[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
HEALTH INSURANCE INDUSTRY ENFORCEMENT ACT OF 2009
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON COURTS AND
COMPETITION POLICY
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
ON
H.R. 3596
__________
OCTOBER 8, 2009
__________
Serial No. 111-120
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
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COMMITTEE ON THE JUDICIARY
JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California LAMAR SMITH, Texas
RICK BOUCHER, Virginia F. JAMES SENSENBRENNER, Jr.,
JERROLD NADLER, New York Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina ELTON GALLEGLY, California
ZOE LOFGREN, California BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas DANIEL E. LUNGREN, California
MAXINE WATERS, California DARRELL E. ISSA, California
WILLIAM D. DELAHUNT, Massachusetts J. RANDY FORBES, Virginia
ROBERT WEXLER, Florida STEVE KING, Iowa
STEVE COHEN, Tennessee TRENT FRANKS, Arizona
HENRY C. ``HANK'' JOHNSON, Jr., LOUIE GOHMERT, Texas
Georgia JIM JORDAN, Ohio
PEDRO PIERLUISI, Puerto Rico TED POE, Texas
MIKE QUIGLEY, Illinois JASON CHAFFETZ, Utah
LUIS V. GUTIERREZ, Illinois TOM ROONEY, Florida
BRAD SHERMAN, California GREGG HARPER, Mississippi
TAMMY BALDWIN, Wisconsin
CHARLES A. GONZALEZ, Texas
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SANCHEZ, California
DEBBIE WASSERMAN SCHULTZ, Florida
DANIEL MAFFEI, New York
Perry Apelbaum, Majority Staff Director and Chief Counsel
Sean McLaughlin, Minority Chief of Staff and General Counsel
------
Subcommittee on Courts and Competition Policy
HENRY C. ``HANK'' JOHNSON, Jr., Georgia, Chairman
JOHN CONYERS, Jr., Michigan HOWARD COBLE, North Carolina
RICK BOUCHER, Virginia JASON CHAFFETZ, Utah
ROBERT WEXLER, Florida BOB GOODLATTE, Virginia
CHARLES A. GONZALEZ, Texas F. JAMES SENSENBRENNER, Jr.,
SHEILA JACKSON LEE, Texas Wisconsin
MELVIN L. WATT, North Carolina DARRELL ISSA, California
BRAD SHERMAN, California GREGG HARPER, Mississippi
MIKE QUIGLEY, Illinois
Christal Sheppard, Chief Counsel
Blaine Merritt, Minority Counsel
C O N T E N T S
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OCTOBER 8, 2009
Page
THE BILL
H.R. 3596, the ``Health Insurance Industry Antitrust Enforcement
Act of 2009''.................................................. 3
OPENING STATEMENTS
The Honorable Henry C. ``Hank'' Johnson, Jr., a Representative in
Congress from the State of Georgia, and Chairman, Subcommittee
on Courts and Competition Policy............................... 1
The Honorable Howard Coble, a Representative in Congress from the
State of North Carolina, and Ranking Member, Subcommittee on
Courts and Competition Policy.................................. 5
WITNESSES
Mr. James D. Hurley, Member, Medical Professional Liability
Subcommittee, American Academy of Actuaries, Washington, DC
Oral Testimony................................................. 26
Prepared Statement............................................. 30
Dr. Peter J. Mandell, former President, California Orthopaedic
Association, Burlingame, CA
Oral Testimony................................................. 35
Prepared Statement............................................. 38
Ms. Ilene Knable Gotts, Chair, Section of Antitrust Law, American
Bar Association, Washington, DC
Oral Testimony................................................. 105
Prepared Statement............................................. 107
Mr. David Balto, Senior Fellow, Center for American Progress,
Washington, DC
Oral Testimony................................................. 116
Prepared Statement............................................. 118
APPENDIX
Material Submitted for the Hearing Record
Prepared Statement of the American Dental Association (ADA)...... 147
HEALTH INSURANCE INDUSTRY ENFORCEMENT ACT OF 2009
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THURSDAY, OCTOBER 8, 2009
House of Representatives,
Subcommittee on Courts and
Competition Policy
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 12:23 p.m., in
room 2237, Rayburn House Office Building, the Honorable Henry
C. ``Hank'' Johnson, Jr. (Chairman of the Subcommittee)
presiding.
Present: Representatives Johnson, Quigley, and Coble.
Also present: Representative DeGette.
Staff present: (Majority) Christal Sheppard, Subcommittee
Chief Counsel; Anant Raut, Counsel; Elisabeth Stein, Counsel;
Rosalind Jackson, Professional Staff Member; and Stewart
Jeffries, Minority Counsel.
Mr. Johnson. This is the hearing of the Committee on the
Judiciary, the Subcommittee on Courts and Competition Policy.
It will now come to order.
Without objection, the Chair is authorized to declare a
recess. Today, I begin the first in a series of hearings I call
``An Antitrust System for the 21st Century.''
Five years ago, the Judiciary Committee created a
bipartisan Committee, the Antitrust Modernization Commission,
to evaluate the Nation's antitrust laws and offer
recommendations for updating and improving them.
One of their recommendations was to repeal the McCarran-
Ferguson Act. McCarran-Ferguson was passed by Congress in 1945
and largely exempts insurance companies from the Federal
antitrust laws.
You know, it is funny how for-profit insurance companies
work. They want their premiums as high as possible, and they
want to pay out as little of it as possible. It is in their
shareholders' interest to cover the healthiest people and dump
the sickest.
The insurance companies will tell us that they need this
antitrust exemption because it really make the industry more
competitive. Oh, really? Insurance profits have grown nearly
sixfold in the past decade, while more than 40 million
Americans go without insurance--and this is their idea of a
competitive market.
The only thing these companies are competing for are the
people who need them the least. Premiums have increased 87
percent in the past 6 years. Where is this vigorous competition
in the industry?
Last month I, Chairman Conyers and Representative DeGette
joined our colleagues in the Senate to introduce the
legislation before you, H.R. 3596. The bill says that McCarran-
Ferguson can no longer be used by health and medical
malpractice insurers as a shield for price fixing, bid rigging
or market allocation.
With more and more people having to choose between having
health insurance or having food on the table, I am very curious
to hear what, if any, justifications can be offered for why the
insurance industry continues to need protection from the
antitrust laws.
[The bill, H.R. 3596, follows:]
__________
Mr. Johnson. I now recognize my colleague, Howard Coble,
the distinguished Ranking Member of the Subcommittee, for his
opening remarks.
Mr. Coble. Thank you, Mr. Chairman.
And I will apologize to you and to the audience for my
raspy throat. I have come down with my annual autumn cold, so
it doesn't sound good, but I will--we will work through it.
Thank you, Mr. Chairman, for calling this hearing on the
Courts and Competition Policy Subcommittee. I appreciate your
willingness to involve the House Judiciary Committee in the
health care debate that has been actively involved on--in
Washington for the past few months.
These are important issues for the American people, and I
have not ruled out, Mr. Chairman, insurance reform as an answer
to America's health care problems, and I am having a little
difficulty in embracing the bill before us, and I look forward
to seeing what is--what sort of illumination is forthcoming for
me.
The McCarran-Ferguson, as you pointed out, Mr. Chairman,
was Congress' response to a 1944 Supreme Court decision holding
that the business of insurance was interstate commerce.
McCarran-Ferguson Act--Congress decided to keep regulation of
insurance at the state level.
As part of that legislation, Congress gave a limited
exemption to the Federal antitrust laws for insurance companies
on the grounds that their activities would be regulated by
state entities.
The states have, in fact, continued to rigorously regulate
the insurance industry. Those regulators can and do guarantee
that insurers do not collude to set price, rig bids or divide
territories.
In addition to the state insurance commissioners, many
state attorneys general have the authority to bring antitrust
suits against insurers under state antitrust laws. To my mind,
these state regulators have done a good job of protecting the
consumers in their respective states.
Mr. Chairman, I know that the bill is targeted only at the
health care and medical malpractice insurance markets. However,
I am concerned, as are many of my friends, that it may mean the
beginning of a broad scale to repeal McCarran-Ferguson for all
insurance providers. I am not sure that the record supports
such a broad-scale repeal.
Further, I am concerned that many key terms in the
legislation, including issuers of medical malpractice
insurance, price fixing, bid rigging and market allocation are
undefined. While the latter three phrases are used in--as terms
of art in antitrust litigation, there may be significant
litigation to define what they mean as part of this
legislation.
Mr. Chairman, this legislation raises a lot of questions,
and I am glad that we have such a distinguished panel of
experts before us to help us understand them all.
And with that, Mr. Chairman, I yield back the balance of my
time. And without objection, I would like to submit for the
record a statement from Lamar Smith, the distinguished Ranking
Member of the full Committee; the testimony of the Property
Casualty Insurers Association; the Insurers of Physicians
Association; the American Insurance Association; and the
Americans Health Insurance Plans, if I may introduce those for
the record.
Mr. Johnson. Without objection, it is so ordered.
[The information referred to follows:]
__________
__________
__________
__________
__________
Mr. Coble. And I yield back.
Mr. Johnson. I thank the gentleman for his statement.
And other Members' opening statements will be included in
the record.
I am now pleased to introduce the witnesses for today's
hearing. As you know, the health insurance trade association,
or AHIP, has been invited to come before Congress and explain
why health insurance companies need immunity from the antitrust
laws. Although they declined to provide a witness, they have
submitted a statement which will be introduced into the record.
I don't want to ruin the suspense for anyone, but they end
up saying that they don't like our bill.
Our first witness is Mr. Jim Hurley on behalf of the
American Association of Actuaries. Mr. Hurley has over 30 years
of industry experience, with 25 of them in medical malpractice.
Mr. Hurley is the former chairperson of AAA's subcommittee on
medical professional liability.
Welcome, Mr. Hurley.
Our next witness will be Dr. Peter Mandell, former
president of the California Orthopaedic Association. Dr.
Mandell has practiced orthopedic surgery in the Bay Area for
almost 30 years.
Welcome, Dr. Mandell.
Dr. Mandell. Thank you, Mr. Chairman.
Mr. Johnson. Next, we have Ilene Knable Gotts, Chair of the
American Bar Association's section of antitrust law. Ms. Gotts
worked formerly as a staff attorney in the Federal Trade
Commission's Bureau of Competition. She is currently working as
a partner with the law firm of Wachtell Lipton Rosen & Katz.
Welcome, Ms. Gotts.
And finally, we have David Balto, Senior Fellow with the
Center for American Progress. He has over 25 years of
experience as an antitrust attorney in the private sector, the
Antitrust Division of the Department of Justice and the Federal
Trade Commission.
Welcome, Mr. Balto.
Thank you all for your willingness to participate in
today's hearing. Without objection, your written statement will
be placed into the record, and we would ask that you limit your
oral remarks to 5 minutes.
You will note that we have a lighting system that starts
with a green light. At 4 minutes, it turns to yellow, then red
at 5 minutes. After each witness has presented his or her
testimony, Subcommittee Members will be permitted to ask
questions subject to the 5-minute limit.
And, Mr. Hurley, would you begin your testimony?
TESTIMONY OF JAMES D. HURLEY, MEMBER, MEDICAL PROFESSIONAL
LIABILITY SUBCOMMITTEE, AMERICAN ACADEMY OF ACTUARIES,
WASHINGTON, DC
Mr. Hurley. Thank you, Mr. Chairman.
Chairman Johnson, Ranking Member Coble and distinguished
Members of the Subcommittee, thank you for inviting me to
testify today. My name is Jim Hurley. I am a consulting actuary
with the firm Towers Perrin. I am an associate of the Casualty
Actuarial Society and a member of the American Academy of
Actuaries.
My work is primarily in the medical professional liability
area as an actuary, and my comments will be from that
perspective rather than from the health insurance perspective.
Before providing my comments, it is important to recognize
the unique characteristics of medical professional liability
coverage.
In comparison to other lines of insurance, medical
professional liability is a low-frequency, high-severity, long-
tailed coverage, meaning, on average, there is an extended
period of time between the occurrence of an event, the report
of a claim related to the event, and the ultimate resolution of
the claim.
From a statistical standpoint, this makes the estimation of
losses and premium rates is more uncertain than for other lines
of insurance, such as most types of health insurance.
In the time allowed, I would like to comment on the bill's
language and interpretations of it. More extensive comments are
available in my submitted testimony.
The explicitly stated impact of the legislation would seem
a non-event on its face. The proposal states, in part, that
nothing in the McCarran-Ferguson Act shall be construed to
permit issuers of medical malpractice insurance to engage in
any form of price fixing, bid rigging or market allocations.
My understanding is that engaging in these acts in the
context of the proposed legislation is illegal pursuant to
state laws enacted after implementation of the McCarran-
Ferguson Act. And as such, in my experience, companies do not
engage in collusive price fixing, bid rigging, or market
allocation.
However, possible interpretations of the words ``in any
form'' raise potential issues and consequences. In particular,
it is possible that the words ``in any form'' as contained in
the proposal could preclude the collection, aggregation and
analysis of data across companies.
Currently, such analyses are permitted in accordance with
the provisions of McCarran-Ferguson and with the oversight of
state regulators.
Results of these analyses can be provided to companies that
participate in the data collection or, perhaps, to other
entities that may be given the opportunity to purchase that
information.
Analyses of aggregated data serve several purposes, which
align with the original intent of the McCarran-Ferguson Act and
assist state regulators charged with overseeing the pricing of
insurance coverage.
A few of these purposes are, one, these analyses provide
more credible data upon which to base loss estimates and
premium rates.
In the absence of this information, companies or self-
insured entities would be forced to rely on their own more
limited data to make loss or rate determinations. Reduced
access to data could increase the volatility of these
determinations from year to year.
Two, these analyses also serve to enhance competition.
Without access to industry information, existing companies may
be less willing to provide products in new markets or to cover
different types of exposure because of the greater uncertainty
associated with determining loss estimates and premium rates.
As further supports competition, industry information is of
particular importance to newly formed companies or self-
insurers looking to begin covering medical professional
liability exposure.
Absent the use of information from the industry, they may
be reluctant to assume or retain this exposure. Their decision
not to provide coverage reduces competitive alternatives in the
marketplace.
Such industry analyses serve as guidance for companies,
self-insurers and regulators in reducing the likelihood of
insolvencies, both a long-term and recent concern.
Through the review of the industry data, these entities are
better able to evaluate if too little is being charged or not
enough is being set aside in reserves for a given exposure
situation.
These data aggregations serve the purposes outlined,
particularly for medical professional liability, which has
characteristics that make it a statistically challenging
exposure for companies and self-insurers.
A couple of examples may help illustrate some of the
challenges. One example is industry analyses can provide
guidance to companies and self-insurers regarding reasonable
charges for higher limits of coverage.
For instance, the experience of an individual company or
self-insurer is probably not sufficient to estimate losses at
$10 million or $20 million limits of coverage.
Additionally, a single entity's data would rarely be
sufficient to determine the appropriate differentials among
types of exposure. For example, what would be an equitable loss
cost differential among a family practice physician, a general
surgeon or an obstetrician?
There are a number of possible consequences of not having
credible information to assist in making loss cost
determinations. Insurance companies and self-insurers, in the
interest of preserving their viability, would be more cautious,
if not unwilling, to assume exposure given the risk of the
coverage.
Thus, at the end of the--the end result relating to medical
professional liability insurance companies is likely to be
reduced availability with fewer willing insurers, less vigorous
competition among those who do write the coverage, and higher
costs to the consumer.
Self-insurers are likely to be less willing to retain
exposure, reducing their risk financing options and possibly
increasing their costs as well.
It is my understanding that one stated purpose of the
proposed legislation is to reduce medical professional
liability premiums. In my opinion, this change will not
accomplish that purpose. In fact, it is more likely to have the
opposite effect for the reasons I have outlined.
Additionally, medical professional liability losses and
rates have been flat or declining in the last 2 to 3 years
without the influence of this proposed change.
Attached to the written version of my testimony is an
exhibit displaying rate change activity for the last 3 years,
showing approximately 30 percent of the observations reflect
rate reductions.
These trends occurred following the implementation of, and
debate about, tort reforms in many states, as well as the
growing impact of risk management and patient safety
initiatives.
I thank you for this time and this opportunity to comment
on the proposed legislation. I will be happy to answer any
questions you have about these comments. Thank you.
[The prepared statement of Mr. Hurley follows:]
Prepared Statement of James D. Hurley
__________
Mr. Johnson. Thank you, Mr. Hurley.
Dr. Mandell, please begin.
TESTIMONY OF PETER J. MANDELL, FORMER PRESIDENT, CALIFORNIA
ORTHOPAEDIC ASSOCIATION, BURLINGAME, CA
Dr. Mandell. Thank you, Mr. Chairman and Ranking Member
Coble and the distinguished Members of the Committee.
The California Orthopaedic Association appreciates this
opportunity to submit testimony to the Committee about H.R.
3596. We appreciate and support the Subcommittee's interest in
this issue.
However, respectfully, we do raise some concerns about H.R.
3596, and I will briefly outline those for you. The handouts
will go into greater detail.
We have consulted our antitrust experts and have failed to
find any cases where commercial health insurers have been
charged with price fixing, collusion or market allocation.
In fact, we believe the commercial health insurers moved
past that business model many years ago and have little need to
fix prices or allocate markets because they have done things in
other ways, like consolidated to gain a larger share of the
insurance market.
As you know, in the last decade, there have been over 400
health care mergers--health insurance mergers. The Payor market
has become more concentrated, less divers. And payors have
enjoyed substantial negotiating leverage over patients and
providers in most markets.
The most recent data indicates that the two largest
insurance companies actually control about 36 percent of the
market and 67 million lives. And control is pretty much the
right word for that in terms of their health care.
Instead of price fixing, we believe the larger problem is
the virtual monopolies that commercial health insurers have. In
many areas of the country, there may be only one or two
carriers. There is no effective competition.
Physicians are told to take it or leave it with the
contracts they are offered, and there is no--and accept below-
market reimbursement. Patient coverages are also rescinded when
they become ill. These inappropriate activities and decisions
have been well documented in the media and also in these halls
of Congress.
The power garnered by health insurers through rapid, large-
scale consolidation has not been used to the advantage of
patients. Premiums have soared, and many employers have stopped
providing coverage, substantially limited or reduced the scope
of benefits, or asked employees to pay higher shares of the
premiums.
As far as we can see, the Federal Trade Commission and the
Department of Justice have shown little interest in restricting
additional mergers and no interest in addressing complaints of
monopolization by dominant health insurers.
We would urge that the Subcommittee consider some real
enforcement of merger laws and even break up the commercial
insurers who have this virtual monopoly.
In addition, repeal of the antitrust protections afforded
to commercial insurers under McCarran-Ferguson could have some
negative impact on health care cooperatives such as those being
discussed now in this Congress as a way of developing more
care--delivering more care to individuals.
New companies would likely benefit from the antitrust
protections under the act. Repealing the carriers' protections
will make it more difficult for these small companies to gain
market share and easier for the large companies to gobble them
up once they are formed.
And finally, we ask the Subcommittee to reconsider the
inclusion of medical liability carriers in this bill. In
California, many of the medical liability carriers we currently
have were created in the mid 1970's when we had our medical
liability crisis. Many of them were doctor-formed.
In our opinion, they achieved the goals of availability,
affordability and stability. We see no evidence that the
medical liability carriers in our state share data or drop
physicians from coverage. We would urge the medical liability
carriers be excluded from this bill.
We thank you for this opportunity to talk to the
Subcommittee today, and we appreciate your consideration of our
comments and hope that we will be able to work with you and
your staff further as this important effort continues.
[The prepared statement of Dr. Mandell follows:]
Prepared Statement of Peter J. Mandell
ADDENDUM 1
ADDENDUM 2
ADDENDUM 3
__________
Mr. Johnson. Thank you, Dr. Mandell.
Next we will hear from Ms. Gotts.
TESTIMONY OF ILENE KNABLE GOTTS, CHAIR, SECTION OF ANTITRUST
LAW, AMERICAN BAR ASSOCIATION, WASHINGTON, DC
Ms. Gotts. Thank you, Mr. Chairman.
Mr. Chairman and Members of the Subcommittee, my name is
Ilene Gotts and I am the chair of the section of antitrust law
of the American Bar Association and a partner at the law firm
of Wachtell Lipton Rosen & Katz.
I appreciate the opportunity to present the views of the
American Bar Association on H.R. 3596. I am appearing on behalf
of the American Bar Association today, and my testimony here
reflects the position of the American Bar Association with
respect to this legislation.
I would like to state from the outset that my testimony
today is limited to this legislation. I am not addressing any
of the larger health care issues and health care legislation
currently before Congress, notwithstanding that this particular
legislation is, to some extent, related to these broader
issues.
The antitrust section of the ABA and the American Bar
Association have repeatedly embraced the view that industry-
specific exemptions from the antitrust laws are rarely
justified.
McCarran-Ferguson dates back to another era of antitrust
jurisprudence. It was enacted in 1945 to ensure that the
regulation of the insurance industry remained principally the
province of the states.
The Sherman Act has served this Nation well for nearly 120
years, because it is simple and very flexible. It states what
the competition policy is and is interpreted by the courts
based on the facts and circumstances presented in each
particular case. This flexibility eliminates, in most cases,
the need for industry-specific exemptions.
Moreover, the benefits of exemptions rarely outweigh the
potential harm imposed on society by the loss of competition
resulting from such exemptions and are often not necessary to
limit the risk of deterring pro-competitive conduct.
In short, the objectives and goals of these exemptions
frequently can be achieved in a manner consistent with
established antitrust principles and enforcement policy, thus
rendering exemptions unnecessary.
Consistent with these general principles, the American Bar
Association, for over 20 years, has supported that McCarran-
Ferguson reform occur for the entire industry and be instead
replaced with a series of safe harbor protections for certain
forms of collective insurer conduct that were unlikely to cause
anticompetitive harm to consumers.
To the extent that H.R. 3596 constitutes a first step in
this direction by repealing the antitrust exemption for these
two types of insurance, the American Bar Association would
support such legislation, but only if it were amended to
provide safe harbors for certain pro-competitive conduct as set
forth in the ABA policy that is attached to my written
statement.
These safe harbors are not designed to alter the existing
antitrust policy. Rather, they are to deter private litigation
that might, post-exemption, challenge conduct that in the
unique circumstances of the insurance industry may actually
promote competition.
They have been included in several other McCarran repeal
proposals over the years but are not contained in H.R. 3596,
and the American Bar Association believes it is necessary to
add these safe harbor provisions as clarifying amendments to
the legislation.
Please note that in recommending that the insurance
industry should not be subject to an antitrust exemption, the
ABA is not suggesting that the industry be subject to a more
rigorous antitrust standard than the rest of American industry.
We do not believe that it is the intention of the
legislation, but the broad prohibitions on price fixing, bid
rigging and market allocations could potentially be read to
condemn activity that would otherwise be permissible under the
antitrust laws.
The terms have very specific meanings in the existing case
law interpreting the Sherman Act, and it should clearly not be
the intent of this legislation to place a greater burden on the
insurance industry than on other industries.
The safe harbors that we support help to ensure against
this result, but further clarification on this point would also
be beneficial.
Finally, I would like to thank you for the opportunity to
appear here today to present the views of the American Bar
Association. The American Bar Association believes strongly
in--competition in the insurance industry can be enhanced,
consistent with necessary joint activities, to benefit all
segments of our society.
And I will be happy to answer any questions that you may
have. Thank you.
[The prepared statement of Ms. Gotts follows:]
Prepared Statement of Ilene Knable Gotts
__________
Mr. Johnson. Thank you, Ms. Gotts.
And now we turn to Mr. Balto for your testimony.
TESTIMONY OF DAVID BALTO, SENIOR FELLOW,
CENTER FOR AMERICAN PROGRESS, WASHINGTON, DC
Mr. Balto. Thank you, Chairman Johnson, Ranking Member
Coble and the other distinguished Members of the Committee.
Thank you for the privilege of testifying before you today
about health insurance markets and competition.
I know, from my experience as an antitrust enforcer and a
representative of public interest groups on competition issues,
there are three things for a market to function properly--
transparency, choice and a lack of conflicts of interest. All
of these elements are lacking in the health insurance markets.
Few markets are as concentrated, opaque and complex, and
subject to rampant anticompetitive and deceptive practices. My
simple message is as the health care debate continues, many may
advocate for limited reform of the insurance system.
Their belief is that it is a fundamentally sound market;
with a little dose of additional regulation, everything will be
cured. They could not be more wrong.
My testimony, briefly summarized, is from both a
competition and consumer protection perspective. Few markets
are as dysfunctional as the health insurance market.
Profits are increasing rapidly. The number of uninsured are
increasing significantly. It is not surprising Wall Street
calls the tune for these health insurers. They have no choice
but to try to increase profits as much as possible, and
engaging in deceptive or fraudulent conduct doesn't stop them
from doing that.
Unfortunately, as Dr. Mandell has pointed out, we have been
in an 8-year period of regulatory neglect. You are talking
about a statutory antitrust exemption.
But from the perspective of the Federal antitrust and
consumer protection agencies, health insurance has enjoyed
another antitrust exemption. They have brought zero cases
against anticompetitive practices by health insurance. They
have brought zero cases against consumer protection violations
by health insurers.
Hundreds of mergers have been approved with only minor
restructuring of two of them. Where have the enforcement
dollars been spent? Going after doctors.
Now, there is no evidence in the world that doctors were a
major source of escalating health care costs. The Bush
administration brought over 30 cases against doctors and zero
cases against insurance companies. Members of this Committee,
that makes no sense.
The most effective means of addressing this problem is the
establishment of the public plan, and the House deserves
tremendous credit for the Committees enacting that.
What you need to restructure this market is to create an
entity that doesn't play to the tune of Wall Street but plays
to the public interest. The public plan will have the clout to
go and bring competition to the markets.
The public plan will not engage in these practices because
it has to serve the public interest. And in that fashion, other
insurance companies will have to compete not by discriminating
and cutting service but by improving service.
In any case, this record of regulatory neglect must be
reversed. There must be significant regulatory reforms to
attempt to begin to grapple with the broken health insurance
markets.
What do I suggest? First, Congress has been doing it right.
Your oversight function is tremendously important, and the work
of various Committees in Congress to look at the
anticompetitive and egregious practices of the health insurance
industry must continue.
You should adopt 3596, but you should go further. There is
uncertainty created by the McCarran-Ferguson Act about whether
the FTC can go after anticompetitive or deceptive conduct by
health insurers. Let's clarify that so that we can use the FTC
to go after these practices.
Third, the Obama administration should marshal its
enforcement resources to go after the egregious conduct by
health insurers, not the conduct of small-town doctors.
Fourth, the FTC should create a separate division for
health insurance consumer production enforcement.
Fifth, both agencies should look at anticompetitive
practices by health insurers.
Sixth, the FTC and DOJ should do a retrospective on some of
the mergers that Dr. Mandell has complained about. And if those
mergers are anticompetitive, let's unwind them and break them
up.
Finally, Congress should require the transparency of all
health insurer intermediaries--not only insurers, but PBMs and
group purchasing organizations. There is tremendous mischief
going on in--with both of those intermediaries. Fortunately,
H.R. 3200 addresses that partially for PBMs. It should also go
on and address it for group purchasing organizations.
We face a daunting task here in trying to bring competition
back to a market that is severely broken. We need a tremendous
effort in terms of not only the public plan but, really, a
realignment of enforcement efforts so that we can start to
bring these industries--this industry in line so that consumers
don't suffer from these egregious and deceptive practices.
I welcome your questions.
[The prepared statement of Mr. Balto follows:]
Prepared Statement of David Balto
__________
Mr. Johnson. Thank you.
And with that, we will begin with questions.
Ms. Gotts, what was the justification 64 years ago for
passing McCarran-Ferguson? And what, if anything, has changed
since then that would merit continued insulation of insurance
companies from the antitrust laws?
Ms. Gotts. What was the reason that the exemption was
initially put into place was a Supreme Court case which found a
restriction on the ability of states to regulate insurance, and
it was based on the interstate commerce clause, so it was to
make clear that there could be a scheme of state regulation.
And that should definitely continue.
On behalf of the American Bar Association, I am not here
today to try to justify the continuation of the McCarran-
Ferguson exemption as it is written, so you are not going to
hear that out of my mouth in any way.
Instead, what I would suggest to you--that in the last 65
years, what we have seen is antitrust jurisprudence really
advance. Today we have, through case law, much more recognition
of the efficiency, pro-competitive justifications that can go
into joint activity.
Today we also have certain checks and balances on
plaintiffs bringing frivolous suits with Twombly having come
out--the Supreme Court.
This all suggests--and the general view over time has been
for the last 15 years where we have seen exemptions going by
the wayside--that the Sherman Act is really what should apply.
But for clarification purposes, because we would be doing
this sea change, we would want to make clear that activities
that are specified under safe harbors, which we believe there
is little chance that there would be anticompetitive activity,
are recognized and are protected, so that what Mr. Hurley talks
about in the sharing of information that is used in order to be
able to keep rates down--that that can be permitted, but at the
same time the antitrust laws can be enforced.
So the position of the American Bar Association has been
clearly for the last 20 years to get rid of McCarran-Ferguson
and replace it with just these safe harbors and with full
recognition that the antitrust laws apply.
Mr. Johnson. Thank you.
Dr. Mandell and Mr. Balto, in Mr. Hurley's written
testimony, he says that eliminating McCarran-Ferguson will
result in less vigorous competition.
Dr. Mandell, Mr. Balto, when you look at the insurance
market, do you see vibrant competition?
Mr. Balto. The AMA study of documents, I think quite
clearly, that the vast majority of markets are highly
concentrated.
The report by Health Care for Americans Now documents how
almost every state is dominated by one or, at most, two
insurers. That doesn't sound like a competitive market to me.
Dr. Mandell. Your question was about medical liability
insurance, or health care? I am sorry.
Mr. Johnson. Health care, and medical liability--the same
question would apply on liability insurance as well.
Dr. Mandell. Well, let me take medical liability. In my
state, there are at least four or five companies that I can
think of that are vying for the--the customers like me, the
orthopedic surgeons and other doctors.
And it is a fairly vibrant market. The prices are fairly
low. The service is high. The reason I think we have this is
partly because of things that go on at the state level, but
also because of the overall micro reforms that were put down in
1975.
Mr. Johnson. What happens if the states don't have a
vigorous regulatory bent of mind?
Dr. Mandell. Well, there are states where--one of the
reasons we had our change in California in 1975 is everybody
left the state. The insurance carriers left the state. We had
no insurance. And so people had to put it together, and doctors
put it together, and small groups put it together, and that
sort of thing.
There are still states, at least a year or two ago when I
last looked at this--Pennsylvania, for one--where insurance
premiums for medical liability are so high that very few
carriers are willing to write.
So depending on, you know, whether you have these micro-
type reforms, you can have a situation where I am presuming the
insurance companies can make a profit or they are not going to
stick around.
Mr. Johnson. Thank you, sir.
Ms. Gotts and Mr. Hurley--Ms. Gotts, can you think of any
reason that the process of trending, in which industry data
aggregators project future prices for insurance premiums,
should enjoy a special protection under the antitrust laws?
Ms. Gotts. The ABA has not studied in detail how the
pricing mechanisms would work.
I would state, though, that the way the safe harbor is now
being proposed that is in our written statement, I think we get
the right balance, which would be for very limited but pro-
competitive sharing of information would be permitted, and the
others will be subject to the antitrust laws.
So if they do have an anticompetitive purpose, there would
be a way of challenging it.
Mr. Johnson. Mr. Hurley?
Mr. Hurley. The issue of trending--I think Ms. Gotts is
saying that collection of data--the aggregation of data is
fine. The issue of trending is essentially analysis of the
data, in some sense.
And in the absence of analysis of that data, the relatively
smaller, newer companies or the self-insurers who might
otherwise be able to use the results of that analysis, which,
incidentally, creates loss costs, not rates--it doesn't
necessarily translate into a premium.
It translates into an interpretation of losses. So someone
can estimate what a loss cost is for a particular base class
physician or for an acute care bid--that sort of thing. It
translates into increased limits relationships would allow--
which allows you to determine what higher limits of coverage
should cost.
These things are highly technical. They require generally
the work of an actuary. Many smaller, newer companies getting
into the business would have difficulty in having that kind of
expertise or having access to that kind of expertise.
So this is an interim step before the establishment of
rates. It is not actually establishing a rate. It is
establishing what a loss cost is. So there is an intervening
step.
Companies ultimately who provide this coverage would have
to take those loss costs, interpret them, and then adjust them
such that they would make it into rates that are appropriate
for their underwriting standards and their expense level. Hope
that answers the question.
Mr. Johnson. Thank you.
Mr. Hurley, if lawsuits alleging price fixing by insurance
companies have been thrown out because of McCarran-Ferguson,
and if we don't have a vigorous regulatory environment by state
governments, how can we say that there is no price fixing going
on in the industry?
And also, what is it that justifies antitrust exemption for
insurers?
And last but not least, you mention about--in your
statement--we have consulted--excuse me, Dr. Mandell mentioned
in his statement that we have consulted antitrust experts and
have failed to find any cases where the commercial health
insurers have been charged with price fixing or collusion in
sharing of price information.
And the doctor goes on to see--to say that there is little
need to collude on pricing as they have--the insurance
companies have consolidated and been able to control a larger
part of the health insurance market.
And I would like to know whether or not that is a positive
or a negative trend.
Mr. Hurley. Well, I think I heard three questions there,
and I know you will help me if I don't get to one of them.
Mr. Johnson. I will try.
Mr. Hurley. Start from the beginning. You mentioned the
issue of price fixing in lightly regulated states. That is
essentially one of the concerns.
Mr. Johnson. Yes.
Mr. Hurley. I think what I can say is that the actual act
of price fixing, colluding to fix prices, is--it just, in my
experience, does not happen, as I said in my testimony.
In a lightly regulated state, I think there is the forces
of competition, just like there are in regulated states.
Companies will compete for business whether the regulation is
harsher, I guess, tighter, or looser, as you were asking.
So I think that the competition does exist there. Companies
will compete for business.
In fact, in some sense, harsher and tighter regulatory
environments sometimes make it tougher to compete because you
have to get rates through the insurance departments before you
are able to implement them. But companies will compete in both
of those types of regulatory environments, in my opinion.
The second one--I don't know that I can recollect, but let
me touch on the issue of consolidation. It is true, I think,
that in medical professional liability that there probably
aren't as many medical professional liability insurers offering
coverage as there are automobile insurance companies.
However, I think that most folks who would evaluate the
marketplace would say that there is--there are enough companies
in most jurisdictions to provide a competitive marketplace. In
other words, there are probably three or four or five insurers
who are willing to participate in this business.
I would supplement that by saying that this--as Dr. Mandell
suggested, this is a tough line of business. It is a line of
business where most commercial insurers do not find or have the
appetite to write the business because of the things I
mentioned--the unpredictability of it, the uncertainty of it,
the long-tail nature of it.
And so there are fewer companies that are willing to write
it. A lot of the companies that do write it specialize in it.
And that is why there, perhaps, are fewer of them, because they
actually specialize in that line of business.
And the reason why they specialize in it--and many of them
are, in fact, owned by the physicians they insure. They are
mutual companies.
So they are in there for the reason, the reason that they
want to provide available coverage at the most reasonably
economic, affordable price that makes sense financially, fiscal
sense. So they are trying to do that.
And I apologize. I think I missed your middle question.
Mr. Johnson. That is okay. It is time for us to move on to
our Ranking Member, Mr. Coble. Thank you all for your responses
to my questions.
Mr. Coble. Thank you, Mr. Chairman.
Thank the panelists for being with us today as well.
Mr. Hurley, let me bring you in on this. We discussed it
earlier, but--less clear for me as to the relationship between
medical malpractice liability reform and medical malpractice
insurance rates in any given state.
Mr. Hurley. Well, I guess this is a good time to ask that
question, because we have just been through a period of time
when a number of reforms were passed in the last few years in a
number of the states.
It is hard for me as an actuary to make a cause and effect
relationship between medical reforms--tort reforms and rates.
However, I would say that there are a number of dynamics that
affect that. It is the medical reforms, it is changes in the
economy and things like that.
However, it is hard to deny the coincidence of lower
frequency of claims that has occurred since the implementation
of reform, and in states where reforms were passed, the
coincidence of timing of lower frequency of claims, therefore
lower costs driving rates, coincidental with the implementation
of those reforms.
Mr. Coble. The lower cost--you mean lower premium payments?
Mr. Hurley. Lower costs will ultimately result in lower
premiums.
Mr. Coble. I got you. Thank you, sir.
Dr. Mandell, you mentioned that you would like to see some
clarification to the application of antitrust laws to the
practice of medicine. Elaborate a little bit on that.
And let me ask you this. In your opinion, should the
Federal Trade Commission and the Department of Justice revise
their health care guidelines to reflect modern practice of
medicine?
Dr. Mandell. I believe the answer is yes, but--yes, but
what I was really referring to in this statement is their
treatment of health insurers and how they are consolidating,
and how they are using that consolidated power to--I guess the
best word I think of is bully patients and doctors into
accepting things that are not ideal, not high value.
And the reason we think that that happens is because
insurance companies have become so big, so powerful, so
profitable that they feel they can get away with just about
anything.
I am sure you--and perhaps you were in the room when
somewhere in Congress they were interviewing a woman from Texas
who had had breast cancer, and they cut--the insurance company
cut their--her treatment in the middle of her course, and that
caused things to get worse and all this kind of thing.
And later on, somebody asked the CEOs of the two or three
insurance companies would they commit now to--oh, I am sorry,
they cut it because she had forgotten to put on her application
that she had acne at one time, or something completely
unrelated.
And the folks in that room asked the insurance CEOs,
``Would you commit right now to not doing that anymore? Sure,
you can dump people if they lie to you, but for something like
that, you know, get real.'' And they wouldn't do it. You know,
they said, ``We have to follow the state laws, and this is what
the state laws say.''
So that is something that needs to change.
Mr. Coble. Ms. Gotts, are you aware of any policy
justification for separating out health insurance or medical
malpractice insurance from other types of insurance?
Ms. Gotts. I am not aware of any, and the ABA to date has
not taken a position. We saw this as a good first step.
Mr. Coble. Thank you.
Doctor, I don't believe you touched on my question
regarding the Federal Trade Commission and the Justice
Department. Should they make any revisions?
Dr. Mandell. Well, yeah. That was what I was trying to
say----
Mr. Coble. Okay. I am----
Dr. Mandell [continuing]. Apparently not very well. They
should more vigorously look at these companies, and if they are
doing things which, in effect, are bad for patients, take
appropriate action so----
Mr. Coble. Okay. I got you.
Mr. Balto, I don't want you to escape without recognition.
Your written testimony, Mr. Balto, essentially accuses state
insurance commissioners of some regulatory neglect.
In your opinion, does this apply to all forms of insurance,
or are health insurance and medical malpractice insurance
markets particularly dysfunctional?
Mr. Balto. Let me clarify my statement. I certainly would
never accuse the diligent and under--the underfunded state
insurance commissioners of regulatory neglect.
The problem here is that state insurance commissioners face
a very daunting task. There is testimony by Georgetown
professor Karen Pollitz which--before the Senate Commerce
Committee which explains how--the lack of resources and ability
of state insurance commissioners to effectively police health
insurance markets.
And I would be glad to provide the Committee with
documentation that shows that if you are in a big state like
New York and California, you are much more likely to have an
activist insurance commissioner who can really protect you.
So as the Committee considers whether or not state
insurance commission enforcement is an adequate substitute for
Federal enforcement such that you don't need to amend the
statute, you should recognize that the vast majority of states
have extraordinarily limited resources to effectively go after
this conduct.
Mr. Coble. I thank you, sir.
Thank you all.
Thank you, Mr. Chairman. I yield back.
Mr. Johnson. Thank you, Mr. Ranking Member.
I would be remiss by not introducing or recognizing my
colleague from the Energy and Commerce Committee, Ms. Diana
DeGette.
Welcome today.
And although she is not able to ask any questions because
she is not assigned to this Committee, she is certainly
eligible to sit with us as we listen to the testimony.
I will say that for the record she wants us to know that it
was not their intention in drafting this bill to prohibit
appropriate pro-competitive information-sharing.
And we are certainly willing to look at that recommendation
of the ABA and others with regards to this issue. And I did
want to--to say that for the record on behalf of Congresswoman
DeGette.
If there are no other questions----
Mr. Balto. Mr. Chairman, could I just make one additional
comment? You know, there is some question in the discussion
about whether or not this is really necessary, this--and I
think you need to take a dynamic look. Don't only look at the
way the markets are today.
But if we turn to using a health care exchange, doesn't the
existence of the health care exchange offer a greater number of
opportunities for the kinds of collusion that might be
protected under the current McCarran-Ferguson Act? And isn't
that a reason to go and amend the act to sort of protect
ourselves against that kind of collusion?
Mr. Johnson. Well, I love rhetorical questions, and with
that we----
Mr. Coble. Mr. Chairman?
Mr. Johnson. Yes.
Mr. Coble. If I may, Congressman Harper would--requested
that his statement be made a part of the record. I would like
to introduce that, if I may.
Mr. Johnson. Okay. All right. Without objection, so
ordered.
[The information referred to follows:]
__________
__________
Mr. Johnson. I would like to thank all of the witnesses for
their testimony today. And without objection, Members will have
5 legislative days to submit any additional written questions,
which we will forward to the witnesses and ask that you all
answer as promptly as you can so that they can be made a part
of the record.
Without objection, the record will remain open for 5
legislative days for the submission of any additional
materials.
Mr. Coble. May I, Mr. Chairman?
Mr. Balto, you indicated that you might make available to
us regarding my question concerning the various and sundry
studies--if you can do that.
Mr. Balto. Yes.
Mr. Coble. Mr. Chairman, I think that would be in order.
Mr. Johnson. All right. Certainly.
Mr. Balto. I will be glad to. Thank you.
Mr. Johnson. Today's hearing raised a number of important
issues. As we consider the legislation before us, the question
we must ask ourselves is are consumers better off when their
health insurance and medical malpractice insurance companies
are exempted from antitrust laws.
And with that, this hearing on the Subcommittee on Courts
and Competition Policy is adjourned.
[Whereupon, at 12:23 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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Material Submitted for the Hearing Record