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Those curious about why the insurance industry has such astounding power over Congress should begin by understanding the history of regulation of this industry.

The usual power relationship between elected officials and private industries centers around one relationship: industry input on regulatory and/or taxation matters in return for campaign contributions. In all such relationships, no modern industry has been as successful as the insurance industry in keeping Congress from playing any significant role in its regulation.

That success began with the McCarran-Ferguson Act of 1945.

The story begins with antitrust. In 1944, Attorney-General Francis Biddle, appointed by FDR, brought a case against the South-Eastern Underwriters Association under the Sherman Antitrust Act. The government accused the insurance alliance, among other things, of price fixing. That case,United States vs. South-Eastern Underwriters, was decided in favor of the government by the Supreme Court in 1945. The underwriters alliance made an amazing argument:

Sustaining the demurrer, the District Court held that "the business of insurance is not commerce, either intrastate or interstate"; it "is not interstate commerce or interstate trade, though it might be considered a trade subject to local laws either State or Federal, where the commerce clause is not the authority relied upon."

Thats right. The insurance industry argued that insurance was not a business, therefore not subject to regulation by the Federal Government under its Commerce Clause powers. Therefore, the Sherman Act did not apply to them. They were free to form monopolies and fix prices as they pleased. It's laughable on its face, but that was their argument. The Supreme Court dismissed that foolishness. But the Court also made a very important finding in its opinion. Justice Hugo Black wrote for the 4-3 majority:

Any enactment by Congress either of partial or of comprehensive regulations of the insurance business would come to us with the most forceful presumption of constitutional validity. The fiction that insurance is not commerce could not be sustained against such a presumption, for resort to the facts would support the presumption in favor of the congressional action. The faction therefore must yield to congressional action and continues only at the sufferance of Congress

The morning after that, the lobbying on Capitol kicked in full force. The courts ruling came down on June 4, 1944. Senator Pat McCarran of Nevada, a batshit crazy nativist and anti-communist who also wrote the vile, McCarthyite, and ultimately unconstitutional McCarran Internal Security Act, came to the rescue. (Just so you know the kind of guy McCarran was, note that he was one of the few Democrats who opposed the New Deal. He is also thought to be the model for the corrupt Senator in the Godfather.) Senator Homer Ferguson, Republican of Michigan was the co-author. The new law passed on March 9, 1945 and was signed by an ailing President Roosevelt. In my gut, I know a vigorous FDR would have vetoed it.

Title  15, Chapter 20 of the U.S. Code implements the McCarran Act. Here is its key provision:

No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance: Provided, That after June 30, 1948, the Act of July 2, 1890, as amended, known as the Sherman Act, and the Act of October 15, 1914, as amended, known as the Clayton Act, and the Act of September 26, 1914, known as the Federal Trade Commission Act, as amended [15 U.S.C. 41 et seq.], shall be applicable to the business of insurance to the extent that such business is not regulated by State Law.

This is why you have obscure state insurance commissioners rather than a federal regulatory body. It's why companies like AIG can operate far outside the boundaries of federal securities law. States' limited jurisdiction make it difficult effectively regulate an international insurance company. With states and the federal government limited in their ability to regulate them, there is nobody to stop big insurance.

There have been numerous attempts to regulate insurance, both by court review and by act of Congress. Each time, the industry has managed to slither out of trouble and emerge relatively unscathed. I believe that is due to this:
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Last year, Congressman Pete DeFazio introduced the Insurance Industry Competition Act and watched it die in Barney Frank's finance committee. It is likely it died because of little chance of movement in the Senate and a likely veto by President Bush. DeFazio has re-introduced his bill this year, and it now sits in the committee. This bill would repeal the McCarran-Ferguson provision that prevents antitrust enforcement and would allow the administration to go after the insurance companies. (I discussed the administation's antitrust policy in this diary. A part 2 is forthcoming.) Using the leverage of an antitrust prosecution is exactly the sort of stick that will get the insurance companies moving in the right direction with respect to federal regulation.

If you want to take some action on healthcare, call your congressperson and tell them to support or cosponsor Pete DeFazio's bill H.R. 1583. This legislation has the insurance lobby tossing and turning at night and waking up in cold sweats. Only when the good citizens of this country are heard will the money of the insurance lobby seem less persuasive to our leaders.

Originally posted to Triple-B in the Building on Sat May 23, 2009 at 04:40 AM PDT.

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Comment Preferences

  •  I didn't know this (6+ / 0-)

    thanks for the education!

    If you think you're too small to be effective, you've never been in the dark with a mosquito.

    by marykk on Sat May 23, 2009 at 05:02:00 AM PDT

  •  Great diary! Tipped and recommended! (6+ / 0-)

    Great work, B³. This is the kind of stuff history books don't put into context.

    "Lash those traitors and conservatives with the pen of gall and wormwood. Let them feel -- no temporising!" - Andrew Jackson to Francis Preston Blair, 1835

    by Ivan on Sat May 23, 2009 at 05:20:32 AM PDT

  •  I added the 'teaching' tag (11+ / 0-)

    and will include this in Daily Kos University, which will open in about 45 minutes.

  •  Very nice info.. (8+ / 0-)

    more than one way to skin this cat,right? oops,that old saying might offend here.

    I used to work in the coporate insurance industry(Title,not healthcare) and dealt with the state insurance depts around the country.
    To call them anachranistic,and dusty would be an understatement. Yes, they examined our books,and required informational filings along with annual and quarterly financial statements but otherwise, they pretty much left us alone.
    No experience in the healthcare insurance industry but I sense the insurers/underwriters can handle them before breakfast without breaking a sweat.

    This is where we absolutely need to exert the pressure on these congresscritters,some of whom are clearly beholding to this industry due to campaign contributions. Making this bill an actual threat to the industry can do nothing but help give Kennedy and Sanders some real leverage in their committee as they work toward healthcare reform.

    Nice work,BBB.

  •  Thanks for the deja vu, Brooklyn (7+ / 0-)

    When we were working on ratification of the Equal Rights Amendment (ERA) in Illinois, the money and influence trail led right to the insurance industry.  ERA was easily ratified in many states the first two years after it passed out of Congress.  It stalled 3 states shy of ratification.  It looked for sure like we had the votes in Springfield, but virtually overnight, individuals had been "gotten to" and changed their vote.

    Why would the insurance business feel threatened by ERA?  Sex discrimination is part and parcel of insurance underwriting.  Federal regulation and ERA would force a massive change in the way they do business.  They used to openly discriminate on the basis of race.  Once race as a classification was deemed by the Supreme Court to be inherently suspect, they became more subtle in their practice.

    Don't look back, something may be gaining on you. - L. "Satchel" Paige

    by arlene on Sat May 23, 2009 at 05:59:54 AM PDT

  •  Thank you bbb. (2+ / 0-)
    Recommended by:
    brooklynbadboy, dalfireplug

    You have illuminated a very confusing part of the world for me.

    Songs up at da web site! Also. . . It's Kostown, Jake. . .

    by Crashing Vor on Sat May 23, 2009 at 06:09:10 AM PDT

  •  Thanks for the lesson! (2+ / 0-)
    Recommended by:
    FightForJustice, brooklynbadboy

    Great info. Great diary. Hope it gets on the rec list.

    Let's bust them up in little pieces so they can't hold us hostage like this.

    by RustyCannon on Sat May 23, 2009 at 07:28:29 AM PDT

  •  Sorry, but your history is wrong (1+ / 0-)
    Recommended by:
    rincewind

    http://firedoglake.com/...

    Nice try, but you have left too much history out.  First, AIG is an example of federal regulatory failure. See the above link. AIG is not an insurance company.  It is a holding company that owns many insurance companies.  The states regulated the insurance subsidiaries. The laws were changed in the late 1990s to allow AIG to buy a thrift.  At the holding company level it was regulated by the OTS, a federal agency. (essentially AIG was treated as if it were a savings and loan) Combine this with the Commodity Futures Modernization Act of 2000, which pretty much precluded anyone, either state or federal,from regulating credit default swaps and you had a recipe for disaster.

    Second, the insurance companies spent much of the 1990s and 2000s clamoring for federal regulation.  There are many reasons for this, some legitimate, but they had hoped to reduce their regulation.  Looked at how much the feds regulated the banks.

    Third, the insurance industry that is regulated by the states has held up better than the banks.  The AIG subs are probably solvent.

    Fourth, the insurance companies' argument in the South East Underwriters case was not as ridiculous as it sounds.  The Supreme Court had ruled in 1869 (Paul v.Virginia) that insurance was not a business subject to the commerce clause.  That decision was overruled in 1945.

    Fifth, any time Congress explicitly passes a law ndealing with insurance it has the authority to do so.

    Entities such as AIG need more regulation.  However, it was its involvement in credit default swaps that was the problem.  This still is a huge hole in regulation.  This includes hedge funds, banks and other entities.  Congress needs to get to work.          

    •  yes and no (1+ / 0-)
      Recommended by:
      rincewind

      This is a good and valid point:

      Third, the insurance industry that is regulated by the states has held up better than the banks.  The AIG subs are probably solvent.

      I agree that state regulators have done a good job at requiring solvency. What is out of control are the depredations of the health "insurers".  They are solvent all right, at the cost of retroactively revoking the insurance of expensively sick people, among other horrors.

    •  I'll take each one at a time: (4+ / 0-)
      Recommended by:
      rincewind, theran, Gowrie Gal, chigh

      First, AIG is an example of federal regulatory failure. See the above link. AIG is not an insurance company.  It is a holding company that owns many insurance companies.  The states regulated the insurance subsidiaries. The laws were changed in the late 1990s to allow AIG to buy a thrift.  

      You're addressing an issue that isn't even the subject of this diary, which are the industry changes resulting from financial services de-regulation in the late 1990s. AIG was not always a "holding company" but a band of insurance companies allied together in a scheme BECAUSE of the very law discussed in this diary. Had this law not have been in place, no AIG as you know it today would have emerged.

      Second, the insurance companies spent much of the 1990s and 2000s clamoring for federal regulation.  There are many reasons for this, some legitimate, but they had hoped to reduce their regulation.  Looked at how much the feds regulated the banks.

      This is, quite simply, false. The insurance lobbies did not clamor for more regulation, because they loved and wanted regulation. They did so to escape the aggressive intervention of state Attorneys-General. It's a irrellevant point anyway because the subject of this diary is the antitrust exemption which they remain adamantly in support of.

      Third, the insurance industry that is regulated by the states has held up better than the banks.  The AIG subs are probably solvent.

      Again, you are addressing things are the not the subject of this diary. I'm starting to believe you didn't even read it. I make no points about the health of the industry. My point is that the antitrust exemption, combined with the tremendous amount of congressional contributions, and the inability of a state to enforce antitrust litigation on an international scale are all factors that give the insurance industry such tremendous leverage over its own regulation.

      Fourth, the insurance companies' argument in the South East Underwriters case was not as ridiculous as it sounds.  The Supreme Court had ruled in 1869 (Paul v.Virginia) that insurance was not a business subject to the commerce clause.  That decision was overruled in 1945.

      Insurance was, by tradition, not considered a business in antebellum times. But by the time industrial America had emerged, it was very much a business in every sense of the term. This was well argued by the Supreme Court's majority. So effective, that even the dissenters found that part of the argument laughable.

      Fifth, any time Congress explicitly passes a law ndealing with insurance it has the authority to do so.

      LOL. Again, you seem to make a habit of addressing things that are not part of the topic. Congress has the authority to do all sorts of things. It has the authority to do single payer healthcare. That does not mean it has the will. In this case, that will is compromised by the fact that the insurance industry faces no threat from Sherman, which would cripple a great deal of their business practicises. There is a great case to be made, for example, about actuarial rules and their effect on pricing. But that can't happen because of the law discussed in this diary.

      Entities such as AIG need more regulation.  However, it was its involvement in credit default swaps that was the problem.  This still is a huge hole in regulation.  This includes hedge funds, banks and other entities.  Congress needs to get to work.  

      Again, this is a matter of securites law and has nothing to do with the insurance exemption to antitrust laws.

    •  exactly right -- the feds blew it on AIG,although (0+ / 0-)

      one could argue that the states were far too deferential to the feds on matters such as credit default swaps.

  •  Consumers get much more protection from state (0+ / 0-)

    regulators than they would from federal regulators sleeping in some building in DC.  I don't understand the federal argument when you examine the abysmal job federal agencies such the SEC have done in recent years.

    •  Really? (3+ / 0-)
      Recommended by:
      rincewind, theran, dalfireplug

      Doesn't seem like they are doing a good job by the consumer with health insurance at all. In fact, I don't know of a single regulatory action by any state that has done anything about it.

      But you seem to be, if I understand you correctly, making an argument about the overall health of the industry. I'm not. I know the industry is healthy because they operate outside of the antitrust laws. ANY industry would be extremely health under such circumstances.

      Finally, the SEC does not regulate antitrust. But to address the larger point, the SEC's problem has never been a matter of ability, but rather one of political will.

    •  The problem is that insurance companies (3+ / 0-)
      Recommended by:
      rincewind, theran, brooklynbadboy

      create subsidiaries and trusts in order to circumvent the strictest state regulations.  For example, New York State traditionally had some of the toughest laws regulating the insurance industry, so companies would create subsidiaries that operate in New York only so that the NY state regulations would not be applicable to the company's operations nationwide.

      I'm an ex-actuary who has been out of the industry for almost 20 years now, so my information may be outdated.

      Cause we find ourselves in the same old mess singin' drunken lullabies--Flogging Molly

      by dalfireplug on Sat May 23, 2009 at 08:41:35 AM PDT

      [ Parent ]

  •  Important questions for author (1+ / 0-)
    Recommended by:
    brooklynbadboy

    "Using the leverage of an antitrust prosecution is exactly the sort of stick that will get the insurance companies moving in the right direction with respect to federal regulation."

    Question 1: What direction is that. Federal regulation of the insurance industry equals no regulation of the insurance industry and that's why they want it.

    Question 2: California has some of the toughest insurance regulations in the country. However, it does not extent HMOs. They are virtually unregulated. When you say "insurance" are you referring to HMOs.

    Questions 3 & 4: Most if not all of the state have baby Sherman Acts (Antitrust Act. 15 U.S.C. §1 (1890).) However, anti-trust enforcement is rarely attempted. Do you know why that is and if the state have baby Shermans than it would still negate federal prosecution as that aspect of the law would be still regulated by the states, no?    

    •  Answers (0+ / 0-)

      #1. I'm willing to agree with you that the chances of getting a broad new law covering the insurance companies isn't likely to pass congress without the express backing of the insurance industry. They want the regulation they want to prevent activist state attorneys-general from getting involved. However, by repealing the law discussed here, they will face a slew of FTC, Sherman, and Clayton act regulations already on the books.

      #2. HMOs would be the ultimate juicy target of FTC and antitrust investigation. I'd envision winning several consent agreements and proceeding to then codify those with legislation.

      #3 & #4. I don't know the answer to that, but I'm willing to speculate: It's has to do with limited jurisdiction and the heavy political influence of insurance companies in state legislatures.

  •  In the context of the health care battle, (2+ / 0-)
    Recommended by:
    arlene, brooklynbadboy

    having the insurance companies have to take on that, as well as regulation, as well as campaign finance reform, seems like a good thing.  The crux is that they own Congress, and that is power they should not have.  Thanks BBB for shedding some more light on this.

    "Neither a borrower nor a lender be"

    by HenryBurlingame on Sat May 23, 2009 at 08:52:30 PM PDT

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