Policy

Promoting Competition Through Policies Unlikely to Promote Competition

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In today's New York Times, Supercapitalism author Robert Reich declares "we've got to make sure health insurers compete for every one of our dollars." Competition can be a good thing, but it's not at all clear that his preferred solution would actually result in a more competitive insurance market.

What Reich wants to do is get rid of McCarran-Ferguson, the "limited" antitrust exemption that insurance companies currently enjoy. Would doing so actually increase competition or bring down premiums? Probably not.

Competition!

When the Congressional Budget Office looked at legislation that would repeal the antitrust exemption, it found that "whether premiums would increase or decrease as a result is difficult to determine, but in either case the magnitude of the effects is likely to be quite small." Nor is it at all certain that dumping the exemption would increase competition. For example, via Michael Cannon, here's Cato adjunct and professor of law and medicine at the University of Illinois College of Law David Hyman:

Hyman considers it unlikely that repeal [of the antitrust exemption] would fundamentally change the nature of the market. While it might increase competition in some markets, he says, it could actually decrease it in others, such as those where small insurers survive because they have access to larger providers' data. Changes to the act could therefore hurt smaller companies more than larger ones, he says.

Reich also points to statistics showing that in many states, insurance giant Wellpoint is the dominant insurance provider. That's true, but it's not traditionally been considered a good reason to flex the government's antitrust muscle. Here's Hyman again, this time writing with William Kovacic in Health Affairs:

Even if it could be shown that a health insurer has market power, the issue for antitrust purposes is whether the insurer has obtained or maintained that power through improper means. Absent such evidence, the sole fact that a market is concentrated is unlikely to attract the interest of an antitrust enforcer. With one exception, high levels of concentration have never been thought sufficient by themselves to merit an antitrust challenge. In the late 1970s the FTC briefly flirted with using a "no-fault" theory of antitrust liability to deconcentrate various industries without proof of improper conduct. It dropped this approach after developments in the case law and criticism from antitrust experts led it to conclude that no-fault cases would receive a hostile reception in the courts. No competition agency has sought to revive this strategy in the intervening twenty-odd years.

In other words, one would need to do more than demonstrate that an insurer has a high market share; one would need to demonstrate particular anti-competitive behavior. Reich doesn't do that, but he does make time to gripe about insurance company profits. They sure are high! "Health insurers are making boatloads of money," he writes, "America's five largest health insurers made a total profit of $12.2 billion last year." Boatloads! That's a lot!

Thing is, despite the billions, there's some evidence that health insurance company profit margins really aren't that high, particularly in comparison to other industries. Here's a 2009 article in U.S. News: "Overall, the profit margin for health insurance companies was a modest 3.4 percent over the past year, according to data provided by Morningstar. That ranks 87th out of 215 industries and slightly above the median of 2.2 percent."

That article is title "Why Health Insurers Make Lousy Villains," but, of course, that's exactly how Reich is hoping to portray them. Just as when gutting the insurance exemption was last proposed (as a threatening response to a politically inconvenient report from the insurance lobby), the thinking here seems to basically be that health care is really expensive, and reform legislation isn't likely to pass, and that's just not right! So let's find a bad guy to beat up. It's vindictive politics, not prudent policy. But here's what's really telling: The health insurance industry is fairly nonchalant about the proposal; according to Kaiser Health News, "defeating the bill is not a top priority for America's Health Insurance Plans." If the insurers don't care, how effective a punishment can it be?