The basic axiom of free-market economics is that government regulations mess up a market, which leads to misdistributions, which leads to more cries for government regulation.
You couldn't find a better example than the current health insurance "crisis." This week Congress is poised to take a problematic situation and make it much worse. There are indeed 45 million people who are uninsured in this country. Some of them (like my 23-year-old son) don't want to spend $100 a month for what seems like a useless precaution but others are in dire need of insurance coverage and can't get it. The basic reason is that, instead of allowing a free market to operate, we've done the following:
a) Allowed the states a free hand in regulating insurance, and
b) Shrunk the market by allowing 62 percent of the market to secure its coverage as employer-based "health benefits."
The result is that only 6 percent of the non-elderly population actually buys insurance directly from insurance companies and these tend to be a perversely self-selected group who are too sick to work or can't get a good job. As a result, the insurance companies can't create large risk-pools and have to charge everybody a high rate.
Understanding all this requires a little analysis, of which Democrats seem to be incapable, and so the easiest thing is to blame it on "greed." Thou and I are certainly not greedy, nor are our favorite politicians greedy, but someone out there is greedy -- the insurance companies! -- and therefore their greed must be countered by the government, mainly by getting the government into the insurance business.
I take my text from a 95-page report "Premiums Soaring in Consolidated Health Insurance Market -- Lack of Competition Hurts Rural State, Small Business," issued last May by Health Care For America Now!, a Washington lobbying organization sponsored by the AFL-CIO, Move On, the AFSCME, the teachers' unions, the Children's Defense Fund, La Raza, ACORN and a lot of other groups, the names of which are probably familiar.
The report described an alarming situation:
Commercial health insurance premiums have risen four times faster than wages and have more than doubled in the last nine years. Shrinking competition among health insurance companies is a major cause of these spiraling costs. In the past 13 years more than 400 corporate mergers have involved health insurers, and a small number of companies now dominate local markets.
In 21 states, the top two insurance vendors control more than 70 percent of the market, while in nine states that portion has been captured by a single provider. In Alabama, for instance, Blue Cross/Blue Shield controls 83 percent of the market. In Rhode Island, Blue Cross/Blue Shield and UnitedHealth together own 95 percent. As the report notes, "The U.S. Justice Department considers a market 'highly concentrated' if one company holds more than a 42 percent share of that market, a level that is common in…more than 30…states."
Americans are paying for this unchecked private insurance industry consolidation in the form of higher health premiums and a growing number of uninsured people. Meanwhile, insurance company profits and compensation for the industry's top executives are surging…
The report quotes David Balto, former policy director of the Bureau of Competition at the Federal Trade Commission and now a fellow at the Center for American Progress:
Antitrust enforcement against anti-competitive mergers and exclusionary conduct is essential to a competitive marketplace. This unprecedented level of concentration and the lack of antitrust enforcement pose serious policy and health care concerns.
Then it turns to President Barack Obama for a summary:
"The consequence of lax [antitrust] enforcement for consumers is clear," then-Senator Barack Obama said is a September 2007 address to the American Antitrust Institute. "The number of insurers has fallen by just under 20 percent since 2000. These changes were supposed to make the industry more efficient, but instead premiums have skyrocketed." [brackets in original]
Health Care for America Now!'s solution to the problem is, of course, the "public option":
In several recent reports, leading experts on the American health care system have detailed how the injection of a robust new public health insurance plan as a competitor for private plans would expand choice for individuals and business and drive competition on price and quality in local markets across the country.
In other words, let's get the government in the insurance business.
A very dramatic and convincing case, no? Senator Charles Schumer, who was present at the release of the report, pulled no punches:
This is the starkest evidence yet that the private health care insurance market is in bad need of some healthy competition. A public health insurance option is critical to ensure the greatest amount of choice possible for consumers.
The Health Care Now! report has been the centerpiece of Democratic efforts since then.
So, what's wrong with this picture?
Well, let's try this for starters. Since 1945, the entire insurance industry has been governed by McCarran-Ferguson Act, in which Congress ceded its right to regulate insurance as "interstate commerce" and instead gave pre-emptive authority to the states. The first thing McCarran-Ferguson did was exempt the insurance industry from federal antitrust law. Antitrust does not apply to insurance. This is not the decision of the big, bad insurance companies. It is the will of Congress. Yet nobody -- least of all liberal Democrats in Congress -- seems to be aware of this.
Why was insurance exempted from antitrust laws? It's a long story. Until 1944 the states had routinely regulated insurance companies. The federal government stayed out of the picture on the polite fiction that insurance was not "commerce." Then in United States vs. South-Eastern Underwriters Association, the U.S. Supreme Court decided that the "business of insurance" was indeed commerce and that Congress could regulate. It left open the door, however, that Congress could delegate its powers to the states.
McCarran-Ferguson did just that. It exempted the industry from federal antitrust laws, except in cases where boycott, coercion or intimidation were involved. It also said that state regulations would not be pre-empted by federal law. States were free to license and regulate as they saw fit.
What happened as a result was what happens in all such instances. The regulations became an oligopolistic conspiracy between the regulators and the principal players in the field. Those who secured licenses quickly argued that no new competitors were necessary. More often than not, the regulator agreed. I have a brother-in-law in insurance who, after a series of grain silo explosions in the Midwest in the 1980s, tried for two years to persuade various Midwestern states to allow him to sell insurance backed by European reinsurers. The state insurance commissions told him, "No thanks, we're doing just fine." The same thing happens over and over with health insurance. Blue Cross-Blue Shield, which is run by doctors and hospitals on a nonprofit basis and always has strong local ties, is consistently able to persuade state commissions to grant it a near-monopoly. That is why, of the 25 states dominated by one provider, Blue Cross/Blue Shield controls 15 of them.
All this has become even more acute over the last decade as insurance commissions in some states -- particularly the smaller and more rural ones -- have decided the best way to deal with rising medical costs is to allow consolidation of the market into larger entities. "The idea is that the bigger insurance companies will be able to drive better bargains with doctors and hospitals," said a spokesperson at the National Association of State Insurance Commissioners. But these insurance giants have also found it easier to raise their prices to consumers, which is what Health Care Now! is complaining about.
So what we have is not the big health insurers versus the public. What we have is government versus government. The states have overregulated insurance, erecting barriers to entry and even encouraging consolidation on the theory that all this will help consumers. And when it has the opposite effect, the federal government decides insurance companies are the problem and they have to be supplanted by a federal entity.
There is a much more direct route to beneficial competition -- and it should be the agenda for the "Party of No."
a) Repeal McCarran-Ferguson or settle for its equivalent, Senator Jon Kyl's proposal to allow companies to sell insurance across state lines.
b) Override state mandates that force insurance companies to include coverage for things people don't want.
c) Expand Health Savings Accounts (HSO's), which already cover 8 million people and are rising.
d) Set up high-risk pools for people with serious conditions, as is done at the state level with auto insurance. Provide these people with small subsidies for basic coverage.
The result would be that, instead of today's oligopolized insurance market, a thousand Willie Lomans would start trudging door-to-door trying to sell people health insurance at prices they could afford. Congress could just sit back and watch -- until it found something else it can try to mess up. How about energy?