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56–683 PDF 2010

S. HRG. 111–458 

PROHIBITING PRICE FIXING AND OTHER ANTICOMPETITIVE CONDUCT IN THE HEALTH INSURANCE INDUSTRY 

HEARING 

BEFORE THE

COMMITTEE ON THE JUDICIARY 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

OCTOBER 14, 2009 

Serial No. J–111–57 

Printed for the use of the Committee on the Judiciary 

( 

(II) 

COMMITTEE ON THE JUDICIARY 

PATRICK J. LEAHY, Vermont, Chairman 

HERB KOHL, Wisconsin 

DIANNE FEINSTEIN, California 

RUSSELL D. FEINGOLD, Wisconsin 

CHARLES E. SCHUMER, New York 

RICHARD J. DURBIN, Illinois 

BENJAMIN L. CARDIN, Maryland 

SHELDON WHITEHOUSE, Rhode Island 

AMY KLOBUCHAR, Minnesota 

EDWARD E. KAUFMAN, Delaware 

ARLEN SPECTER, Pennsylvania 

AL FRANKEN, Minnesota 

JEFF SESSIONS, Alabama 

ORRIN G. HATCH, Utah 

CHARLES E. GRASSLEY, Iowa 

JON KYL, Arizona 

LINDSEY GRAHAM, South Carolina 

JOHN CORNYN, Texas 

TOM COBURN, Oklahoma 

BRUCE A. COHEN, Chief Counsel and Staff Director 

MATT MINER, Republican Chief Counsel 

(III) 

C O N T E N T S 

STATEMENTS OF COMMITTEE MEMBERS 

Page 

Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah ............................ 3 

Kohl, Hon. Herb, a U.S. Senator from the State of Wisconsin ............................ 5 

Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont .................... 1 

prepared statement .......................................................................................... 127 

WITNESSES 

Hunter, J. Robert, Director of Insurance, Consumer Federation of America, 

Washington, DC ................................................................................................... 25 

Powell, Lawrence S., PhD., Associate Professor and Whitbeck-Beyer Chair 

of Insurance and Financial Services, University of Arkansas-Little Rock, 

College of Business, Little Rock, Arkansas ........................................................ 26 

Reid, Hon. Harry, a U.S. Senator from the State of Nevada ............................... 8 

Varney, Christine A., Assistant Attorney General, Antitrust Division, Department of Justice ..................................................................................................... 6 

QUESTIONS AND ANSWERS 

Responses of Robert J. Hunter to questions submitted by Senator Leahy ......... 35 

Responses of Lawrence S. Powell to questions submitted by Senator Sessions . 37 

Responses of Christine A. Varney to questions submitted by Senator Sessions 46 

SUBMISSIONS FOR THE RECORD 

American Bar Association, Ilene Knable Gotts, Chair, Section of Antitrust 

Law, Washington, DC, statement and attachment ........................................... 54 

American Dental Association, Chicago, Illinois, statement ................................. 64 

American Hospital Association, Rick Pollack, Executive Vice President, Washington, DC, statement .......................................................................................... 71 

America’s Health Insurance Plans, Karen Ignagni, President & Chief Executive Officer, Washington, DC, statement ........................................................... 73 

American Insurance Association, Leigh Ann Pusey, President and CEO; 

Council of Insurance Agents and Brokers, Ken A. Crerar, President; Independent Agents & Brokers of America, Bob Rusbuldt, President and CEO; 

Financial Services Roundtable, Steve Bartlett, President and CEO; National Association of Mutual Insurance Companies, Charles M. Chamness, 

President and CEO; Property Casualty Insurers Association of America, 

David A. Sampson, CEO; National Association of Professional Insurance 

Agents, Len Brevik, Executive Vice President & CEO; Reinsurance Association of America, Franklin W. Nutter, President; Physician Insurers Association of America, Lawrence E. Smarr, President, statement ............................. 75 

Hoyt, Robert E., Ph.D., and Lawrence S. Powell, Ph.D., National Association 

of Insurance Commissioners, statement ............................................................ 78 

Hunter, J. Robert, Director of Insurance, Consumer Federation of America, 

Washington, DC, statement ................................................................................ 89 

National Association of Attorneys General, Washington, DC, Resolution .......... 129 

Powell, Lawrence S., PhD., Associate Professor and Whitbeck-Beyer Chair 

of Insurance and Financial Services, University of Arkansas-Little Rock, 

College of Business, Little Rock, Arkansas, statement and attachment ......... 131 

Property Casualty Insurers Association of America, Des Plaines, Illinois, 

statement .............................................................................................................. 161 

Reid, Hon. Harry, a U.S. Senator from the State of Nevada, prepared statement ...................................................................................................................... 175 

Page

IV 

Varney, Christine A., Assistant Attorney General, Antitrust Division, Department of Justice, statement .................................................................................. 178 

Voss, Susane E., Commissioner of Insurance, State of Iowa, Des Moines, 

Iowa, statement .................................................................................................... 185 

(1) 

PROHIBITING PRICE FIXING AND OTHER 

ANTICOMPETITIVE CONDUCT IN THE 

HEALTH INSURANCE INDUSTRY 

WEDNESDAY, OCTOBER 14, 2009 

U.S. SENATE, 

COMMITTEE ON THE JUDICIARY, 

Washington, DC. 

The Committee met, pursuant to notice, at 10:08 a.m., in room 

SD–226, Dirksen Senate Office Building, Hon. Patrick J. Leahy, 

Chairman of the Committee, presiding. 

Present: Senators Leahy, Kohl, Feinstein, Feingold, Schumer, 

Durbin, Whitehouse, Klobuchar, Kaufman, Franken, and Hatch. 

OPENING STATEMENT OF HON. PATRICK J. LEAHY, A U.S. 

SENATOR FROM THE STATE OF VERMONT 

Chairman LEAHY. Good morning. Today we are going to focus on 

an issue that has certainly had my attention for a number of years, 

and that is the insurance industry’s exemption from the Federal 

antitrust laws. This exemption, since it was enacted in 1945, has 

served the financial interests of the insurance industry, but I do 

not see where it has helped the consumers at all. 

For the past several months, our Nation has debated how best 

to reform our health care system. Three House Committees and 

two Senate Committees have spent countless hours trying to answer the question of how best to introduce competition and make 

health insurance affordable for all Americans. Now, in this debate, 

it is important to remember that under current law the health insurance industry does not have to play by the same rules of competition as do other industries. 

The lack of affordable health insurance plagues families throughout our country. The rising prices that hospitals and doctors pay 

for medical malpractice insurance drains resources that could otherwise be used to improve patient care. Even in my State of 

Vermont, where there are very few lawsuits, and virtually no large 

recoveries on malpractice, the malpractice insurance, you would 

think you were in California. And the insurance companies will not 

tell anybody why they have to charge those premiums. Antitrust 

oversight in these industries would provide consumers with confidence that insurance companies are not colluding to raise prices 

artificially. 

There is no justification for health insurers engaging in egregious 

anticompetitive conduct to the detriment of consumers. Price fixing, 

bid rigging, and market allocation are per se violations of our laws 

2 

precisely because there is no procompetitive justification for them. 

Other companies in all other industries have to follow these rules, 

and there is no reason why health insurers should be accorded immunity to engage in what would be illegal conduct if being done by 

any other company. Our bill would fix this anomaly in the law once 

and for all. I believe it would lead to more competition and lower 

insurance costs, and basically what it says is that nobody is above 

the law. If the laws are good for every other company, every other 

industry, why shouldn’t they be good for the insurance industry? 

But what has happened, the insurance industry, instead of working to justify this very special exemption, they have used its enormous influence to maintain a special, statutory exemption from 

Federal antitrust laws and the protections they provide. And while 

the insurance industry hides behind the exemption, patients and 

doctors have continued paying artificially inflated prices, as costs 

continue to rise at an alarming rate. 

Now, the cost spiral is just fine for the insurance companies. 

They make huge profits. But it punishes patients, it punishes 

American businesses large and small, and taxpayers. And I think 

while it would be very easy to say there is no justification for the 

antitrust exemption, they will fight like mad for it because it keeps 

insurance premiums high. But when we are debating reform efforts 

to check spiraling costs and expand Americans’ access to quality, 

we should not have this antitrust exemption. 

Last month, I introduced the Health Insurance Industry Antitrust Enforcement Act of 2009, and that would repeal the antitrust 

exemption for health insurance and medical malpractice insurance 

providers. The Majority Leader is a cosponsor of this legislation, as 

are six other members of the Committee—Senators Feinstein, Feingold, Schumer, Durbin, Specter, and Franken. It just says we will 

have the same basic rules of fair competition apply to insurers in 

the health industry that apply to everybody else. 

Last Congress, Senator Trent Lott, the former Senate Republican 

Leader, and others on both sides of the aisle joined me in introducing a much broader repeal of the insurance industry’s antitrust 

exemption. The one we are introducing now is a scaled-down 

version of that. 

I do not see how somebody can say with a straight face that they 

should not be subject to the same antitrust laws as everyone else. 

If they are operating in an appropriate fashion, then they have got 

nothing to fear. 

So I would hope this would be a key part of health programs. 

There is more, and I will put my full statement in the record. 

[The prepared statement of Chairman Leahy appears as a submission for the record.] 

Chairman LEAHY. I know we want to hear certainly from Senator 

Hatch and the Chairman of the Antitrust Subcommittee, Senator 

Kohl. Go ahead. 

Senator HATCH. Do you want to go to Senator Kohl first? 

Chairman LEAHY. No. Go ahead. 

3 

STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM 

THE STATE OF UTAH 

Senator HATCH. Thank you, Mr. Chairman, and welcome, Assistant Attorney General Varney. We appreciate you. 

Thank you, Mr. Chairman. I want to thank the members of this 

distinguished panel of witnesses for appearing here today, including the Senate Majority Leader and the Assistant Attorney General. These are indeed important issues, and it is my hope that we 

can have an open and honest discussion. 

Throughout this current health care debate, we have seen no 

small amount of partisan wrangling and disagreement. Now, this 

is to be expected when we are discussing issues about which Members of Congress have strong philosophical differences and really 

where one-sixth of the American economy is included. However, despite these differences, I believe that we all want to see the same 

results—namely, reduction in the cost of health care in America. 

None of us are indifferent to those in our Nation who are facing 

mounting medical costs. We simply disagree as to what is the best 

role for the Federal Government to play in addressing these costs, 

and that is what brings us to today’s hearing. 

Today we are discussing the effect of the antitrust exemptions 

enjoyed by the insurance industry which were put in place by the 

McCarran-Ferguson Act. This is not a new debate, and I believe 

that for most of us past discussions on this topic will inform the 

current one. 

Let me make my position clear. I believe that the essence of capitalism in our free market system is competition. I believe our antitrust laws, if properly and vigorously enforced, enhance this fundamental element of our economic system. 

In my mind, there are few exceptions to the notion that when 

companies compete with one another, consumers benefit. I believe 

that is true in the insurance industry as in any other. That being 

the case, I remain open to considering any reform measures that 

will promote competition in the insurance sector. And while this 

may include reforms of McCarran-Ferguson to prevent actual 

abuses of the current system, I have as of yet seen little evidence 

to justify a complete repeal of the antitrust exemption for the insurance industry. 

Now, this is true for a few reasons. First, I believe we need to 

ensure that small insurance providers and independent agents are 

able to remain competitive in the insurance market. McCarran-Ferguson has allowed these providers to collaborate in certain areas 

such as the evaluation-of-loss data, which is vital to setting insurance rates. Smaller providers simply do not have sufficient data on 

their own to remain competitive in the insurance market. A complete repeal of McCarran-Ferguson would, therefore, result in 

fewer, smaller competitors, leaving the market for the larger firms. 

Second, I believe limited collaboration between even large competitors can result in lower prices for consumers. I think that the 

data has shown that a ban on collaboration in the insurance industry could result in higher costs for insurers which will undoubtedly 

be passed on to our consumers. That said, McCarran-Ferguson was 

put in place to allow some level of collaboration and to ensure that 

4 

States play the primary role in regulating the insurance industry, 

not to exempt insurance companies from the need to compete. 

So, in the end, I believe any discussion of repealing the antitrust 

exemption should be coupled with actual data that the current 

market is not competitive. I hope that instead of demonizing the 

insurance industry simply because it is currently unpopular and an 

easy target will not take precedence over a robust discussion of the 

actual state of the insurance market. 

I would also like to take a minute to discuss this Committee’s 

role in the overall health care debate. Last week, for the first time 

the Congressional Budget Office released a report addressing the 

costs of defensive medicine in our health care system and the potential for tort reform to reduce those costs. Defensive medicine, as 

we all know, are those procedures and treatments which are redundant and often inappropriate that doctors perform not to improve 

the health of their patients but to avoid malpractice lawsuits. The 

CBO’s letter on this issue came just a few weeks after President 

Obama mentioned it in the most recent address to Congress, and 

I am talking about avoiding really wrongful medical liability lawsuits that are brought mainly to get the defense costs, which are 

extensive in almost every medical liability case. 

According to the CBO, tort reform measures would reduce the Federal deficit by $54 billion over 10 years, and the private sector 

would see even more savings—$11 billion this year alone. These 

are not insignificant figures, and I believe that there is ample data 

demonstrating that the savings to our overall health care system 

would be even larger. Yet it appears that the President and the 

majority in Congress would rather pay lip service to this issue 

rather than enact real reforms. 

For my part, it is very frustrating, having worked on the health 

care bills in both the HELP and Finance Committees, hearing time 

and again from members of the majority that reforming the medical malpractice liability system was a worthy endeavor but outside 

those committees’ jurisdictions. And here we are in the Judiciary 

Committee, the Committee with jurisdiction on these issues, and 

the majority has apparently decided to once again pass on the opportunity to address this important matter. 

A few weeks ago, former DNC Chairman and physician Howard 

Dean was speaking at a town hall meeting on health care. In that 

meeting, he was asked why the House’s health care bill did not include any reforms to the medical malpractice system. In a rare moment of candor on this issue, he stated that no such reforms were 

in the bill because ‘‘the people that wrote it did not want to take 

on the trial lawyers in addition to everyone else they were taking 

on.’’ He was very frank about it. 

I had hoped that, at least with regard to the Senate’s health care 

efforts, this statement would not hold true. But after seeing this 

Committee literally pay only lip service to the problem, I have to 

conclude that Governor Dean was speaking for both the House and 

the Senate. However, I am aware that this is not the subject of today’s hearing, and I will not take up any more of the Committee’s 

time discussing that particular issue. 

But this is an important hearing. I can only be here a short time, 

but I appreciate you holding it, Mr. Chairman, and I appreciate our 

5 

Chairman of the Subcommittee, Senator Kohl, and, frankly, appreciate virtually everybody on this Committee. 

Chairman LEAHY. Well, thank you. And, of course, the reason 

why malpractice was not in the Finance Committee bill is that it 

does not have jurisdiction over that issue. We do. I am happy to 

look at that or any other thing, but—— 

Senator HATCH. Well, I would like you to do that. 

Chairman LEAHY. But I am not going to look at it absent legislation that will give us some honest accounting from the insurance 

companies. This antitrust exemption really is a significant part of 

health care legislation, but within our jurisdiction. 

Senator Kohl. 

STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE 

STATE OF WISCONSIN 

Senator KOHL. Thank you, Mr. Chairman. We meet today to examine the state of competition in the health insurance market, a 

topic of great interest to all Americans who are contending with 

rising health care costs as well as rising health insurance premiums. Ms. Varney, we are particularly pleased to see you here 

today. 

Now, as health care costs continue to rise, consumers face ever 

increasing premiums. A recent study by the Kaiser Family Foundation found that health insurance premiums have risen by over 120 

percent in the past decade. The burden of rising insurance rates is 

borne by millions of families and individuals all across our country 

and also by large and small businesses who find it increasingly difficult to offer health insurance for their employees. 

Health insurance consolidation has left consumers and businesses with fewer choices, leading to higher prices and to what 

many believe to be a decline in coverage. There can be no doubt 

that vigorous competition in the health insurance industry is essential to lower health insurance premiums for consumers as well as 

businesses. 

In this industry, as in all others, a healthy dose of competition 

is the best remedy for that which ails American consumers. We 

need to ensure that our antitrust enforcement agencies are paying 

close attention to competition in this industry and are prepared to 

take enforcement action where necessary. At the same time, we 

need to recognize the important role of State regulation in the insurance industry as well as the needs of insurance companies to 

share information and risk-of-loss data, particularly small companies who rely on this information in order to compete with larger 

established companies. 

I am also glad Ms. Varney is here today because I want to ask 

her about the state of competition in agriculture, particularly in 

the dairy industry. Our small dairy farmers are facing increasing 

consolidation among milk processors, resulting in little choice of 

whom to sell their milk or at what terms. I am interested to learn 

what steps, Ms. Varney, you are planning to take to promote more 

competition in this industry. Again, we thank you for being here 

today and look forward to your testimony. 

Chairman LEAHY. Before we turn to Ms. Varney, I will ask consent to put in the record a letter from the American Hospital AssoVerDate Nov 24 2008 10:57 Jun 11, 2010 Jkt 056683 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\56683.TXT SJUD1 PsN: CMORC
6 

ciation, which states in the context of health care reform, this bill, 

the insurance industry bill, ‘‘should help to achieve the goal of fair 

play by eliminating antitrust protection for price-fixing, bid-rigging, 

and market allocation activities, which would undermine the success of a health insurance exchange and the coverage it promises 

for millions of Americans.’’ 

[The letter appears as a submission for the record.] 

Chairman LEAHY. I will also ask consent to put in the record a 

resolution from the National Association of Attorneys General 

which represents State Attorneys General throughout the country, 

and they state that the association supports repeal of the 

McCarran-Ferguson Act’s exemption for the business of insurance 

from Federal antitrust laws. There have been others that have submitted statements. Those will be put in the record. 

[The statement appears as a submission for the record.] 

Chairman LEAHY. Ms. Varney is the Assistant Attorney General 

for the Antitrust Division, United States Department of Justice. 

Prior to joining the Department of Justice, she was a partner at 

the Washington, D.C., firm of Hogan & Hartson. She was a member of the Antitrust Practice Group. She was head of the Internet 

Practice Group. She served as a Commissioner at the Federal 

Trade Commission from 1994 to 1997, where she was the leading 

official in a variety of Internet competition issues. She served as a 

Special Assistant to the President and Secretary of the Cabinet. 

She received her bachelor’s degree from the State University of 

New York at Albany and her law degree from Georgetown University, which, of course, always makes me happy. 

Ms. Varney, please go ahead. 

STATEMENT OF CHRISTINE A. VARNEY, ASSISTANT ATTORNEY 

GENERAL, ANTITRUST DIVISION, U.S. DEPARTMENT OF JUSTICE 

Ms. VARNEY. Thank you, Senator. Good morning, Mr. Chairman 

and members of the Committee. I am pleased to be here today to 

discuss the McCarran-Ferguson Act’s antitrust immunity for the 

business of insurance. 

Chairman LEAHY. Bring your microphone just a little bit closer. 

Ms. VARNEY. The McCarran-Ferguson Act was designed to delegate to the States the authority to regulate and tax the business 

of insurance. It also created a broad antitrust exemption based on 

State regulation. 

Repeal or reform of the broad antitrust exemption currently enjoyed by the insurance companies has been a perennial subject of 

interest. Most recently, the Antitrust Modernization Commission 

reviewed whether the McCarran exemption is necessary to allow 

insurers to collect, aggregate, and review data on losses. The AMC 

found that the exemption is no longer necessary. The AMC concluded that insurance companies ‘‘would bear no greater risk than 

companies in other industries engaged in data sharing and other 

collaborative undertakings,’’ and noted like all potentially beneficial 

competitor collaborations such data sharing would be assessed by 

antitrust enforcers and the courts under a rule of reason. Such an 

assessment would fully consider the potential procompetitive efVerDate Nov 24 2008 10:57 Jun 11, 2010 Jkt 056683 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\56683.TXT SJUD1 PsN: CMORC
7 

fects of such conduct and condemn it only if, on balance, it was 

anticompetitive. 

The Department is generally opposed to exemptions from the 

antitrust laws. The antitrust laws reflect our society’s belief that 

competition enhances consumer welfare and promotes our economic 

and political freedoms. Exceptions from that policy should be—and 

fortunately are—relatively rare. Those who advocate the creation of 

a new antitrust exemption, or the preservation of a longstanding 

exemption such as the McCarran-Ferguson Act, bear a heavy burden in justifying that exemption. 

The McCarran exemption has been subject to criticism as to its 

results. One antitrust treatise notes that under McCarran, the 

presence of even minimal State regulation, even on issues unrelated to the antitrust suit, is generally sufficient to preserve immunity. Indeed, the case law can be read as suggesting that the Act 

precludes Federal antitrust action whenever there is a State regulatory scheme, regardless of how perfunctory it may be. It is fair 

to say that the McCarran exemption is very expansive with regard 

to anything that may be the business of insurance, including premium pricing and market allocations. As a result, the most egregiously anticompetitive claims, such as naked agreements fixing 

price or reducing coverage, are virtually always immune from antitrust prosecution. 

Concerns over the exemption’s effects are especially relevant 

given the importance of health insurance reform to our Nation. 

There is a general consensus that health insurance reform should 

be built on a strong commitment to competition in all health care 

markets, including those for health and medical malpractice insurance. Repealing the McCarran-Ferguson Act would allow competition to have a greater role in reforming health and medical malpractice insurance markets than would otherwise be the case. 

In evaluating the need for an antitrust exemption, the Congress 

should also consider the flexible nature of the antitrust laws as interpreted in recent cases. These cases allow for a rule-of-reason review. An assertion that particular procompetitive behavior would 

violate the antitrust laws and, thus, should be exempted fails to 

take into account the economically sound competitive analysis that 

is used today to carefully circumscribe per se rules. 

The flexibility of the antitrust laws and their crucial importance 

to the economy argue strongly against antitrust exemptions that 

are not clearly and convincingly justified. 

There are strong indications that the possible justification for the 

broad insurance antitrust exemption in McCarran when it was enacted in 1945 are no longer valid. To the extent that the exemption 

was designed to enable the States to continue to regulate the business of insurance, it is no longer necessary. The state action doctrine was undeveloped in 1945. Today that state action doctrine allows a State to immunize what the antitrust laws may otherwise 

proscribe. 

The application of the antitrust laws to potentially procompetitive collective activity has also become far more sophisticated 

in the 62 years since McCarran was enacted. Some forms of joint 

activity that might have been prohibited under earlier, more restrictive doctrines are now clearly permissible, or at the very least 

8 

analyzed under a rule of reason that takes appropriate account of 

the circumstances and efficient operation of a particular industry. 

Thus, there is far less reason for concern that overly restrictive 

antitrust rulings would impair the insurance industry’s efficiency. 

In sum, the Department of Justice generally supports the idea of 

repealing antitrust exemptions. However, we take no position as to 

how and when Congress should address the issue. In conjunction 

with the administration’s efforts to strengthen insurance regulation 

and the States’ role in setting and enforcing policies, the Department supports efforts to bring more competition to the health insurance marketplace that lowers costs, expands choice, and improves quality for families, businesses, and Government. As you 

know, the administration has been working closely with the Congress to enact health care reform that lowers costs and offers affordable coverage to all Americans. Yesterday, the Senate Finance 

Committee became the fifth and final Committee to report out a 

health reform bill. The President has said that these reforms will 

greatly benefit Americans from all walks of life, as well as the 

economy as a whole. We know that you share this goal, and we 

look forward to working with you and your colleagues in achieving 

our common objectives. 

Mr. Chairman, this concludes my prepared statement. I would be 

happy to address questions. 

[The prepared statement of Ms. Varney appears as a submission 

for the record.] 

Chairman LEAHY. Thank you. 

Before we go to questions, Ms. Varney, Senator Reid, the Majority Leader, is here, and I know he is juggling about 12 other things 

for being here. So I am going to yield to Senator Reid. 

STATEMENT OF HON. HARRY REID, A U.S. SENATOR FROM THE 

STATE OF NEVADA 

Senator REID. Mr. Chairman, thank you very much for allowing 

me to testify. I appreciate the members of the Committee and the 

Ranking Member for listening to me. 

Mr. Chairman, you and I had the good fortune to serve in the 

Senate with Paul Simon. I had the good fortune of serving with 

him, the Senator from Illinois. He and I were lieutenant Governors. 

We served in the House together, and he is one of my favorite people I have ever dealt with in Government. And he had a lot of 

causes. That is who Paul Simon was. But the one cause that he 

talked about incessantly was to get rid of the McCarran-Ferguson 

anticompetitive provision that allows—they have this blanket antitrust exemption. It is something that should have been done a long 

time ago. I do not know what Pat McCarran had in mind when he 

lent his name to this, but that is a story for another day. 

And, Mr. President—or, Mr. Chairman, I am sorry, one needs 

only to read the news today and find out what is going on around 

the country today with the barrage of paid advertisements the insurance industry is doing now to prevent a health care bill from 

passing. They really are desirous of continuing their monopoly they 

have in America today. 

There is not anything we could do to satisfy them in this health 

care bill. Nothing. If we did this, they would want that. They are 

9 

so anticompetitive. Why? Because they make more money than any 

other business in America today. 

I have received hundreds and hundreds of letters, probably now 

in the thousands of e-mails, from constituents who are concerned 

about adequate health care. One of my constituents in Boulder 

City, Nevada, runs a small business. She is paying a huge amount 

of money each month for the most basic health care package she 

could find. Her rates keep going up. No other company will insure 

her. 

Another of my constituents, a psychologist who runs a small 

practice with a handful of employees, has always paid 100 percent 

of his workers’ health care costs. The insurance company he uses 

has decided to raise its rates almost 50 percent-46 percent to be 

exact. He cannot afford this, and he will join the ranks, as will his 

employees, of the uninsured, because there is no option, public or 

otherwise. 

Free competition is fundamental to our economy and essential to 

the American character that we have developed in these 200-plus 

years. 

It is one of the most important decisions that we make, and that 

is, to make sure the insurance industry is playing by the same 

rules as everyone else and that they are subject to competition. 

What a sweet deal they have, Mr. President. 

Competition is what allows great ideas to flourish, and it improves prices and quality for consumers. It allows new businesses 

to enter the market. It gives incentives to entrepreneurs. It fuels 

innovation. 

America’s free and open marketplace gives consumers choices 

and encourages risk taking, and it has been the birthplace of the 

greatest economy in the history of the world. 

That is why we have Federal laws that prohibit price fixing, bid 

rigging, and collusion between companies within an industry. 

When companies are forced to compete with one another, the 

American people benefit. This is not a Democratic Party idea. This 

first came about with a Republican—Theodore Roosevelt, the trust 

buster. These are financial trusts, not personal trusts. 

Take health insurance as an example. 

Providing this blanket exemption for insurance companies to 

antitrust laws has been anticompetitive and damaging to the 

American economy, and that is a gross understatement, I repeat. 

Health insurance premiums have continued to rise at a rapid rate, 

forcing businesses to cut back on health insurance coverage and 

forcing many families to choose between health insurance and basic 

necessities. 

Mr. Chairman, employers do not have health insurance because 

they are cheap or mean. They cannot afford it. 

All too often, working families have to forego health insurance. 

In fact, the primary reason people are uninsured is due to the high 

and escalating costs of health insurance. 

I think it speaks volumes to find out that last year in America 

three-quarters of a million people filed bankruptcy because of their 

medical bills. Next year it will be the same, probably more. 

The increasing costs impact the costs of Government health programs like Medicare and Medicaid and the costs of providing 

10 

health insurance to Federal Government employees. And despite 

rising costs, insurance companies are underpaying doctors for their 

services with many of the monopolistic practices they have developed. 

Remember the movie—Jack Nicholson was in it, and there was 

a point in there where they were bashing managed care, and audiences all over America cheered when that part came up in the 

movie. Why? Because people hate what is happening to them. They 

have no control. 

Insurance companies have become so large they dominate entire 

regions of the country, and that is what you would expect when you 

see an industry protected from the antitrust laws. You see, I repeat, insurance companies becoming so large they dominate an entire region of the country. They not only damage general businesses; they prevent insurance companies from starting up. 

They have become so dominant that they dictate business practices. They are so influential that they exert tremendous influence 

over public policy, as seen by the millions of dollars they are spending today in America bashing the health care programs that we are 

trying to initiate. 

In particular, exempting health insurance companies has had a 

negative effect on the American people, and that is a gross understatement. Health insurance companies have so much authority 

that they often dictate what course of treatment patients receive. 

When you do have health insurance, more than 30 percent of the 

claims made are turned down. They have armies of people figuring 

out ways not to pay people for something that happens to them in 

the way of a medical treatment. Health insurance monopolies 

should not be making health insurance—I am sorry. Health insurance monopolies should not be making health care decisions for patients—and for doctors. No one should come between a patient and 

their doctor when it comes to making health care decisions, but in 

America, the insurance companies come between them millions of 

times a day. 

Patients should be able to choose, just like Members of Congress 

are able to choose, from a variety of different health care plans. 

There is no reason why insurance companies should be allowed to 

form monopolies and dictate health choices. 

I so appreciate, Mr. Chairman, your sponsoring this legislation. 

The minute I saw it, I could not get to my staff quickly enough to 

make me happy to join with you. 

There is no reason why the insurance companies should have exemption from antitrust laws, this blanket exemption. And, you 

know, they have the audacity to say, ‘‘Well, we are subject to the 

antitrust laws of States.’’ That is laughable. 

To the extent insurance companies need to share information to 

provide their services, let them do what other industries have to 

do; they are no different than any other business: Seek prior authorization and guidelines from the Department of Justice and others for how they can work together. This guise they have used for 

decades saying, ‘‘Well, we cannot share information if we do not 

have this monopoly.’’ I am sure that the automobile industry felt 

the same way. Lawyers feel the same way. Doctors, hospitals all 

11 

feel the same way. But they are subject to the law, and so should 

these insurance companies be. 

They should be subject to the same Federal oversight as every 

other industry. Their price-setting and information-sharing practices should not be permitted to take place out of public view, but 

should be brought out into the light of day. 

So I urge all of my colleagues on this Committee and in the Senate to get this out of Committee as quickly as possible and let us 

pass it. 

Now, the reason they are so upset and the reason they are running these ads is the bill that came out of the Finance Committee 

chips away at this monopoly that they have, and they hate that. 

They want to be untouched, as they have been for 60 years. So as 

far as doing something to help the American people, Mr. President, 

there are a lot of things we can do. But your sponsoring this bill 

and getting this out of this Committee sends a tremendous message, an important message to the American people, and the people 

of Vermont are proud of you, as well they should be, for this and 

other reasons. 

[The prepared statement of Senator Reid appears as a submission for the record.] 

Chairman LEAHY. Thank you. Thank you, Mr. Leader. It is interesting. As I said before, your predecessor as Majority Leader, Senator Lott, had been a sponsor of this. You were a sponsor of this. 

It is a bipartisan—I think it is a nonpartisan thing. Basically what 

we are saying is everybody should be subjected to the laws. And 

if you are obeying the law, if you are following the law, if you are 

not breaking the laws that are set up to protect consumers, you 

have got nothing to fear. So that is all we are saying. 

Unless there is a question of the Leader, I know you have to go 

back, Senator Reid, so thank you very much for taking the time to 

be here. 

Ms. Varney, I also want to thank you for being here. Did you finish your statement? 

Ms. VARNEY. I did. I guess it was not that memorable. 

Chairman LEAHY. I know that you offered to yield to Senator 

Reid. 

Ms. VARNEY. I did. He declined. 

Chairman LEAHY. He let you go ahead. That prairie way of being 

sure to give everybody a chance. It sounds like somebody took the 

cork out of the bottle. 

[Laughter.] 

Chairman LEAHY. I do appreciate your being here. You know, I 

have said this to you before privately, and I said it to you in 

Vermont. But I am glad to see the administration taking antitrust 

enforcement so seriously. You have announced the intention to be 

tough on antitrust enforcement. You are showing it. 

A few weeks ago, you were in Vermont at a Judiciary hearing to 

discuss competition issues in the dairy industry. That hearing was 

very compelling. It was of interest to many of us on this Committee. Having you here is very helpful. 

You said that the Antitrust Division is suspect of antitrust exemptions generally. Are there any procompetitive justifications for 

allowing price fixing, bid rigging, and market allocation to the 

12 

health insurance and medical malpractice industries? Is there a 

reason that would help the consumers to have those exemptions? 

Ms. VARNEY. Well, Senator, I think historically there was a view 

that you had to be able to share risk and loss data over time in 

order to come up with future projections. I think that concern is 

largely alleviated now because in many, many industries, as Senator Reid noted, you can absolutely share historical data, and so 

long as you are sharing it on a blinded basis, you can use it to 

project future trends. 

So I do not think that the reasons that were in existence in 1945 

are still very viable to justify this exemption. 

Chairman LEAHY. A lot of industries share safety data, for example, do they not? 

Ms. VARNEY. Yes, they do. 

Chairman LEAHY. The legislation I introduced, the Health Insurance Industry Antitrust Enforcement Act, only repeals the 

McCarran-Ferguson exemption for what I think we would all agree 

are egregious violations of the antitrust laws—price fixing and bid 

rigging and market allocation. Why would somebody object to that? 

Ms. VARNEY. I do not know that they would, Senator. I certainly 

would not. 

Chairman LEAHY. The insurance companies apparently do, according to what Senator Reid and others have said. 

Ms. VARNEY. Well, again, I think that it is time for everybody to 

realistically assess how you can share information. We see it in 

many, many industries. There is no prohibition in the antitrust law 

on sharing historical data. There is no prohibition on coming up 

with future trend projections, so long as it is blinded so you cannot 

tell whose data are whose. And it happens across the board. It happens in the lumber industry, in the paper industry, in the safety 

industries. Law firms share historical data to project the future. I 

mean, data sharing is a well-recognized undertaking that, when 

done appropriately, when you are not talking about fixing price, 

when you are not talking about allocating markets, is absolutely 

permissible under the law. 

Chairman LEAHY. Your State colleagues, State Attorneys General—I mentioned the resolution which I put in the record from the 

National Association of Attorneys General, and they have expressed their support for the repeal of McCarran-Ferguson. Now, 

how do you go about working with them? How does the Federal 

Government, the Attorney General’s office, how do you work with 

other attorneys general in the States on anticompetitive antitrust 

matters? 

Ms. VARNEY. Well, we work very closely. I was just last week in 

New York at a meeting of several of the Attorneys General where 

we were outlining areas that we could beneficially work together. 

One I think we are all interested in, particularly you, Senator 

Kohl, is agriculture, and in any area where the State Attorneys 

General are the front line of what is happening to consumers, that 

is an area where we can work very closely with them. There is a 

long tradition of something called ‘‘multi-state task force,’’ where 

several attorneys general can come together and agree with the Department of Justice that we will coordinate an investigation or a 

prosecution, share data, share resources. Oftentimes, the States 

13 

like us to take the lead because we may have more resources. 

Other times, particular States may have more expertise, and we 

will support them. But we work very closely with the State attorneys general, and this is an area that we would work closely with 

them. 

Chairman LEAHY. I see a high concentration, I see a lack of competition in the medical insurance market. You cannot look at that 

today because of the antitrust exemption. If the antitrust exemption was removed, is that something that would at least have inquiry or review by the Department of Justice? 

Ms. VARNEY. Yes, Senator, I am also aware that in several regions there is a very high concentration, and as we have talked 

about before, in any industry where you see significant concentration, whether it is regionally or nationally, you want to look very 

carefully at what are the competitive effects of such concentration, 

so yes. 

Chairman LEAHY. Thank you. 

Senator Kohl. 

Senator KOHL. Thank you very much, Mr. Chairman. 

Ms. Varney, according to the AMA, in the past 12 years out of 

400 health insurance mergers, the Justice Department challenged 

only two. At the same time, health insurance premiums have risen 

120 percent over the past decade. Many industry observers blame 

sharp industry consolidation for these rising premiums. 

Do you believe that antitrust enforcement officials could have 

done more to prevent health insurance industry consolidation? And 

what is your view of the record of antitrust enforcement in the 

health insurance industry in recent years? 

Ms. VARNEY. Well, Senator, clearly there is significant concentration in the health insurance market in certain regions. As you 

know, I have been at the Division just 6 months, and I was not involved in any of the prior reviews of health insurance mergers, so 

I cannot comment specifically on why they were let through or why 

they were not challenged. 

I can say that as we continue to look in very concentrated markets, there is real cause for concern when you are reducing competition in those markets. On the other hand, there are some geographic markets which are very competitive, where there are multiple players, and you may see a case where you have a smaller insurance company that may not be able to compete effectively where 

there is robust competition. 

So there can be reasons why you might see an acquisition, but 

certainly particularly in areas of high concentration, I would be 

very skeptical that there would not be a reduction in competition. 

Senator KOHL. Ms. Varney, dairy farmers across our country are 

facing acute economic pain, as I am sure you are well aware. They 

are being battered by a ‘‘perfect storm’’ of high input costs and historically low dairy prices. They have lost more than $4 billion in 

their equity. Their stories are compelling and painful, and we clearly have to find a better system. 

As you know, there is a lot of complexity in dairy markets, and 

there is growing concern that concentration and consolidation on 

the processor side is hurting dairy farmers a lot. 

14 

Some time ago, you and the Secretary of Agriculture announced 

a series of workshops to look specifically at antitrust in agriculture. 

I would like an update on your progress and a commitment that 

at least one of your workshops will delve specifically into dairy 

issues. Hopefully a workshop of that sort might occur in the State 

of Wisconsin. I would like some comment from you on that issue 

as well. 

Ms. VARNEY. Absolutely, Senator. Well, we actually went to 

Vermont a few weeks ago—although Vermont was a field hearing 

of this Committee, and talked with the dairy farmers there and 

began to get a real understanding of the reality of their day-to-day 

life and how difficult it is to maintain their farms. 

We are starting our own field hearings early in the spring with 

the Secretary of Agriculture. This has never been done before that 

the Department of Justice and the Department of Agriculture have 

jointly examined concentration in the agriculture industry. We are, 

of course, looking at dairy. It is at the top of our list. For dairy 

farmers I met in Vermont, it was so clear to me that they needed 

action; otherwise, they were not going to be able to stay in business. 

So we will be in Wisconsin. We will be looking at dairy. I will 

keep you fully apprised of what we are finding. And, of course, I 

cannot comment on whether or not we have any investigations ongoing. 

Senator KOHL. Well, it is good to know that you will be out in 

Wisconsin with a field hearing. 

Ms. VARNEY. I will. 

Senator KOHL. Ms. Varney, at your confirmation hearing, we discussed my bill to eliminate the wholly unwarranted antitrust exemption enjoyed by the freight railroad industry. 

Ms. VARNEY. Right. 

Senator KOHL. Because of this exemption, rail shippers have 

been victimized by the conduct of dominant railroads and have no 

antitrust remedies. Higher rail shipping costs are passed along to 

consumers, resulting in higher electricity bills, higher food prices, 

and higher prices as well for manufactured goods. 

I was pleased that you stated at your confirmation that you support the bill, but we have asked the Justice Department for a letter 

in support of our railroad antitrust bill now for more than a year. 

Can we expect such a letter from the Department soon? 

Ms. VARNEY. Well, as you know, Senator, the administration has 

not yet taken a position on any particular antitrust exemption bill, 

and they have not taken a position on the railroad bill. I continue 

to be very interested in this matter and continue to talk with your 

staff and the Committee staff about this issue, as well as bring it 

to the attention of everyone in the administration who is considering these issues. 

Senator KOHL. Thank you so much, and thank you, Mr. Chairman. 

Chairman LEAHY. Thank you very much. 

Senator Feinstein. 

Senator FEINSTEIN. Thank you very much, Mr. Chairman. I 

would like to just indicate my very strong support for your bill. 

15 

I am deeply concerned about the medical insurance marketplace. 

I believe it lacks a moral compass. I believe what has happened in 

my State is untenable, and let me say a little bit about what I 

think has happened. 

Two large health insurers—namely, Anthem Blue Cross and Kaiser Permanente—now control 58 percent of the market in the entire State. In smaller markets, like Salinas, the top two companies 

control up to 80 percent of the market. In the last 8 years, profits 

of the publicly owned medical insurance companies have increased, 

I understand, around 428 percent while premiums have escalated 

dramatically, doubling all across the State. 

I cannot tell you how many times when I go home people come 

up to me and say, ‘‘I just got a 20-percent increase in my premium. 

I cannot handle it. Last year I had a 10-percent increase.’’ And the 

fact of the matter is, you know, as you get older, most people have 

some condition or another. So premiums are out of hand. I think 

CEO salaries are out of hand. I think administrative costs, running 

about 23 percent, are out of hand. 

My bottom-line belief is that the health care medical insurance 

industry should be nonprofit in the United States, and the more I 

read about other countries, the more this view is supported in my 

own mind. 

To me, this bill is one small step we can take to send a very loud 

signal to the medical insurance industry that times have got to 

change. People cannot absorb it, and particularly in my State. I 

think this bill really is necessary. I think it is a bill whose time 

has come. I hope we pass it very speedily. And, Ms. Varney, I hope 

your Department takes a very, very affirmative position. 

I can speak for a State that is almost 40 million people now. 

Health care costs are high. Premium costs are out of sight. And we 

have got huge unemployment. So it is a highly concentrated market any way you look at it. 

So I would just like, Mr. Chairman, without asking any questions, to say I am 100 percent behind this bill, and I thank you. 

Chairman LEAHY. Thank you, and if that is a problem in a State 

as huge as California, you can imagine what it is like in a small 

State like mine or others. 

Senator Feingold is not here. Senator Whitehouse. 

Senator WHITEHOUSE. Mr. Chairman, may I yield to the Assistant Majority Leader who is with us? 

Senator DURBIN. Go ahead. 

Senator WHITEHOUSE. Are you sure? All right. 

Chairman LEAHY. That is going to cost you later on, but go 

ahead. 

[Laughter.] 

Senator WHITEHOUSE. Ms. Varney, the AMA has calculated that 

94 percent of metropolitan areas have a health insurance market 

that is highly concentrated—which is a term of art—highly concentrated according to Department of Justice standards. In 39 

States, two health insurers control at least half of the market, 39 

out of 50. You have effectively a duopoly for the majority of the 

market. And in nine States, a single insurer controls at least 75 

percent of the market. Really an effective monopoly. 

16 

When you hear those numbers and you measure them against 

the Department of Justice’s standards for what is a competitive 

versus a noncompetitive market, what is your reaction? And what 

does having a market be deemed by the Department of Justice to 

be ‘‘highly concentrated’’ mean? 

Ms. VARNEY. Well, Senator, whenever you see concentration 

numbers like the ones you just mentioned, we are deeply concerned 

because the higher the concentration, the less competition. When 

you do not have competition, you do not get the best price, you do 

not get the best output. So we are always concerned in any industry, including insurance, when you see those levels of concentration. 

At the moment it is the State attorneys general and the State 

insurance commissioners that would have to examine any behavior 

in a highly concentrated market, and we would welcome them to 

do that. Should we have the authority, we would, of course, closely 

examine those markets where there is such high concentration. 

Senator WHITEHOUSE. Were you to have the authority, what 

would it mean that those 94—essentially every metropolitan area 

in the country is deemed ‘‘highly concentrated.’’ 

Ms. VARNEY. Well, I think what we would probably do would be 

work with the State attorneys general and insurance commissioners in those markets where those on the front lines believe that 

there may be impermissible conduct that is keeping those levels of 

concentration in place. 

Senator WHITEHOUSE. You were—I guess let me ask the question 

a different way. The best argument that I have heard for the antitrust exemption is that because an insurance company has a hard 

time entering a market and pricing its product if it does not have 

claims experience, it has to have a proxy in order to facilitate that 

market entry, and the proxy is ISO or, in the case of workers’ compensation, NCCI, and they provide general information that allows 

a company that does not have claims experience to become a new 

entrant and in theory reduces that barrier to entry. And it also 

helps small insurers make that choice because they do not have the 

overhead to calculate rates as readily as a great big company does. 

That is the best case. I am not sure it is very convincing, but I 

would like to hear your reaction to it. 

Ms. VARNEY. I think, Senator, that is the historic case. In 1945, 

the state action doctrine and the rule of reason did not really exist. 

State action doctrine was barely developed. So I think today it is 

clear in multiple industries across many, many sectors of the economy, there is no prohibition on sharing historic data. 

Senator WHITEHOUSE. So long as you engage with the State and 

get clearance that it is not, in fact, anticompetitive, and that is an 

established process and procedure. 

Ms. VARNEY. You can share historic data as long as you do it 

carefully, you are not in any small closed rooms setting prices, allocating markets. Many industries—in fact, that is a service that 

many trade associations offer their members—they take the data 

in, they strip it of any identification so it becomes blind data. They 

aggregate it, and get historical data. 

You can use that data to project future trends. That is completely 

permissible under the antitrust laws. 

17 

Senator WHITEHOUSE. And when they do that, if they want to 

come to the Department of Justice to get clearance, do you—— 

Ms. VARNEY. We give them what is called a ‘‘business review letter.’’ We work with them so that they understand the parameters 

of how they can do this. We then set out our views in what is called 

a business review letter that explains what they can do. 

Senator WHITEHOUSE. And if they rely on the business review 

letter, they are protected against—— 

Ms. VARNEY. I would generally protect them against Government 

enforcement. 

Senator WHITEHOUSE. Very good. Thank you very much. 

Thank you, Mr. Chairman. 

Senator KOHL. [Presiding.] Thank you very much. 

Senator Feingold. 

Senator FEINGOLD. Thank you, Mr. Chairman. I will make a few 

comments, and I will just have a question for Ms. Varney. 

The antitrust laws enacted in the early 20th century provide essential protections for consumers and businesses, and I also believe 

that those protections should apply to Americans buying health 

and medical malpractice insurance. As Congress debates the cost 

of health care, it is very much worth noting that purchases of these 

insurance policies are particularly susceptible to industry collusion 

leading to inflated prices. But under current law, health and medical malpractice insurance providers are exempt from the Federal 

antitrust regulations. This is because, as we all know, the insurance industry was given a statutory exemption from antitrust laws 

over 60 years ago by the McCarran-Ferguson Act antitrust laws. 

Since McCarran-Ferguson was enacted, it has become clear that 

health and medical malpractice insurers have abused this exemption to the detriment of patients and doctors everywhere. Industryspecific antitrust exemptions are rarely justifiable. And if there is 

a good reason to maintain the current exemption for these parts of 

the insurance industry, I certainly have not heard it. 

Simply put, because of the insurance exemption, a competitive 

market for health and medical malpractice insurance does not 

exist. In 26 States, a single insurer covers at least half of the population. In 39 States, two insurers control more than half of the insurance market. A recent survey by the American Medical Association found that most metropolitan areas have a highly concentrated 

commercial market for health insurance. 

Now, this lack of competition has hurt both patients and doctors. 

While market-dominating health insurance companies have made 

record profits, basic coverage has become unaffordable for millions 

of Americans. And in Wisconsin, the price of health insurance premiums for families and individuals has doubled over the last 10 

years. If current trends hold, family health insurance for a Wisconsin family will consume 46.2 percent of the projected median 

family income in 2016. In addition, doctors around the country are 

suffering as medical malpractice insurance providers profit from 

premiums that are not commensurate with the cost of claims. 

Without thorough competition, patients and doctors have little 

choice but to continue paying whatever premiums the dominant insurers in their market decide to charge, so addressing this problem 

is crucial to health care reform and does require legislative action 

18 

to ensure that health and medical malpractice insurance companies 

do not engage in anticompetitive behavior. 

Although insurance companies have certain informational needs, 

there is no reason to exempt them from the regulation of the most 

harmful anticompetitive practices. Without a repeal of the antitrust 

exemption, insurance companies will continue to have the power to 

gouge patients and doctors. 

So I am also pleased to cosponsor S. 1681, Chairman Leahy’s bill, 

to fix this problem, and I want to commend him for holding this 

hearing. And I also want to thank Assistant Attorney General 

Christine Varney for appearing here today and for all her outstanding efforts thus far to revitalize and reinvigorate the Department of Justice’s Antitrust Division. 

Ms. Varney, you promised me at your confirmation hearing that 

you would take a very serious look at what has been going on in 

the agriculture industry, which obviously I have been concerned 

about for years. You have been true to your word, and I want to 

personally thank you on behalf of my constituents. I hope the plans 

by the Departments of Justice and Agriculture for a series of joint 

workshops next year will be followed by similar partnerships with 

other agencies that have critical oversight roles, such as the Commodity Futures Trading Commission and the FTC. And, of course, 

I also can think of no better place for a workshop on dairy than 

Wisconsin. I am so pleased that Senator Kohl raised this with you 

and you indicated that there would be one held there. 

One question. Given your extensive background in antitrust enforcement, how do the health insurance and medical malpractice 

insurance industries compare to other industries that you have examined in terms of market concentration? In your view, are there 

serious imbalances in the marketplace for these products that need 

to be addressed? 

Ms. VARNEY. Well, Senator, we have not undertaken a thorough 

evaluation of the price effect of concentration. I know many others 

have, and we carefully monitored those studies. I think it is a logical result that when you have the levels of concentration that you 

see in the insurance industry, you generally do see prices rising, 

often at a higher rate, as Senator Feinstein mentioned, than other 

sectors of the economy. 

Senator FEINGOLD. Thank you, and thank you, Mr. Chairman. 

Senator KOHL. Thank you very much, Senator Feingold. 

Senator Kaufman. 

Senator KAUFMAN. Thank you, Senator, and I want to thank 

Chairman Leahy, first, for putting this bill in and, second, for holding these hearings today. I am pleased to see Ms. Varney here. I 

think that you are getting a chorus from members here about our 

unhappiness with what is going on in terms of antitrust over a 

whole series of years, and I think, as I said at your confirmation, 

you are a perfect choice for this to get this straightened out. And 

my feeling is there is a new sheriff in town and we are going to 

go after a lot of these things that go on, which have been eloquently presented by other members. 

Let me ask you a question about how important you think it is 

that we include an antitrust savings clause in any health care legislation that we pass. 

19 

Ms. VARNEY. Well, I think that the administration is working 

closely with the committees on the details that need to go into any 

final bill, so I think we need to look at the bill as a whole so we 

understand what language and what standards will be appropriate. 

Senator KAUFMAN. But you think that is important. 

Ms. VARNEY. Very important. 

Senator KAUFMAN. Good. The second thing is: What have you 

done to change the deliberative process in the Antitrust Division to 

let various stakeholders participate in the process? 

Ms. VARNEY. Well, we went up to Vermont, to start. We participated in a Senate Judiciary field hearing with the dairy farmers 

in Vermont. We are undertaking the field workshops with USDA 

to hear from all sectors of agriculture. We also have announced recently that we are reviewing our merger guidelines, so we will be 

working with all sectors of industry and consumers on whether or 

not we are completely transparent in the way that we are doing 

merger reviews. So we are trying to bring everybody into the process. 

Senator KAUFMAN. Great. What is the biggest challenge—I mean, 

I have not had a chance to ask you this. What is the biggest challenge since you took over the Division? 

Ms. VARNEY. Trying to find enough hours in the day to get everything done that we want to get done. 

Senator KAUFMAN. Good. And, finally, I know last week the 

United Kingdom Competition Commission blocked a proposed 

merger of Live Nation and Ticketmaster, and you have a thing underway. Can we expect a decision somewhat soon in that case? 

Ms. VARNEY. You know, we cannot comment on any ongoing investigations, but we take our charge seriously, and when we get to 

the end, we will get to the end. 

Senator KAUFMAN. Great. Thank you. 

Thank you, Mr. Chairman. 

Senator KOHL. Thank you very much. 

Senator Franken. 

Senator FRANKEN. Thank you, Mr. Chairman. 

Ms. Varney, there is a recent case in which Anthem Health 

Plans, a subsidiary of WellPoint, is suing the State of Maine. The 

company argues that the State must guarantee them a 3-percent 

profit margin, even though this margin would result in an 18.5-percent premium increase on 12,000 individual policy holders. 

I am not aware of any industry that is entitled to any guaranteed margin of profit. Are you? 

Ms. VARNEY. No, I am not, Senator. 

Senator FRANKEN. OK. The average individual Maine health insurance consumer is paying four times as much today for health 

care as they did 10 years ago. Do you believe the fact that Anthem 

controls nearly 80 percent of the insurance market in Maine has 

fostered this company’s I guess brazen behavior at the expense of 

beneficiaries’ pocketbooks? 

Ms. VARNEY. Well, Senator, when you do not have to compete, 

you can get pretty big profit margins so, yes, if you have got that 

kind of market share. 

Senator FRANKEN. Let me ask you something that I do not—it 

is a good kind of question because I do not know the answer to it. 

20 

Sometimes you hear folks say, well, we should open up the insurance market, you should be able to buy insurance in any other 

State. And I know that in Minnesota, for example, we have basic 

standards for which, you know, insurance companies have to meet 

in order to do business in Minnesota, and the danger is that you 

would get—you know, this would get rid of all the standards, and 

so you would not know what you were buying. 

Ms. VARNEY. Right. 

Senator FRANKEN. Does the fact that McCarran basically gives 

States the jurisdiction over antitrust, does that complicate the 

issue of if you were to allow people to buy insurance across State 

lines? Does that make it—— 

Ms. VARNEY. I do not think, Senator, that it makes it more complicated. I think States can still take and should take a primary 

role in determining what is required to do business in their State 

when it comes to offering insurance products. At the same time, 

that does not need to preclude any insurer’s ability to be reviewed 

under the Federal antitrust laws. I think they are consistent. 

Senator FRANKEN. That is not what I am asking. I am saying 

that if you did not change this, if you kept this the same, would 

that have any effect over the concept of being able to buy plans 

from other States? So, in other words, there was no Federal regulation over at least the antitrust part of insurance companies, in addition to all the other issues in terms of what is covered and what 

is not covered and those kind of standards, does this also complicate that notion of getting insurance products from other States, 

health insurance products? 

Ms. VARNEY. You know, Senator, I am not familiar with the complexities that you are describing. I would like to look into it and 

maybe get back to your office with a view of how that would work, 

how it might work. 

Senator FRANKEN. OK. I personally hear this a lot about, oh, 

well, you should be able to buy insurance products from—you 

know, we should deregulate it so you could buy insurance products 

from all over the place. But in Minnesota, there is well-baby care. 

There are other kinds of things—shots for babies that are covered 

that are not covered in other States. And I just do not want to 

lower our standards, and any insurance company that operates— 

that wants to operate in Minnesota can just simply meet our standards. There are no barriers to that. 

Ms. VARNEY. And I do not think that what we are talking about 

today would change that. I think States would still be entitled to 

and should set the standards for doing insurance business in their 

State. But let me have a look at it in a little bit more detail. 

Senator FRANKEN. Yes, what I am asking is, if you continue 

McCarran, would it be an argument against buying insurance products from other States, health insurance products. 

Ms. VARNEY. Yes, let me get you a thoughtful analysis. 

Senator FRANKEN. OK. Thank you. I appreciate that. 

Thank you, Mr. Chairman. 

Chairman LEAHY. Thank you. 

Senator Durbin. 

Senator DURBIN. Thank you very much, Ms. Varney. And so 

when the health insurance industry tells us Monday night, ‘‘We are 

21 

raising rates; premiums are going up,’’ they can kind of say that 

with some authority, because if they decide to come together and 

fix prices, for example, allocate markets, any other company might 

be brought to court for it saying you have violated antitrust. But 

a health insurance company under McCarran-Ferguson would not 

be subject to Federal prosecution, would they? 

Ms. VARNEY. They would not, Senator. 

Senator DURBIN. It puts it in perspective for a lot of us, incidentally, who support a public option and think that they need real 

competition to keep them honest on this. 

I want to go into the medical malpractice insurance area because 

it has been a topic during this health care reform debate. And I do 

not know how familiar you are with this market, but here is an insurance market that I think raises some serious questions. 

According to the National Association of Insurance Commissioners, in 2008 medical malpractice insurers had $11.2 billion in 

direct premiums written, paid out $4.1 billion in losses—in other 

words, $7.1 billion more in premiums than paid out in tort claims. 

About $2.1 billion went for defense and cost containment, but that 

left them $5 billion at the end of the day. 

Also, between 2003 and 2008, the same data shows that the total 

losses paid out by medical malpractice insurers decreased by over 

50 percent, from $8.4 billion to $4.1 billion, while premiums, direct 

premiums charged, actually increased during that period of time 

from $10.6 billion to $11.2 billion. 

Do you believe that lack of competition in the medical malpractice insurance industry is enabling insurers to overcharge policy holders and pocket more money? 

Ms. VARNEY. Senator, in any region where there are the levels 

of concentration we have been talking about today, there is very little incentive to compete on price. So the more competition you can 

get into those markets, the better price you are going to get and 

the better quality product you are going to get. 

Senator DURBIN. And isn’t that at the basis of our antitrust law? 

Ms. VARNEY. It certainly is. 

Senator DURBIN. Competition. 

Ms. VARNEY. Yes, sir. 

Senator DURBIN. And this industry has been exempt from that 

basic requirement. In the next panel, Dr. Powell is going to say 

that he believes McCarran-Ferguson ‘‘increases competition by promoting the characteristics of competitive markets.’’ And he goes on 

to say, ‘‘From all indications, the law has been remarkably successful in achieving this objective.’’ 

Ms. Varney, do you have any comment or response? 

Ms. VARNEY. I have not seen Dr. Powell’s testimony, but in my 

testimony I have referenced several studies that evaluate the cost 

impact of McCarran. 

Senator DURBIN. Do you believe health and medical malpractice 

insurance markets in America are competitive? 

Ms. VARNEY. I think they are highly concentrated in many geographic regions. In any region where you see the levels of concentration that we have been discussing here today, I certainly do 

not think they are competitive. 

22 

Senator DURBIN. The loss ratio in medical malpractice insurance 

in 2008 was 36 percent, according to A.M. Best, significantly lower 

than the loss ratio for major types of property/casualty insurance. 

For example, in 2008 private auto liability insurance had a loss 

ratio of 66 percent, homeowners 72 percent, workers’ comp 65 percent. 

In your opinion, what accounts for the lower loss ratio for medical malpractice insurance? 

Ms. VARNEY. Well, it certainly could be lack of competition. 

Senator DURBIN. I think so. 

Let me ask you this: In the course of this debate on McCarranFerguson, I am familiar with what used to exist called the Insurance Services Office. Is that still in existence—ISO? 

Ms. VARNEY. I do not know. 

Senator DURBIN. Well, this used to be their common meeting 

place for discussing rates and premiums and market allocations. 

That is where they came together in violation—what would have 

violated the antitrust laws for any other company. 

Ms. VARNEY. Right. 

Senator DURBIN. But an insurance company could exchange that 

information and parcel out the market and set their prices through 

their own devices. 

And so in this situation, do we do any investigation of that kind 

of activity by the insurance industry? 

Ms. VARNEY. No, we do not. Not the Federal antitrust authorities. 

Senator DURBIN. Because of McCarran-Ferguson. 

Ms. VARNEY. Because of McCarran. 

Senator DURBIN. Well, I would say that there has never been a 

better time for us to address this, and the health insurance industry has thrown down the gauntlet Monday night and said, ‘‘We are 

going to increase premiums no matter what you do, and we are 

going to hold you responsible for those.’’ And I think if there is ever 

a time when we need to confront what is a clear inequity in the 

law, it is now. Senator Leahy’s bill is a good one, and I am glad 

to cosponsor it. 

Thank you. 

Chairman LEAHY. Thank you very much. 

It is interesting. Somebody asked if I had scheduled this hearing 

as a response to exactly the ads that you stated, Senator Durbin, 

when they said they were just going to get together and increase 

premiums, which would be a violation if any other industry did it. 

And I said, no, actually it was coincidence. As you know, the notices scheduled this hearing some time previous, and that is why 

I was surprised at the ad because it makes the point so strongly. 

Senator Schumer. 

Senator SCHUMER. Well, thank you, Mr. Chairman. Again, I want 

to thank you for introducing this legislation. Again, I guess the insurance industry is stirring the pot and saying this is retaliation 

for them being off the reservation. Let me read the date when this 

legislation was introduced by Senator Leahy for himself, Senators 

Feingold, Cantwell, Durbin, Schumer, and Feinstein: September 

17, 2009. And I believe Senator Leahy has introduced similar legislation in previous Congresses as well. 

23 

So this is a longstanding issue, and maybe because the insurance 

industry blundered so badly on Monday, it gives us a greater opportunity to pass it. But it has long been out there as something 

we care about. 

Now, I remain committed to the notion that only increased competition is going to give insurers the incentive they need to keep 

the costs down. That is why I have been fighting for a public option 

to be included in health reform for months, and that is why I am 

proud to be a cosponsor of the important legislation Senator Leahy 

has produced. 

Removing the insurance companies’ antitrust exemption is so important that I think we should all work with Chairman Leahy to 

make sure that it is part of our health reform bill, the joint bill 

that Senator Reid will put together, and I for one am committed 

to helping you, Senator Leahy, make sure it is in that bill to get 

it done. 

Now, back in 1945—this is interesting—when Congress exempted insurers from Federal antitrust laws, the insurance companies 

argued they needed the exemption because insurers are not engaged in interstate commerce. I want to say that again. The rationale for McCarran-Ferguson was that the insurance companies argued that they were not engaged in interstate commerce. 

Well, a lot has changed since 1945. We should not be surprised 

to learn that 60 years later the insurance industry is one of the 

most highly concentrated in our economy; 94 percent of insurance 

markets in the U.S. are now regarded as highly concentrated by 

the objective definition used by the Justice Department. In nearly 

40 States, two insurance companies dominate over half the market. 

That is not acceptable. We need more competition. 

And at the very least, the onus should be on the insurance industry to come forward with real reasons why it is entitled to do 

things like write policy language in collaboration with so-called 

competitors. So far I have not seen any. 

In fact, after the heavily slanted and really one-sided report that 

was issued by the insurance industry early this week, you have to 

conclude they are sort of out of arguments. Let me give an example 

of what this antitrust exemption does in a State like New York, 

which, incidentally, is probably more competitive than most of the 

other States, even though we are not very competitive. I was talking to contractors who hire construction workers. They only have 

a choice among three firms for that insurance. When there are only 

three firms, there is never price competition, as you point out. 

But we have a for-profit insurer called United Health. It owns 

the very company that is called Ingenix that determines whether 

the price of a doctor’s visit is reasonable and customary. Ingenix is 

not an independent group. It is a black box for consumers. And because there is no antitrust regulation, other insurers use Ingenix 

as well to decide what is reasonable and customary. So let me give 

an example. 

My doctor tells me my visit with her costs $100. But WellPoint, 

my insurer, will only pay $60 because Ingenix, owned by United 

Health, tells United Health that is what the reasonable and customary rate is, and WellPoint works with United Health to set the 

reimbursement rate. The consumer is totally stuck and has to pay 

24 

that $40, and it is not—you know, it is clear that it is sort of not 

fair to have this one company owned by another health insurance 

company set the rates for everybody. That is one of the reasons 

health costs have gone up. 

So true competition means true choice for consumers. It means 

innovation and improved service, and I want to work with—(audio 

failure)—certain a potential antitrust investigation should 

McCarran-Ferguson be lifted. 

Chairman LEAHY. Do you want to respond, Ms. Varney. The red 

talk button should be on. 

Senator SCHUMER. She speaks softly but carries a big stick. 

Chairman LEAHY. We seem to—excuse me just a moment. I do 

want to get this in. We seem to be having some difficulty because 

the recorder is having trouble getting it. We will just switch machines. It is still not coming through. Hold on just a moment, and 

we will make sure—this does not come out of Senator Schumer’s 

time. 

You are not getting any of this. Is that right? You can hear me, 

but you are not getting any of the rest. It sounds like we are doing 

the cell phone ads, but the reporter—hold on just a moment. 

Go ahead. 

Senator SCHUMER. Thank you. Let me ask this: What are the 

steps that your Division might be able to do to—well, you have answered that one before. If McCarran-Ferguson is repealed, would 

there still be other barriers in the way in terms of antitrust law 

to reduce competition? 

Good. So it sort of would be a pretty complete solution. OK. 

Thank you, Mr. Chairman. 

Chairman LEAHY. Thank you very much. We will put other questions for Ms. Varney in the record, and we will take a 5-minute 

break, and we will switch for the next two witnesses. And I would 

also ask the staff to double-check those microphones in the meantime. 

Ms. Varney, thank you very much. I do want to just note—thank 

you one more time for coming to Vermont for the hearing. I know 

that was a very long hearing. Many, many people have taken the 

time to come up to me in Vermont who were there and say how 

impressed they were with your understanding of the issues and the 

fact you listened. They realize you have to make up your own mind 

on what you are going to do, but they were impressed that you took 

the time and listened to them. So thank you very much. 

Ms. VARNEY. Thank you. 

[Recess 11:28 a.m. to 11:33 a.m.] 

Chairman LEAHY. We are going to have to move along. The first 

witness is J. Robert Hunter. Mr. Hunter is the Director of Insurance for the Consumer Federation of America. He serves as a consultant on public policy and actuarial issues. He has extensive experience working on these issues. He served as a Federal Insurance 

Administrator under Presidents Ford and Carter as well as the 

Texas Insurance Commissioner. He received the Secretary of Housing and Urban Development’s Award for Excellent Service for his 

work between 1971 and 1977, and the Consumer Federation’s Esther Peterson Consumer Service Award for Lifetime Service in 

2002. 

25 

Mr. Hunter, please go ahead. 

STATEMENT OF J. ROBERT HUNTER, DIRECTOR OF INSURANCE, CONSUMER FEDERATION OF AMERICA, WASHINGTON, 

D.C. 

Mr. Hunter. Thank you, Mr. Chairman. Oh, that is working. 

Good morning. CFA offers our wholehearted support to your legislation, Mr. Chairman, S. 1681, because it is time that health insurers played by the rules of competition as the rest of the commercial 

enterprises in America do. In fact, we wish you would go beyond 

it and repeal the antitrust exemption completely for not only health 

insurance but the entire insurance industry at some point. But this 

is a great first step. 

Consider the following anticompetitive activities: 

Cartel-like bureaus, such as ISO, day after day produce price 

guidance on 70 percent of the rate that many insurers use as the 

basis for the pricing, including medical malpractice guidance. Rate 

bureaus manipulate data and project pricing into the future using 

steps legal experts have told Congress would be illegal absent the 

McCarran immunity. This is particularly bad for lines of insurance, 

like medical malpractice, where the bureau rates exacerbate the 

spikes in prices during hard market periods and generally lead to 

overpricing. 

Rate bureaus have cartel-like control of rate making data. They 

use it to establish classes and territories that are used to rate people and data are collected in that format, enforcing significant uniformity. 

Bid-rigging, market allocation arrangements and hidden kickbacks to brokers were uncovered by then Attorney General Spitzer 

showing that even the largest, most sophisticated buyers are victims of anticompetitive acts. The potential for such abuses in 

health insurance must be removed. 

But perhaps none of what we have learned recently is as outrageous as the use of claims systems that artificially create ‘‘savings’’ for insurers by underpaying claimants. For example, when 

patients use non-network doctors, their insurance company agrees 

to pay 70 percent to 80 percent of the ‘‘reasonable and customary’’ 

charges for a given medical service in the same geographic area. 

If the doctor’s bill is higher than that rate, the patient must makeup the difference or the doctor must settle for less. The use by 

many health insurers, like Aetna and United Health, of recommendations produced by Ingenix, a subsidiary of United Health, 

to place reasonable and customary limits on benefits, led to underpayment of health insurance benefits to claimants in New York 

state of between 10 and 18 percent, according to findings on the 

New York Attorney General Cuomo. If health insurers collude on 

benefit levels, they certainly can collude on price, markets and 

other aspects of their business. 

A computerized claims system called Colossus has underpaid 

consumers by billions of dollars by allowing insurers to tune their 

claims payment recommendations to produce ‘‘savings’’ on claims of 

those with medical injuries from auto accidents. I have forwarded 

shocking, recently unsealed documentation of this massive, and apparently coordinated, abuse to you, Mr. Chairman. While lawsuits 

26 

have begun to mitigate the damage to consumers from Colossus for 

first party auto claims (like uninsured motorists) for some insurers, 

the much larger use of the product is in third party bodily injury 

liability, where the use of the product, we believe, continues 

unabated. 

We urge this Committee to look into the Inginex use by major 

health insurers and also into Colossus User Groups and other ways 

that insurers have worked together to create a way to underpay 

America’s insurance consumers billions of dollars in claims. Ingenix 

costs consumers 10 to 28 percent of claims and Colossus has resulted in underpayments of double digits as well. Certainly antitrust exemptions are not intended to shield this sort of scandalous 

joint activity. 

We heard today that small insurance companies would not be 

able to obtain historic data for the development of their prices if 

the antitrust laws were applied to insurance. I have carefully studied this claim for decades (the large insurers always rush forward 

to protect the small insurers from the free market and save themselves from competition as well) and there is absolutely no evidence 

for this claim. Legal experts have testified, including today, that 

procompetitive activities such as collection and dissemination of 

historic data would be legal under the current antitrust laws. What 

would end is what they do with the data, which is jointly manipulate it to figure out what the prices are going to be that they will 

charge in the future. 

It is true that some companies might have to hire some additional actuarial service to replace the joint actions, and if a State 

wanted to replicate some process such as joint trending, it could do 

so under state action doctrine. But the difference would be that the 

State would have to be actively involved in regulating it instead of 

today where all you need is a law on the books and not even effective regulation. This would be a great step forward for consumers 

since today many States provide very little oversight. It is time, 

Mr. Chairman, for your bill to be adopted. 

[The prepared statement of Mr. Hunter appears as a submission 

for the record.] 

Chairman LEAHY. Thank you very much, Mr. Hunter. 

Our next witness, Mr. Powell, holds the Whitbeck-Beyer Chair of 

Insurance and Financial Services at the University of Arkansas at 

Little Rock. His primary research interest is the effects of regulation on insurance markets. In addition to his academic pursuits, he 

serves as Treasurer on the board of Arkansas Mutual Insurance 

Company, a physician-owned medical professional liability insurance carrier founded in 2008. He has his bachelor’s degree from the 

University of South Carolina and his Ph.D. from the University of 

Georgia. 

Mr. Powell, sorry for all the confusion here, but glad to have you 

here, sir. Please go ahead. 

27 

STATEMENT OF LAWRENCE S. POWELL, PH.D., ASSOCIATE 

PROFESSOR AND WHITBECK-BEYER CHAIR OF INSURANCE 

AND FINANCIAL SERVICES, UNIVERSITY OF ARKANSAS-LITTLE ROCK, COLLEGE OF BUSINESS, LITTLE ROCK, ARKANSAS 

Mr. POWELL. Thank you, Mr. Chairman and members of the 

Committee. It is truly an honor to be invited here to discuss these 

important topics. As you said, my name is Lawrence Powell, and 

I currently hold the Whitbeck-Beyer Chair at the University of Arkansas-Little Rock. I am also a founding board member of Arkansas Mutual Insurance Company, which is a physician-owned insurer offering medical professional liability coverage. 

I want to briefly address two issues relevant to this topic: First, 

that insurance pricing is an inherently difficult task. Repealing the 

McCarran-Ferguson Act would further exacerbate this difficulty. 

And, second, that the limited antitrust exemption provided by 

McCarran enhances competition in insurance markets. To repeal 

McCarran would at best maintain the status quo in the near term, 

but going forward, it would stifle competition to the detriment of 

consumers. 

Pricing insurance is very difficult because the price has to be set 

before all of the costs are known. And the difficulty is amplified for 

medical professional liability insurance because of its long claim 

tail. On average, an insurer does not know the ultimate outcome 

of a claim until more than 4 years after the potential loss event. 

Losses also follow distinct trends over time. The trend of claim 

frequency has reversed a few times in recent decades, leading to 

substantial mispricing in certain periods. It is clear and intuitive 

to recognize this possibility given the time lag between suspicion 

and confirmation that a trend has reversed. Therefore, these inflection points have brought about infrequent temporary pricing and 

return anomalies in this line of coverage. 

In some years, ultimate losses differ from initial estimates by 

more than in other years, but overall, the sum of the initial estimates and the ultimate losses are remarkably similar, differing by 

only 5 percent in the last three decades or so. 

In practice, McCarran permits insurers to pool data through 

independent statistical agents that produce advisory loss costs to 

eight insurers in the ratemaking process. This benefits consumers 

by promoting financial strength, efficiency, and competition in insurance markets. The ability to pool loss cost data through independent statistical agents is—— 

Chairman LEAHY. Excuse me, Mr. Powell. You understand this 

bill would do nothing to stop removing the McCarran-Ferguson exemption in this context. It would not stop—or prohibit companies 

from sharing the loss information. 

Mr. POWELL. Well, my understanding is that it is currently permitted to be done that way under McCarran and that we have 

known that for more than six decades. 

Chairman LEAHY. But as Assistant Attorney General Varney testified, this kind of sharing, blind sharing, would be allowed. 

Mr. POWELL. My understanding—and I am not an attorney. My 

understanding is that while it could be permitted, the companies 

would have to file for permission to do so. It would introduce addiVerDate Nov 24 2008 10:57 Jun 11, 2010 Jkt 056683 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\56683.TXT SJUD1 PsN: CMORC
28 

tional costs as opposed to standing on the precedent that has been 

around for 60-some years to increase that cost for no benefit. I can 

come back and address this in the remainder of my remarks. 

So as I was saying, I think this benefits consumers by promoting 

financial strength, efficiency, and competition, and the ability to 

pool these data are most important for extreme risks. These include very large and infrequent losses and new exposures to loss. 

So should the underlying distribution of losses change as a result 

of new medicine, new disease, or new liability, insurers that currently rely largely on their own past loss data would again benefit 

from advisory loss costs. Any of these scenarios would introduce 

substantial new uncertainty to insurance markets, increasing the 

price of insurance. 

The current markets enjoy several characteristics that benefit 

consumers. First, consider the ownership structure of medical professional liability insurers. Approximately 60 percent of U.S. private physicians are insured by physician-owned companies. To believe that these companies are price gouging physicians, we must 

first reach the flawed conclusion that policyholders are price 

gouging themselves. 

Medical professional liability markets in the United States also 

exhibit substantial competition, suggesting that additional antitrust measures would not benefit consumers. Nearly 3,000 companies currently sell property and liability insurance in the United 

States. Of these, a few hundred participate in medical professional 

liability coverage. While a few hundred insurers are clearly adequate for competition, it is also instructive to consider that more 

than 2,000 other existing companies could potentially enter the 

market. Finally, it is also possible to form a new company to compete with existing insurers. 

Next, consider the absence of sustained profit we would expect 

if markets were not competitive. While return for medical professional liability insurers fluctuates substantially over time, the average return is quite modest and has even been negative in several 

years. 

Shifting now to my experience in the industry, I participated in 

the recent formation of Arkansas Mutual Insurance Company, 

which entered the medical professional liability insurance market 

earlier this year. The ability to access industry loss data was paramount in the formation of this new insurance carrier. Without access to loss information, we could not have done it. Therefore, it follows that this bill would have limited competition from Arkansas 

Mutual and from several dozen similar insurers that formed in recent years. 

Since Arkansas Mutual commenced business, I have witnessed 

firsthand an incredible level of competition in the market. The 

number of insurers actively underwriting medical professional liability insurance in Arkansas has increased several times over. In 

the last year, I have seen decreases in premium for some physicians as large as 40 percent, and this aggressive pricing and increasing number of market participants indicates substantial competition to the benefit of consumers. 

In light of these observations, the best possible outcome from repealing McCarran is continuation of the status quo. However, it is 

29 

also likely that repealing McCarran would have negative consequences for consumers by decreasing competition and accuracy in 

insurance pricing. 

Thank you. 

[The prepared statement of Mr. Powell appears as a submission 

for the record.] 

Chairman LEAHY. Thank you. Is there anything in this specific 

legislation that would prohibit procompetitive functions by the insurance companies? Anything that we prohibit that is actually procompetitive? 

Mr. POWELL. The wording of this legislation—and, you know, 

wording of legislation is not my area of expertise, but it seems that 

specifically there is not a lot going on. It would be nice to see a 

lot of the terms defined as to what specifically the legislation—— 

Chairman LEAHY. Is it stopping any procompetitive activities by 

any insurance company? Procompetitive activity by the insurance 

company. Because I could not find any. 

Mr. POWELL. Well, just that the idea that it is going to be reconsidered, the idea that if there is—recognizing that the sharing of 

data to set advisory loss costs is a procompetitive act. 

Chairman LEAHY. And we allow the historic loss data sharing. 

Mr. POWELL. And to that extent, if it is allowed, if there is not 

a new consumer of it, if it is not changing at all, then it would, I 

assume, continue the status quo. There is not anything in this legislation that is not already illegal just by State law as it is. I have 

not witnessed or found evidence of any of this price fixing and such 

that it is noted. 

Chairman LEAHY. That sounds almost like an endorsement of the 

legislation, but I will not put those words in your mouth because 

your employer may not be happy with you if that were the case. 

Only because of the time I am going to yield to Senator Whitehouse 

for questions. 

Senator WHITEHOUSE. Thank you, Chairman. I have a question 

for Mr. Powell and then a question for Mr. Hunter. 

My question for Mr. Powell is whether in your testimony you cite 

for the proposition that insurance markets are highly competitive 

an article by Paul Joskow. Do I have the date of that article correct, it is 1973? 

Mr. POWELL. I believe so. 

Senator WHITEHOUSE. And so necessarily any of the data on 

which that article would rely for that conclusion would be pre-1973 

data, correct? 

Mr. POWELL. For that article, I would suppose it is. There are 

also some more recent studies cited in—— 

Senator WHITEHOUSE. But the one you cite is the 1973 article. 

Mr. POWELL. I also cite two of my own studies earlier in the testimony that are much more recent. 

Senator WHITEHOUSE. Very good. 

Mr. Hunter, first of all, thank you for your long efforts on behalf 

of insurance consumers in these vineyards. I very much appreciate 

the dedication that you have shown to this issue over so many 

years of service. One observation that I come across in this is kind 

of in the category of good for the goose, good for the gander. 

30 

In Rhode Island, we have seen situations in which, when doctors 

try to get together to strategize about how they are going to deal 

with the dominant insurers in Rhode Island, they are constrained 

from doing so by the fear or the threat of antitrust litigation being 

brought against them. 

The insurance company, by virtue of being a big corporation with 

a huge market share, can have anticompetitive conversations about 

how to deal with the doctors in its own board room, in its own hallways. And when the doctors try to get together to have the exact 

same conversation about the insurance company strategies and 

how to respond, for them it is an antitrust violation. For the insurance companies it is not because they are protected by their corporate status. And over and over again there are cases in which insurance companies—here is Blue Cross and Blue Shield United of 

Wisconsin v. Marshfield Clinic, and there are many others in 

which—United Healthcare brought a price-fixing claim against the 

practices of a large Chicago area health system. 

Does it seem incongruous to you that an industry that demands 

protection from the antitrust laws is so quick to take advantage of 

those very same antitrust laws that they think should not apply to 

them when it comes to beating down doctors and trying to make 

sure that they maximize their competitive advantage in terms of 

provider negotiations? 

Mr. HUNTER. Well, of course, they are going to use whatever they 

can, but it is awful that they—I have to press the button here. 

Sorry. It is awful that the insurance companies are operating in a 

system where they are the only ones essentially that can get together and decide what to do while the people they are going to do 

it to cannot. And I think that is wrong. 

Senator WHITEHOUSE. Just sort of a basic element of plain old 

fair play, isn’t it? 

Mr. HUNTER. Exactly. And, amazingly, if you go back—and I 

gave you the history of the McCarran Act—Claude Pepper got up 

on the floor when the McCarran Act was passing and said—because it came back from a joint committee. When the Senate sent 

it over, it was clearly a 2-year moratorium for antitrust enforcement to give everybody a chance to figure out how to deal with it, 

the States and the industry. So they sent it back to the Senate, and 

Pepper got up on the floor and said, ‘‘Wait a minute. This looks like 

the language has changed like it is going to be permanent.’’ And 

McCarran reassured Pepper, ‘‘He is in error on his whole premise 

in the matter.’’ And then Senator O’Mahoney told him why it would 

be over in 2 years. ‘‘Don’t worry. It is over in 2 years.’’ And then 

they voted. And even at that, I think it was like 30 people said, 

‘‘We are afraid of the language’’ and voted the other way. And then 

the courts ruled against what the assurances were. I guess they did 

not use legislative history too much when they made those rulings. 

Senator WHITEHOUSE. Thank you very much. 

Chairman LEAHY. Senator Franken, then Senator Durbin, and I 

would note that the vote has started on the floor. 

Senator FRANKEN. Mr. Powell, in your testimony you outlined 

four characteristics of competitive markets, in your written testimony: one, multiple independent sellers; two, multiple consumers; 

31 

three, homogeneous products; four, low barriers to entry and exit 

into the market. 

In numerous States, nearly 90 percent of the health insurance 

markets are dominated by a single carrier. Do you believe having 

90 percent of a market dominated by a single insurer meets your 

definition of a competitive market? 

Mr. POWELL. Well, first I will say that I am not aware of that 

90-percent number. I will take your word for it for purposes—— 

Senator FRANKEN. This is post-1973. 

[Laughter.] 

Mr. POWELL. Thank you. Thank you. I think something that is 

instructive that no one has mentioned today as we talk about competition is that market concentration is not necessarily by itself indicative of a lack of competition. It could also be a sign of efficiency. What I have read about the Alabama Blue Cross and Blue 

Shield having a large market share, they also have some of the 

lowest expense ratios in running their business of any Blue Cross 

in the country. 

Senator FRANKEN. Would you mind answering my question, 

though? Do you find that if these companies control 90 percent of 

the market, it fits your definition of a competitive market? 

Mr. POWELL. Well, if they control 90 percent and somebody else 

is controlling 10 percent and there are hundreds of other companies who come in and take a share if they could do a better job. 

I am not saying that there is not competition—— 

Senator FRANKEN. So it does. 

Mr. POWELL [continuing]. If the market is concentrated. 

Senator FRANKEN. OK. So it does. 

In 2007, there were 18 metropolitan areas in which one company 

held 100 percent of the HMO market. Would those markets meet 

your criteria for a competitive market? 

Mr. POWELL. Are you separating the HMO market from the rest 

of health insurance? 

Senator FRANKEN. I think by definition that question would, yes. 

Mr. POWELL. I think that clearly HMOs are competing with 

PPOs and POS plans and traditional health plans. The fact that 

there is only one HMO might suggest that the HMO model does 

not fit very well there, but not that there is a lack of competition. 

Senator FRANKEN. OK. You say in your testimony—and, Mr. 

Hunter, I want you to speak to this. Mr. Powell says in his testimony that ‘‘valid evidence of anticompetitive behavior is not observed in insurance markets.’’ That does not seem to comport with 

your report. 

Mr. HUNTER. There is all kinds of anticompetitive behavior. They 

get together on claims. They get together on pricing. They have 

rate bureaus that make recommendations for 70 percent of the 

rate. They do many, many things that would violate the antitrust 

laws if the antitrust laws were applied to them. 

Senator FRANKEN. Yes. It just seemed that your two testimonies 

were in conflict. 

I am a cosponsor of this bill, and I believe that Senator Leahy’s 

legislation in health care companies—health insurance companies’ 

exemption from antitrust laws is a crucial first step to anticompetitive behavior. However, we are on the verge of insuring 46 million 

32 

new Americans with significant Federal support, and I am deeply 

concerned that without additional checks and balances, this expansion will be a windfall for insurance companies, and we will end 

up with Federal funds going to exorbitant CEO fees, et cetera. 

What provisions must we include in any national health reform 

bill to ensure sufficient competition in health insurance markets 

and to prevent profiteering by insurance companies? 

Mr. HUNTER. Well, first of all, I think you should pass this bill 

to impose the antitrust laws on the health insurance industry. 

Second, you should have a guaranteed competitive player in 

there. That is why I like the public option. Or if you do not have 

a guaranteed player like the public option, then you are going to 

have to have much more regulation to assure that insurance companies—that inefficient costs are not passed through to consumers, 

like you do with public utilities. Public utilities, you know, will not 

allow costs through unless they are used and useful. If you do not 

have a competitive entity to test the market like a public option, 

then I think you need some kind of utility sort of ratemaking or 

something to make sure that the prices do not pass through—— 

Senator FRANKEN. But the alternative to a public option may be 

more regulation. 

Mr. HUNTER. I think it has to be more regulation if not a public 

option because, otherwise, you—right today no one will stop the insurance companies from passing through the cost of the ads that 

they are using against you in the health insurance debate to consumers. We will be paying the bill. 

Senator FRANKEN. Thank you, Mr. Chairman. 

Chairman LEAHY. Thank you very much. 

Senator Durbin. 

Senator DURBIN. Professor Powell, you have talked about the loss 

reserve development, and you start your testimony by saying that 

when it comes to medical professional liability insurance, one of the 

big problems is the ultimate outcome of a claim may not be known 

for 4 years. 

Mr. POWELL. Right. 

Senator DURBIN. Isn’t that true for virtually all casualty insurance? 

Mr. POWELL. The claim tail is not quite as long in some of the 

lines. In some lines it could be longer. 

Senator DURBIN. It seems to me, if I recall correctly—it has been 

many years since I did this for a living, but we had a 2-year statute 

of limitations in Illinois unless there was concealment of extraordinary circumstances. And so you could wait 2 years after an event 

to file a lawsuit, and it would take a minimum of 1 or 2 years to 

complete it, even if you were dealing with an automobile accident 

and an injury from that accident. So I find it hard to understand 

why this is a unique field of insurance. It appears that most casualty insurance has a long tail before you know what your actual 

expenditure is going to be for a loss. 

Mr. POWELL. Sure, and part of that is that, for example, in Arkansas there are about 5,500 physicians that purchase medical professional liability insurance in a given year, the non-Federal physicians. There are substantially more automobiles and businesses 

33 

than that, so you have got a little bit bigger pool to look at, perhaps more data to follow, but also—— 

Senator DURBIN. And a larger reserve. 

Mr. POWELL. Not necessarily. The other part of it—— 

Senator DURBIN. Automobiles as opposed to physicians? 

Mr. POWELL. By reserve, you mean—— 

Senator DURBIN. The amount that is set aside by the company 

in anticipation of payouts, losses. 

Mr. POWELL. There is certainly a lot more cost to trying and settling a medical malpractice claim based on the cost of the experts 

and such. 

Senator DURBIN. You say you are testifying on behalf of the Physician Insurers Association of America, and there has been a question raised as to what is happening in the area of tort reform. It 

is my understanding that anywhere from 26 to 40 or maybe more 

States are involved in some type of tort reform at the moment. And 

I was wondering if you could, through your association, tell me that 

there is a correlation between tort reform and the medical malpractice premiums being charged in given States. 

Mr. POWELL. There is certainly evidence, from my own academic 

research and from others, that the effect of certain tort reform laws 

and tort reform laws in general is to reduce the cost and improve 

the availability of insurance. That was the reason why they were 

proposed, and that is indeed what happened in the markets after 

they were passed. 

Senator DURBIN. I do not quarrel with that being the reason they 

were proposed, but I will ask you, can you provide me through the 

Physician Insurers Association of America data relative to malpractice premiums that can track specific tort reforms such as caps 

on non-economic losses to determine whether, in fact, that did result in lower malpractice premiums for the physicians in that 

State? 

Mr. POWELL. I can provide my own academic research that shows 

that. Yes, I will be happy to. 

Senator DURBIN. Would you do that? 

Mr. POWELL. Yes. 

Senator DURBIN. I appreciate it very much. 

[The information referred to appears as a submission for the 

record.] 

Senator DURBIN. And if your premise is that we really get more 

competition if we ignore antitrust, do you suggest we eliminate 

antitrust laws for business in general? 

Mr. POWELL. No, and the difference is that with insurance you 

do not know the price of your primary good and service until long 

after—or you do not know the cost until long after you have set the 

price. That is the nature of the business, and that is why this exemption is necessary so that the data can be shared and you can 

have new companies like Arkansas Mutual enter a market where 

we thought we could do a better job for our doctors. 

Senator DURBIN. If I understand Chairman Leahy, there is no 

prohibition against sharing historical data. 

Mr. POWELL. Clearly it is something that would have to be 

looked at again. Right now you can do it, and there is not a step 

that has to be taken. It is subject to all of the same antitrust proviVerDate Nov 24 2008 10:57 Jun 11, 2010 Jkt 056683 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 S:\GPO\HEARINGS\56683.TXT SJUD1 PsN: CMORC
34 

sions at the State level that there—the idea that there is a bunch 

of insurance companies sitting around deciding what they are going 

to do together, I have never observed that. I have been in plenty 

of places where the companies and their employees go out of their 

way to not discuss those things because it is illegal. 

Senator DURBIN. We just have 2 minutes left. The last question 

I will ask you is—and this dates me here because it goes back to 

the time when I was involved in this field. Is there still an Insurance Services Office? 

Mr. POWELL. Yes, ISO still exists. 

Senator DURBIN. And what do they do? 

Mr. POWELL. They take the loss data, and they aggregate it and 

perform actuarial analysis of trending and all that to produce advisory loss costs. 

Senator DURBIN. For price fixing. 

Mr. POWELL. It is advisory loss costs. It says this is how much 

you would expect certain classifications to differ among each other. 

In medical malpractice, you might see the difficulty in differentiating price across different specialties, and especially at the higher limits of loss where that would be useful for all companies that 

do not experience losses like that as often as some of the lower levels. 

Senator DURBIN. Thanks, Mr. POWELL. Mr. Hunter, I am sorry. 

We ran out of time. 

Chairman LEAHY. I will submit my questions for the record, and 

we will keep the record open for others. 

[The questions appear as questions and answers at the end of 

hearing.] 

Chairman LEAHY. I thank you both, and we are not beating a 

hasty departure based on your testimony, but based on the fact we 

have run out of time on the vote on the floor. 

[Whereupon, at 12:04 p.m., the Committee was adjourned.] 

[Questions and answers and submissions for the record follow.] 

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