While President Obama plays Hamlet on whether to push hard for comprehensive health care reform, House Speaker Nancy Pelosi says her next move will be repeal of the 1945 McCarran-Ferguson Act, the insurance industry’s antitrust exemption. A bill is slated to come to the floor of the House later this week.
It is the wrong move at the wrong time. Without comprehensive insurance reform, beefed up antitrust enforcement of the industry could backfire and wind up raising health care costs.
At first blush, the repeal would seem to have a strong economic logic to back its populist appeal. A recent American Medical Association survey showed the health insurance industry is highly concentrated, with a majority of the 314 U.S. metropolitan areas dominated by just one or two carriers. 94 percent of those markets are categorized as "highly concentrated," according to standards set by the Justice Department and Federal Trade Commission.
Under traditional antitrust theory, breaking up these monopolies and duopolies should lead to more competition and lower health insurance premiums. That was the logic behind liberals’ push to create a public health insurance option, which was seen as a way to guarantee price competition in every market in the country.
But do we really want a more fragmented insurance industry? Do the primary purchasers of health care services — insurers — have too much market clout vis-à-vis the hospitals, the physicians, drug companies and the rest of the medical industry? Or is it possible they have too little?
High prices for medical services are clearly one of the major drivers of skyrocketing health care costs. In a famous 2003 study in the journal Health Affairs (headlined "It’s the Prices, Stupid"), economists found that the cost of the average stay in an American hospital was three times higher than in other industrialized nations. Among the chief reasons: "The inputs used for providing hospital care in the U.S. — health care workers’ salaries, medical equipment, and pharmaceutical and other supplies — are more expensive than in other countries." Insurance margins had nothing to do with it.
After a recent review of the health economics literature, Boston University health economist Austin Frakt and attorney Ian Crosby noted that increased market power for insurers didn’t lead to monopolistic insurance pricing. "Rather it provides a counterbalance to the power held by hospitals and provider groups."
Even the Congressional Budget Office found that a stand-alone bill that removed the insurance antitrust exemption "would have no significant effect on premiums that private insurers would charge for health insurance."
Trustbusters determined to go after a health care target would do more to control health care costs by going after hospital mergers and consolidations, which have sharply lowered competition in most markets in recent years, Frakt and Crosby suggested.
We’ve already seen what a highly fragmented insurance market delivers. The notoriously overpriced small group market in each of the 50 states has a median of 27 insurance carriers. Do we want to extend that fragmentation to the entire health insurance market?
It’s never easy, especially for Democrats, to lend political cover to America’s Health Insurance Plans, the trade group for the insurance industry. The group opposes repeal of McCarran-Ferguson, although not too strenuously. So, if the Democrats are intent on going after the insurance industry, perhaps they should try a different tactic. Why not give insurers more power to confront their mirror-image monopolists on the health care playing field: the physician guilds, the market-controlling hospitals, and the patent-protected drug manufacturers?
If given extra powers (like the right to jointly bargain for common pricing in each market), insurers would have to be policed so they didn’t use their extra clout to pad profits. That would require strong regulators — like those exchanges contained in the House and Senate bills. In other words, it would have to be part of comprehensive health insurance reform.
I’m afraid the cry to break up the insurance monopolies will only take us farther away from a rational and transparent health care pricing system.
Merrill Goozner , is the author of "The $800 Million Pill: The Truth behind the Cost of New Drugs."