Regulating Regulators in the Name of De-Regulation [w/ multiple updates]

The prospect of further Federal involvement in insurance regulation is becoming a surprisingly hot topic of late. I have noted in prior posts Senator John Edwards’ interest in repealing the McCarran-Ferguson Act’s exemptions of insurers from federal regulation, at least in connection with claimed “price fixing” in relation to medical malpractice liability premiums. David Giacalone has been actively engaged on this subject, and I recommend reading his comments, attached to posts here and here.

I agree with the consensus behind David’s position that there is no particular cause to believe that federal antitrust enforcers would target information sharing activities among insurers that bear upon the accurate assessment of risk, with or without the McCarran-Ferguson exemption. I quoted the relevant bill in my original post, and acknowledged that its focus was explicitly on “price fixing, bid rigging, or market allocations” -- activities that, if proven, certainly ought to be halted or penalized.

The questions I think remain unanswered are:

(1) Is there any evidence at all that such activities are actually going on in the insurance industry generally or with regard to medical malpractice coverage in particular?

(2) Is there any evidence that the states would be ineffectual in stopping that activity if it actually did take place (i.e., is federal antitrust enforcement per se superior to state-level enforcement)? And

(3) If eliminating the McCarran-Ferguson is such a good idea, why is the proposed legislation focused on medical malpractice coverages and not on the entire insurance industry?

My personal views in favor of maintaining the McCarran-Ferguson exemption stem not from any wish that insurers should be free from all regulation or should be permitted to engage in anticompetitive activities, but from a belief that the state level is the right level at which to carry out that regulation. The insurance “ecosystem,” if you will, has evolved under a McCarran-Ferguson regime in which the states have handled the bulk of the regulation of insurance qua insurance. The re-Federalization of that regulation does not appear to offer advantages concomitant with the havoc it would likely cause. In the abstract, McCarran-Ferguson may not have been necessary when it was originally enacted, but after the entire structure of the industry has for so many decades been built around its effects I have yet to see a compelling argument that its repeal is any more necessary or that it would result in any measurable improvement or public benefit.

Having expressed a distaste for Federal involvement generally, consistency compels me to look askance initially at the latest Republican proposals for federal legislation to mandate or prohibit state insurance regulators from engaging in specified regulatory activities, such as rate regulation. I have not dug deeply enough into this to express any informed opinion yet, but Professor Martin Grace is following the issue closely on his weblog, a tort et a travers. I can’t seem to get his permalinks to work properly (nor do my trackback pings appear to stick properly on his site), but his first report on this subject is on August 23, with updates on succeeding days. The most thorough summary of the Republican proposal, linked by Professor Grace today, is this report from A.M. Best. No doubt, there will be more to say as the legislation and election roll forward.

UPDATE [8/27/04]: Following the wry advice often given to the government during the Vietnam War, David Giacalone has declared victory and gone home, promising to return his attention to the crafting of elegant haiku. His parting ode to online debate and camaraderie reminds me of an old "Far Side" cartoon, in which one of a pair of medieval torturers says to the other at the end of a long day: "I'm tired, but it's a good tired."

Rest up; there's more battles ahead to be sure.

FURTHER UPDATE [still later on 8/27/04]: Tired of technical difficulties, Professor Grace has made a discrete migration to TypePad. I have made post facto updates of my various links to his posts of the past few days. I particularly direct you to this one, that one, and this other one, too.

FINAL FURTHER UPDATE [also 8/27/04]: A good summary of where we all stand at this stage of the discussion is available, for those who are not weary of the whole thing, in this latest post from Professor Grace. I can't complain: he has given what strikes me as an accurate rundown of the positions I've taken so far, and I definitely endorse his characterization of some of the proposals from both sides of the aisle -- including the Republican-backed "SMART Act" (when, pray, are we going to oblige our legislators to grow up and overcome their fondness for cute acronyms?) that triggered this particular post -- as "'funny' federalism." That seems as good a note as any on which to leave off on the subject, at least for the weekend. . . .

Comments

[david giacalone]

Hello, again, George (it's more fun meeting you over In the Forest). I wanted to respond "quickly" to a few questions you have raised.

Is there evidence of med-mal insurers colluding? Of course, collusion is always one possible explanation when prices seem high. My Comment at your prior post, in response to Prof. Grace, focuses on this issue:

With the M-FA exemption stopping federal enforcers from investigating, it's a little hard to have evidence in hand of collusion. However, collusion exists in every other industry, despite the applicability of the antitrust laws. It is far from illogical to believe that it might also take place in an industry that (1) has historically colluded; (2) could be tempted to jointly stabilize or manage prices, or allocate markets, because it "goes through boom and bust cycles, with premiums ebbing and flowing as companies enter and exit the market and investment income rises and falls;" (3) already does far more information-sharing and has more publicly-declared prices than other industries; and (4) has had a federal antitrust exemption for half a century, so has less fear of consequences from collusion.

Are federal antitrust enforcers better than state proscutors? We certainly thought so during the decade that I was at the FTC, but I'll leave this for others to argue. Suffice it to say, a lot of state AGs have little experience in major antitrust litigation, and inadequate resources available to fight major companies.

Is federal antitrust enforcement jurisdiction better? It surely is when multi-state insurers are involved and the alleged conspiracies exist across state lines.

Why just focus on med-mal insurance? It's smart politics to take on a small part of the industry first (especially an unpopular part), even though the same proponents have indeed recommended industry-wide repeal for many years. Have you ever seen what happens when the entire insurance industry feels threatened? [e.g., the McCarran-Fergson Act gets passed virtually overnight.] In fact, twenty five years ago, the FTC angered just one powerful sector, when it wanted to require life insurers to disclose the annual rate of interest earned on whole life policies. It faced a lobbying firestorm that nearly closed down the entire agency, and severely restricted its rule-making powers.

Lifting the med-mal insurer antitrust exemption can be thought of as a pilot project. It can reassure those who fear collusion exists, while showing that antitrust enforcement will not interfere with proper insurer activities.

[david giacalone]

Hmmm: "I'm tired, but it's a good tired." That reminds me of a quip of my own, after pulling an all-nighter to meet a court deadline:

"There's only one good reason to be this tired, and this isn't it."

[Scott McMillan]

Whether it be by "information sharing" or by the use of the same "consultants," other than for concerted political activity, there should be no allowance for any sort of collusion in business decision making between competitors. The exemptions allowed to insurance companies make little sense in the broad scheme of antitrust policy.