That insurance regulation rests primarily with the fifty states has become axiomatic and even cliché. Around the country are operational state insurance commissions, and for much of the twentieth century, the federal government has let these agencies be. The Employee Retirement Income Security Act’s (ERISA) sweeping preemptive force is cabined by a savings statute that allows the business of insurance to escape federal employee benefit plan regulation. And the McCarran-Ferguson Act, generally speaking, provides that three comprehensive federal statutes sanctioning anti-competitive, unfair, and deceptive market activity—namely the Sherman Act, the Clayton Act, and the Federal Trade Commission Act—do not reach the insurance industry inasmuch as the business of insurance is regulated by the states.
This state-centric arrangement has come under fire in the last couple of decades, with the federal government staking its ground regulating insurance first around the periphery and then increasingly at the core of the insurance industry. Some federal statutes make certain practices with certain aspects of an application for or policy of insurance illegal, whether proscribing genetic discrimination, as the Genetic Information Nondiscrimination Act (GINA) does, or limiting the pre-existing condition as the Health Insurance Portability and Accountability Act (HIPAA) did. Also regulating health insurance at the federal level is the monumental Patient Protection and Affordable Care Act of 2010 (PPACA or “Obamacare” as it is more popularly known). The PPACA statutorily mandates that some health insurance policies and group health plans eliminate certain provisions altogether, such as lifetime limits on health benefits and the pre-existing condition limitation. Perhaps even more radically, the PPACA delegates authority to the Department of Health and Human Services to regulate the contents of health insurers’ and plans’ summary of benefits and even the policies themselves.
All the while, a bigger proposal for federalizing insurance laid under the surface. Something else was being debated amid the political grandstanding accusing conservatives of callously turning a blind eye to the poor’s unmet health care needs and liberals of fashioning monstrous “death panels.” These debates considered repealing the McCarran-Ferguson Act. Timothy Noah, Busted Trust, Slate (Oct. 14, 2009), http://www.slate.com/id/2232443/ (last visited Jul. 10, 2011).
Though there would be significant symbolic import to repealing a statute prescribing a policy of federalism, as Professor Kenneth Abraham suggested in Insurance Law & Regulation, favoring state regulation in an era of increasing federal commercial regulation, some commentators posit that McCarran-Ferguson might not have much of an effect on its own, with other theories and defenses that can take up its slack. According to Phillip Areeda’s and Herbert Hovenkamp’s treatise, the antitrust laws might already apply to the insurance industry’s collaborative activity in situations lacking sufficient state regulation or to activities that are sufficiently interstate; might not create antitrust liability in the first instance; or would be saved by the defense of state action immunity under Parker v. Brown, 317 U.S. 431 (1943). Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law § 219d (2000). Nonetheless, Professors Areeda and Hovenkamp also maintain there may be some ways in which McCarran-Ferguson may add something to the overall mix of antitrust liability, such as providing a more expansive defense than does Parker immunity. Id.
Let’s flesh this out a bit, first by examining the first-level statements of each defense’s elements. The Parker Court exempted from federal antitrust scrutiny acts of government and public officials implementing a state law that requires anticompetitive conduct. Parker v. Brown, 317 U.S. 341, 352 (1943). That being said, states may not confer Parker immunity simply by allowing private parties to engage in anticompetitive conduct. Cantor v. Detroit Edison Co., 428 U.S. 579, 592-93 (1976). “It is not enough that . . . anticompetitive conduct is ‘prompted’ by state action; rather, anticompetitive activities must be compelled by direction of the state acting as a sovereign.” Goldfarb v. Virginia State Bar, 421 U.S. 773, 791 (1975). The Midcal Aluminum case gave further definition to Parker immunity, stating that “the challenged restraint must be ‘one clearly articulated and affirmatively expressed as state policy’ [and] the policy must be “actively supervised” by the State itself.” California Liquor Dealers v. Midcal Aluminum, Inc., 445 U.S. 97, 105 (1980) (citing City of Lafayette v. Louisiana Power & Light Co., 435 U.S. 389, 410 (1978) (Brennan, J.)).
By contrast, the relationship between state insurance regulation and acquiring McCarran-Ferguson immunity can be much looser; to qualify, “[the states] do not have to expressly authorize a specific activity, or proscribe it, for the exemption to apply. . . . It is enough that a detailed overall scheme of regulation exists.” Klamath-Lake Pharmaceutical Ass’n v. Klamath Medical Service Bureau, 701 F.2d 1276, 1287 (9th Cir. 1983).
To make this abstract comparison more concrete, let’s next look at a hypothetical. For a situation similar to FTC v. Ticor Title Insurance Co., 504 U.S. 621 (1992), imagine that a group of liability insurance providers conspired to fix the prices they charge for premiums. Without any defenses available, price-fixing between and among competitors may be per se illegal under the Sherman Act. United States v. Socony-Vacuum Oil Co., 310 U.S. 150 (1940). Enter McCarran-Ferguson; because state insurance commissions regulate premium setting, McCarran-Ferguson immunity may save the cartelizing insurance companies from antitrust liability. There may be some room for debate whether the price-fixing scheme somehow is an effort to “boycott, coerce, or intimidate,” 15 U.S.C. § 1013(b) (2006), but otherwise, immunity is fairly easily found.
Now consider this same scenario under Parker immunity. Whether state action immunity will lie depends on the nature of various state insurance agencies’ methods of premium ratemaking. Some actually make rates, though that approach is rare. Abraham, supra, at 136. Other regulatory programs for setting premiums require prior approval by an insurance commission before an insurance company can use them or agency approval after proposed premium rates have been filed with the state commission beforehand. Id. at 137. Others still allow insurers to increase and decrease rates within an allowable range, a practice called “flex rating.” Id. And some agencies will just let private insurers prescribe rates through market competition. Id. Many of these regulatory schemes would not form a basis for Parker immunity, especially those that require insurer competition in the market. Furthermore, that state insurance commissions mandate regulatory approval of premium rates as a general matter does not excuse anticompetitive means by insurers to create these rates. Cf. FTC v. Superior Court Trial Lawyers Ass’n, 493 U.S. 411, 424-25 (1990) (holding that even though private parties may petition the government to allow them to engage in anticompetitive conduct, an antitrust violation may occur if their methods of petitioning are unreasonable restraints on trade in themselves). Even if an insurance commission allows these practices, as noted above, such authorization of private-party collusion does not necessarily qualify for Parker immunity.
Professors Areeda and Hovenkamp recognize that there is such a the gap between Parker and McCarran-Ferguson. And for them, that gap might justify a repeal. Their treatise states:
To the extent these three reasons do not apply to a practice, repeal seems desirable, for the effective impact of McCarran is to immunize activities (1) that would normally be antitrust violations when engaged in by private parties, and (2) where there is inadequate public supervision to qualify for Parker supervision. Thus the residual impact of repeal would be to force states either to regulate more actively themselves or else leave provable antitrust violations to the antitrust tribunals rather than the unsupervised discretion of private firms.
Areeda & Hovenkamp, supra.
But such unsupervised discretion might ultimately be more favorable to consumers of insurance. Subjecting the insurance industry to the antitrust laws would mire insurance companies’ in-house legal departments in additional legal research and drive them away from other matters of corporate policy-making. To the extent that an insurance company wishes to place these legal issues on the desks of outside counsel, the insurance industry may then spend millions in the aggregate on legal fees. And this says nothing of the possible liabilities for treble damage suits under the federal antitrust laws. See Abraham, supra, at 189. As per a discussion on this topic I had with Professor Kircher, the effects could be even more painful for small, local insurers. In any case, the risk thus arises that these additional costs would be placed on the shoulders of insureds through higher premiums.
Such would be the result if a new law swamped an entire industry with new regulations, but the insurance industry’s antitrust exemption is especially valuable given the history of collaboration among insurance companies, from standard ISO policy forms to data pooling. Abraham, supra, at 32-34, 189-90. These collaborative practices allow insurance companies to assess their risk and liability exposures more efficiently. To the extent such pooling might pose antitrust problems–whether they actually would is a different question–insurance companies may then be forced to endure additional uncertainty as to actuarial data and underwriting. This too creates a risk of rising premiums.
Imposing even greater costs still is the system variability and unpredictability of the antitrust laws themselves. The line between antitrust liability and no antitrust liability for a given trade practice is a blurry and moving one. To be sure, the default rule under the Sherman Act for antitrust violations in section 1, which relates to conspiracies and agreements to restrain trade, is the Rule of Reason. Texaco Inc. v. Dagher, 547 U.S. 1, 5 (2006). The rule’s name speaks for itself: it is an overall reasonableness test. State Oil Co. v. Khan, 522 U.S. 3, 10 (1997) (recognizing that the “Court has long recognized that Congress intended to outlaw only unreasonable restraints” on trade). Reasonableness tests are notorious in other areas of the law for their lack of predictability. Cf. Ira E. Williams, First, Do No Harm: The Cure for Medical Malpractice 52 (2004) (“A legal definition for an acceptable standard of care found in many state statutes is ‘one used by a reasonably prudent practitioner.’ This is so vague as to be meaningless.”). Even the categories of per se illegal restraints on trade do not inject much certainty into the antitrust analysis, with the Supreme Court’s move away from per se illegality for some trade practices toward more case-by-case reasonableness inquiries and characterization analyses. Lawrence A. Sullivan & Warren S. Grimes, The Law of Antitrust: An Integrated Handbook (2d ed. 2006); accord, e.g., FMC v. Svenska Amerika Linien, 390 U.S. 238, 250 (1968) (“Under the Sherman Act, any agreement by a group of competitors to boycott a particular buyer or group of buyers is illegal per se.”); Northwest Wholesale Stationers, Inc. v. Pacific Stationery and Printing Co., 472 U.S. 284 (1985) (limiting per se illegality to some and not all horizontal group refusals to deal). And so, Professors Areeda’s and Hovenkamp’s second point–that some practices may not violate the antitrust laws in the first instance–is exceedingly difficult to quantify.
These considerations all demonstrate that McCarran-Ferguson does pull some weight in the antitrust and trade regulation fields, whether as an objective doctrinal matter or in terms of creating expectations upon which insurance companies can rely in their own internal legal compliance programs.