New York attorney general Eliot Spitzer announced Monday a settlement with Marsh-McLennan, the world's biggest insurance broker, in conjunction with charges of price fixing, kickbacks, bid-rigging and other collusive business practices in New York State [Yahoo! News - Marsh to Pay $850 Mln to Settle Probe]. Marsh will pay $850M into a restitution fund for clients that initiated policies from 2001-2003.
What does this have to do with “tort reform” as the President framed it in his run for re-election? A whole hell of a lot. Pres. Bush liked to point to the need for malpractice caps in reining in runaway medical malpractice insurance costs, declaring that predatory personal injury lawyers were running our healthcare system into the ground by getting vast sums out of the courts for themselves rather than for their clients, that these damages awards are the core of the cost increases facing doctors and hospitals, and that medical-malpractice insurance providers had to jack up the rates for doctors and hospitals to cover the costs.
This is a thorny issue, knotting valid concerns and needs with the desires and influence of some of the most organized, well-heeled trade groups and industries in America (including, but not limited to, the AMA, the ABA, and the entire insurance industry). The thing GWB and the GOP conveniently leave out of their equation is the catbird seat that the med-mal insurers occupy. That industry, as part of the insurance industry as a whole, has a blanket exemption from federal antitrust laws.
The exemption shields them from basic rules that other businesses, in every other for-profit industry, must abide by in the US. Any insurance company can share any information it wants with any other insurance company – about costs, about profits, about their plans, about changes in coverage they are considering, about what areas they want to raise rates in, anything at all. These companies are also exempt from investigation by the federal government about the information they share or for what purposes they use any shared information.
The insurance industry as a whole operates as a government-sanctioned cartel. Economists argue cartels are difficult to maintain over the long term, and historical data does tend to show that to be true. The problem is that “long term” to an economist can be a decade or more, and in that time, an industry cartel can turn the screws on a lot of doctors, hospitals, and patients to make up for any foolish business or investment practices that led to lower profits or losses. A cartel can even keep their act together long enough to get legislation changed – it can collude price changes drastic enough over a handful of years to put their customers businesses and healthcare in crisis, and use that climate of fear and need to extract further change in the regulatory climate, to the industry's favor. The push for national medical malpractice damage caps is exactly such a ploy.
The federal antitrust exemption is subject to state override and modification, and some states have done that. Specifically in response to med-mal insurance, some states have enacted med-mal damage caps, and some have changed the oversight of insurers within their state. California has done both, and today has a system that has checked the growth of med-mal premiums well below the growth through the nation as a whole. In 1975, a package of damage caps and statutes of limitations was passed (MICRA) to try to deal with CA's med-mal crisis in the early 1970's (which, btw, followed a particularly bad investment period for insurers). Californians had to revisit the equation in the 1980's, as MICRA did not change the situation for the better: MICRA actually made things worse, as the insurers' costs were contained by the caps, but their cartel pricing power was untouched.
Proposition 103 passed in 1988, and that is when California's med-mal growth rates changed, both in absolute terms and relative to the country as a whole. Prop 103, among other things, forced insurers to disclose what information they shared, and forced them to submit any proposed rate hikes to state review (headed by an elected official), to prove they are related to the underlying costs and risks of writing insurance (as opposed to covering investment losses or other losses incurred by other units of those insurance companies).
I'm sure any fire-breathing free-marketeers reading about state regulation are scared, and taking deep breaths to belt out cries of “socialism” and “don't trust those wacky California latte drinking bureaucrats” or whatever else they feel will preemptively disgrace government action of any sort. Well, here's the punch-line: insurance companies didn't flee the state after Prop 103 passed, despite their objections and predictions of woe. They have had many rate increases approved since Prop 103 passed. California med-mal insurers make a LOT of profit, even today, after 17 years of state oversight. What they don't get to do is gouge a captive and blindered market, and they don't get to operate in a system of anti-competitive privilege.
Any self-respecting Republican who believes real market forces in their economy are a good thing needs to think at least twice about why this single industry has an exemption from both competition and oversight. Monday's settlement with the State of NY is an industry attempt to put a neutral face on the collusive behavior of Big Insurance, and avoid national removal of their antitrust exemption. It is an implicit admission that the behavior of Big Insurance in areas without such regulation is worse, and the willingness of a single insurer to refund nearly a billion dollars to get the spotlight off this arena shows that they will pay almost any price to guard their privileged position.
It is time for some Republicans to cross the aisle on this issue, as they seem to be willing to do to save Social Security from being Wall Streeted out of existence. This is where they get their chance to say that public interest exists, and that it can't be sacrificed on the altar of “the needs of business” without doing irreparable harm to the lives of millions of patients and tens of thousands of doctors.
It is time for Democrats to keep the pressure up on the aisle crossers. The opportunity to outflank the Republicans as the defenders of competition is here; I suggest they seize it and not let go.