[Senate Hearing 111-458]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 111-458
                       HEALTH INSURANCE INDUSTRY



                               before the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE


                             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
CHARLES E. SCHUMER, New York         JON KYL, Arizona
RICHARD J. DURBIN, Illinois          LINDSEY GRAHAM, South Carolina
BENJAMIN L. CARDIN, Maryland         JOHN CORNYN, Texas
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




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


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

                       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 

                      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 
    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.

                            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 
    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 
    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 
    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 
    Senator Kohl.


    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 
    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 
    [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 
    [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.


    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 
    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 
    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 
    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 


    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 
    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 
    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 
    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.
    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 
    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 
    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 
    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 
    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 
    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 
    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 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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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.


    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 
    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 
    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.

                         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 
    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 
    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 
    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 
    Chairman Leahy. And we allow the historic loss data 
    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 
    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 
    Senator Franken. This is post-1973.
    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, 
    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 
    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 
    Mr. Hunter. Well, first of all, I think you should pass 
this bill to impose the antitrust laws on the health insurance 
    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 
    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