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The Right Prescription

Although many commentators have warned against it, Republicans have taken the dare and decided to sit down eyeball-to-eyeball with President Obama Thursday and discuss healthcare legislation. This is not a bad thing. It gives the GOP the chance to put their ideas on the table and shake the moniker as the "party of no."

Going into any such gathering, however, requires having a firm grasp of the situation. There are many seemingly easy fixes to healthcare problems. For example, the Democrats have recently been seized with the idea that all they had to do was repeal the insurance industry's anti-trust exemption and the healthcare mess would be halfway to righting itself. All this was undertaken, of course, without any recollection of why the exemption was granted in the first place. Instead it was based on the premise that certain insurance companies have somehow achieved a "monopoly" in certain states. Whatever monopoly may exist has been purely the work of the state insurance commissions, rather than the sinister powers of any one insurance company. The anti-trust exemption was in fact granted in exchange for other concessions from the insurance industry -- but we'll get to that in a moment.

In any case, when House Speaker Nancy Pelosi summoned the troops, she quickly discovered that repealing the anti-trust exemption without repealing the other half of the 1945 McCarran-Ferguson Act -- forbidding insurance companies from selling across state lines -- would quickly make things worse. Underwriting insurance policies involves collecting a lot of data. The anti-trust exemption allows bigger companies to share their data with smaller competitors, which keeps a lot of small firms in the market. Removing this exemption would only lead to greater industry concentration.

Oh well, nothing is ever easy in healthcare. Democrats don't understand it better than anyone else. In fact they understand less. Their entire philosophy of "reform" has been "bring it all down to Washington and we'll figure it out later."

Before Republicans storm out of any health summit, then -- or before Democrats try to sneak some "reconciliation" effort through in the dead of night -- it might be worth pondering for a few moments how American health insurance became tied up in such knots and what simple steps might be taken to untangle it.

THE SEGEMENTATION OF THE HEALTH INSURANCE MARKET began in 1945 when the South-Eastern Underwriters Association, which controlled 90 percent of the market in six southern states, was challenged by the federal government on anti-trust grounds. The Association challenged the federal government's right to regulate their business. Traditionally, Washington had avoided invoking its interstate commerce powers on the legal fiction that selling insurance was not "commerce." The U.S. Supreme Court quickly cast this aside and ruled that the federal government could indeed prosecute insurance companies. Acknowledging the tradition, however, the Court left open the option that Congress could delegate its powers to the states.

Congress took up the offer by passing the McCarran-Ferguson Act of 1945, a bi-partisan effort co-sponsored by Senators Pat McCarran, a Democrat from Nevada, and Homer Ferguson, a Republican from Michigan. The law reserved licensing and regulation of the industry to the states, assuming they would run it along the lines of a public utility. Because they were setting rates in conjunction with state insurance authorities, the companies were allowed to collaborate on data collection and risk estimates. For this they were exempted from the Sherman Anti-Trust Act.

Thus began the system we have today, where there is no national market for health, fire, or auto insurance but 50 separate state markets. Insurance companies must go through extensive licensing procedures in order to gain permission to sell insurance in each and every state. Some states are very permissive, others are very restrictive. As usually happens in such situations, companies that are already licensed to sell insurance generally oppose licensing other carriers in order to suppress competition. In many states, regulators have formed a virtual partnership with one large carrier -- usually the local Blue Cross.

Democrats have discovered this system of state regulation, however, and concluded that the insurance companies have created the monopolies. Last May, Health Care for America Now!, a lobbying group formed by the AFL-CIO, ACORN, MoveOn.org, the SIEU, the Children's Defense Fund, the Center for American Progress, and a host of liberal organizations, published a study revealing that "94 percent of insurance markets in the United States are now highly concentrated.

In Hawaii, Rhode Island, Alaska, Vermont, Alabama, Maine, Montana, Wyoming, Arkansas and Iowa, the two largest health insurers control at least 80 percent of the statewide market.

Senator Chuck Schumer, who spoke at the press event, proclaimed, "A public plan will push down health care premiums by injecting competition into the health insurance market, which right now has too few players and they have a stranglehold over consumers."

What the Democrats do not seem to realize is that these "monopolies" are entirely created by state regulations. Many state insurance commissions are still operating on the 1990s model, which said that one or two big providers will have leverage to beat down prices charged by doctors, hospitals and other medical service providers. This was the era when Health Maintenance Organizations were seen as the key to keeping down costs. The obvious solution is to break up these monopolies by allowing carriers to sell across state lines. This has been proposed many times by Republican Congressmen and Senators. But Democrats would prefer to take us further away from a competitive market by centralizing everything in Washington instead.

State regulations had other flaws as well. One of the most unfortunate is the everlasting temptation of state legislators to mandate coverage for particular services. This is a very predictable process, fueled by well-meaning health crusaders plus the desire of particular providers to make sure their bills are going to get paid. Typically the providers of some marginal health service such as chiropractic or treatment for alcoholism will come to the legislature and insist that theirs is a service essential to all humanity. Often crusading consumers of chiropractic or alcoholism treatment second their efforts. The legislature responds by mandating that every insurance policy include coverage. Before long, people are being forced to buy coverage for services they don't want or need. The result is that insurance costs go up for everyone. The Council on Affordable Health Insurance estimates that there are now 2,133 separate mandates in the 50 states for services as diverse as podiatrists, midwives, occupational therapists, athletic trainers and pastoral counselors. CAHI estimates these mandates raise the price of insurance 20 to 50 percent.

All this state meddling would have provoked a public outcry years ago except for one thing -- 55 percent of the working population has found a way of getting around these state regulations. It is called the Employee Retirement Income Security Act of 1974 -- "ERISA."

ERISA was adopted after the Studebaker Corporation went bankrupt in the 1960s, leaving its retirees without their pensions. Pressure mounted for the federal government to insure corporate pensions and in 1974 Congress passed the law. Most retirement programs were administered by labor union and funds for health benefit plans were often intermingled, so in order to avoid an accounting nightmare, Congress threw in coverage of health benefits as well. From now on, the federal government was on the hook if a fund failed.

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Health Care