It looks as though I may have missed the biggest bit of news hidden away in the Kerry-Edwards campaign's proposals for medical malpractice reform, discussed below.
In his link to the previous post, Walter Olson (Overlawyered) points out the campaign's unusual "failure to raise federalism objections which ordinarily are front and center in Democratic resistance to liability reform at a national level." He is right to raise that question, because it appears that one of the principal goals of the Kerry-Edwards proposal is to chip away at the statute that has served as the cornerstone of American insurance regulation for the past 60 years.
If you re-read the quote from the Kerry-Edwards campaign site in the preceding post, you may note one provision on which I did not comment. For purposes of lowering medical malpractice insurance premiums, the Two Senators Named John propose to:
Eliminate the special privileges that allow insurance companies to fix prices and collude in ways that increase medical malpractice premiums.
"'Special privileges?' What's that about?" you may wonder, as well you should. The answer is to be found, with a little help from Google, in a May 20, 2003 Washington Post editorial, still available on Senator Edwards' own campaign site. The first reform proposal Senator Edwards offered in that editorial -- before reducing the number of "frivolous" suits or reducing "preventable medical errors" -- is this:
The most critical step is reforming the insurance industry. Today insurance companies use slow and burdensome processes to discourage both doctors and patients from filing legitimate claims. Worse still, these companies can fix prices and divvy up the country in order to drive up their profits. Even when companies don't explicitly collude, they set their rates based on a trade-group loss calculation that they know other companies will follow. In any other industry, this kind of conduct would be subject to scrutiny under the antitrust laws. But an obscure 1945 law gives insurance companies a broad antitrust exemption. Because of the insurance lobby's influence, Congress has even blocked the Federal Trade Commission from investigating insurance company rip-offs. These special privileges must go.
The "obscure 1945 law" to which the Senator refers is the McCarran-Ferguson Act, 15 U.S. Code, sections 1011-1015, (viewable here), which embodies the very conscious decision of the Congress -- a then-Democratic Congress -- to leave most regulation of the insurance industry to the states, rather than to the federal government. Here is a compact summary from the American Medical Association:
The McCarran Act is the federal law authorizing state regulation of insurance. The act also provides a limited federal antitrust exemption for the business of insurance, subject to state regulation and oversight, for activities such as joint data collection that help foster a competitive marketplace benefiting consumers. Furthermore, the exemption does not insulate insurers from the enforcement of state or federal antitrust laws in the context of anti-competitive business practices such as boycott, coercion or other intimidation in the marketplace.
The roll-back of McCarran-Ferguson -- and therefore the expansion of federal regulation of the insurance industry and the reduction or elimination of well-established state authority -- has been on the agenda of the plaintiffs' bar for many years. As recently as 2003, at about the time he wrote that editorial, Senator Edwards was a co-sponsor (with Senators Leahy, Kennedy, Feingold and Boxer among others) of the Medical Malpractice Insurance Antitrust Act of 2003, Senate Bill 352, the substance of which is contained in this paragraph:
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.
The sole purpose of the bill is to repeal McCarran-Ferguson -- but only as to medical professional liability insurance, and only in connectio with activities (the nasty-sounding "price fixing, bid rigging, or market allocations") as to which it is virtually certain that the states already have full authority to act. Not only do the individual states have the requisite authority to address claimed anti-competitive activity directly, each state also has the power and incentive to launch a direct assault on any insurance rate that is genuinely "too high." Every state already prohibits insurers from charging rates that are excessive or discriminatory, and in many states -- California among them -- premium rates must be pre-approved by the Department of Insurance before they can be used at all.
Presumably, the elimination of McCarran-Ferguson from medical malpractice insurance is intended as a prelude to repealing it altogether, "federalizing" insurance regulation as a whole. Regardless of the merits of that idea, it is troubling that the Kerry-Edwards campaign has seen fit to bury such a fundamental change in vague language appended as little more than a footnote to its other malpractice-related proposals.
(Postscript: Thanks as well to Medpundit for linking the previous entry on this topic.)
For Further Reading:
The Congressional Research Service of the Library of Congress prepared a succinct and evenhanded analysis of Senator Leahy's bill, which identifies the arguments on both sides.
Those who want a more detailed economic analysis of how McCarran-Ferguson affects pricing and competition in insurance might review an article written by Professor Patricia M. Danzon of the Wharton School of the University of Pennsylvania, for the Cato Institute in the early 1990's, entitled "The McCarran-Ferguson Act Anticompetitive or Procompetitive?" Here is Prof. Danzon's summary of the reasons favoring collective action and information sharing among liability insurers, i.e., the benefits of the sort of activities that would be prohibited under the Kerry-Edwards proposal:
In fact, it is highly likely that repeal would actually reduce competition, increase the cost of insurance, and reduce the availability for some high-risk coverages, because the threat of antitrust litigation would make insurers unwilling to engage in efficiency-enhancing cooperative activities.
Insurers are in the business of assuming risk. Collective activities that increase information or spread risk among insurers tend to reduce the price of insurance. Collective action is most important for loss forecasting and pricing accuracy. The fair or competitive price of an insurance policy is equal to the present value of expected losses (including claim adjustment or litigation expense), discounted to reflect expected investment income and adjusted for taxes and a normal return on capital. Forecasting expected losses on a pool of policies is relatively simple for stable lines of insurance such as life insurance, where losses across policyholders are uncorrelated and trends over time are stable. For any pool of risks, the predictive accuracy achieved with a given number of policies is lower, the larger the variance of the underlying loss distribution, the higher the correlation between losses for individual policyholders in the pool, and the less certain the estimates of the parameters of the underlying loss distribution.
All of the factors that tend to undermine predictive accuracy for insurers apply more to liability insurance lines than to life insurance and are most severe for general liability, because general liability losses are highly dependent on the trends in tort law. The fact that both the frequency of claims and the size of awards against policyholders are influenced by trends in tort law induces a positive correlation of outcomes for individual risks in the pool. Differences in judicial rulings across jurisdictions and changes over time mean that the parameters of the underlying loss distribution cannot be estimated with precision.
Unpredictability is greater, the longer the duration of the liability. The so-called long tail of liability is more extreme for general liability than for other lines because in most states the statute of limitations for product liability does not begin to run until the discovery of the injury giving rise to the complaint, which may be many years after the insurance policy was written. The average lag between pricing the policy and paying out on claims is around five years for general liability and may be as long as twenty years or more for coverage of long-lived capital equipment and products that may be linked to cancers with very long gestation periods.
In addition to the uncertainty created by a long exposure period during which rules of tort law may undergo dramatic change, general liability is characterized by a huge range in possible losses for any policyholder. Although most policyholders will have no claims in a particular policy year, there is a small chance of a multimillion dollar loss in the event of a severe personal injury with a large pain and suffering award, multiplied manyfold if there are multiple claims from the same product line. Interstate differences in tort regimes and the potential for forum-shopping by plaintiffs exacerbate the uncertainty.
Those characteristics of the underlying loss distribution--high variance, high correlation, and imprecise parameter estimates because of dependence on tort regimes that differ across states and over time--mean that the experience of any single insurer typically gives a very imprecise estimate of expected losses for a given class of insureds in a single state. Precision in loss forecasts can be increased by pooling the loss data of multiple insurers, provided that the losses reflect similar policy provisions. Because the losses for a particular policy year are paid out over many years, the accuracy of loss forecasts requires tracking and analyzing payout patterns (loss development) and trends over time in the underlying loss distribution. Thus, as long as the underlying tort system remains unpredictable, loss forecasts for liability insurance will remain imprecise and there will be gains from using common policy forms and pooling loss experience, including estimation of loss development and trends over a period of years.