OPINION: Interstate insurance sales start with McCarran Ferguson repeal currently languishing in Senate

by Deborah Nelson (reprinted in edited form from Citizens for a Just Government)


The Federal Government’s abrogation of interstate commerce authority over the insurance industry has resulted in the very problem which that authority exists to prevent:  a fragmented market that works to the benefit of industry, at the expense of consumers.

Citizens for a Just Government advocates a full repeal of Federal McCarran Ferguson Act legislation for all insurance industry sectors.  The 1945 McCarran Ferguson Act transferred insurance industry regulatory oversight from the Federal government to states; fragmenting the industry, breaking up insurers’ ability to spread costs over national risk pools, and blocking interstate commercial flow.

To facilitate unfettered interstate competition, CJG urges Federal authorities to establish a national insurance regulatory framework in its place, in accordance with the Federal Government’s Constitutional, court-affirmed responsibility to oversee interstate commerce.

The Federal Government’s abrogation of interstate commerce authority over the insurance industry has resulted in the very problem which that authority exists to prevent:  a fragmented market that works to the benefit of industry, at the expense of consumers.

CJG supports repealing McCarran Ferguson as a first step towards the Federal government reassuming its appropriate Constitutional responsibility to ensure competitive, Federally-overseen insurance markets, nationwide.

In the absence of a full repeal, CJG supports HR 372, which would roll back part of the health insurance industry’s exemption from Federal anti-trust oversight.


Why can’t we buy insurance across state lines?

What’s preventing cross-state sales now?

The answer is state regulation.  Or more precisely, 56 different systems of state and territory regulation.  Most of which disallow insurance policies from other states.

The Federal government doesn’t forbid cross-state sales.  In fact, Congress washed their hands of the whole issue in 1945, with legislation called The McCarran Ferguson Act, which passed insurance regulatory oversight to states.

Now, to allow interstate insurance commerce; either states would have to agree on common regulatory standards and reciprocity terms or the Federal government would have to take back oversight authority, overrule state laws, and regulate insurance from Washington.

The U.S. Constitution’s Commerce Clause says they can do that.

The Clause delegates authority over multi-state commercial activity to the Federal government.  That power is intended to prevent states from slowing the free flow of economic activity to benefit themselves.

In America’s early years, courts held that insurance was not a form of commerce for the purposes of Federal oversight.

But in 1944, in an insurance industry fraud case called United States v. South-Eastern Underwriters Association, the Supreme Court ruled that insurance does, in fact, fall under interstate commerce authority.

A year later, Congress exempted “the business of insurance” from Federal commerce oversight through the McCarran Ferguson Act.  In effect, Congress declined to regulate insurance at the national level, and declared that:

The business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation or taxation of such business.”

The McCarran Ferguson Act also exempts the insurance industry from Federal antitrust laws to the extent they’re already regulated by the particular state in which they reside.  It does retain Federal authority to prosecute anti-competitive behavior that involves boycott, coercion or intimidation.

Through McCarran Ferguson, Congress issued a declaration of intent:

“Congress hereby declares that the continued regulation and taxation by the several States of the business of insurance is in the public interest, and that silence on the part of the Congress shall not be construed to impose any barrier to the regulation or taxation of such business by the several States.”

That doesn’t mean Congress gave up authority to pass Federal insurance laws.  In fact, they’ve passed a number since, including Obamacare rules.

It simply states that only Federal laws that specifically apply to the business of insurance will supersede state law.

Generic laws, like nonspecific racketeering legislation, don’t apply to insurance companies as long as there’s a state law in place that does.

What Congress signaled with McCarran Ferguson is that although they can regulate the insurance industry, they generally don’t intend to.  And in the face of that “silence,” state laws stand.

Indeed, Congress has since gone out of its way to make sure some Federal laws that touch on insurance don’t overlap state authority.

The 1974 Federal Employee Retirement Income Security Act (ERISA) includes preemption language that supersedes state employee benefit plan laws, but specifically carves out a McCarran Ferguson-mandated exception for the “business of insurance.”  This created two different oversight standards for employer sponsored private insurance health plans versus company “self-funded” ones, because self-funded plans are not insurance companies for the purposes of the law, and thus don’t fall under McCarran Ferguson’s exception.  As an “unintended consequence,” larger companies are more likely to afford self-funded plans that bypass state health insurance regulation, which may make their plans less expensive than those purchased by smaller firms or individuals.

Even Obamacare negotiations ultimately rejected full Federal insurance industry oversight.

McCarran Ferguson applies to all types of insurance.

Despite recent calls for health insurance to be as “obtainable across state lines as auto coverage;” in fact, property, life, casualty and other forms of insurance fall under the same state-level authority as health coverage.

Insurance companies must typically register with each state in which they want to do business.  Large holding companies like Aetna, Geico and Prudential establish state-specific subsidiaries to do business in each jurisdiction.  Some smaller, independent companies operate out of their respective state only.

In each state, the insurance industry must meet that government’s regulatory standards.  Some kinds of insurance policies, however, are easier to transfer between states.  Auto insurance may just require a change of residence form and small coverage adjustments.

Health insurance is a different issue, because of the local nature of hospital, doctor and other kinds of care, and the provider networks insurers set up to accept their policyholders.


What would McCarran Ferguson Repeal Do?

The U.S. House, March 23, 2017, passed a bill (HR 372) to repeal part of McCarran Ferguson.  The bill is currently sitting in the Senate Judiciary Committee.

HR 372 would only repeal the antitrust exemption for health insurance – it wouldn’t affect property, casualty or other kinds of coverage.

Those kinds of insurance would remain exempt from Federal antitrust laws.  And HR 372 only repeals parts of the exemption.  It includes several provisions that maintain industry rights to share some kinds of statistical information.

It’s not clear how HR 372 would impact the health insurance market.  The nonpartisan Congressional Budget Office predicts it would have little effect on policy prices.

Nor is it obvious how repealing McCarran Ferguson (albeit only partially, in the case of the current bill) might affect interstate insurance competition or the establishment of national risk pools.  Repeal, in and of itself, wouldn’t impose any insurance-specific new Federal regulation or negate existing state laws.  Absent new Federal rules, current state regulation would still apply to insurance companies within each jurisdiction’s boundaries.  Presumably, the only exceptions would be, depending on how far McCarran Ferguson was repealed, any state level anti-trust laws that would now conflict with the Federal ones that were the specific object of McCarran Ferguson to begin with.

Solving the issue of multiple regulatory jurisdictions will almost certainly require some combination of regulatory cooperation at the state level, or new Congressional “preemption” legislation to supersede State insurance laws with a new Federal framework.

To reemphasize, repealing McCarran Ferguson would not, in and of itself, negate State regulation.  The 1944 Supreme Court decision ruled that insurance could be regulated by the Federal government, i.e., it falls under Interstate Commerce authority.  It did not say that states could not regulate in the absence of applicable Federal rules.

Repealing McCarran Ferguson absent a new Federal framework, a fragmented regulatory system would still exist.


Who would Regulate Interstate Insurance Sales?

Since the ostensible point of expanding markets is to increase consumer choice, presumably the regulatory structure best suited to facilitate competition would provide the optimum oversight.

Regulation tends to be a dirty word with free market advocates, but it’s important to emphasize that the point of antitrust laws is to ensure competition.  Indeed, it was an insurer price fixing case that prompted the Supreme Court to affirm the industry falls under Federal authority in the first place.  When Congress subsequently passed responsibility for antitrust policing to states; it was with the understanding that they’d create their own antitrust oversight.

Over the years, a number of iterations between federal, state and combined regulatory authority have been proposed to oversee an interstate-oriented industry.

Interstate CompactStates voluntarily join a multi-state entity that sets uniform industry product standards that apply in all member states.  A prototype called the Interstate Insurance Product Regulation Commission already exists, with 45 states joined to date.  The IIPRC covers “asset-based insurance products, including individual and group life insurance, annuities, disability income, and long-term care insurance,” per the NAIC.  Obamacare (Section 1333 – p 88) also provides for interstate compacts.

Reciprocity/Cross-Licensing:  Five states currently allow out-of-state insurance sales.  Eighteen considered similar legislation before Obamacare was enacted, and thirteen have considered it since.

Federal ExchangesObamacare includes Federal exchanges for individual health policies, but they’re run out of individual states.  The Office of Personnel Management runs a “multi-state plan” program that aims to offer plans that are the same in several states, but not necessarily portable or interstate.  Only Blue Cross currently offers a multi-state plan on the Obamacare exchange.

Universal Federal Employees Health Benefits Plan Eligibility:  Congressman Darrell Issa (R – San Diego CA) proposed this in January 2017.  It would allow any American to enroll in the Federal Employee Health Benefits program, administered by the Federal Office of Personnel Management.  The program offers a range of insurance providers and policies, and operates like a Federal exchange.  FEHB plans are not subject to state regulation.

Federal Oversight:  a Federal Insurance Office, established by Dodd-Frank financial industry reform, already exists.  It does not have regulatory powers, but monitors financial stability in all industry sectors except health insurance.  Full insurance industry oversight would likely entail additional Federal authority and a national regulatory framework.  Congress would have to repeal McCarran Ferguson, to negate its delegation of authority to states and establish an alternative regulatory framework in Washington.

Universal Medicare:  A single-payer option that would place all Americans into Medicare primary health coverage, currently funded by taxes and premium payments.  Insurance companies may still sell supplemental policies in the private market.

Insurance Industry Choice:  The Federal government would establish an Office of National Insurance within the Treasury Department.  Companies would have the option to choose Federal or State licensing and regulatory oversight.  The National Insurance Act of 2006, which would have established a Federal agency to oversee nationally chartered insurance companies, died in committee.

Association Health Plans:  Allow small employers, and theoretically depending on scope, individuals, to form an association to buy group health insurance; or to join and existing association that offers group insurance.  Only those classified by the Federal government as large group plans are regulated federally instead of by states.  President Trump signed an Executive Order, October 12, expressing intent to change regulations to expand small business eligibility to participate.

CJG advocates a full repeal of McCarran Ferguson legislation for all industry sectors, and establishment of a Federal regulatory framework in its place.


Deborah Nelson is Policy and Communications Director for Citizens for a Just Government

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