[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:]
    
    
    
    
    
    
    
    
    
    
    
    

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    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
















                                 
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