Health-Care Reform October 19, 2009, 11:16PM EST

Reviving an Old Threat in Health-Insurance Battle

President Obama and some Democrats want to repeal the federal antitrust exemption for insurers. That may not be easy—or effective

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As the battle over health-insurance reform heats up, a 64-year-old decision to shield insurers from federal regulation is being reconsidered.

Last week, the insurance industry finally broke with its tentative support for President Barack Obama's health-care reform efforts. The industry's trade group issued a report claiming a bill just passed by the Senate Finance Committee would hike insurance premiums faster than if no bill were passed. The President fired back in his weekly radio and Internet address on Oct. 17, blasting insurers for "making this last-ditch effort to stop reform even as costs continue to rise and our health-care dollars continue to be poured into their profits, bonuses, and administrative costs that do nothing to make us healthy." The industry is "earning these profits and bonuses while enjoying a privileged exception from our antitrust laws," he said, adding that this is "a matter that Congress is rightfully reviewing."

That was a specific reference to efforts to repeal the McCarran-Ferguson Act of 1945, a piece of legislation that exempted insurance companies from federal antitrust scrutiny. Leading Democrats have been targeting McCarran-Ferguson for some time as a way to inject pricing competition into the industry. Senate Majority Leader Harry Reid (D-Nev.) has called it "anticompetitive and damaging to the American economy." House Speaker Nancy Pelosi (D-Calif.) has spoken of "tremendous interest in our caucus" to overturn the act. Senator Patrick Leahy (D-Vt.), chairman of the Senate Judiciary Committee, is behind a bill that would eliminate the antitrust exemption for the insurance industry. Such lawmakers as Senator Charles Schumer (D-N.Y.) want to add it to the broader health-care-reform legislation.

For a number of reasons, though, repealing McCarran-Ferguson serves better as a threat to get insurers back on board with reform than as an actual device to drive down pricing. "They're sending a signal to the industry—if you throw everything at us, we'll throw everything at you," says Andy Laperriere, a Washington-based policy analyst and managing director at ISI Group.

Most U.S. Markets: One or Two Main Players

McCarran-Ferguson paved the way for state authorities, rather than federal officials, to regulate the industry. According to a 2005 report by the U.S. Government Accountability Office, the act gave the industry a "very limited exemption from the federal antitrust laws… Although Congress had clear authority to regulate insurance, it determined in McCarran-Ferguson that it would be beneficial, as a matter of public policy, to allow the states to continue regulating and taxing such business in most instances."

Proponents of federal insurance regulation say that its absence is one reason why local markets are dominated by massive insurance companies with little incentive to keep consumer costs low. In January, the American Medical Assn. found in its annual survey of the country's commercial health insurance industry that just one or two companies dominate most markets—94% of the 314 metropolitan markets surveyed. "Without rivals to compete against, a large health-insurance company can take advantage of patients by raising premiums and dictating important aspects of patient care without fear of losing business," said AMA President-elect J. James Rohack in a statement.