McCarran-Ferguson and a cross-state health market

Republicans accidentally began this debate earlier this year when they called for allowing purchase of health policies "across state lines," and for tort reform.
Written by Dana Blankenhorn, Inactive

Last week, after the AHIP health insurance lobby issued a report saying the Senate Finance Committee health reform package would mean higher insurance rates Senate Democrats talked openly of "repealing McCarran-Ferguson."

Observers might well ask, "What is McCarran-Ferguson and why should I care?" (That's Sen. Pat McCarran to the right. Co-sponsor Sen. Homer Ferguson is below.)

The McCarran-Ferguson Act defines insurance as a state activity, meaning it's not interstate commerce. Before the law was passed, in 1945, courts held that insurance wasn't even commerce.

A bill to give the Federal Trade Commission some authority over insurance was introduced in May by Rep. Peter DeFazio as HR 1583. It currently has 9 co-sponsors, all Democrats.

But when Senate leaders talked about McCarran-Ferguson this week, they described it as giving insurers an "anti-trust exemption."

That is not entirely true in law, but has often been true in practice.

The federal government has no authority to regulate insurance or the insurance industry. In practice this means that if only one or two companies choose to enter a state market regulators are helpless to prevent a monopoly.

It is currently possible to buy some types of insurance across state lines. When I bought my first life insurance policy in the 1980s, the fact my carrier was based in New York was a selling point. New York regulation, I was assured, was very strict, so my contract would be honored.

But this is an exception. Drivers are required to carry car insurance, but they can only buy it within the state where they are registered to drive. You can't base a Los Angeles policy on a Salt Lake City risk rating.

Republicans accidentally began this debate earlier this year when they called for allowing purchase of health policies "across state lines," and for tort reform.

In the former case politicians who made these statements were careful not to suggest the creation of a single national market for health insurance. Liberals like former Gov. Eliot Spitzer are also warning Democrats to only amend McCarran-Ferguson in terms of antitrust, fearing it will undercut state regulation.

Their followers, however, could talk about a national market. And did.

Creation of a national health insurance market would leave legislators with two choices.

  1. A national regulatory scheme to go along with the new market. This would require the creation of a new agency, or a bureau within an existing agency, and the writing of complex regulations, costing time and money.
  2. On the other hand there is a reason most corporations are technically based in Delaware, and most credit card companies are technically based in South Dakota. Laws in those states are highly favorable to the interests of those industries.

A limited form of the second idea was probably behind the original Republican suggestion. If New York regulators are imposing high costs on health insurers, let people buy policies from Vermont. But if you're going to let New Yorkers buy from Vermont why not let them buy from Las Vegas?

One reason might be that health insurance carries more risk of litigation than, say, life insurance or credit cards. A state could set itself up as a health insurance haven by establishing rules that did not require claims to be paid, giving jurisdiction to a court that would always hold for the industry.

That, however, would guarantee a rush to impose national regulation. Thus the careful language on buying coverage "across state lines" from conservatives, and only applying it to anti-trust issues among liberals.

Then there's the question of tort reform. It has become a staple of conservative rhetoric to insist that tort reform be part of any health reform deal, in order to lower malpractice premiums.

But insurance torts, including malpractice torts, are currently state torts. Any national standard for such suits would, of necessity, lead to national regulation of claims. And once you're regulating court claims in U.S. courts it's a very short step to regulating markets in Washington.

Thus even the suggestion of repealing McCarran-Ferguson was a powerful political blow. It made the idea of a national market for health insurance, controlled by national regulators, part of the debate. It made something previously thought unthinkable sound downright conservative.

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