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Austin Frakt and Ian Crosby on the insurance antitrust exemption
Taxpayers will be best served by insurers with sufficient market power to bargain down provider rates, but with not quite enough power to keep the savings (“rents”) for themselves. That is, we want low provider rates to translate into low premiums. Though liberals may be skeptical that this balance is achievable, it is not at odds with their objectives in principle. After all, one of the arguments for the public option is that it would be a large insurer with commensurately large negotiating power but would use that power on the behalf of consumers.
How to balance the power of insurers and providers is far from simple. Many have pointed to the alleged dominant market position of insurers as a substantial source of high health care costs. However, the health economics literature supports the notion that recent increased market power of insurers does not lead toward monopolistic pricing, but rather it provides a counter-balance to the power held by hospitals and provider groups.
Moreover, insurance companies are partially exempt from federal antitrust law for an important reason: so they can share rate-making data. This function actually benefits small insurers who would not otherwise have sufficient data to properly adjust premiums. Paradoxically, removing the legal cover for data sharing would harm small insurers more than large ones.
Read his whole post, which also has a good public choice analysis of the recent threat to repeal the exemption.
Posted by Tyler Cowen on October 15, 2009 at 11:10 AM | Permalink
Comments
Probably worth pointing out that this particular problem is much more tractable in view of Williamson's classification of transactions costs into frequency, specificity, and uncertainty. The first and last do not change with the antitrust exemption. Specificity, however, does; and this is Frakt's point about "balance of market power."
Posted by: Michael F. Martin at Oct 15, 2009 12:19:15 PM
What is the distinction between "insurers" and "providers" he implicitly makes? Insurers are providers of insurance. They don't buy insurance from insurance wholesalers then turn around and retail it to consumers, as he seems to think. They do buy reinsurance from re-insurers to insure some of their exposure, but that is an entirely different matter.
Low providers rates are low premiums.
Posted by: AADL at Oct 15, 2009 12:22:58 PM
Austin states [McCarran-Ferguson]..."actually benefits small insurers who would not otherwise have sufficient data to properly adjust premiums." Did he mean ..."actually benefits small insurers who would not otherwise have sufficient data to properly adjust premiums quickly enough to avoid some economic downside associated with finding out about a particular (or set of) rate adjustments recently instituted by a large competitor."?
Also this; "Paradoxically, removing the legal cover for data sharing would harm small insurers more than large ones." Is this an a priori claim, somehow safe from scrutiny?
He asks "It is not unreasonable to worry that providers might try to use the ACO structure to lobby Congress and negotiate more favorable Medicare payments and regulation?" I'm convinced it is unreasonable. Know your opponent and prepare for his threats. When possible, block them.
Posted by: RP at Oct 15, 2009 12:39:07 PM
We've got a long way to go on this debate. These people keep getting it exactly wrong. When an insurance bargains down rates, the balance is paid for by me...and the others that maximize cash payment, the only people with the effective incentive to control costs at the micro level. Consumers don't compete with producers, consumers compete with consumers.
Posted by: Andrew at Oct 15, 2009 12:53:03 PM
There's a catch-22 here, isn't there?
The logic behind a public option is that it allows a large pool of customers that reduces premiums. And yet the larger the private insurers get the more attractive targets they become to apply antitrust measures to.
Why not allow them to get as large as they want but regulate prices in the same manner we do utilities?
Posted by: Patrick at Oct 15, 2009 1:39:21 PM
Weren't universities (the Overlap Group) in the last 2 decades NOT permitted to do the same thing, and for the same justification?
Posted by: wintercow20 at Oct 15, 2009 1:41:48 PM
My response is that there is nothing wrong with profit in the insurance industry. Profit leads to a variety of virtuous outcomes. So why be distressed about profits?
Posted by: Seward at Oct 15, 2009 2:21:03 PM
By providers, he clearly means health care providers, who are not the target of anyone's wrath, even though they are a big reason that costs are they way they are.
I'd be interested to see how much better off the average doctor is compared to the average university graduate, and compare those numbers across western nations. A similar comparison of hospital costs would probably be enlightening. How much are middle class Americans paying for having every single hospital bed be suite that beats a $250 a night hotel down the street? Are the increased costs on all of us that much higher due to having to take care of people that are unable to pay for emergency services, and reached that state due to lack of preventive care?
We sure can't blame it all on diet and exercise, since the differences in costs for the same illnesses are so wide between the US and abroad.
Posted by: hibikir at Oct 15, 2009 3:29:26 PM
Sorry, but the person you posted doesn't know what he is talking about when he describes McCarran-Ferguson.
This is pathetic. I'm an antitrust lawyer and have expertise in the McCarran-Ferguson Act.
The McCarran-Ferguson Act does not, repeat does not, permit insurance carriers to agree among themselves as to what they would pay doctors, hospitals or anyone else. The McCarran Act exempts activities that are the "business of insurance" and the US Supreme Court has ruled the business of insurance does not include procurement or agreements among insureds to boycott or refuse to deal with providers.
Doesn't anyone screen this stuff. ????
Here is a link to a recent speach by the head of the Antitrust Division, Chris Varney, citing the many studies, including the Antitrust Commission study in 1989, calling for changes or elimination of McCarran.
http://www.usdoj.gov/atr/public/testimony/250917.htm
Posted by: Bill at Oct 15, 2009 4:19:41 PM
Continuing from my previous comment that McCarran does not permit carriers to agree on what they would pay providers, and thus "bargain down" provider prices through joint conduct, let me also say that the only basis for some exemption relates to pooling of historical loss data. However, there is controversy on whether an exemption is needed for this if it is aggregated and historical. California and its state AG has subjected insurance carriers to antitrust in their state (thereby in effect repealing McCarran) while opining that historical data aggregation is subject to the rule of reason and would not be challenged by the State AG. So much for that argument.
Now, as to pooling of data, some have argued that there should be compulsory pooling because some carriers are so large in their respective fields that there data would be necessary to underwrite. The industry has opposed compulsory pooling, although insurance regulators do gather loss data which is made available over time.
This site should be aligned with promoting competition. It is sad to see insurance PR firms making up stories and sending them off on the web. May I suggest that instead of posting some uninformation that the site post studies by the Antitrust Division, GAO and FTC on this subject. I think they have the interests of consumers and competition in mind over the interests of those in the industry.
Posted by: Bill at Oct 15, 2009 4:28:56 PM
Here is a link to the ABA Antitrust Section urging the repeal of McCarran Ferguson. http://www.abanet.org/media/youraba/200607/article07.html
Posted by: Bill at Oct 15, 2009 4:58:59 PM
I'd be interested to see how much better off the average doctor is compared to the average university graduate, and compare those numbers across western nations.
It is rather simple. US docs make 2-5 times more money than their counterparts in civilized countries. Nurses also make 2-4 times more money. It adds pretty quick.
Here is wage data for a county hospital, good, but nothing extraordinary:
www.contracostatimes.com/public-employee-salaries
(Select Santa Clara in Region pull-down menu).
Hospital recovers about 20% of its expenses from insurance providers, MediCal and private. PC commissars prohibit collecting patient immigration status, but anywhere from 30% to 60% are illegals.
Can US provide first-class medical care to 10 million illegals and their children and pay doctors quarter million and up?
You tell me.
Posted by: Mick at Oct 15, 2009 6:06:03 PM
Here is a link to a US Supreme Court decision holding that the McCarran-Ferguson exemption does not apply to procurement practices of insurance carriers as procurement is not "in the business of insurance. See Pireno, http://supreme.justia.com/us/458/119/case.html
Thus, insurance companies cannot agree on what to pay providers, and the argument that "taking away" McCarran immunity will somehow weaken carriers so they cannot negotiate a good deal for consumers is more than bogus.
Posted by: Bill at Oct 15, 2009 7:04:14 PM
Bill
Where did it say that insurers can collude on payments to doctors?
It said that they have more market power to negotiate with providers.
Where did it say that states can not regulate insurers?
The argument is that the balance of power in many states rest with the providers. They, the providers, can refuse to do business with insurance companies as they see fit. If the market has many small insurance companies, they can not risk being shut out of provider networks and are less likely to impose measures that might anger providers.
Bill your comments maybe good enough for government work but they distort (ignore) what is actually written in the links.
Posted by: DanC at Oct 15, 2009 7:55:44 PM
Dan,
Your comment says: "If the market has many small insurance companies, they can not risk being shut out of provider networks and are less likely to impose measures that might anger providers."
The post posited that McCarran gives carriers power to bargain with providers, and your comment above implies that individual carriers will be assisted by McCarran in dealing with providers.
McCarran does not permit collective conduct by carriers in negotiating with providers.
Secondly, as to the argument that McCarran's loss would damage small providers because of an alleged inability to share loss data, I would point out that California has applied the antitrust law to insurance (in effect repealing McCarran at the state level) and the State AG stated, as would most antitrust lawyers, that the carriers can pool aggregated historical loss data under the antitrust laws, much as a trade association can aggregate historical data within the antitrust laws. So, McCarran's existence with respect to that argument is weak. (Now, let me say, some argue that there should be a safe harbour for this, and that's fine with most antitrust practictioners.)
But, at a more practical level, there is nothing that compels a dominant carrier to share aggegate loss data. Nothing in McCarran compels a large carrier to share any loss data with another carrier.
The post was particularly bothersome because it portrayed repeal or modification of McCarran as something that was going to injure the consumer. Far from it. It also portrayed this as something Congress suddenly found as interesting. Far from it. These are periodic hearings that have been the focus of much debate.
Posted by: Bill at Oct 15, 2009 8:14:39 PM
I believe, as Dan suggests, that Bill has misunderstood why we believe repeal of McCarran may decrease insurer market power vis a vis providers. I attempted to address his concerns in the comments to the post to which this blog links: http://theincidentaleconomist.com/antitrust-and-health-reform/
Posted by: Ian Crosby at Oct 15, 2009 9:02:08 PM
If the belief is that increasing insurer market power is facilitated by having McCarran--and this is the argument--then market power can be used for any purpose. It is not limited to using it to benefit consumers. This is a strange argument, that we should create market power in a seller (and remember, McCarran can't be used for agreements between buyers) in order to improve competition in another market. Were insurance companies so generous that we would chose to give them market power without a requirement that they give us lower prices. If there are dominant health insurers in a market, is giving them market power vis a vis consumers, and not just providers, through an antitrust exemption a good idea?
Posted by: Bill at Oct 15, 2009 9:15:42 PM
In the interest of intellectual honesty, I will admit that I read the initial post as implying that McCarran immunity would be used by carriers to jointly bargain down the price to providers. In reading the materials again, I can see that is not the case: that the argument is that McCarran gives insurance carriers collectively market power, and with that market power, they can each individually negotiate with providers. But, my argument is the same: giving an antitrust exemption that creates or facilitates market power vis consumers on the belief that market power will also be used against providers is a poor public policy choice. First, McCarran doesn't give market power to carriers viz providers--carriers can't agree or do anything collectively against providers. McCarran does give carriers the right to agree on rates, terms and other matters viz consumers, and exchange present and future rates with other carriers.
As to the literature that carriers that have market power may use it to get better terms, I have no doubt that is true. But, that may also be a problem: a dominant Blue Cross carrier may demand a most favored customer clause from a hospital as a means of forstalling entry by an HMO which would seek some differentiating discount in exchange for moving business. Alternatively, a dominant hospital in a small community may very well like the exclusive relationship with a dominant carrier making it unlikely that a clinic offering hospital outpatient services would likely get a foothold in the market.
If you believe in markets and competition, you should be careful in accepting the siren song that if we give someone market power they will exercise it in the consumers interest.
Posted by: Bill at Oct 15, 2009 9:31:08 PM
Bill
You seem to want to argue that McCarran does some damage. What is it.
Does it encourage price fixing as Leahy claims? Of course not. Does it stop states from imposing regulations? No, of course not.
What does it do. It allows insurers to share information about risks. And it leaves states to regulate the industry.
Ms Varney does not dispute the value of information sharing, she thinks the Justice department would still allow exemptions. The big change is that the Federal government, using the power of the Justice department, will be in control. For those in Washington it is a battle for Federal regulatory control over the insurance industry. The rest is noise.
And please carefully read the two links.
"the health economics literature supports the notion that recent increased market power of insurers does not lead toward monopolistic pricing, but rather it provides a counter-balance to the power held by hospitals and provider groups."
Nothing about collusion or anything like it. i.e. We have little (really no) data that insurance companies are charging prices that vary from what you would see in a competitive market.
"Greater health insurer market concentration is not associated with monopsony power and suggests that insurers use their power to offset monopolistic providers".
Posted by: DanC at Oct 15, 2009 9:37:32 PM
Dan,
Your comment is legally incorrect. McCarran permits carriers to agree on rates, adopt rating plans, etc. I'll see if I can find a link for you to the ABA Antitrust Insurance Handbook.
Posted by: Bill at Oct 15, 2009 9:45:40 PM
McCarran, as I understand it, leaves such issues to the individual states. So I suppose if a state wanted to encourage rate fixing it could but nothing in McCarran encourages it.
This is really a pre New Deal view of the world with much greater control in the hands of the states.
Also, you might want to read the writings of the newest Nobel winner. Providers and insurers may have come to a much better market solution then can be expected from a plan imposed from regulators in Washington.
Posted by: DanC at Oct 15, 2009 10:02:00 PM
In case anyone is interested in the question of whether McCarran facilitates power on the buy side and what conditions buy side power needs to have for it to be beneficial for consumers, here are some additional comments that I posted on the web article that was the source of this discussion:
Not to be a pest, I looked at one of the articles on increasing monopsony power by healthcare plans and consumer effects that formed the basis for the initial premise that McCarran somehow increased buyer power (it only affects competition on the sell side between carriers, not the buy side) and this would be beneficial to consumers.
My initial reaction would have been that, unless the monopsonist was a coop non-profit that redistributed gains back to consumer owners, that monopsony would not necessarily benefit consumers. And, lo and behold, that’s what the article said: monopsony has to be associated with non-profit ownership; having a private carrier with monopsony power does not solve the problem.
So, going back to this post, McCarrans facilitation of concentration on the sell side does not benefit consumers unless there is a monopsony of a non-profit consumer HMO. I do not see how McCarrans facilitation of market power on the sell side translates into power on the buy side (if two carriers agree on rates, but can’t agree on what to pay providers, sell side price goes up but nothing should change on the buy side since that can’t be coordinated). Furthermore, you would have to posit that both carriers were nonprofit monopsonists who distributed gains back to their customers.
(I would also add that even if the non-profit monopsonist was consumer controlled there would be a risk that its managers would capture the gains.)
Posted by: Bill at Oct 15, 2009 11:52:48 PM
