[Senate Hearing 111-458]
[From the U.S. Government Publishing Office]
S. Hrg. 111-458
PROHIBITING PRICE FIXING AND OTHER ANTICOMPETITIVE CONDUCT IN THE
HEALTH INSURANCE INDUSTRY
=======================================================================
HEARING
before the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
OCTOBER 14, 2009
__________
Serial No. J-111-57
__________
Printed for the use of the Committee on the Judiciary
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COMMITTEE ON THE JUDICIARY
PATRICK J. LEAHY, Vermont, Chairman
HERB KOHL, Wisconsin JEFF SESSIONS, Alabama
DIANNE FEINSTEIN, California ORRIN G. HATCH, Utah
RUSSELL D. FEINGOLD, Wisconsin CHARLES E. GRASSLEY, Iowa
CHARLES E. SCHUMER, New York JON KYL, Arizona
RICHARD J. DURBIN, Illinois LINDSEY GRAHAM, South Carolina
BENJAMIN L. CARDIN, Maryland JOHN CORNYN, Texas
SHELDON WHITEHOUSE, Rhode Island TOM COBURN, Oklahoma
AMY KLOBUCHAR, Minnesota
EDWARD E. KAUFMAN, Delaware
ARLEN SPECTER, Pennsylvania
AL FRANKEN, Minnesota
Bruce A. Cohen, Chief Counsel and Staff Director
Matt Miner, Republican Chief Counsel
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah...... 3
Kohl, Hon. Herb, a U.S. Senator from the State of Wisconsin...... 5
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont. 1
prepared statement........................................... 127
WITNESSES
Hunter, J. Robert, Director of Insurance, Consumer Federation of
America, Washington, DC........................................ 25
Powell, Lawrence S., PhD., Associate Professor and Whitbeck-Beyer
Chair of Insurance and Financial Services, University of
Arkansas-Little Rock, College of Business, Little Rock,
Arkansas....................................................... 26
Reid, Hon. Harry, a U.S. Senator from the State of Nevada........ 8
Varney, Christine A., Assistant Attorney General, Antitrust
Division, Department of Justice................................ 6
QUESTIONS AND ANSWERS
Responses of Robert J. Hunter to questions submitted by Senator
Leahy.......................................................... 35
Responses of Lawrence S. Powell to questions submitted by Senator
Sessions....................................................... 37
Responses of Christine A. Varney to questions submitted by
Senator Sessions............................................... 46
SUBMISSIONS FOR THE RECORD
American Bar Association, Ilene Knable Gotts, Chair, Section of
Antitrust Law, Washington, DC, statement and attachment........ 54
American Dental Association, Chicago, Illinois, statement........ 64
American Hospital Association, Rick Pollack, Executive Vice
President, Washington, DC, statement........................... 71
America's Health Insurance Plans, Karen Ignagni, President &
Chief Executive Officer, Washington, DC, statement............. 73
American Insurance Association, Leigh Ann Pusey, President and
CEO; Council of Insurance Agents and Brokers, Ken A. Crerar,
President; Independent Agents & Brokers of America, Bob
Rusbuldt, President and CEO; Financial Services Roundtable,
Steve Bartlett, President and CEO; National Association of
Mutual Insurance Companies, Charles M. Chamness, President and
CEO; Property Casualty Insurers Association of America, David
A. Sampson, CEO; National Association of Professional Insurance
Agents, Len Brevik, Executive Vice President & CEO; Reinsurance
Association of America, Franklin W. Nutter, President;
Physician Insurers Association of America, Lawrence E. Smarr,
President, statement........................................... 75
Hoyt, Robert E., Ph.D., and Lawrence S. Powell, Ph.D., National
Association of Insurance Commissioners, statement.............. 78
Hunter, J. Robert, Director of Insurance, Consumer Federation of
America, Washington, DC, statement............................. 89
National Association of Attorneys General, Washington, DC,
Resolution..................................................... 129
Powell, Lawrence S., PhD., Associate Professor and Whitbeck-Beyer
Chair of Insurance and Financial Services, University of
Arkansas-Little Rock, College of Business, Little Rock,
Arkansas, statement and attachment............................. 131
Property Casualty Insurers Association of America, Des Plaines,
Illinois, statement............................................ 161
Reid, Hon. Harry, a U.S. Senator from the State of Nevada,
prepared statement............................................. 175
Varney, Christine A., Assistant Attorney General, Antitrust
Division, Department of Justice, statement..................... 178
Voss, Susane E., Commissioner of Insurance, State of Iowa, Des
Moines, Iowa, statement........................................ 185
PROHIBITING PRICE FIXING AND OTHER ANTICOMPETITIVE CONDUCT IN THE
HEALTH INSURANCE INDUSTRY
----------
WEDNESDAY, OCTOBER 14, 2009
U.S. Senate,
Committee on the Judiciary,
Washington, DC.
The Committee met, pursuant to notice, at 10:08 a.m., in
room SD-226, Dirksen Senate Office Building, Hon. Patrick J.
Leahy, Chairman of the Committee, presiding.
Present: Senators Leahy, Kohl, Feinstein, Feingold,
Schumer, Durbin, Whitehouse, Klobuchar, Kaufman, Franken, and
Hatch.
OPENING STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM
THE STATE OF VERMONT
Chairman Leahy. Good morning. Today we are going to focus
on an issue that has certainly had my attention for a number of
years, and that is the insurance industry's exemption from the
Federal antitrust laws. This exemption, since it was enacted in
1945, has served the financial interests of the insurance
industry, but I do not see where it has helped the consumers at
all.
For the past several months, our Nation has debated how
best to reform our health care system. Three House Committees
and two Senate Committees have spent countless hours trying to
answer the question of how best to introduce competition and
make health insurance affordable for all Americans. Now, in
this debate, it is important to remember that under current law
the health insurance industry does not have to play by the same
rules of competition as do other industries.
The lack of affordable health insurance plagues families
throughout our country. The rising prices that hospitals and
doctors pay for medical malpractice insurance drains resources
that could otherwise be used to improve patient care. Even in
my State of Vermont, where there are very few lawsuits, and
virtually no large recoveries on malpractice, the malpractice
insurance, you would think you were in California. And the
insurance companies will not tell anybody why they have to
charge those premiums. Antitrust oversight in these industries
would provide consumers with confidence that insurance
companies are not colluding to raise prices artificially.
There is no justification for health insurers engaging in
egregious anticompetitive conduct to the detriment of
consumers. Price fixing, bid rigging, and market allocation are
per se violations of our laws precisely because there is no
procompetitive justification for them. Other companies in all
other industries have to follow these rules, and there is no
reason why health insurers should be accorded immunity to
engage in what would be illegal conduct if being done by any
other company. Our bill would fix this anomaly in the law once
and for all. I believe it would lead to more competition and
lower insurance costs, and basically what it says is that
nobody is above the law. If the laws are good for every other
company, every other industry, why shouldn't they be good for
the insurance industry?
But what has happened, the insurance industry, instead of
working to justify this very special exemption, they have used
its enormous influence to maintain a special, statutory
exemption from Federal antitrust laws and the protections they
provide. And while the insurance industry hides behind the
exemption, patients and doctors have continued paying
artificially inflated prices, as costs continue to rise at an
alarming rate.
Now, the cost spiral is just fine for the insurance
companies. They make huge profits. But it punishes patients, it
punishes American businesses large and small, and taxpayers.
And I think while it would be very easy to say there is no
justification for the antitrust exemption, they will fight like
mad for it because it keeps insurance premiums high. But when
we are debating reform efforts to check spiraling costs and
expand Americans' access to quality, we should not have this
antitrust exemption.
Last month, I introduced the Health Insurance Industry
Antitrust Enforcement Act of 2009, and that would repeal the
antitrust exemption for health insurance and medical
malpractice insurance providers. The Majority Leader is a
cosponsor of this legislation, as are six other members of the
Committee--Senators Feinstein, Feingold, Schumer, Durbin,
Specter, and Franken. It just says we will have the same basic
rules of fair competition apply to insurers in the health
industry that apply to everybody else.
Last Congress, Senator Trent Lott, the former Senate
Republican Leader, and others on both sides of the aisle joined
me in introducing a much broader repeal of the insurance
industry's antitrust exemption. The one we are introducing now
is a scaled-down version of that.
I do not see how somebody can say with a straight face that
they should not be subject to the same antitrust laws as
everyone else. If they are operating in an appropriate fashion,
then they have got nothing to fear.
So I would hope this would be a key part of health
programs. There is more, and I will put my full statement in
the record.
[The prepared statement of Chairman Leahy appears as a
submission for the record.]
Chairman Leahy. I know we want to hear certainly from
Senator Hatch and the Chairman of the Antitrust Subcommittee,
Senator Kohl. Go ahead.
Senator Hatch. Do you want to go to Senator Kohl first?
Chairman Leahy. No. Go ahead.
STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM THE STATE
OF UTAH
Senator Hatch. Thank you, Mr. Chairman, and welcome,
Assistant Attorney General Varney. We appreciate you.
Thank you, Mr. Chairman. I want to thank the members of
this distinguished panel of witnesses for appearing here today,
including the Senate Majority Leader and the Assistant Attorney
General. These are indeed important issues, and it is my hope
that we can have an open and honest discussion.
Throughout this current health care debate, we have seen no
small amount of partisan wrangling and disagreement. Now, this
is to be expected when we are discussing issues about which
Members of Congress have strong philosophical differences and
really where one-sixth of the American economy is included.
However, despite these differences, I believe that we all want
to see the same results--namely, reduction in the cost of
health care in America.
None of us are indifferent to those in our Nation who are
facing mounting medical costs. We simply disagree as to what is
the best role for the Federal Government to play in addressing
these costs, and that is what brings us to today's hearing.
Today we are discussing the effect of the antitrust
exemptions enjoyed by the insurance industry which were put in
place by the McCarran-Ferguson Act. This is not a new debate,
and I believe that for most of us past discussions on this
topic will inform the current one.
Let me make my position clear. I believe that the essence
of capitalism in our free market system is competition. I
believe our antitrust laws, if properly and vigorously
enforced, enhance this fundamental element of our economic
system.
In my mind, there are few exceptions to the notion that
when companies compete with one another, consumers benefit. I
believe that is true in the insurance industry as in any other.
That being the case, I remain open to considering any reform
measures that will promote competition in the insurance sector.
And while this may include reforms of McCarran-Ferguson to
prevent actual abuses of the current system, I have as of yet
seen little evidence to justify a complete repeal of the
antitrust exemption for the insurance industry.
Now, this is true for a few reasons. First, I believe we
need to ensure that small insurance providers and independent
agents are able to remain competitive in the insurance market.
McCarran-Ferguson has allowed these providers to collaborate in
certain areas such as the evaluation-of-loss data, which is
vital to setting insurance rates. Smaller providers simply do
not have sufficient data on their own to remain competitive in
the insurance market. A complete repeal of McCarran-Ferguson
would, therefore, result in fewer, smaller competitors, leaving
the market for the larger firms.
Second, I believe limited collaboration between even large
competitors can result in lower prices for consumers. I think
that the data has shown that a ban on collaboration in the
insurance industry could result in higher costs for insurers
which will undoubtedly be passed on to our consumers. That
said, McCarran-Ferguson was put in place to allow some level of
collaboration and to ensure that States play the primary role
in regulating the insurance industry, not to exempt insurance
companies from the need to compete.
So, in the end, I believe any discussion of repealing the
antitrust exemption should be coupled with actual data that the
current market is not competitive. I hope that instead of
demonizing the insurance industry simply because it is
currently unpopular and an easy target will not take precedence
over a robust discussion of the actual state of the insurance
market.
I would also like to take a minute to discuss this
Committee's role in the overall health care debate. Last week,
for the first time the Congressional Budget Office released a
report addressing the costs of defensive medicine in our health
care system and the potential for tort reform to reduce those
costs. Defensive medicine, as we all know, are those procedures
and treatments which are redundant and often inappropriate that
doctors perform not to improve the health of their patients but
to avoid malpractice lawsuits. The CBO's letter on this issue
came just a few weeks after President Obama mentioned it in the
most recent address to Congress, and I am talking about
avoiding really wrongful medical liability lawsuits that are
brought mainly to get the defense costs, which are extensive in
almost every medical liability case.
According to the CBO, tort reform measures would reduce the
Federal deficit by $54 billion over 10 years, and the private
sector would see even more savings--$11 billion this year
alone. These are not insignificant figures, and I believe that
there is ample data demonstrating that the savings to our
overall health care system would be even larger. Yet it appears
that the President and the majority in Congress would rather
pay lip service to this issue rather than enact real reforms.
For my part, it is very frustrating, having worked on the
health care bills in both the HELP and Finance Committees,
hearing time and again from members of the majority that
reforming the medical malpractice liability system was a worthy
endeavor but outside those committees' jurisdictions. And here
we are in the Judiciary Committee, the Committee with
jurisdiction on these issues, and the majority has apparently
decided to once again pass on the opportunity to address this
important matter.
A few weeks ago, former DNC Chairman and physician Howard
Dean was speaking at a town hall meeting on health care. In
that meeting, he was asked why the House's health care bill did
not include any reforms to the medical malpractice system. In a
rare moment of candor on this issue, he stated that no such
reforms were in the bill because ``the people that wrote it did
not want to take on the trial lawyers in addition to everyone
else they were taking on.'' He was very frank about it.
I had hoped that, at least with regard to the Senate's
health care efforts, this statement would not hold true. But
after seeing this Committee literally pay only lip service to
the problem, I have to conclude that Governor Dean was speaking
for both the House and the Senate. However, I am aware that
this is not the subject of today's hearing, and I will not take
up any more of the Committee's time discussing that particular
issue.
But this is an important hearing. I can only be here a
short time, but I appreciate you holding it, Mr. Chairman, and
I appreciate our Chairman of the Subcommittee, Senator Kohl,
and, frankly, appreciate virtually everybody on this Committee.
Chairman Leahy. Well, thank you. And, of course, the reason
why malpractice was not in the Finance Committee bill is that
it does not have jurisdiction over that issue. We do. I am
happy to look at that or any other thing, but----
Senator Hatch. Well, I would like you to do that.
Chairman Leahy. But I am not going to look at it absent
legislation that will give us some honest accounting from the
insurance companies. This antitrust exemption really is a
significant part of health care legislation, but within our
jurisdiction.
Senator Kohl.
STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE STATE OF
WISCONSIN
Senator Kohl. Thank you, Mr. Chairman. We meet today to
examine the state of competition in the health insurance
market, a topic of great interest to all Americans who are
contending with rising health care costs as well as rising
health insurance premiums. Ms. Varney, we are particularly
pleased to see you here today.
Now, as health care costs continue to rise, consumers face
ever increasing premiums. A recent study by the Kaiser Family
Foundation found that health insurance premiums have risen by
over 120 percent in the past decade. The burden of rising
insurance rates is borne by millions of families and
individuals all across our country and also by large and small
businesses who find it increasingly difficult to offer health
insurance for their employees.
Health insurance consolidation has left consumers and
businesses with fewer choices, leading to higher prices and to
what many believe to be a decline in coverage. There can be no
doubt that vigorous competition in the health insurance
industry is essential to lower health insurance premiums for
consumers as well as businesses.
In this industry, as in all others, a healthy dose of
competition is the best remedy for that which ails American
consumers. We need to ensure that our antitrust enforcement
agencies are paying close attention to competition in this
industry and are prepared to take enforcement action where
necessary. At the same time, we need to recognize the important
role of State regulation in the insurance industry as well as
the needs of insurance companies to share information and risk-
of-loss data, particularly small companies who rely on this
information in order to compete with larger established
companies.
I am also glad Ms. Varney is here today because I want to
ask her about the state of competition in agriculture,
particularly in the dairy industry. Our small dairy farmers are
facing increasing consolidation among milk processors,
resulting in little choice of whom to sell their milk or at
what terms. I am interested to learn what steps, Ms. Varney,
you are planning to take to promote more competition in this
industry. Again, we thank you for being here today and look
forward to your testimony.
Chairman Leahy. Before we turn to Ms. Varney, I will ask
consent to put in the record a letter from the American
Hospital Association, which states in the context of health
care reform, this bill, the insurance industry bill, ``should
help to achieve the goal of fair play by eliminating antitrust
protection for price-fixing, bid-rigging, and market allocation
activities, which would undermine the success of a health
insurance exchange and the coverage it promises for millions of
Americans.''
[The letter appears as a submission for the record.]
Chairman Leahy. I will also ask consent to put in the
record a resolution from the National Association of Attorneys
General which represents State Attorneys General throughout the
country, and they state that the association supports repeal of
the McCarran-Ferguson Act's exemption for the business of
insurance from Federal antitrust laws. There have been others
that have submitted statements. Those will be put in the
record.
[The statement appears as a submission for the record.]
Chairman Leahy. Ms. Varney is the Assistant Attorney
General for the Antitrust Division, United States Department of
Justice. Prior to joining the Department of Justice, she was a
partner at the Washington, D.C., firm of Hogan & Hartson. She
was a member of the Antitrust Practice Group. She was head of
the Internet Practice Group. She served as a Commissioner at
the Federal Trade Commission from 1994 to 1997, where she was
the leading official in a variety of Internet competition
issues. She served as a Special Assistant to the President and
Secretary of the Cabinet. She received her bachelor's degree
from the State University of New York at Albany and her law
degree from Georgetown University, which, of course, always
makes me happy.
Ms. Varney, please go ahead.
STATEMENT OF CHRISTINE A. VARNEY, ASSISTANT ATTORNEY GENERAL,
ANTITRUST DIVISION, U.S. DEPARTMENT OF JUSTICE
Ms. Varney. Thank you, Senator. Good morning, Mr. Chairman
and members of the Committee. I am pleased to be here today to
discuss the McCarran-Ferguson Act's antitrust immunity for the
business of insurance.
Chairman Leahy. Bring your microphone just a little bit
closer.
Ms. Varney. The McCarran-Ferguson Act was designed to
delegate to the States the authority to regulate and tax the
business of insurance. It also created a broad antitrust
exemption based on State regulation.
Repeal or reform of the broad antitrust exemption currently
enjoyed by the insurance companies has been a perennial subject
of interest. Most recently, the Antitrust Modernization
Commission reviewed whether the McCarran exemption is necessary
to allow insurers to collect, aggregate, and review data on
losses. The AMC found that the exemption is no longer
necessary. The AMC concluded that insurance companies ``would
bear no greater risk than companies in other industries engaged
in data sharing and other collaborative undertakings,'' and
noted like all potentially beneficial competitor collaborations
such data sharing would be assessed by antitrust enforcers and
the courts under a rule of reason. Such an assessment would
fully consider the potential procompetitive effects of such
conduct and condemn it only if, on balance, it was
anticompetitive.
The Department is generally opposed to exemptions from the
antitrust laws. The antitrust laws reflect our society's belief
that competition enhances consumer welfare and promotes our
economic and political freedoms. Exceptions from that policy
should be--and fortunately are--relatively rare. Those who
advocate the creation of a new antitrust exemption, or the
preservation of a longstanding exemption such as the McCarran-
Ferguson Act, bear a heavy burden in justifying that exemption.
The McCarran exemption has been subject to criticism as to
its results. One antitrust treatise notes that under McCarran,
the presence of even minimal State regulation, even on issues
unrelated to the antitrust suit, is generally sufficient to
preserve immunity. Indeed, the case law can be read as
suggesting that the Act precludes Federal antitrust action
whenever there is a State regulatory scheme, regardless of how
perfunctory it may be. It is fair to say that the McCarran
exemption is very expansive with regard to anything that may be
the business of insurance, including premium pricing and market
allocations. As a result, the most egregiously anticompetitive
claims, such as naked agreements fixing price or reducing
coverage, are virtually always immune from antitrust
prosecution.
Concerns over the exemption's effects are especially
relevant given the importance of health insurance reform to our
Nation. There is a general consensus that health insurance
reform should be built on a strong commitment to competition in
all health care markets, including those for health and medical
malpractice insurance. Repealing the McCarran-Ferguson Act
would allow competition to have a greater role in reforming
health and medical malpractice insurance markets than would
otherwise be the case.
In evaluating the need for an antitrust exemption, the
Congress should also consider the flexible nature of the
antitrust laws as interpreted in recent cases. These cases
allow for a rule-of-reason review. An assertion that particular
procompetitive behavior would violate the antitrust laws and,
thus, should be exempted fails to take into account the
economically sound competitive analysis that is used today to
carefully circumscribe per se rules.
The flexibility of the antitrust laws and their crucial
importance to the economy argue strongly against antitrust
exemptions that are not clearly and convincingly justified.
There are strong indications that the possible
justification for the broad insurance antitrust exemption in
McCarran when it was enacted in 1945 are no longer valid. To
the extent that the exemption was designed to enable the States
to continue to regulate the business of insurance, it is no
longer necessary. The state action doctrine was undeveloped in
1945. Today that state action doctrine allows a State to
immunize what the antitrust laws may otherwise proscribe.
The application of the antitrust laws to potentially
procompetitive collective activity has also become far more
sophisticated in the 62 years since McCarran was enacted. Some
forms of joint activity that might have been prohibited under
earlier, more restrictive doctrines are now clearly
permissible, or at the very least analyzed under a rule of
reason that takes appropriate account of the circumstances and
efficient operation of a particular industry. Thus, there is
far less reason for concern that overly restrictive antitrust
rulings would impair the insurance industry's efficiency.
In sum, the Department of Justice generally supports the
idea of repealing antitrust exemptions. However, we take no
position as to how and when Congress should address the issue.
In conjunction with the administration's efforts to strengthen
insurance regulation and the States' role in setting and
enforcing policies, the Department supports efforts to bring
more competition to the health insurance marketplace that
lowers costs, expands choice, and improves quality for
families, businesses, and Government. As you know, the
administration has been working closely with the Congress to
enact health care reform that lowers costs and offers
affordable coverage to all Americans. Yesterday, the Senate
Finance Committee became the fifth and final Committee to
report out a health reform bill. The President has said that
these reforms will greatly benefit Americans from all walks of
life, as well as the economy as a whole. We know that you share
this goal, and we look forward to working with you and your
colleagues in achieving our common objectives.
Mr. Chairman, this concludes my prepared statement. I would
be happy to address questions.
[The prepared statement of Ms. Varney appears as a
submission for the record.]
Chairman Leahy. Thank you.
Before we go to questions, Ms. Varney, Senator Reid, the
Majority Leader, is here, and I know he is juggling about 12
other things for being here. So I am going to yield to Senator
Reid.
STATEMENT OF HON. HARRY REID, A U.S. SENATOR FROM THE STATE OF
NEVADA
Senator Reid. Mr. Chairman, thank you very much for
allowing me to testify. I appreciate the members of the
Committee and the Ranking Member for listening to me.
Mr. Chairman, you and I had the good fortune to serve in
the Senate with Paul Simon. I had the good fortune of serving
with him, the Senator from Illinois. He and I were lieutenant
Governors. We served in the House together, and he is one of my
favorite people I have ever dealt with in Government. And he
had a lot of causes. That is who Paul Simon was. But the one
cause that he talked about incessantly was to get rid of the
McCarran-Ferguson anticompetitive provision that allows--they
have this blanket antitrust exemption. It is something that
should have been done a long time ago. I do not know what Pat
McCarran had in mind when he lent his name to this, but that is
a story for another day.
And, Mr. President--or, Mr. Chairman, I am sorry, one needs
only to read the news today and find out what is going on
around the country today with the barrage of paid
advertisements the insurance industry is doing now to prevent a
health care bill from passing. They really are desirous of
continuing their monopoly they have in America today.
There is not anything we could do to satisfy them in this
health care bill. Nothing. If we did this, they would want
that. They are so anticompetitive. Why? Because they make more
money than any other business in America today.
I have received hundreds and hundreds of letters, probably
now in the thousands of e-mails, from constituents who are
concerned about adequate health care. One of my constituents in
Boulder City, Nevada, runs a small business. She is paying a
huge amount of money each month for the most basic health care
package she could find. Her rates keep going up. No other
company will insure her.
Another of my constituents, a psychologist who runs a small
practice with a handful of employees, has always paid 100
percent of his workers' health care costs. The insurance
company he uses has decided to raise its rates almost 50
percent-46 percent to be exact. He cannot afford this, and he
will join the ranks, as will his employees, of the uninsured,
because there is no option, public or otherwise.
Free competition is fundamental to our economy and
essential to the American character that we have developed in
these 200-plus years.
It is one of the most important decisions that we make, and
that is, to make sure the insurance industry is playing by the
same rules as everyone else and that they are subject to
competition.
What a sweet deal they have, Mr. President.
Competition is what allows great ideas to flourish, and it
improves prices and quality for consumers. It allows new
businesses to enter the market. It gives incentives to
entrepreneurs. It fuels innovation.
America's free and open marketplace gives consumers choices
and encourages risk taking, and it has been the birthplace of
the greatest economy in the history of the world.
That is why we have Federal laws that prohibit price
fixing, bid rigging, and collusion between companies within an
industry. When companies are forced to compete with one
another, the American people benefit. This is not a Democratic
Party idea. This first came about with a Republican--Theodore
Roosevelt, the trust buster. These are financial trusts, not
personal trusts.
Take health insurance as an example.
Providing this blanket exemption for insurance companies to
antitrust laws has been anticompetitive and damaging to the
American economy, and that is a gross understatement, I repeat.
Health insurance premiums have continued to rise at a rapid
rate, forcing businesses to cut back on health insurance
coverage and forcing many families to choose between health
insurance and basic necessities.
Mr. Chairman, employers do not have health insurance
because they are cheap or mean. They cannot afford it.
All too often, working families have to forego health
insurance. In fact, the primary reason people are uninsured is
due to the high and escalating costs of health insurance.
I think it speaks volumes to find out that last year in
America three-quarters of a million people filed bankruptcy
because of their medical bills. Next year it will be the same,
probably more.
The increasing costs impact the costs of Government health
programs like Medicare and Medicaid and the costs of providing
health insurance to Federal Government employees. And despite
rising costs, insurance companies are underpaying doctors for
their services with many of the monopolistic practices they
have developed.
Remember the movie--Jack Nicholson was in it, and there was
a point in there where they were bashing managed care, and
audiences all over America cheered when that part came up in
the movie. Why? Because people hate what is happening to them.
They have no control.
Insurance companies have become so large they dominate
entire regions of the country, and that is what you would
expect when you see an industry protected from the antitrust
laws. You see, I repeat, insurance companies becoming so large
they dominate an entire region of the country. They not only
damage general businesses; they prevent insurance companies
from starting up.
They have become so dominant that they dictate business
practices. They are so influential that they exert tremendous
influence over public policy, as seen by the millions of
dollars they are spending today in America bashing the health
care programs that we are trying to initiate.
In particular, exempting health insurance companies has had
a negative effect on the American people, and that is a gross
understatement. Health insurance companies have so much
authority that they often dictate what course of treatment
patients receive.
When you do have health insurance, more than 30 percent of
the claims made are turned down. They have armies of people
figuring out ways not to pay people for something that happens
to them in the way of a medical treatment. Health insurance
monopolies should not be making health insurance--I am sorry.
Health insurance monopolies should not be making health care
decisions for patients--and for doctors. No one should come
between a patient and their doctor when it comes to making
health care decisions, but in America, the insurance companies
come between them millions of times a day.
Patients should be able to choose, just like Members of
Congress are able to choose, from a variety of different health
care plans. There is no reason why insurance companies should
be allowed to form monopolies and dictate health choices.
I so appreciate, Mr. Chairman, your sponsoring this
legislation. The minute I saw it, I could not get to my staff
quickly enough to make me happy to join with you.
There is no reason why the insurance companies should have
exemption from antitrust laws, this blanket exemption. And, you
know, they have the audacity to say, ``Well, we are subject to
the antitrust laws of States.'' That is laughable.
To the extent insurance companies need to share information
to provide their services, let them do what other industries
have to do; they are no different than any other business: Seek
prior authorization and guidelines from the Department of
Justice and others for how they can work together. This guise
they have used for decades saying, ``Well, we cannot share
information if we do not have this monopoly.'' I am sure that
the automobile industry felt the same way. Lawyers feel the
same way. Doctors, hospitals all feel the same way. But they
are subject to the law, and so should these insurance companies
be.
They should be subject to the same Federal oversight as
every other industry. Their price-setting and information-
sharing practices should not be permitted to take place out of
public view, but should be brought out into the light of day.
So I urge all of my colleagues on this Committee and in the
Senate to get this out of Committee as quickly as possible and
let us pass it.
Now, the reason they are so upset and the reason they are
running these ads is the bill that came out of the Finance
Committee chips away at this monopoly that they have, and they
hate that. They want to be untouched, as they have been for 60
years. So as far as doing something to help the American
people, Mr. President, there are a lot of things we can do. But
your sponsoring this bill and getting this out of this
Committee sends a tremendous message, an important message to
the American people, and the people of Vermont are proud of
you, as well they should be, for this and other reasons.
[The prepared statement of Senator Reid appears as a
submission for the record.]
Chairman Leahy. Thank you. Thank you, Mr. Leader. It is
interesting. As I said before, your predecessor as Majority
Leader, Senator Lott, had been a sponsor of this. You were a
sponsor of this. It is a bipartisan--I think it is a
nonpartisan thing. Basically what we are saying is everybody
should be subjected to the laws. And if you are obeying the
law, if you are following the law, if you are not breaking the
laws that are set up to protect consumers, you have got nothing
to fear. So that is all we are saying.
Unless there is a question of the Leader, I know you have
to go back, Senator Reid, so thank you very much for taking the
time to be here.
Ms. Varney, I also want to thank you for being here. Did
you finish your statement?
Ms. Varney. I did. I guess it was not that memorable.
Chairman Leahy. I know that you offered to yield to Senator
Reid.
Ms. Varney. I did. He declined.
Chairman Leahy. He let you go ahead. That prairie way of
being sure to give everybody a chance. It sounds like somebody
took the cork out of the bottle.
[Laughter.]
Chairman Leahy. I do appreciate your being here. You know,
I have said this to you before privately, and I said it to you
in Vermont. But I am glad to see the administration taking
antitrust enforcement so seriously. You have announced the
intention to be tough on antitrust enforcement. You are showing
it.
A few weeks ago, you were in Vermont at a Judiciary hearing
to discuss competition issues in the dairy industry. That
hearing was very compelling. It was of interest to many of us
on this Committee. Having you here is very helpful.
You said that the Antitrust Division is suspect of
antitrust exemptions generally. Are there any procompetitive
justifications for allowing price fixing, bid rigging, and
market allocation to the health insurance and medical
malpractice industries? Is there a reason that would help the
consumers to have those exemptions?
Ms. Varney. Well, Senator, I think historically there was a
view that you had to be able to share risk and loss data over
time in order to come up with future projections. I think that
concern is largely alleviated now because in many, many
industries, as Senator Reid noted, you can absolutely share
historical data, and so long as you are sharing it on a blinded
basis, you can use it to project future trends.
So I do not think that the reasons that were in existence
in 1945 are still very viable to justify this exemption.
Chairman Leahy. A lot of industries share safety data, for
example, do they not?
Ms. Varney. Yes, they do.
Chairman Leahy. The legislation I introduced, the Health
Insurance Industry Antitrust Enforcement Act, only repeals the
McCarran-Ferguson exemption for what I think we would all agree
are egregious violations of the antitrust laws--price fixing
and bid rigging and market allocation. Why would somebody
object to that?
Ms. Varney. I do not know that they would, Senator. I
certainly would not.
Chairman Leahy. The insurance companies apparently do,
according to what Senator Reid and others have said.
Ms. Varney. Well, again, I think that it is time for
everybody to realistically assess how you can share
information. We see it in many, many industries. There is no
prohibition in the antitrust law on sharing historical data.
There is no prohibition on coming up with future trend
projections, so long as it is blinded so you cannot tell whose
data are whose. And it happens across the board. It happens in
the lumber industry, in the paper industry, in the safety
industries. Law firms share historical data to project the
future. I mean, data sharing is a well-recognized undertaking
that, when done appropriately, when you are not talking about
fixing price, when you are not talking about allocating
markets, is absolutely permissible under the law.
Chairman Leahy. Your State colleagues, State Attorneys
General--I mentioned the resolution which I put in the record
from the National Association of Attorneys General, and they
have expressed their support for the repeal of McCarran-
Ferguson. Now, how do you go about working with them? How does
the Federal Government, the Attorney General's office, how do
you work with other attorneys general in the States on
anticompetitive antitrust matters?
Ms. Varney. Well, we work very closely. I was just last
week in New York at a meeting of several of the Attorneys
General where we were outlining areas that we could
beneficially work together. One I think we are all interested
in, particularly you, Senator Kohl, is agriculture, and in any
area where the State Attorneys General are the front line of
what is happening to consumers, that is an area where we can
work very closely with them. There is a long tradition of
something called ``multi-state task force,'' where several
attorneys general can come together and agree with the
Department of Justice that we will coordinate an investigation
or a prosecution, share data, share resources. Oftentimes, the
States like us to take the lead because we may have more
resources. Other times, particular States may have more
expertise, and we will support them. But we work very closely
with the State attorneys general, and this is an area that we
would work closely with them.
Chairman Leahy. I see a high concentration, I see a lack of
competition in the medical insurance market. You cannot look at
that today because of the antitrust exemption. If the antitrust
exemption was removed, is that something that would at least
have inquiry or review by the Department of Justice?
Ms. Varney. Yes, Senator, I am also aware that in several
regions there is a very high concentration, and as we have
talked about before, in any industry where you see significant
concentration, whether it is regionally or nationally, you want
to look very carefully at what are the competitive effects of
such concentration, so yes.
Chairman Leahy. Thank you.
Senator Kohl.
Senator Kohl. Thank you very much, Mr. Chairman.
Ms. Varney, according to the AMA, in the past 12 years out
of 400 health insurance mergers, the Justice Department
challenged only two. At the same time, health insurance
premiums have risen 120 percent over the past decade. Many
industry observers blame sharp industry consolidation for these
rising premiums.
Do you believe that antitrust enforcement officials could
have done more to prevent health insurance industry
consolidation? And what is your view of the record of antitrust
enforcement in the health insurance industry in recent years?
Ms. Varney. Well, Senator, clearly there is significant
concentration in the health insurance market in certain
regions. As you know, I have been at the Division just 6
months, and I was not involved in any of the prior reviews of
health insurance mergers, so I cannot comment specifically on
why they were let through or why they were not challenged.
I can say that as we continue to look in very concentrated
markets, there is real cause for concern when you are reducing
competition in those markets. On the other hand, there are some
geographic markets which are very competitive, where there are
multiple players, and you may see a case where you have a
smaller insurance company that may not be able to compete
effectively where there is robust competition.
So there can be reasons why you might see an acquisition,
but certainly particularly in areas of high concentration, I
would be very skeptical that there would not be a reduction in
competition.
Senator Kohl. Ms. Varney, dairy farmers across our country
are facing acute economic pain, as I am sure you are well
aware. They are being battered by a ``perfect storm'' of high
input costs and historically low dairy prices. They have lost
more than $4 billion in their equity. Their stories are
compelling and painful, and we clearly have to find a better
system.
As you know, there is a lot of complexity in dairy markets,
and there is growing concern that concentration and
consolidation on the processor side is hurting dairy farmers a
lot.
Some time ago, you and the Secretary of Agriculture
announced a series of workshops to look specifically at
antitrust in agriculture. I would like an update on your
progress and a commitment that at least one of your workshops
will delve specifically into dairy issues. Hopefully a workshop
of that sort might occur in the State of Wisconsin. I would
like some comment from you on that issue as well.
Ms. Varney. Absolutely, Senator. Well, we actually went to
Vermont a few weeks ago--although Vermont was a field hearing
of this Committee, and talked with the dairy farmers there and
began to get a real understanding of the reality of their day-
to-day life and how difficult it is to maintain their farms.
We are starting our own field hearings early in the spring
with the Secretary of Agriculture. This has never been done
before that the Department of Justice and the Department of
Agriculture have jointly examined concentration in the
agriculture industry. We are, of course, looking at dairy. It
is at the top of our list. For dairy farmers I met in Vermont,
it was so clear to me that they needed action; otherwise, they
were not going to be able to stay in business.
So we will be in Wisconsin. We will be looking at dairy. I
will keep you fully apprised of what we are finding. And, of
course, I cannot comment on whether or not we have any
investigations ongoing.
Senator Kohl. Well, it is good to know that you will be out
in Wisconsin with a field hearing.
Ms. Varney. I will.
Senator Kohl. Ms. Varney, at your confirmation hearing, we
discussed my bill to eliminate the wholly unwarranted antitrust
exemption enjoyed by the freight railroad industry.
Ms. Varney. Right.
Senator Kohl. Because of this exemption, rail shippers have
been victimized by the conduct of dominant railroads and have
no antitrust remedies. Higher rail shipping costs are passed
along to consumers, resulting in higher electricity bills,
higher food prices, and higher prices as well for manufactured
goods.
I was pleased that you stated at your confirmation that you
support the bill, but we have asked the Justice Department for
a letter in support of our railroad antitrust bill now for more
than a year. Can we expect such a letter from the Department
soon?
Ms. Varney. Well, as you know, Senator, the administration
has not yet taken a position on any particular antitrust
exemption bill, and they have not taken a position on the
railroad bill. I continue to be very interested in this matter
and continue to talk with your staff and the Committee staff
about this issue, as well as bring it to the attention of
everyone in the administration who is considering these issues.
Senator Kohl. Thank you so much, and thank you, Mr.
Chairman.
Chairman Leahy. Thank you very much.
Senator Feinstein.
Senator Feinstein. Thank you very much, Mr. Chairman. I
would like to just indicate my very strong support for your
bill.
I am deeply concerned about the medical insurance
marketplace. I believe it lacks a moral compass. I believe what
has happened in my State is untenable, and let me say a little
bit about what I think has happened.
Two large health insurers--namely, Anthem Blue Cross and
Kaiser Permanente--now control 58 percent of the market in the
entire State. In smaller markets, like Salinas, the top two
companies control up to 80 percent of the market. In the last 8
years, profits of the publicly owned medical insurance
companies have increased, I understand, around 428 percent
while premiums have escalated dramatically, doubling all across
the State.
I cannot tell you how many times when I go home people come
up to me and say, ``I just got a 20-percent increase in my
premium. I cannot handle it. Last year I had a 10-percent
increase.'' And the fact of the matter is, you know, as you get
older, most people have some condition or another. So premiums
are out of hand. I think CEO salaries are out of hand. I think
administrative costs, running about 23 percent, are out of
hand.
My bottom-line belief is that the health care medical
insurance industry should be nonprofit in the United States,
and the more I read about other countries, the more this view
is supported in my own mind.
To me, this bill is one small step we can take to send a
very loud signal to the medical insurance industry that times
have got to change. People cannot absorb it, and particularly
in my State. I think this bill really is necessary. I think it
is a bill whose time has come. I hope we pass it very speedily.
And, Ms. Varney, I hope your Department takes a very, very
affirmative position.
I can speak for a State that is almost 40 million people
now. Health care costs are high. Premium costs are out of
sight. And we have got huge unemployment. So it is a highly
concentrated market any way you look at it.
So I would just like, Mr. Chairman, without asking any
questions, to say I am 100 percent behind this bill, and I
thank you.
Chairman Leahy. Thank you, and if that is a problem in a
State as huge as California, you can imagine what it is like in
a small State like mine or others.
Senator Feingold is not here. Senator Whitehouse.
Senator Whitehouse. Mr. Chairman, may I yield to the
Assistant Majority Leader who is with us?
Senator Durbin. Go ahead.
Senator Whitehouse. Are you sure? All right.
Chairman Leahy. That is going to cost you later on, but go
ahead.
[Laughter.]
Senator Whitehouse. Ms. Varney, the AMA has calculated that
94 percent of metropolitan areas have a health insurance market
that is highly concentrated--which is a term of art--highly
concentrated according to Department of Justice standards. In
39 States, two health insurers control at least half of the
market, 39 out of 50. You have effectively a duopoly for the
majority of the market. And in nine States, a single insurer
controls at least 75 percent of the market. Really an effective
monopoly.
When you hear those numbers and you measure them against
the Department of Justice's standards for what is a competitive
versus a noncompetitive market, what is your reaction? And what
does having a market be deemed by the Department of Justice to
be ``highly concentrated'' mean?
Ms. Varney. Well, Senator, whenever you see concentration
numbers like the ones you just mentioned, we are deeply
concerned because the higher the concentration, the less
competition. When you do not have competition, you do not get
the best price, you do not get the best output. So we are
always concerned in any industry, including insurance, when you
see those levels of concentration.
At the moment it is the State attorneys general and the
State insurance commissioners that would have to examine any
behavior in a highly concentrated market, and we would welcome
them to do that. Should we have the authority, we would, of
course, closely examine those markets where there is such high
concentration.
Senator Whitehouse. Were you to have the authority, what
would it mean that those 94--essentially every metropolitan
area in the country is deemed ``highly concentrated.''
Ms. Varney. Well, I think what we would probably do would
be work with the State attorneys general and insurance
commissioners in those markets where those on the front lines
believe that there may be impermissible conduct that is keeping
those levels of concentration in place.
Senator Whitehouse. You were--I guess let me ask the
question a different way. The best argument that I have heard
for the antitrust exemption is that because an insurance
company has a hard time entering a market and pricing its
product if it does not have claims experience, it has to have a
proxy in order to facilitate that market entry, and the proxy
is ISO or, in the case of workers' compensation, NCCI, and they
provide general information that allows a company that does not
have claims experience to become a new entrant and in theory
reduces that barrier to entry. And it also helps small insurers
make that choice because they do not have the overhead to
calculate rates as readily as a great big company does.
That is the best case. I am not sure it is very convincing,
but I would like to hear your reaction to it.
Ms. Varney. I think, Senator, that is the historic case. In
1945, the state action doctrine and the rule of reason did not
really exist. State action doctrine was barely developed. So I
think today it is clear in multiple industries across many,
many sectors of the economy, there is no prohibition on sharing
historic data.
Senator Whitehouse. So long as you engage with the State
and get clearance that it is not, in fact, anticompetitive, and
that is an established process and procedure.
Ms. Varney. You can share historic data as long as you do
it carefully, you are not in any small closed rooms setting
prices, allocating markets. Many industries--in fact, that is a
service that many trade associations offer their members--they
take the data in, they strip it of any identification so it
becomes blind data. They aggregate it, and get historical data.
You can use that data to project future trends. That is
completely permissible under the antitrust laws.
Senator Whitehouse. And when they do that, if they want to
come to the Department of Justice to get clearance, do you----
Ms. Varney. We give them what is called a ``business review
letter.'' We work with them so that they understand the
parameters of how they can do this. We then set out our views
in what is called a business review letter that explains what
they can do.
Senator Whitehouse. And if they rely on the business review
letter, they are protected against----
Ms. Varney. I would generally protect them against
Government enforcement.
Senator Whitehouse. Very good. Thank you very much.
Thank you, Mr. Chairman.
Senator Kohl. [Presiding.] Thank you very much.
Senator Feingold.
Senator Feingold. Thank you, Mr. Chairman. I will make a
few comments, and I will just have a question for Ms. Varney.
The antitrust laws enacted in the early 20th century
provide essential protections for consumers and businesses, and
I also believe that those protections should apply to Americans
buying health and medical malpractice insurance. As Congress
debates the cost of health care, it is very much worth noting
that purchases of these insurance policies are particularly
susceptible to industry collusion leading to inflated prices.
But under current law, health and medical malpractice insurance
providers are exempt from the Federal antitrust regulations.
This is because, as we all know, the insurance industry was
given a statutory exemption from antitrust laws over 60 years
ago by the McCarran-Ferguson Act antitrust laws.
Since McCarran-Ferguson was enacted, it has become clear
that health and medical malpractice insurers have abused this
exemption to the detriment of patients and doctors everywhere.
Industry-specific antitrust exemptions are rarely justifiable.
And if there is a good reason to maintain the current exemption
for these parts of the insurance industry, I certainly have not
heard it.
Simply put, because of the insurance exemption, a
competitive market for health and medical malpractice insurance
does not exist. In 26 States, a single insurer covers at least
half of the population. In 39 States, two insurers control more
than half of the insurance market. A recent survey by the
American Medical Association found that most metropolitan areas
have a highly concentrated commercial market for health
insurance.
Now, this lack of competition has hurt both patients and
doctors. While market-dominating health insurance companies
have made record profits, basic coverage has become
unaffordable for millions of Americans. And in Wisconsin, the
price of health insurance premiums for families and individuals
has doubled over the last 10 years. If current trends hold,
family health insurance for a Wisconsin family will consume
46.2 percent of the projected median family income in 2016. In
addition, doctors around the country are suffering as medical
malpractice insurance providers profit from premiums that are
not commensurate with the cost of claims.
Without thorough competition, patients and doctors have
little choice but to continue paying whatever premiums the
dominant insurers in their market decide to charge, so
addressing this problem is crucial to health care reform and
does require legislative action to ensure that health and
medical malpractice insurance companies do not engage in
anticompetitive behavior.
Although insurance companies have certain informational
needs, there is no reason to exempt them from the regulation of
the most harmful anticompetitive practices. Without a repeal of
the antitrust exemption, insurance companies will continue to
have the power to gouge patients and doctors.
So I am also pleased to cosponsor S. 1681, Chairman Leahy's
bill, to fix this problem, and I want to commend him for
holding this hearing. And I also want to thank Assistant
Attorney General Christine Varney for appearing here today and
for all her outstanding efforts thus far to revitalize and
reinvigorate the Department of Justice's Antitrust Division.
Ms. Varney, you promised me at your confirmation hearing
that you would take a very serious look at what has been going
on in the agriculture industry, which obviously I have been
concerned about for years. You have been true to your word, and
I want to personally thank you on behalf of my constituents. I
hope the plans by the Departments of Justice and Agriculture
for a series of joint workshops next year will be followed by
similar partnerships with other agencies that have critical
oversight roles, such as the Commodity Futures Trading
Commission and the FTC. And, of course, I also can think of no
better place for a workshop on dairy than Wisconsin. I am so
pleased that Senator Kohl raised this with you and you
indicated that there would be one held there.
One question. Given your extensive background in antitrust
enforcement, how do the health insurance and medical
malpractice insurance industries compare to other industries
that you have examined in terms of market concentration? In
your view, are there serious imbalances in the marketplace for
these products that need to be addressed?
Ms. Varney. Well, Senator, we have not undertaken a
thorough evaluation of the price effect of concentration. I
know many others have, and we carefully monitored those
studies. I think it is a logical result that when you have the
levels of concentration that you see in the insurance industry,
you generally do see prices rising, often at a higher rate, as
Senator Feinstein mentioned, than other sectors of the economy.
Senator Feingold. Thank you, and thank you, Mr. Chairman.
Senator Kohl. Thank you very much, Senator Feingold.
Senator Kaufman.
Senator Kaufman. Thank you, Senator, and I want to thank
Chairman Leahy, first, for putting this bill in and, second,
for holding these hearings today. I am pleased to see Ms.
Varney here. I think that you are getting a chorus from members
here about our unhappiness with what is going on in terms of
antitrust over a whole series of years, and I think, as I said
at your confirmation, you are a perfect choice for this to get
this straightened out. And my feeling is there is a new sheriff
in town and we are going to go after a lot of these things that
go on, which have been eloquently presented by other members.
Let me ask you a question about how important you think it
is that we include an antitrust savings clause in any health
care legislation that we pass.
Ms. Varney. Well, I think that the administration is
working closely with the committees on the details that need to
go into any final bill, so I think we need to look at the bill
as a whole so we understand what language and what standards
will be appropriate.
Senator Kaufman. But you think that is important.
Ms. Varney. Very important.
Senator Kaufman. Good. The second thing is: What have you
done to change the deliberative process in the Antitrust
Division to let various stakeholders participate in the
process?
Ms. Varney. Well, we went up to Vermont, to start. We
participated in a Senate Judiciary field hearing with the dairy
farmers in Vermont. We are undertaking the field workshops with
USDA to hear from all sectors of agriculture. We also have
announced recently that we are reviewing our merger guidelines,
so we will be working with all sectors of industry and
consumers on whether or not we are completely transparent in
the way that we are doing merger reviews. So we are trying to
bring everybody into the process.
Senator Kaufman. Great. What is the biggest challenge--I
mean, I have not had a chance to ask you this. What is the
biggest challenge since you took over the Division?
Ms. Varney. Trying to find enough hours in the day to get
everything done that we want to get done.
Senator Kaufman. Good. And, finally, I know last week the
United Kingdom Competition Commission blocked a proposed merger
of Live Nation and Ticketmaster, and you have a thing underway.
Can we expect a decision somewhat soon in that case?
Ms. Varney. You know, we cannot comment on any ongoing
investigations, but we take our charge seriously, and when we
get to the end, we will get to the end.
Senator Kaufman. Great. Thank you.
Thank you, Mr. Chairman.
Senator Kohl. Thank you very much.
Senator Franken.
Senator Franken. Thank you, Mr. Chairman.
Ms. Varney, there is a recent case in which Anthem Health
Plans, a subsidiary of WellPoint, is suing the State of Maine.
The company argues that the State must guarantee them a 3-
percent profit margin, even though this margin would result in
an 18.5-percent premium increase on 12,000 individual policy
holders.
I am not aware of any industry that is entitled to any
guaranteed margin of profit. Are you?
Ms. Varney. No, I am not, Senator.
Senator Franken. OK. The average individual Maine health
insurance consumer is paying four times as much today for
health care as they did 10 years ago. Do you believe the fact
that Anthem controls nearly 80 percent of the insurance market
in Maine has fostered this company's I guess brazen behavior at
the expense of beneficiaries' pocketbooks?
Ms. Varney. Well, Senator, when you do not have to compete,
you can get pretty big profit margins so, yes, if you have got
that kind of market share.
Senator Franken. Let me ask you something that I do not--it
is a good kind of question because I do not know the answer to
it. Sometimes you hear folks say, well, we should open up the
insurance market, you should be able to buy insurance in any
other State. And I know that in Minnesota, for example, we have
basic standards for which, you know, insurance companies have
to meet in order to do business in Minnesota, and the danger is
that you would get--you know, this would get rid of all the
standards, and so you would not know what you were buying.
Ms. Varney. Right.
Senator Franken. Does the fact that McCarran basically
gives States the jurisdiction over antitrust, does that
complicate the issue of if you were to allow people to buy
insurance across State lines? Does that make it----
Ms. Varney. I do not think, Senator, that it makes it more
complicated. I think States can still take and should take a
primary role in determining what is required to do business in
their State when it comes to offering insurance products. At
the same time, that does not need to preclude any insurer's
ability to be reviewed under the Federal antitrust laws. I
think they are consistent.
Senator Franken. That is not what I am asking. I am saying
that if you did not change this, if you kept this the same,
would that have any effect over the concept of being able to
buy plans from other States? So, in other words, there was no
Federal regulation over at least the antitrust part of
insurance companies, in addition to all the other issues in
terms of what is covered and what is not covered and those kind
of standards, does this also complicate that notion of getting
insurance products from other States, health insurance
products?
Ms. Varney. You know, Senator, I am not familiar with the
complexities that you are describing. I would like to look into
it and maybe get back to your office with a view of how that
would work, how it might work.
Senator Franken. OK. I personally hear this a lot about,
oh, well, you should be able to buy insurance products from--
you know, we should deregulate it so you could buy insurance
products from all over the place. But in Minnesota, there is
well-baby care. There are other kinds of things--shots for
babies that are covered that are not covered in other States.
And I just do not want to lower our standards, and any
insurance company that operates--that wants to operate in
Minnesota can just simply meet our standards. There are no
barriers to that.
Ms. Varney. And I do not think that what we are talking
about today would change that. I think States would still be
entitled to and should set the standards for doing insurance
business in their State. But let me have a look at it in a
little bit more detail.
Senator Franken. Yes, what I am asking is, if you continue
McCarran, would it be an argument against buying insurance
products from other States, health insurance products.
Ms. Varney. Yes, let me get you a thoughtful analysis.
Senator Franken. OK. Thank you. I appreciate that.
Thank you, Mr. Chairman.
Chairman Leahy. Thank you.
Senator Durbin.
Senator Durbin. Thank you very much, Ms. Varney. And so
when the health insurance industry tells us Monday night, ``We
are raising rates; premiums are going up,'' they can kind of
say that with some authority, because if they decide to come
together and fix prices, for example, allocate markets, any
other company might be brought to court for it saying you have
violated antitrust. But a health insurance company under
McCarran-Ferguson would not be subject to Federal prosecution,
would they?
Ms. Varney. They would not, Senator.
Senator Durbin. It puts it in perspective for a lot of us,
incidentally, who support a public option and think that they
need real competition to keep them honest on this.
I want to go into the medical malpractice insurance area
because it has been a topic during this health care reform
debate. And I do not know how familiar you are with this
market, but here is an insurance market that I think raises
some serious questions.
According to the National Association of Insurance
Commissioners, in 2008 medical malpractice insurers had $11.2
billion in direct premiums written, paid out $4.1 billion in
losses--in other words, $7.1 billion more in premiums than paid
out in tort claims. About $2.1 billion went for defense and
cost containment, but that left them $5 billion at the end of
the day.
Also, between 2003 and 2008, the same data shows that the
total losses paid out by medical malpractice insurers decreased
by over 50 percent, from $8.4 billion to $4.1 billion, while
premiums, direct premiums charged, actually increased during
that period of time from $10.6 billion to $11.2 billion.
Do you believe that lack of competition in the medical
malpractice insurance industry is enabling insurers to
overcharge policy holders and pocket more money?
Ms. Varney. Senator, in any region where there are the
levels of concentration we have been talking about today, there
is very little incentive to compete on price. So the more
competition you can get into those markets, the better price
you are going to get and the better quality product you are
going to get.
Senator Durbin. And isn't that at the basis of our
antitrust law?
Ms. Varney. It certainly is.
Senator Durbin. Competition.
Ms. Varney. Yes, sir.
Senator Durbin. And this industry has been exempt from that
basic requirement. In the next panel, Dr. Powell is going to
say that he believes McCarran-Ferguson ``increases competition
by promoting the characteristics of competitive markets.'' And
he goes on to say, ``From all indications, the law has been
remarkably successful in achieving this objective.''
Ms. Varney, do you have any comment or response?
Ms. Varney. I have not seen Dr. Powell's testimony, but in
my testimony I have referenced several studies that evaluate
the cost impact of McCarran.
Senator Durbin. Do you believe health and medical
malpractice insurance markets in America are competitive?
Ms. Varney. I think they are highly concentrated in many
geographic regions. In any region where you see the levels of
concentration that we have been discussing here today, I
certainly do not think they are competitive.
Senator Durbin. The loss ratio in medical malpractice
insurance in 2008 was 36 percent, according to A.M. Best,
significantly lower than the loss ratio for major types of
property/casualty insurance. For example, in 2008 private auto
liability insurance had a loss ratio of 66 percent, homeowners
72 percent, workers' comp 65 percent.
In your opinion, what accounts for the lower loss ratio for
medical malpractice insurance?
Ms. Varney. Well, it certainly could be lack of
competition.
Senator Durbin. I think so.
Let me ask you this: In the course of this debate on
McCarran-Ferguson, I am familiar with what used to exist called
the Insurance Services Office. Is that still in existence--ISO?
Ms. Varney. I do not know.
Senator Durbin. Well, this used to be their common meeting
place for discussing rates and premiums and market allocations.
That is where they came together in violation--what would have
violated the antitrust laws for any other company.
Ms. Varney. Right.
Senator Durbin. But an insurance company could exchange
that information and parcel out the market and set their prices
through their own devices.
And so in this situation, do we do any investigation of
that kind of activity by the insurance industry?
Ms. Varney. No, we do not. Not the Federal antitrust
authorities.
Senator Durbin. Because of McCarran-Ferguson.
Ms. Varney. Because of McCarran.
Senator Durbin. Well, I would say that there has never been
a better time for us to address this, and the health insurance
industry has thrown down the gauntlet Monday night and said,
``We are going to increase premiums no matter what you do, and
we are going to hold you responsible for those.'' And I think
if there is ever a time when we need to confront what is a
clear inequity in the law, it is now. Senator Leahy's bill is a
good one, and I am glad to cosponsor it.
Thank you.
Chairman Leahy. Thank you very much.
It is interesting. Somebody asked if I had scheduled this
hearing as a response to exactly the ads that you stated,
Senator Durbin, when they said they were just going to get
together and increase premiums, which would be a violation if
any other industry did it. And I said, no, actually it was
coincidence. As you know, the notices scheduled this hearing
some time previous, and that is why I was surprised at the ad
because it makes the point so strongly.
Senator Schumer.
Senator Schumer. Well, thank you, Mr. Chairman. Again, I
want to thank you for introducing this legislation. Again, I
guess the insurance industry is stirring the pot and saying
this is retaliation for them being off the reservation. Let me
read the date when this legislation was introduced by Senator
Leahy for himself, Senators Feingold, Cantwell, Durbin,
Schumer, and Feinstein: September 17, 2009. And I believe
Senator Leahy has introduced similar legislation in previous
Congresses as well.
So this is a longstanding issue, and maybe because the
insurance industry blundered so badly on Monday, it gives us a
greater opportunity to pass it. But it has long been out there
as something we care about.
Now, I remain committed to the notion that only increased
competition is going to give insurers the incentive they need
to keep the costs down. That is why I have been fighting for a
public option to be included in health reform for months, and
that is why I am proud to be a cosponsor of the important
legislation Senator Leahy has produced.
Removing the insurance companies' antitrust exemption is so
important that I think we should all work with Chairman Leahy
to make sure that it is part of our health reform bill, the
joint bill that Senator Reid will put together, and I for one
am committed to helping you, Senator Leahy, make sure it is in
that bill to get it done.
Now, back in 1945--this is interesting--when Congress
exempted insurers from Federal antitrust laws, the insurance
companies argued they needed the exemption because insurers are
not engaged in interstate commerce. I want to say that again.
The rationale for McCarran-Ferguson was that the insurance
companies argued that they were not engaged in interstate
commerce.
Well, a lot has changed since 1945. We should not be
surprised to learn that 60 years later the insurance industry
is one of the most highly concentrated in our economy; 94
percent of insurance markets in the U.S. are now regarded as
highly concentrated by the objective definition used by the
Justice Department. In nearly 40 States, two insurance
companies dominate over half the market. That is not
acceptable. We need more competition.
And at the very least, the onus should be on the insurance
industry to come forward with real reasons why it is entitled
to do things like write policy language in collaboration with
so-called competitors. So far I have not seen any.
In fact, after the heavily slanted and really one-sided
report that was issued by the insurance industry early this
week, you have to conclude they are sort of out of arguments.
Let me give an example of what this antitrust exemption does in
a State like New York, which, incidentally, is probably more
competitive than most of the other States, even though we are
not very competitive. I was talking to contractors who hire
construction workers. They only have a choice among three firms
for that insurance. When there are only three firms, there is
never price competition, as you point out.
But we have a for-profit insurer called United Health. It
owns the very company that is called Ingenix that determines
whether the price of a doctor's visit is reasonable and
customary. Ingenix is not an independent group. It is a black
box for consumers. And because there is no antitrust
regulation, other insurers use Ingenix as well to decide what
is reasonable and customary. So let me give an example.
My doctor tells me my visit with her costs $100. But
WellPoint, my insurer, will only pay $60 because Ingenix, owned
by United Health, tells United Health that is what the
reasonable and customary rate is, and WellPoint works with
United Health to set the reimbursement rate. The consumer is
totally stuck and has to pay that $40, and it is not--you know,
it is clear that it is sort of not fair to have this one
company owned by another health insurance company set the rates
for everybody. That is one of the reasons health costs have
gone up.
So true competition means true choice for consumers. It
means innovation and improved service, and I want to work
with--(audio failure)--certain a potential antitrust
investigation should McCarran-Ferguson be lifted.
Chairman Leahy. Do you want to respond, Ms. Varney. The red
talk button should be on.
Senator Schumer. She speaks softly but carries a big stick.
Chairman Leahy. We seem to--excuse me just a moment. I do
want to get this in. We seem to be having some difficulty
because the recorder is having trouble getting it. We will just
switch machines. It is still not coming through. Hold on just a
moment, and we will make sure--this does not come out of
Senator Schumer's time.
You are not getting any of this. Is that right? You can
hear me, but you are not getting any of the rest. It sounds
like we are doing the cell phone ads, but the reporter--hold on
just a moment.
Go ahead.
Senator Schumer. Thank you. Let me ask this: What are the
steps that your Division might be able to do to--well, you have
answered that one before. If McCarran-Ferguson is repealed,
would there still be other barriers in the way in terms of
antitrust law to reduce competition?
Good. So it sort of would be a pretty complete solution.
OK. Thank you, Mr. Chairman.
Chairman Leahy. Thank you very much. We will put other
questions for Ms. Varney in the record, and we will take a 5-
minute break, and we will switch for the next two witnesses.
And I would also ask the staff to double-check those
microphones in the meantime.
Ms. Varney, thank you very much. I do want to just note--
thank you one more time for coming to Vermont for the hearing.
I know that was a very long hearing. Many, many people have
taken the time to come up to me in Vermont who were there and
say how impressed they were with your understanding of the
issues and the fact you listened. They realize you have to make
up your own mind on what you are going to do, but they were
impressed that you took the time and listened to them. So thank
you very much.
Ms. Varney. Thank you.
[Recess 11:28 a.m. to 11:33 a.m.]
Chairman Leahy. We are going to have to move along. The
first witness is J. Robert Hunter. Mr. Hunter is the Director
of Insurance for the Consumer Federation of America. He serves
as a consultant on public policy and actuarial issues. He has
extensive experience working on these issues. He served as a
Federal Insurance Administrator under Presidents Ford and
Carter as well as the Texas Insurance Commissioner. He received
the Secretary of Housing and Urban Development's Award for
Excellent Service for his work between 1971 and 1977, and the
Consumer Federation's Esther Peterson Consumer Service Award
for Lifetime Service in 2002.
Mr. Hunter, please go ahead.
STATEMENT OF J. ROBERT HUNTER, DIRECTOR OF INSURANCE, CONSUMER
FEDERATION OF AMERICA, WASHINGTON, D.C.
Mr. Hunter. Thank you, Mr. Chairman. Oh, that is working.
Good morning. CFA offers our wholehearted support to your
legislation, Mr. Chairman, S. 1681, because it is time that
health insurers played by the rules of competition as the rest
of the commercial enterprises in America do. In fact, we wish
you would go beyond it and repeal the antitrust exemption
completely for not only health insurance but the entire
insurance industry at some point. But this is a great first
step.
Consider the following anticompetitive activities:
Cartel-like bureaus, such as ISO, day after day produce
price guidance on 70 percent of the rate that many insurers use
as the basis for the pricing, including medical malpractice
guidance. Rate bureaus manipulate data and project pricing into
the future using steps legal experts have told Congress would
be illegal absent the McCarran immunity. This is particularly
bad for lines of insurance, like medical malpractice, where the
bureau rates exacerbate the spikes in prices during hard market
periods and generally lead to overpricing.
Rate bureaus have cartel-like control of rate making data.
They use it to establish classes and territories that are used
to rate people and data are collected in that format, enforcing
significant uniformity.
Bid-rigging, market allocation arrangements and hidden
kickbacks to brokers were uncovered by then Attorney General
Spitzer showing that even the largest, most sophisticated
buyers are victims of anticompetitive acts. The potential for
such abuses in health insurance must be removed.
But perhaps none of what we have learned recently is as
outrageous as the use of claims systems that artificially
create ``savings'' for insurers by underpaying claimants. For
example, when patients use non-network doctors, their insurance
company agrees to pay 70 percent to 80 percent of the
``reasonable and customary'' charges for a given medical
service in the same geographic area. If the doctor's bill is
higher than that rate, the patient must makeup the difference
or the doctor must settle for less. The use by many health
insurers, like Aetna and United Health, of recommendations
produced by Ingenix, a subsidiary of United Health, to place
reasonable and customary limits on benefits, led to
underpayment of health insurance benefits to claimants in New
York state of between 10 and 18 percent, according to findings
on the New York Attorney General Cuomo. If health insurers
collude on benefit levels, they certainly can collude on price,
markets and other aspects of their business.
A computerized claims system called Colossus has underpaid
consumers by billions of dollars by allowing insurers to tune
their claims payment recommendations to produce ``savings'' on
claims of those with medical injuries from auto accidents. I
have forwarded shocking, recently unsealed documentation of
this massive, and apparently coordinated, abuse to you, Mr.
Chairman. While lawsuits have begun to mitigate the damage to
consumers from Colossus for first party auto claims (like
uninsured motorists) for some insurers, the much larger use of
the product is in third party bodily injury liability, where
the use of the product, we believe, continues unabated.
We urge this Committee to look into the Inginex use by
major health insurers and also into Colossus User Groups and
other ways that insurers have worked together to create a way
to underpay America's insurance consumers billions of dollars
in claims. Ingenix costs consumers 10 to 28 percent of claims
and Colossus has resulted in underpayments of double digits as
well. Certainly antitrust exemptions are not intended to shield
this sort of scandalous joint activity.
We heard today that small insurance companies would not be
able to obtain historic data for the development of their
prices if the antitrust laws were applied to insurance. I have
carefully studied this claim for decades (the large insurers
always rush forward to protect the small insurers from the free
market and save themselves from competition as well) and there
is absolutely no evidence for this claim. Legal experts have
testified, including today, that procompetitive activities such
as collection and dissemination of historic data would be legal
under the current antitrust laws. What would end is what they
do with the data, which is jointly manipulate it to figure out
what the prices are going to be that they will charge in the
future.
It is true that some companies might have to hire some
additional actuarial service to replace the joint actions, and
if a State wanted to replicate some process such as joint
trending, it could do so under state action doctrine. But the
difference would be that the State would have to be actively
involved in regulating it instead of today where all you need
is a law on the books and not even effective regulation. This
would be a great step forward for consumers since today many
States provide very little oversight. It is time, Mr. Chairman,
for your bill to be adopted.
[The prepared statement of Mr. Hunter appears as a
submission for the record.]
Chairman Leahy. Thank you very much, Mr. Hunter.
Our next witness, Mr. Powell, holds the Whitbeck-Beyer
Chair of Insurance and Financial Services at the University of
Arkansas at Little Rock. His primary research interest is the
effects of regulation on insurance markets. In addition to his
academic pursuits, he serves as Treasurer on the board of
Arkansas Mutual Insurance Company, a physician-owned medical
professional liability insurance carrier founded in 2008. He
has his bachelor's degree from the University of South Carolina
and his Ph.D. from the University of Georgia.
Mr. Powell, sorry for all the confusion here, but glad to
have you here, sir. Please go ahead.
STATEMENT OF LAWRENCE S. POWELL, PH.D., ASSOCIATE PROFESSOR AND
WHITBECK-BEYER CHAIR OF INSURANCE AND FINANCIAL SERVICES,
UNIVERSITY OF ARKANSAS-LITTLE ROCK, COLLEGE OF BUSINESS, LITTLE
ROCK, ARKANSAS
Mr. Powell. Thank you, Mr. Chairman and members of the
Committee. It is truly an honor to be invited here to discuss
these important topics. As you said, my name is Lawrence
Powell, and I currently hold the Whitbeck-Beyer Chair at the
University of Arkansas-Little Rock. I am also a founding board
member of Arkansas Mutual Insurance Company, which is a
physician-owned insurer offering medical professional liability
coverage.
I want to briefly address two issues relevant to this
topic: First, that insurance pricing is an inherently difficult
task. Repealing the McCarran-Ferguson Act would further
exacerbate this difficulty. And, second, that the limited
antitrust exemption provided by McCarran enhances competition
in insurance markets. To repeal McCarran would at best maintain
the status quo in the near term, but going forward, it would
stifle competition to the detriment of consumers.
Pricing insurance is very difficult because the price has
to be set before all of the costs are known. And the difficulty
is amplified for medical professional liability insurance
because of its long claim tail. On average, an insurer does not
know the ultimate outcome of a claim until more than 4 years
after the potential loss event.
Losses also follow distinct trends over time. The trend of
claim frequency has reversed a few times in recent decades,
leading to substantial mispricing in certain periods. It is
clear and intuitive to recognize this possibility given the
time lag between suspicion and confirmation that a trend has
reversed. Therefore, these inflection points have brought about
infrequent temporary pricing and return anomalies in this line
of coverage.
In some years, ultimate losses differ from initial
estimates by more than in other years, but overall, the sum of
the initial estimates and the ultimate losses are remarkably
similar, differing by only 5 percent in the last three decades
or so.
In practice, McCarran permits insurers to pool data through
independent statistical agents that produce advisory loss costs
to eight insurers in the ratemaking process. This benefits
consumers by promoting financial strength, efficiency, and
competition in insurance markets. The ability to pool loss cost
data through independent statistical agents is----
Chairman Leahy. Excuse me, Mr. Powell. You understand this
bill would do nothing to stop removing the McCarran-Ferguson
exemption in this context. It would not stop--or prohibit
companies from sharing the loss information.
Mr. Powell. Well, my understanding is that it is currently
permitted to be done that way under McCarran and that we have
known that for more than six decades.
Chairman Leahy. But as Assistant Attorney General Varney
testified, this kind of sharing, blind sharing, would be
allowed.
Mr. Powell. My understanding--and I am not an attorney. My
understanding is that while it could be permitted, the
companies would have to file for permission to do so. It would
introduce additional costs as opposed to standing on the
precedent that has been around for 60-some years to increase
that cost for no benefit. I can come back and address this in
the remainder of my remarks.
So as I was saying, I think this benefits consumers by
promoting financial strength, efficiency, and competition, and
the ability to pool these data are most important for extreme
risks. These include very large and infrequent losses and new
exposures to loss. So should the underlying distribution of
losses change as a result of new medicine, new disease, or new
liability, insurers that currently rely largely on their own
past loss data would again benefit from advisory loss costs.
Any of these scenarios would introduce substantial new
uncertainty to insurance markets, increasing the price of
insurance.
The current markets enjoy several characteristics that
benefit consumers. First, consider the ownership structure of
medical professional liability insurers. Approximately 60
percent of U.S. private physicians are insured by physician-
owned companies. To believe that these companies are price
gouging physicians, we must first reach the flawed conclusion
that policyholders are price gouging themselves.
Medical professional liability markets in the United States
also exhibit substantial competition, suggesting that
additional antitrust measures would not benefit consumers.
Nearly 3,000 companies currently sell property and liability
insurance in the United States. Of these, a few hundred
participate in medical professional liability coverage. While a
few hundred insurers are clearly adequate for competition, it
is also instructive to consider that more than 2,000 other
existing companies could potentially enter the market. Finally,
it is also possible to form a new company to compete with
existing insurers.
Next, consider the absence of sustained profit we would
expect if markets were not competitive. While return for
medical professional liability insurers fluctuates
substantially over time, the average return is quite modest and
has even been negative in several years.
Shifting now to my experience in the industry, I
participated in the recent formation of Arkansas Mutual
Insurance Company, which entered the medical professional
liability insurance market earlier this year. The ability to
access industry loss data was paramount in the formation of
this new insurance carrier. Without access to loss information,
we could not have done it. Therefore, it follows that this bill
would have limited competition from Arkansas Mutual and from
several dozen similar insurers that formed in recent years.
Since Arkansas Mutual commenced business, I have witnessed
firsthand an incredible level of competition in the market. The
number of insurers actively underwriting medical professional
liability insurance in Arkansas has increased several times
over. In the last year, I have seen decreases in premium for
some physicians as large as 40 percent, and this aggressive
pricing and increasing number of market participants indicates
substantial competition to the benefit of consumers.
In light of these observations, the best possible outcome
from repealing McCarran is continuation of the status quo.
However, it is also likely that repealing McCarran would have
negative consequences for consumers by decreasing competition
and accuracy in insurance pricing.
Thank you.
[The prepared statement of Mr. Powell appears as a
submission for the record.]
Chairman Leahy. Thank you. Is there anything in this
specific legislation that would prohibit procompetitive
functions by the insurance companies? Anything that we prohibit
that is actually procompetitive?
Mr. Powell. The wording of this legislation--and, you know,
wording of legislation is not my area of expertise, but it
seems that specifically there is not a lot going on. It would
be nice to see a lot of the terms defined as to what
specifically the legislation----
Chairman Leahy. Is it stopping any procompetitive
activities by any insurance company? Procompetitive activity by
the insurance company. Because I could not find any.
Mr. Powell. Well, just that the idea that it is going to be
reconsidered, the idea that if there is--recognizing that the
sharing of data to set advisory loss costs is a procompetitive
act.
Chairman Leahy. And we allow the historic loss data
sharing.
Mr. Powell. And to that extent, if it is allowed, if there
is not a new consumer of it, if it is not changing at all, then
it would, I assume, continue the status quo. There is not
anything in this legislation that is not already illegal just
by State law as it is. I have not witnessed or found evidence
of any of this price fixing and such that it is noted.
Chairman Leahy. That sounds almost like an endorsement of
the legislation, but I will not put those words in your mouth
because your employer may not be happy with you if that were
the case. Only because of the time I am going to yield to
Senator Whitehouse for questions.
Senator Whitehouse. Thank you, Chairman. I have a question
for Mr. Powell and then a question for Mr. Hunter.
My question for Mr. Powell is whether in your testimony you
cite for the proposition that insurance markets are highly
competitive an article by Paul Joskow. Do I have the date of
that article correct, it is 1973?
Mr. Powell. I believe so.
Senator Whitehouse. And so necessarily any of the data on
which that article would rely for that conclusion would be pre-
1973 data, correct?
Mr. Powell. For that article, I would suppose it is. There
are also some more recent studies cited in----
Senator Whitehouse. But the one you cite is the 1973
article.
Mr. Powell. I also cite two of my own studies earlier in
the testimony that are much more recent.
Senator Whitehouse. Very good.
Mr. Hunter, first of all, thank you for your long efforts
on behalf of insurance consumers in these vineyards. I very
much appreciate the dedication that you have shown to this
issue over so many years of service. One observation that I
come across in this is kind of in the category of good for the
goose, good for the gander.
In Rhode Island, we have seen situations in which, when
doctors try to get together to strategize about how they are
going to deal with the dominant insurers in Rhode Island, they
are constrained from doing so by the fear or the threat of
antitrust litigation being brought against them.
The insurance company, by virtue of being a big corporation
with a huge market share, can have anticompetitive
conversations about how to deal with the doctors in its own
board room, in its own hallways. And when the doctors try to
get together to have the exact same conversation about the
insurance company strategies and how to respond, for them it is
an antitrust violation. For the insurance companies it is not
because they are protected by their corporate status. And over
and over again there are cases in which insurance companies--
here is Blue Cross and Blue Shield United of Wisconsin v.
Marshfield Clinic, and there are many others in which--United
Healthcare brought a price-fixing claim against the practices
of a large Chicago area health system.
Does it seem incongruous to you that an industry that
demands protection from the antitrust laws is so quick to take
advantage of those very same antitrust laws that they think
should not apply to them when it comes to beating down doctors
and trying to make sure that they maximize their competitive
advantage in terms of provider negotiations?
Mr. Hunter. Well, of course, they are going to use whatever
they can, but it is awful that they--I have to press the button
here. Sorry. It is awful that the insurance companies are
operating in a system where they are the only ones essentially
that can get together and decide what to do while the people
they are going to do it to cannot. And I think that is wrong.
Senator Whitehouse. Just sort of a basic element of plain
old fair play, isn't it?
Mr. Hunter. Exactly. And, amazingly, if you go back--and I
gave you the history of the McCarran Act--Claude Pepper got up
on the floor when the McCarran Act was passing and said--
because it came back from a joint committee. When the Senate
sent it over, it was clearly a 2-year moratorium for antitrust
enforcement to give everybody a chance to figure out how to
deal with it, the States and the industry. So they sent it back
to the Senate, and Pepper got up on the floor and said, ``Wait
a minute. This looks like the language has changed like it is
going to be permanent.'' And McCarran reassured Pepper, ``He is
in error on his whole premise in the matter.'' And then Senator
O'Mahoney told him why it would be over in 2 years. ``Don't
worry. It is over in 2 years.'' And then they voted. And even
at that, I think it was like 30 people said, ``We are afraid of
the language'' and voted the other way. And then the courts
ruled against what the assurances were. I guess they did not
use legislative history too much when they made those rulings.
Senator Whitehouse. Thank you very much.
Chairman Leahy. Senator Franken, then Senator Durbin, and I
would note that the vote has started on the floor.
Senator Franken. Mr. Powell, in your testimony you outlined
four characteristics of competitive markets, in your written
testimony: one, multiple independent sellers; two, multiple
consumers; three, homogeneous products; four, low barriers to
entry and exit into the market.
In numerous States, nearly 90 percent of the health
insurance markets are dominated by a single carrier. Do you
believe having 90 percent of a market dominated by a single
insurer meets your definition of a competitive market?
Mr. Powell. Well, first I will say that I am not aware of
that 90-percent number. I will take your word for it for
purposes----
Senator Franken. This is post-1973.
[Laughter.]
Mr. Powell. Thank you. Thank you. I think something that is
instructive that no one has mentioned today as we talk about
competition is that market concentration is not necessarily by
itself indicative of a lack of competition. It could also be a
sign of efficiency. What I have read about the Alabama Blue
Cross and Blue Shield having a large market share, they also
have some of the lowest expense ratios in running their
business of any Blue Cross in the country.
Senator Franken. Would you mind answering my question,
though? Do you find that if these companies control 90 percent
of the market, it fits your definition of a competitive market?
Mr. Powell. Well, if they control 90 percent and somebody
else is controlling 10 percent and there are hundreds of other
companies who come in and take a share if they could do a
better job. I am not saying that there is not competition----
Senator Franken. So it does.
Mr. Powell [continuing]. If the market is concentrated.
Senator Franken. OK. So it does.
In 2007, there were 18 metropolitan areas in which one
company held 100 percent of the HMO market. Would those markets
meet your criteria for a competitive market?
Mr. Powell. Are you separating the HMO market from the rest
of health insurance?
Senator Franken. I think by definition that question would,
yes.
Mr. Powell. I think that clearly HMOs are competing with
PPOs and POS plans and traditional health plans. The fact that
there is only one HMO might suggest that the HMO model does not
fit very well there, but not that there is a lack of
competition.
Senator Franken. OK. You say in your testimony--and, Mr.
Hunter, I want you to speak to this. Mr. Powell says in his
testimony that ``valid evidence of anticompetitive behavior is
not observed in insurance markets.'' That does not seem to
comport with your report.
Mr. Hunter. There is all kinds of anticompetitive behavior.
They get together on claims. They get together on pricing. They
have rate bureaus that make recommendations for 70 percent of
the rate. They do many, many things that would violate the
antitrust laws if the antitrust laws were applied to them.
Senator Franken. Yes. It just seemed that your two
testimonies were in conflict.
I am a cosponsor of this bill, and I believe that Senator
Leahy's legislation in health care companies--health insurance
companies' exemption from antitrust laws is a crucial first
step to anticompetitive behavior. However, we are on the verge
of insuring 46 million new Americans with significant Federal
support, and I am deeply concerned that without additional
checks and balances, this expansion will be a windfall for
insurance companies, and we will end up with Federal funds
going to exorbitant CEO fees, et cetera.
What provisions must we include in any national health
reform bill to ensure sufficient competition in health
insurance markets and to prevent profiteering by insurance
companies?
Mr. Hunter. Well, first of all, I think you should pass
this bill to impose the antitrust laws on the health insurance
industry.
Second, you should have a guaranteed competitive player in
there. That is why I like the public option. Or if you do not
have a guaranteed player like the public option, then you are
going to have to have much more regulation to assure that
insurance companies--that inefficient costs are not passed
through to consumers, like you do with public utilities. Public
utilities, you know, will not allow costs through unless they
are used and useful. If you do not have a competitive entity to
test the market like a public option, then I think you need
some kind of utility sort of ratemaking or something to make
sure that the prices do not pass through----
Senator Franken. But the alternative to a public option may
be more regulation.
Mr. Hunter. I think it has to be more regulation if not a
public option because, otherwise, you--right today no one will
stop the insurance companies from passing through the cost of
the ads that they are using against you in the health insurance
debate to consumers. We will be paying the bill.
Senator Franken. Thank you, Mr. Chairman.
Chairman Leahy. Thank you very much.
Senator Durbin.
Senator Durbin. Professor Powell, you have talked about the
loss reserve development, and you start your testimony by
saying that when it comes to medical professional liability
insurance, one of the big problems is the ultimate outcome of a
claim may not be known for 4 years.
Mr. Powell. Right.
Senator Durbin. Isn't that true for virtually all casualty
insurance?
Mr. Powell. The claim tail is not quite as long in some of
the lines. In some lines it could be longer.
Senator Durbin. It seems to me, if I recall correctly--it
has been many years since I did this for a living, but we had a
2-year statute of limitations in Illinois unless there was
concealment of extraordinary circumstances. And so you could
wait 2 years after an event to file a lawsuit, and it would
take a minimum of 1 or 2 years to complete it, even if you were
dealing with an automobile accident and an injury from that
accident. So I find it hard to understand why this is a unique
field of insurance. It appears that most casualty insurance has
a long tail before you know what your actual expenditure is
going to be for a loss.
Mr. Powell. Sure, and part of that is that, for example, in
Arkansas there are about 5,500 physicians that purchase medical
professional liability insurance in a given year, the non-
Federal physicians. There are substantially more automobiles
and businesses than that, so you have got a little bit bigger
pool to look at, perhaps more data to follow, but also----
Senator Durbin. And a larger reserve.
Mr. Powell. Not necessarily. The other part of it----
Senator Durbin. Automobiles as opposed to physicians?
Mr. Powell. By reserve, you mean----
Senator Durbin. The amount that is set aside by the company
in anticipation of payouts, losses.
Mr. Powell. There is certainly a lot more cost to trying
and settling a medical malpractice claim based on the cost of
the experts and such.
Senator Durbin. You say you are testifying on behalf of the
Physician Insurers Association of America, and there has been a
question raised as to what is happening in the area of tort
reform. It is my understanding that anywhere from 26 to 40 or
maybe more States are involved in some type of tort reform at
the moment. And I was wondering if you could, through your
association, tell me that there is a correlation between tort
reform and the medical malpractice premiums being charged in
given States.
Mr. Powell. There is certainly evidence, from my own
academic research and from others, that the effect of certain
tort reform laws and tort reform laws in general is to reduce
the cost and improve the availability of insurance. That was
the reason why they were proposed, and that is indeed what
happened in the markets after they were passed.
Senator Durbin. I do not quarrel with that being the reason
they were proposed, but I will ask you, can you provide me
through the Physician Insurers Association of America data
relative to malpractice premiums that can track specific tort
reforms such as caps on non-economic losses to determine
whether, in fact, that did result in lower malpractice premiums
for the physicians in that State?
Mr. Powell. I can provide my own academic research that
shows that. Yes, I will be happy to.
Senator Durbin. Would you do that?
Mr. Powell. Yes.
Senator Durbin. I appreciate it very much.
[The information referred to appears as a submission for
the record.]
Senator Durbin. And if your premise is that we really get
more competition if we ignore antitrust, do you suggest we
eliminate antitrust laws for business in general?
Mr. Powell. No, and the difference is that with insurance
you do not know the price of your primary good and service
until long after--or you do not know the cost until long after
you have set the price. That is the nature of the business, and
that is why this exemption is necessary so that the data can be
shared and you can have new companies like Arkansas Mutual
enter a market where we thought we could do a better job for
our doctors.
Senator Durbin. If I understand Chairman Leahy, there is no
prohibition against sharing historical data.
Mr. Powell. Clearly it is something that would have to be
looked at again. Right now you can do it, and there is not a
step that has to be taken. It is subject to all of the same
antitrust provisions at the State level that there--the idea
that there is a bunch of insurance companies sitting around
deciding what they are going to do together, I have never
observed that. I have been in plenty of places where the
companies and their employees go out of their way to not
discuss those things because it is illegal.
Senator Durbin. We just have 2 minutes left. The last
question I will ask you is--and this dates me here because it
goes back to the time when I was involved in this field. Is
there still an Insurance Services Office?
Mr. Powell. Yes, ISO still exists.
Senator Durbin. And what do they do?
Mr. Powell. They take the loss data, and they aggregate it
and perform actuarial analysis of trending and all that to
produce advisory loss costs.
Senator Durbin. For price fixing.
Mr. Powell. It is advisory loss costs. It says this is how
much you would expect certain classifications to differ among
each other. In medical malpractice, you might see the
difficulty in differentiating price across different
specialties, and especially at the higher limits of loss where
that would be useful for all companies that do not experience
losses like that as often as some of the lower levels.
Senator Durbin. Thanks, Mr. Powell. Mr. Hunter, I am sorry.
We ran out of time.
Chairman Leahy. I will submit my questions for the record,
and we will keep the record open for others.
[The questions appear as questions and answers at the end
of hearing.]
Chairman Leahy. I thank you both, and we are not beating a
hasty departure based on your testimony, but based on the fact
we have run out of time on the vote on the floor.
[Whereupon, at 12:04 p.m., the Committee was adjourned.]
[Questions and answers and submissions for the record
follow.]
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