    [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

                                  ----------

                                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

                                  ----------

                           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