Consequences: the McCarran Ferguson edition

What follows is my understanding of the impact of recently passed legislation. I am not a lawyer, so please forgive me if I have misinterpreted some of the legal stuff. My purpose for this post is to explore the consequences of the legislation on the health insurance industry from a political-economic perspective.

What is McCarran Ferguson? The short version goes like this:

The McCarran-Ferguson Act of 1945 gives states the authority to regulate the “business of insurance” without interference from federal regulation, unless federal law specifically provides otherwise.

On Tuesday, December 22, 2020, the US Senate voted to repeal the McCarran-Ferguson Act as part of a package of amendments to the Competitive Health Insurance Reform Act (CHIRA). It was passed by a voice vote with no objections. The House of Representatives passed the legislation earlier in the year, so with the Senate passage, the bill now sits on the President’s desk.

Because a new Congress has just been sworn in, the President must sign the bill, HR 1418, within 10 days of his receipt of the bill or the legislation effectively disappears, dying a quiet lonely death. Word is, though, that President Trump will sign the legislation before it expires.

So what does this mean? CHIRA gives additional authority to the federal government to regulate the business of health insurance, and, with the repeal of McCarran Ferguson, it can do so without specifying what aspects of the health insurance business it is assuming regulatory authority.

In the short run, the repeal of McCarran Ferguson probably will not have much effect on the business of insurance. But like all federal programs, given time, this reorienting of regulatory authority from the states to the federal government will have profound implications in the years to come.

At least in theory, the motivating idea supporting the repeal of McCarran Ferguson is that it would allow insurance plans from one state to be offered in another state without going through the regulatory process for both states.

One of the effects would be that insurance companies could then create policies in the state with the lowest regulatory burden and offer them in states with higher regulatory burdens. In theory, the cost to offer the policy to consumers or businesses would be lower and so the insurance company could offer the policy at a more competitively priced premium.

Another effect could also mean the possibility of greater competition in a market, which would also put downward pressure of insurance premiums. But also, less concentration of market power by the insurance companies could also change the relationship between health care providers and the insurance companies. With the balance of power shifting, providers will have a stronger position from which to negotiate rates. Again, in theory, this could result in increases in premium and/or a lower level of profitability for the insurance company.

There are a lot of moving parts related to the impact on insurance pricing and many who have looked into the economic effects conclude that the consumer wins, especially in states that have a highly regulated insurance market like New York, New Jersey and California to name a few.

However, the repeal of McCarran Ferguson and other provisions of CHIRA also come with a greater role in the regulation of insurance by the federal government. It is this aspect of CHIRA that I believe will have the greatest impact on the competitiveness of the insurance industry and insurance premiums.

As the regulatory power slowly shifts from the states to the federal government, insurance companies will naturally seek out regulatory approvals from the federal government. In fact, those insurance companies that offer policies in most or all 50 states will prefer federal regulatory authority. If federal regulations supersede state regulations, for the nationally oriented carriers, the regulatory burden for them will be lessened by the single point of contact. Smaller companies that operate in a single state or just a few states, will lose the benefit of the level playing field in terms of the regulatory environment and will also be burdened with the need to submit to a federal authority with whom they have less influence than they had with their state authority.

Over time, these smaller insurers will find they do not have the scale of operations necessary to deal with the transition of regulatory authority and maintain price competitiveness. The result over a longer time frame is that only the larger companies will survive and the market will become more concentrated and less competitive.

There is another danger to the shift in regulatory authority from the states to the federal government to the insurance industry. By granting greater power to the federal government and taking it from the states, the concerns of the smaller companies are more likely to be ignored or subjugated to lower levels of consideration than those with more influence, like the larger, nationally oriented insurance companies. Over time, the smaller insurers will decide it is easier and more profitable to sell or discontinue their business, leaving the insurance market to fewer, larger, and more economically powerful companies.

In time, and these changes could take place over a generational time scale, providers will have less influence and with the states slowly removed from the process, consumers will have fewer and more difficult processes to submit their grievances and receive remedy for harmful consequences a single point of regulation.

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