Sen. Chuck Schumer (D-N.Y.) on Wednesday called for an amendment to the health care reform bill that would remove the long-standing antitrust exemption for insurers, echoing a push by other Democrats to crack down on the industry.
“The health insurance’s antitrust exemption is one of the worst accidents of American history," Schumer said. "It deserves a lot of the blame for the huge rise in premiums that has made health insurance so unaffordable. It is time to end this special status and bring true competition to the health insurance industry."
Sen. Patrick Leahy, chairman of the Judiciary Committee, introduced a bill last month to remove the anti-trust exemption and convened a hearing Wednesday, where Schumer called for eliminating the exemption as part of the health bill working its way through Congress.
At issue here is the 1945 McCarran-Ferguson Act which came up in my long-winded explanation of why selling insurance across state lines in the absence of federal regulations is bad. This is the law that essentially says the regulation of insurance companies is up to the individual states. McCarran-Ferguson also exempts insurance companies from federal anti-trust laws. This is the provision the Democrats are zeroing in on.
But it seems a little narrow to me. The root problem is that we want to have our socialist cake and eat it, too. This is evident in Schumer's declaration that what we really need to do is "bring true competition to the health insurance industry." And to some extent that's true; that is, after all, the rationale behind the public option. But it's a band-aid designed to keep a malfunctioning system on its feet a bit longer. No, the key to the whole thing revolves around a dirty little secret: the whole idea of health insurance is, at its core, socialist.
I'm not a socialist, I'm just an American. We're pragmatists who know the value of capitalism and the value of socialism. We're just not allowed to talk about the latter, though we accept it in practice with a wink and a nudge. Health insurance brings together a group of people who voluntarily pay premiums every month into a communal pool of resources from which others can draw when they're sick or require some medical service. The younger and healthier members of the insurance pool subsidize the health-related expenses of the older or sicker members of the pool. A health insurance pool necessarily entails an intra-pool transfer of resources just as surely as Medicare entails an intergenerational transfer of resources.
In accordance with their prerogative under McCarran-Ferguson, states make decisions on what consumer protections they will afford their residents. The state-by-state variation in these laws (along with state licensing requirements) fragments the industry and compartmentalizes it into 50 state variations. As this is done to protect consumers, this is largely a good thing. But it puts an upper limit on the size of the population from which an insurance company attracts its insurance pool. Here we run into a problem: in general, a bigger insurance pool is a better insurance pool. This is the reason all of the health care reform bills mandate that everyone enter an insurance pool: we need young and healthy people to enter the pools so that they can subsidize the people with pre-existing conditions that will also get to enter the insurance pools. There's also the matter of negotiating with providers, something every insurance pool must do: a larger insurance pool theoretically has more bargaining power to levy against doctors and hospitals. It just isn't feasible to have Mom and Pop insurance companies because big insurance pools are needed to make an effective pool.
What's the effect of this? There naturally tends to be concentration in the health insurance markets, particularly in states that have small populations because those states can support fewer insurance companies. To borrow a graphic from Speaker Pelosi's blog:
Compare that with this map of state populations where yellow states have the biggest populations, purple-blue states have the smallest, and shades of green are somewhere in between:
You can see that, in general, less populated states have a greater concentration in their insurance markets while the states with the largest populations have the least concentration. Certainly the insurers' exemption from federal anti-trust laws helps this to happen but this result is also a logical imperative, given the rule of thumb that bigger pools are better pools.* This is why tiny Rhode Island passed a bill last year to examine the feasibility of fusing its health insurance market with those of Connecticut and Massachusetts. Schumer's desire to try to inject capitalism into socialism in this case won't necessarily work because insurance pools by their very nature are strongest (i.e. spread out risk enough and have enough healthy people to keep the communal resource pool stable) when they're large; you simply can't have a multitude of tiny insurance pools competing for customers. In order to remain competitive (not to mention solvent), those pools would have to cherrypick customers to such an extent that no one who actually needs health insurance would ever get it. Thus there is an inherent contradiction contained in the idea that socialist resource pools should act in a more capitalistic manner.
Part of the problem is the mere existence of for-profit insurers. Here we see the same contradiction. The profit motive forces these quasi-socialist institutions to "compete" but being very odd birds by nature, they don't necessarily do it the way most businesses compete with each other. Instead of lowering prices for everyone and increasing access to care (things one might naively assume are the point of having a health care sector), a health insurance company often can compete by shedding risk--read "sick people"--or shifting costs to less insurable customers who might have difficulty shopping around for something else. There's no reward for doing the decent thing, the thing an insurance company ostensibly exists to do: insure people. A socialist institution subject to capitalistic forces is a wretched creature more at home on the Island of Doctor Moreau than in the Land of Liberty. Thus insurance companies twist themselves into knots pursuing profits over people. And if there should be one guiding principle in health care in the United States, it should be "people over profits." The skeptic might suggest that this requires bankrupting the nation in paying for every conceivable health expense; it most certainly does not and that would be a somewhat ironic accusation, given the fact that the current system is bankrupting the nation.
A slightly smarter system could retain private insurers if it made insurance companies (at least partly) into not-for-profit organizations that enjoyed a risk-adjustment mechanism, in which the government redistributes revenues in accordance with the level of risk associated with a given insurance pool. That way the market doesn't punish a given insurance company for ending up with a slightly sicker insurance pool than another insurer. Radical thoughts! This, by the way, is how Switzerland does it: private insurance companies exist but they cannot make profits on basic health insurance plans (they can, however, make profits on supplemental insurance policies). But this requires letting a socialist system--health insurance--behave in accordance with its socialist tendencies instead of making it pretend to be your average free market business enterprise. And that's politically dangerous.
So the health reform proposals preserve the profit-driven, employer-based system we have now. Sure, they rein insurance companies in a bit with new federal regulations (e.g. with guaranteed issue provisions that prevent insurers from turning people away and with community rating rules that limit the ability of insurers to charge different premiums to different members of their insurance pool). They strengthen existing insurance pools by pumping in hundreds of billions of dollars--filtered through lower-and-middle-income people who get to vote for an insurance pool with their government affordability credits--over the next decade. They even potentially have a strong public option that competes with private insurers not just by merely existing but by reimbursing providers at Medicare (+ 5%) rates. There are lots of good (read "better than the status quo") things in these bills. But at their heart they preserve and strengthen the existing system, sanding over some of its rougher edges but not necessarily eradicating them. So the attempt by Senator Schumer to attack the anti-trust exemptions in McCarran-Ferguson seems weak. What he ought to be examining is the inherent friction between the competition he values and the socialistic leanings of the very concept of health insurance which, by its very nature, is often a matter of scale and thus not necessarily the best target for strict anti-trust regulation (it might be a better idea to think of insurers in the same way we think of regulated monopolies: as sons of bitches but our sons of bitches).
So why are the Democrats bothering to take this shot at the insurance companies now? Probably because heretofore the insurance companies had been allies (attracted, no doubt, by the infusions of government-subsidized customers that would flood their pools under these reforms) but they've now gone off the reservation, launching their opening volley the other day with a bogus "study" that suggested premium spikes would result from the Senate Finance health reform bill that passed out of committee the other day. One wonders why, if in the end the final forms of the reform bills will engender the opposition of the insurance industry, the Democrats didn't just go for broke in writing these bills: force insurers to operate at least part of their pools in a not-for-profit capacity in some sort of Swiss-American cheese hybrid. Hindsight may be 20/20 but this stuff has to stop someday.
*One might think that this logically points to a need for greater competition, not within states but nationwide. As I explained in another post, allowing insurers to sell policies in different states can have negative consequences in the absence of federal rules. However, it should be noted that the Senate Finance health reform bill (the Baucus bill) allows for the creation of national health plans that would be subject to federal standards and could be sold across state lines. This is likely much more workable than the Republican version of this idea. To be clear, I'm well aware that competition can have positive effects; my concern is simply that competition alone doesn't correct for the issues that accompany a profit-driven system of private insurance.
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