuse to deal with providers.

Doesn't anyone screen this stuff. ????

Here is a link to a recent speach by the head of the Antitrust Division, Chris Varney, citing the many studies, including the Antitrust Commission study in 1989, calling for changes or elimination of McCarran.

Here is a link to the ABA Antitrust Section urging the repeal of McCarran Ferguson.

Here is a link to a US Supreme Court decision holding that the McCarran-Ferguson exemption does not apply to procurement practices of insurance carriers as procurement is not "in the business of insurance. See Pireno,

Thus, insurance companies cannot agree on what to pay providers, and the argument that "taking away" McCarran immunity will somehow weaken carriers so they cannot negotiate a good deal for consumers is more than bogus.


Your comment says: "If the market has many small insurance companies, they can not risk being shut out of provider networks and are less likely to impose measures that might anger providers."

The post posited that McCarran gives carriers power to bargain with providers, and your comment above implies that individual carriers will be assisted by McCarran in dealing with providers.

McCarran does not permit collective conduct by carriers in negotiating with providers.

Secondly, as to the argument that McCarran's loss would damage small providers because of an alleged inability to share loss data, I would point out that California has applied the antitrust law to insurance (in effect repealing McCarran at the state level) and the State AG stated, as would most antitrust lawyers, that the carriers can pool aggregated historical loss data under the antitrust laws, much as a trade association can aggregate historical data within the antitrust laws. So, McCarran's existence with respect to that argument is weak. (Now, let me say, some argue that there should be a safe harbour for this, and that's fine with most antitrust practictioners.)

But, at a more practical level, there is nothing that compels a dominant carrier to share aggegate loss data. Nothing in McCarran compels a large carrier to share any loss data with another carrier.

The post was particularly bothersome because it portrayed repeal or modification of McCarran as something that was going to injure the consumer. Far from it. It also portrayed this as something Congress suddenly found as interesting. Far from it. These are periodic hearings that have been the focus of much debate.

If the belief is that increasing insurer market power is facilitated by having McCarran--and this is the argument--then market power can be used for any purpose. It is not limited to using it to benefit consumers. This is a strange argument, that we should create market power in a seller (and remember, McCarran can't be used for agreements between buyers) in order to improve competition in another market. Were insurance companies so generous that we would chose to give them market power without a requirement that they give us lower prices. If there are dominant health insurers in a market, is giving them market power vis a vis consumers, and not just providers, through an antitrust exemption a good idea?


You seem to want to argue that McCarran does some damage. What is it.

Does it encourage price fixing as Leahy claims? Of course not. Does it stop states from imposing regulations? No, of course not.

What does it do. It allows insurers to share information about risks. And it leaves states to regulate the industry.

Ms Varney does not dispute the value of information sharing, she thinks the Justice department would still allow exemptions. The big change is that the Federal government, using the power of the Justice department, will be in control. For those in Washington it is a battle for Federal regulatory control over the insurance industry. The rest is noise.

And please carefully read the two links.

"the health economics literature supports the notion that recent increased market power of insurers does not lead toward monopolistic pricing, but rather it provides a counter-balance to the power held by hospitals and provider groups."

Nothing about collusion or anything like it. i.e. We have little (really no) data that insurance companies are charging prices that vary from what you would see in a competitive market.

"Greater health insurer market concentration is not associated with monopsony power and suggests that insurers use their power to offset monopolistic providers".

McCarran, as I understand it, leaves such issues to the individual states. So I suppose if a state wanted to encourage rate fixing it could but nothing in McCarran encourages it.

This is really a pre New Deal view of the world with much greater control in the hands of the states.

Also, you might want to read the writings of the newest Nobel winner. Providers and insurers may have come to a much better market solution then can be expected from a plan imposed from regulators in Washington.

I think we can agree that having a large number of carriers operating under a price-fix umbrella of a rating bureau mistates number of competitors for competition. But, it also demonstrates that McCarran, rather than reducing the number of ostensible “competitors†, increases the number of fringe players who, according to the monopsony hypothesis of the post, would be unable to bargain for a better price.

In my opinion the best insurance that is on the market at the moment can be done only if you work with Farmers Insurance Quote in my opinion. Now you will figure out that I'm right once you decide to check it out and really try it. That's when you will come up here and thank me for that.

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