Insurance Industry Antitrust Exemption

Wouldn’t it be great if there were already a precedent we could look at for evidence of what happens when the insurance industry’s antitrust exemption is removed? Well…there is: California’s proposition 103. And if you’ll join me after the jump, we’ll tiptoe through the tulips of insurance reform arcana, circa 1988, California.

I read mcjoan’s post on ending the insurance industry’s antitrust exemption with interest, and while I agree with nearly everything she said, I want to offer a little “color commentary” – some of it from personal perspective. First, obviously, I agree that removal of the industry’s antitrust exemption should not impede or be a substitute for an all-out push for a public option. They are – or should be – complementary, not exclusive, goals. And I agree that removing the McCarran/Ferguson exemption would have a tremendous positive impact on insurance rates. But I don’t share mcjoan’s belief that without the public option, the effect wouldn’t be nearly as significant. Certainly, it would be ideal to have both, buy I think she underestimates the effect it would have all on its own.

Lemme ‘splain the “personal angle” before I go any farther: I was one of the on-the-ground grunts who helped Harvey Rosenfield and Ralph Nader pass Prop. 103 in California in1988. Let me also acknowlede what’s completely obvious, just so you don’t think I’ve missed a couple of obvious points entirely: first, specifically-targeted liability insurance in one state (even a big, bellwether state like California) is indeed very, very different than health insurance for the entire nation. And, of course, 1988 isn’t 2009. But we ARE still talking about insurance, and the possibility of government reining in some of the worst abuses thereof. Many of us are Californians (sadly, I no longer am), so those who are may know quite a bit about Prop. 103 already. But for any of us who aren’t…or those whose memories might be a little foggy twenty-one years after the fact, here are the details.

The battle over Prop. 103 set what was at that time a record (and I think it may still be one, but there could have been others which have surpassed it in the interim) for dollars spent to defeat a ballot proposition anywhere in the nation. The insurance industry spent – well, accurate estimates were hard to come by, and varied somewhat…but, by all accounts it was somewhere in the neighborhood of $72 million to both defeat Prop. 103 outright, and to confuse voters by trying to pass their industry-written competing initiatives, Prop 104 (which was a toothless “no-fault” measure) and another one (106), which focused on trial lawyers (the everpresent wingnut chant of “tort reform!!!”).

Anyway, when the smoke cleared on election day, the final tally was 50.4% yes for Prop. 103 – all the others went down in flames, if I remember correctly. One of the LA Times’ political cartoons from the morning after the election simply showed the back end of a car, with the license plate “PROP 103,” and a bumper sticker that read “We Won!”

Well….sorta.

If you remember, the insurance industry was ready to go the very morning after Prop 103’s victory with several different lawsuits claiming unconstitutionality, etc…and those lawsuits prevented the provisions of Prop. 103 from going into effect, pending the outcome of the court challenges – which seemed to drag on practically forever (though I was young and impatient at the time, perhaps it just seemed longer than it was). Nevertheless, in May of 1989, the CA supreme court unanimously ruled that Prop. 103 was constitutional….with one small–seeming, but VERY significant change. The original language of Prop. 103 stated that the across-the-board cuts which it mandated had to be held in place with no rate increases whatsoever until sometime in late 1989 unless an insurer could demonstrate that it was at “substantial risk of insolvency.” The CA Supremes, in their ruling, held that forcing an insurer to get to the brink of insolvency before being able to raise rates to avoid it was an invalid standard. Instead, they ruled, the language would be changed from “substantially threatened with insolvency” to language which said that insurers could not be denied a fair rate of return.

Since CA supreme court justices are elected (just ask Rose Bird), this was a strategy that was as politically brilliant as it was craven: the court significantly softened the language and – worse – it did not define what a “reasonable rate of return” for any given auto insurer in California was, thus opening the door to literally hundreds of individual lawsuits by various insurers in every court they could think of, arguing that they were being “denied a fair rate of return” (however they defined it).

What a mess, right? Well, yes and no. The rate-rollbacks contained in Prop. 103 were essentially a stop-gap measure to provide consumers with some immediate relief from spiraling auto insurance prices. We had in CA for auto insurance what is now a distinct possibility with regard to health insurance: an individual mandate to purchase a product from a private industry, with no significant constraints on that industry. In fact, the insurance industry has, over time, managed to position itself in a truly unique place in the constellation of American businesses with respect to the law. The landmark Sherman antitrust act is still one of the strongest consumer protections around….when it comes to most industries. But back in 1945, the insurance industry was successfully able to argue, in what became the McCarran-Ferguson Act, that they were not like other businesses in that they needed to share between them not only historical pricing data (which does not violate the antitrust laws) but ALSO projection data – in other words, to tell each other what they were intending to charge – and why – in future years. Essentially, it was legalized collusion. Add that to a state mandate that individuals MUST purchase auto insurance, and you’ve got a recipe for exactly what was happening in the pre-Prop. 103 years: skyrocketing insurance costs.

If the immediate 20% rollbacks were the “hook” that provided instant interest from consumers – as well as provided instant relief TO them, the provisions which really made the wheels turn were much less sexy and much less discussed (at least in the media and among voters; I’m sure it was discussed PLENTY in the insurance industry’s boardrooms)….but they were ultimately also much more instrumental in bringing the insurance industry into line. There were a few of them, but the main one was to take away the insurance industry’s comprehensive exemption from the antitrust laws under McCarran-Ferguson, ending the legalized collusion they’d been able to employ (and enjoy) for years. The other major provision was to make the insurance commissioner of California, previously an appointed position (and industry sinecure/revolving door), an elected position. Yeah, yeah, I know: just making a position elected doesn’t guarantee you’ll get good, honest people in the position (else there would be damn few elected Republicans, LOL)….but it IS measurably better than a governor-appointed industry lackey in the role.

And when I say “measurably better,” I mean it, and it’s this that led me to write this post in the first place. Proposition 103, although it was delayed and ultimately significantly weakened by the CA supreme court, has genuinely been effective in providing rate-relief and better insurance overall to the drivers of California than would have been the case had it not passed. This study (PDF file) demonstrates the changes – and they’re not subtle. They find that the average auto insurance premium DROPPED 7% in cost between 1989 and 2004. And that’s even WITH the sometimes-flagrant ignoring of and violating Proposition 103 that’s done by various insurers. And that figure is in real dollars, not inflation-adjusted ones. If you adjust for inflation, the average auto policy in California dropped 39% in that time-frame. The study found that in 1989, CA insurance average was $519.39, while the national average was $339.82. By 2004, an average CA policy cost $483.44….while the national average had gone up to $499.00. In 1989, California was the second-most expensive state in the country in which to purchase auto insurance (New Jersey was first). By 2004, California’s ranking against other states was 21st….and falling. It will probably never be as low as in places like Montana, where there just simply aren’t as many risks, etc, as there are in a much more densely-populated area like much of California, but still – those are pretty astonishing, and significant, numbers.

The point I’m making with this is to show that even with the insurance industry’s financial resources (not to mention their near-certain obstructionism), and even with the government having to fairly apply various laws and regulations, if the original legislation is written well, there is a significant positive impact to be gained from removal of the antitrust exemption. Let me be clear: I think there is still plenty of opportunity for the White House and congressional Democrats to screw this up, big-time, like they did by not including single-payer advocates at the table in the early negotiations. But even if this bill isn’t the shining bit of perfection that it could and should be, it might very well surprise many of us with just how well it DOES work, especially if a removal of the antitrust exemption is part of the picture.

There were many of us who were absolutely CRUSHED in 1989 when we heard that the supreme court had been weaselly and allowed the insurers “a fair rate of return” without bothering to define what that might look like. We were CERTAIN that the entire initiative for which we’d been putting 80-90 hour weeks for months had just been very cleverly gutted, and would only be one more example of how government doesn’t work, once big-money interests get their tentacles on it. But I’ve checked in with the real-world effects of Prop. 103 over the years, and, while it’s not perfect, I feel much better about what we accomplished than I did in the summer of 1989.