The Scope of McCarran‑Ferguson
The "Business of Insurance"
The McCarran-Ferguson Act exempts from antitrust review certain insurer activities that are part of the "business of insurance," which are regulated by state law but do not amount to a boycott, coercion, or intimidation. Courts have interpreted the "business of insurance" to apply to conduct that (i) has the effect of transferring or spreading a policyholder's risk; (ii) is an integral part of the policy relationship between the insurer and the insured; and (iii) is limited to entities within the insurance industry.
What activities qualify as the "business of insurance" is not always clear and is subject to courts' interpretation. Courts have applied the McCarran-Ferguson exemption to cooperative ratemaking efforts, development of standard policy forms, joint underwriting, decisions to accept or deny insurance applications, claims handling, and reinsurance. Just last month, a federal district court ruled that McCarran-Ferguson exempted from federal antitrust review a decision by the Blue Cross Blue Shield Association and five plan administrators to deny coverage for LifeWatch's telemetry heart monitors. A case on appeal in the Eleventh Circuit explores whether McCarran-Ferguson exempts Florida Blue's policy of prohibiting its brokers from selling health plans of competing insurers. In contrast, courts have held that McCarran-Ferguson does not exempt reimbursement agreements between insurers and providers, an insurer's use of physicians for peer review of medical bills, financial or investment products that do not involve risk spreading, certain agreements with third-party vendors, and tying of insurance with noninsurance products, among other practices.
Regulated by State Law
Courts have held that a state's general administrative insurance regulation framework satisfies McCarran-Ferguson's "regulated by state law" requirement.
The Latest Effort to Repeal McCarran‑Ferguson
In the 75 years since McCarran-Ferguson became law, members of Congress have introduced dozens of bills to repeal or otherwise limit the exemption, but none passed or achieved such broad bipartisan support. CHIRA revokes application of McCarran-Ferguson to health insurance only, which it defines also to include the business of dental insurance and limited-scope dental benefits. CHIRA makes clear that the McCarran-Ferguson exemption continues to apply to life insurance and property or casualty insurance.
Although CHIRA repeals the McCarran-Ferguson federal antitrust exemption as to health insurance generally, CHIRA carves out certain health insurer activities to which the McCarran-Ferguson exemption will continue to apply. The exemption will continue to apply to joint efforts among health insurers to:
- Collect, compile, or disseminate historical loss data;
- Determine a loss development factor applicable to historical loss data;
- Perform actuarial services if such contract, combination, or conspiracy does not involve a restraint of trade; and
- Develop or disseminate a standard insurance policy form (including a standard addendum to an insurance policy form and standard terminology in an insurance policy form), so long as parties do not agree to adhere to a standard form.
Impact of CHIRA on Health Insurers
The impact of repealing McCarran-Ferguson is hotly debated. Those who support repeal claim there is no reason for insurance companies to have an exemption when most other industries are subject to the federal antitrust laws. The Department of Justice Antitrust Division ("DOJ") lauded CHIRA, stating that courts have interpreted McCarran-Ferguson "to allow a range of harmful anticompetitive conduct in health insurance markets."
Those who oppose repeal, including the National Association of Insurance Commissioners, say that McCarran-Ferguson merely insulates procompetitive activity from costly federal litigation and that many state antitrust laws, insurance laws, and regulatory oversight already prohibit anticompetitive conduct, such as bid rigging, price fixing, and market allocation. They claim a new "layer of federal review would only lead to increased costs, confusion, and possible conflicts in federal and state courts."
Regardless of the policy debate, CHIRA affects health insurers' antitrust risk in the following ways.
Conduct that Has Never Been Exempt
CHIRA does not affect those insurer activities that were never covered under the McCarran-Ferguson federal antitrust exemption in the first place. As noted above, McCarran-Ferguson has never exempted health insurer activities that fail to meet the definition of the "business of insurance." Examples include reimbursement agreements between insurers and providers, an insurer's use of physicians for peer review of medical bills, financial or investment products that do not involve risk spreading, certain agreements with third-party vendors, and tying of insurance with noninsurance products, among other practices. For many years, the DOJ has investigated, obtained settlements in, and litigated mergers and acquisitions in the health insurance industry. Although CHIRA does not change the law for these activities, it nevertheless may shed more light on industry practices.
Conduct that Is Still Exempt
CHIRA leaves in place residual exemptions for certain insurer activities, such as sharing of historical loss data, determining loss development factors, certain actuarial services, and development of standard policy forms.
Other federal antitrust exemptions also will continue to apply to protect certain insurer activities from antitrust challenges. For example, the filed rate doctrine is not affected by CHIRA and, asserted successfully, precludes recovery of treble damages in federal antitrust actions arising from certain uniform rates filed with and approved by the federal or a state government. The state action doctrine is an affirmative defense to antitrust liability if (i) the challenged activity is "clearly articulated and affirmatively expressed as state policy"; and (ii) the policy is "actively supervised" by the state itself. Therefore, the state action doctrine will continue to exempt insurers' joint agreements on pricing or products offered to certain customers if required by state law and "actively supervised" by the state. For instance, many states compel or permit insurers to participate in residual market mechanisms that help provide insurance coverage for risks that are otherwise unable to obtain it. Likewise, state-mandated guaranty associations protect members and claimants in the event of insurance company's bankruptcy. Courts have interpreted the active supervision element of the state action doctrine to be more demanding than McCarran-Ferguson's "regulated by state law" requirement, but which states' laws are sufficiently actively supervised to avail an insurer of the state action defense has yet to be litigated.
State antitrust and insurance laws vary widely, with some adopting federal exemptions and others choosing not to do so. As a result, no formula can adequately predict which state laws qualify for state action immunity from the federal antitrust laws. Even if all state insurance regulations qualify insurers for state action immunity, courts will sort this out only after protracted litigation.
All Other "Business of Health Insurance"
All other conduct will now be subject to review under the federal antitrust laws. Under the "per se" rule, certain agreements such as price fixing, bid rigging, or market allocation are unlawful without an inquiry into market facts and benefits because those types of agreements are always or almost always anticompetitive. Courts test all other agreements under the "rule of reason" standard, which balances anticompetitive effects and procompetitive benefits to determine the net impact on competition.
Express agreements among health insurers related to price (if any such agreements exist given that many state antitrust and insurance laws also prohibit such conduct) either will have to stop or be shielded by a different exemption. Harder questions arise where there are no express agreements on price, but where health insurers share data as a means of gathering better information for purposes of setting their own prices. Although sharing of historical loss data remains exempt, exchanges of other data, e.g., expenses, overhead, non-loss data, risk classifications, trending analysis, might be outside CHIRA's residual exemptions. Nevertheless, some of these exchanges are encouraged or even mandated by state laws, and others might be procompetitive under a rule of reason review. CHIRA therefore is not likely to necessitate radical changes in the way health insurers conduct business; however, it may open health insurer activities to more antitrust scrutiny. Although many of those practices are procompetitive, and hence legal under antitrust law to begin with, or can be shielded by state laws mandating the practice, it could take years of large-scale litigation or state lawmaking to achieve the level of clarity previously available under the McCarran‑Ferguson exemption.