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August 05, 2004


david giacalone

George, you've awaken some long-repressed memories for me by discussing the McCarran-Ferguson Act. My main assignment when I first joined the FTC in 1978 was to become an expert on the M-FA exemption to the antitrust laws. I ended up writing the proposal for amending the McCarran-Ferguson Act that was adopted by the President's National Commission for the Review of the Antitrust Laws and Procedures (1979).

It's rare that I see you catastrophizing, but you seem to be doing so here. Let me make a few quick points:

1) Enforcing the antitrust laws is not "regulation" as that term is traditionally used -- no more than enforcing laws against theft and murder.

2) M-FA is far more a symbol of the power of the insurance industry than a valiant tribute to states' rights. The fact that the Supreme Court had held prior to U.S. v. South-Eastern Underwriters Assn, 322 U.S. 533 (1944), that insurance was not "commerce" under the Commerce Clause, made no more sense than the continuned holding today that baseball is not commerce.

3) The fact that insurance is regulated by states is scarcely a good reason to exempt it from the federal antitrust laws. Telephone, gas, electricity, and the learned professions are examples of state-regulated businesses that have no special antitrust exemption. The insurance industry exemption is indeed quite "special."

4) As the Supreme Court said in Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205, 221, 224 (1979), M-FA was passed in reaction to the SEUA decision, with the "primary concern of both representatives of the insurance industry and the Congress was that cooperative ratemaking efforts be exempt from the antitrust laws" as long as they were regulated by the state.

5) Since at least 1978, both federal antitrust enforcement agencies have consistently stated -- as they did separately to NCRALP -- that the joint pooling of data done by insurance companies to assess and underwrite risks would be entirely legal under the federal antitrust laws, because the conduct does in fact create needed efficiencies and enhance competition. To make that point perfectly clear and allay fears, the FTC and DOJ each recommended that the repeal of the M-FA antitrust exemption include explicit immunity for such conduct, even though none was required to allow the practices to continue.

6) Despite having a broad array of congressional leaders as Commission members [see fn. 50], such as liberal politicians Edward M. Kennedy, Jacob K. Javits, Howard Metzenbaum, Peter Rodino and Barbara Jordan, along with conservatives like Orrin Hatch, the final recommendations of NCRALP called for the repeal of the antitrust portion of the McCarran-Ferguson Act, but included the specific protection for joint data pooling and risk assessment.

7) Pooling risk assessment data to allow rate-making is a lot different than price fixing -- which is competitors jointly setting rates. Price fixing should be unlawful, even if state regulators review submitted premium levels.

8) The loss of the federal antitrust exemption should not in any way affect the legitimate operation and regulation of the business of insurance. Many state regulators and attorneys general have long supported repealing the exemption.

9) The issue has come up in the context of health care insurance and malpractice insurance, because doctors and other providers (who cannot jointly negotiate fees) have argued that the existence of the M-FA exemption gives insurers and HMOs unfair bargaining advantages.

Okay, now I shall repress this information again and get back to the business of (under)writing haiku.

david giacalone

After trading emails with Walter Olson and Martin Grace, I want to point out that Sen. Edwards' statements are in fact rather benign. He says that he is against "price fixing," "divvying" up markets, and forms of colluding that raise premiums (targets that are hard to fault). He then points out that, even when not colluding directly, insurers might knowingly set premiums in a coordinated way that keeps premiums high -- and that such conduct would at least receive "antitrust scrutiny" in every other industry.

As many an antitrust plaintiff or prosecutor can tell you, "scrutiny," is a lot different than "condemnation" or "prohibition." The distinction is crucial here, since antitrust scrutiny of interdependent action has become less and less strict (if not totally passe), and top enforcers have been going out of their way to say that information sharing can be procompetitive.

As with most things political or ideological, anti-Edwards folks seem to be cherry-picking his statements for phrases to use to attack him, and then distorting the meaning of even those few phrases. Of course, more even-handed coverage is expected here at Decs & Exs than from more baldly partisan or crusading websites.

Prof. Grace made it clear today that he agrees with me: antitrust would not outlaw the kinds of information sharing done by insurers to assess risk. For additional reference, please see State of FTC Chairman Daniel Oliver to the U.S. Senate (1987, supporting repeal of the M-FA antitrust exemption):

"The tragic irony -- for consumers -- is that McCarran-Ferguson is simply not necessary. States may regulate insurers with or without McCarran-Ferguson. And the forms of insurer cooperation needed for efficiency are perfectly legal under the antitrust laws."

The DOJ/FTC Policy Statement on Health Care Antitrust Enforcement (1996) also makes it clear that many forms of information exchange between competitors that are far less crucial than insurer risk assessment would pass antitrust muster.

Finally, see the Opinion Letter of FTC Staff to Washington State Legislature (2002), where the FTC lawyers explain:

"The antitrust laws do not prohibit information exchanges that are unlikely to harm consumers. The Supreme Court has determined that information exchanges among competitors must be evaluated on a case-by-case basis to determine whether their benefits outweigh any potential anticompetitive effects. [See United States v. United States Gypsum Co., 438 U.S. 422 (1978).] In an assessment of the net effect of a particular exchange, the decisive issue is the impact on consumer welfare. Thus, if a plaintiff cannot show that an information exchange among competing providers is likely to injure consumers, the practice would not be held unlawful."

david giacalone

p.s. The bill proposed by Sen. Edwards and others relating to medical malpractice insurance and M-FA is narrowly focused:

"Notwithstanding any other provision of law, nothing in the Act of March 9, 1945 (15 U.S.C. 1011 et seq., commonly known as the `McCarran-Ferguson Act') shall be construed to permit commercial insurers to engage in any form of price fixing, bid rigging, or market allocations in connection with the conduct of the business of providing medical malpractice insurance. "

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