Congress to Insurers: Say Goodbye to Your Monopoly

What do Major League Baseball and health insurers have in common? They're both granted antitrust exemptions under the McCarran-Ferguson Act of 1945.

Fortunately for MLB, not too many people in Washington care about the price of tickets at a Washington Nationals game (no one's going -- they rank 24th out of 30 in attendance).

Not so true of health insurers, though. A lot of politicians aren't fond of the likes of Aetna (NYSE: AET  ) , Cigna (NYSE: CI  ) , and Humana (NYSE: HUM  ) . And it looks as if there's growing support in Congress to repeal insurers' federal antitrust exemption. Theoretically, that could be bad news, as the Federal Trade Commission wields a much bigger stick than the individual states that are currently in charge of regulation.

And Buffett cried a little
Berkshire Hathaway (NYSE: BRK-A  ) owns shares of UnitedHealth Group (NYSE: UNH  ) and WellPoint (NYSE: WLP  ) , so Buffett has a stake in the game. But more importantly, he's a big fan of monopolies.

Monopolies are the types of companies that Fools dream of. They aren't a guarantee of instant profits, but all things being equal, little to no competition is better than a lot of it.

Companies with monopolies or at least near-monopolies usually have high margins, because who else are customers going to turn to? Think Google (Nasdaq: GOOG  ) for search engines. Monopolies can be broken, but the large size of the giants in the industry makes doing so really difficult.

Regional monopolies
I've had three different insurance carriers since I moved back to California seven years ago, as my wife and I have changed jobs or had our insurance changed by our employer looking for a better deal. In other parts of the country, such variety isn't as readily available.

According to a 2007 study of health-insurance markets by the American Medical Association, 96% of markets were considered highly concentrated, with just a few insurers. In 64% of the markets, one insurer had more than half of the market share, and in some states, there's a near monopoly. Blue Cross/Blue Shield of Alabama, for instance, controls 83% of the market. In six of the state's 11 major metropolitan areas, its reach topped 94%.

I'm not sure how much an increase in competition is really going to decrease costs for consumers, though. Blue Cross/Blue Shield of Alabama isn't exactly gouging its members; the company had a profit margin of 0.6% last year. In places where for-profit companies dominate, there's a little more play -- UnitedHealth's net profit was 3.7% last year, but it has been as high as 6.6% over the past five fiscal years -- but I can't imagine they'd be willing to lower their prices too much. Competition could result in companies that become more efficient (and lower their internal costs), but one would hope that a for-profit company with net margins that low isn't running that inefficiently.

Consolidation damage
The biggest problem insurers could face in the repeal of McCarran-Ferguson could come from an inability of the industry to consolidate. WellPoint and UnitedHealth have gotten as big as they have by acquiring companies -- at least 11 each this decade. The larger size allows companies to spread fixed costs across a larger number of customers and thus allows them to compete better and/or increase profits.

On the other hand, if the FTC nixes further mergers for anticompetitive reasons, the companies that took advantage of the loophole before it closed up could have a real competitive advantage.

Fixing price fixing
The one place where repealing McCarran-Ferguson could actually help consumers is in eliminating price fixing. It's not clear exactly how much of this goes on, but the Boston Globe reported at the end of last year that Blue Cross/Blue Shield of Massachusetts struck a deal with Partners Health Care to increase the insurer's payment to the hospital and doctors in exchange for guaranteeing that the hospital wouldn't accept a lower payment from other insurers.

The hospital wins with higher payments, the insurer wins because it can't be undercut, and the patients are left picking up the cost. Even the most capitalistic pig can see that's just plain wrong.

For investors in health-insurance companies, I'm not sure the lack of price fixing affects you much. You'll just need to find companies that can strike good, legitimate deals that hold down costs, rather than lazy price-fixing ones.

You know, like in every other industry.

What do you think about repealing McCarran-Ferguson? Is it real reform or just more rhetoric out of Washington? Let us know in the comment box below.

Google is a Motley Fool Rule Breakers recommendation. Berkshire Hathaway and UnitedHealth Group are Stock Advisor picks. Berkshire Hathaway, UnitedHealth Group, and WellPoint are all Inside Value recommendations.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool owns shares of Berkshire Hathaway and UnitedHealth Group and has a disclosure policy.


Read/Post Comments (18) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 17, 2009, at 12:46 PM, lpnews wrote:

    If they appeal McCarran-Ferguson do they really need a public option? This is difficult to judge. I believe appealing McCarran_Ferguson will open up competition to some degree. I do agree with you that the largest companies(United & Wellpoint) will benefit the most. What happens to the other companies who can not compete because their membership is small in comparsion. Obviously their administration cost per member will be much higher which leads me to believe many health insurers will fail.

    .

  • Report this Comment On October 17, 2009, at 1:17 PM, starbucks4ever wrote:

    "Congress to Insurers: Say Goodbye to Your Monopoly"...

    because we are giving you a super-monopoly!

  • Report this Comment On October 17, 2009, at 4:10 PM, LatifK wrote:

    While free market has done wonders to many aspects of society, a monopoly is NOT a free market, and the very nature of the current health insurance rules (or lack of) lends to the practice of abuses that we often see in the forms of horror health stories.

    For far too long, these companies have escaped regulation allowing for a level playing field that would allow for the innovation and progress that is the hallmark of free markets to occur.

    Reminiscent of "Ma Bell", this has to be broken up, rules set in place, a floor established on what is acceptable and then free market can have at it.

    Until then, in its current form this industry is a cancer upon our society. A pimp of sorts that delivers the goods only at his own choosing, and there was ABSOLUTELY nothing we can say or do about it.

    Until now.

    Please support change.

  • Report this Comment On October 17, 2009, at 11:23 PM, gary55981 wrote:

    I do not support the drastic changes being proposed by Obama because:

    1. I do not want insurnace companies or the Government involved in the delivery of medical services.

    2. Most of those covered by insurance are covered by non profit insurers and providers. Blue Cross is a non profit company that provides insurance to over a third of the US population. Mayo Clinic is one of the largest and in the view of many the highest quality medical provider in the world and is a non-profit provider.

    3. If Obama thinks he can cut the cost of these providers without adversly affecting the quality and our choice of service; he is crazy.

  • Report this Comment On October 18, 2009, at 1:54 AM, LatifK wrote:

    You should support the drastic changes being proposed by Obama because:

    >>1. I do not want insurnace companies or the Government involved in the delivery of medical services.

    BOTH already do both of which you "do not want". Insurance DICTATES your treatment based on what they are willing to pay for. The government already delivers medicine, in the form of the VA system.

    >>2. Most of those covered by insurance are covered by non profit insurers and providers. Blue Cross is a non profit company that provides insurance to over a third of the US population. Mayo Clinic is one of the largest and in the view of many the highest quality medical provider in the world and is a non-profit provider.

    Another reason to break up this monopoly, NO company should control that much market share of health care.

    Mayo clinic's method of operation is not in question or up for debate in this bill.

    3. If Obama thinks he can cut the cost of these providers without adversly affecting the quality and our choice of service; he is crazy.

    Maybe your right, maybe your wrong, but the current system has the US spending over 16% of GDP to achieve performance that is below par with Greece and Algeria in terms of health care. With that 16% of GDP, the US could buy BOTH countries and still have change left over.

    Let us not be afraid of the unknown, as at this point any change from the status quo would be a welcomed change, and change we must.

  • Report this Comment On October 18, 2009, at 6:50 AM, ssbb123 wrote:

    Healthcare does need a change but this is not it.

    Spending $3 TRILLION of OUR MONEY on reform and still 2/3 of the uninsured will remain that way.

    Obama needs to slow down and do it properly then he might gain an ounce of credibility.

  • Report this Comment On October 18, 2009, at 12:08 PM, lpnews wrote:

    I have been hearing a lot about how much more efficient countries with national healthcare are then the US. The thing no one seems to bring up is quality of life. If you have to wait several years or maybe 6 or 7 years depending on your age for a hip or knee replacement your quality of life is impacted while you wait. In the US 80% plus of the population just needs to make a phone call and schedule the surgery. Yes, when you look at what is spent it may be a lot less in other countries but the quality of life is a lot worse than in the US. Let's fix the 20% that needs to be fixed and not mess up what is working.

  • Report this Comment On October 19, 2009, at 6:01 PM, WyattJunker wrote:

    heheh Seems the propagandists are out again.

    The VA cannot be used as a comparison model that public healthcare works since it was employed as a means to treat men and women in unusual circumstances.

    Unless you, as a private citizen on your way to work, are forced by the high command of your superior officer to drive through mine fields or exchange fire with an invading front, then you don't have a right to make straw man comparisons. Unfortunately, the media allows it for the DNC though.

    Has your boss asked you to do that lately? heh heh *doh*

    Also, 16% of GDP ain't nothing considering the amount of people it puts to work and spilloff wealth it creates as well as product innovation.

    But, keep preaching your DMV healthcare. Pretty soon it will be yours. Yeah. Enjoy that.

  • Report this Comment On October 19, 2009, at 6:02 PM, WyattJunker wrote:

    Oh yeah,

    Change we must not.

  • Report this Comment On October 19, 2009, at 6:20 PM, AbstractMotion wrote:

    I'd be happy if they repealed antitrust regulation, it's actually a step in the right direction. I agree though that they don't need a public option if they do this, allow interstate buying and move the bulk of the insurance regulation to the national level (isn't about time to do this after AIG anyways?). True capitalism is all about competition and offering the best product at the best price. There is absolutely no reason that the insurance industry should be exempt from that.

  • Report this Comment On October 19, 2009, at 7:18 PM, mals wrote:

    "Fools love monopoly". I hope the Fools love the game of Monopoly and not the monopoly of profit gluttons like the health insurers. I am no Foo

  • Report this Comment On October 19, 2009, at 7:41 PM, bbell46356 wrote:

    Competition or lack thereof is not necessarily the problem. Regulation is the bigger problem and more of it won't help. Part of the reason there isn't more competition is that each state has different regulations. Regulations also limit the type and scope of insurance available. For example, I can't buy true catastrophic only insurance. HSA rules require every transaction to go through adjustment process and the insurance must cover illnessesses and procedures many would consider unnecessary.

  • Report this Comment On October 19, 2009, at 7:50 PM, xetn wrote:

    Government is the only monopoly that is legal. You should really be looking at the states as one of the problems because every single state regulates the insurance companies that operate within them. There is not a free market in health insurance. If there were, you would have much more competition and much lower premiums. As it stands all health insurance companies must pool all risks together resulting in much higher premiums.

    But I am wasting my time writing about this because all of you believes the big lie that it is governments duty to take care of your health for free.

    Just remember what P. J. O'rourke said: "If you think health care is expensive now, wait until it is free."

    Health care is a scarce resource and it will become more scarce once the government takes over because it must add its "tax" for its huge new bureaucracy that will be created to manage it. If you think health care is inefficient, have you though of how inefficient any government program is? Just look at the post office. In spite of constantly raising postal rates, they have a 10 billion deficit. And, they are burning several million dollars per month having postal worker sitting around doing nothing because with reduced workloads, they are unable to lay off surplus workers and cannot reassign them to other offices because of work rules laid down by the postal workers union. If you think this is an exception, think again.

  • Report this Comment On October 20, 2009, at 10:10 AM, trp2dmd wrote:

    The biggest problem with Obama-care is not what it will do to the Insurance companies. It is what it will do to those who deliver that care. Thirty years ago, the best and brightest went into medicine. They delayed their entry into the work force and paid a price in time and effort. We ended up with some of the best doctors in the world, and they were rewarded for their effort. Sounds like the American dream, but ask any doctor today if they want their kids to go into medicine. The vast majority will tell you NO! How sad for us, and for our kids. Check out how many foreign doctors come to the US to try and make a living from the Socialist countries. Without good doctors any health care delivery system is doomed, and so is our great health care. So keep believing the lies out of DC and suffer the consequences.

  • Report this Comment On October 20, 2009, at 2:11 PM, jimhwall wrote:

    With a public health insurance company I assume it will be able to compete in every state. Thus all private insurance companies should be allowed to compete in every state or they should be allowed to merge with another company in another state so they can compete in every state.

    The real problem with health care is the providers don't provide fee schedules and quality information so individual doesn't make the decision based on cost and quality.

  • Report this Comment On October 20, 2009, at 8:50 PM, fourjays01 wrote:

    I completely agree with jimhwall. We recently had a 300% increase in insurance premiums because we moved across a state line. All else remains the same...but we are now faced with limited choices and blatant price fixing. How about transparency, open access to any insurer, and fixed costs of procedures, hospital charges, etc., so the individual consumer knows that he/she will pay the same as Cigna or WellPoint will pay. Reform is about health care, not health insurance.

    As for trp2md, please spare me the "best doctors in the world" argument. Our doctors protect their status and incomes by perpetuating the medi-slave process of hazing med students into doctors. How about paying for medical school in return for 8-10 years of well-paid community health care in under-served areas? We would still maintain the quality of our physicians, (focusing on those who truly care about medicine and not the bottom line) give them real world experience and turn them into doctors who perform procedures because it improves patient health, not increases their bottom line.

  • Report this Comment On October 22, 2009, at 6:52 PM, mytravelguy wrote:

    Repeal of the anti-trust protection the health insurance companies enjoy is a nice start, but I don't hear anyone asking the fundamental question, which is why there should be health insurance companies at all. There are certain rights we are supposed to have, and life is the first one named - not education or a military or paved roads, all of which we pay with tax dollars. Why should there be companies getting BILLIONS of dollars, they are the middlemen standing between patients and their doctors, they contribute absolutely nothing to the entire process, which is people get sick, they go to doctors, they get treatment, hopefully they will get well. Insurance companies decide which doctor you will go to, they will make you and the doctor fill out reams of forms for payment, they don't pay the doctor the full value of her services, and they get bunches of money for it. The government is already involved in health care, Medicare if you are over 65, Medicaid if you are abysmally poor, collecting premiums, processing claims, etc. I am a small business owner, employees pay 1.35% of their pay for Medicare and I match it. I would gladly pay another 2% of their pay to get them health insurance now, which I otherwise cannot afford for them. I would happily opt into a program myself that would cover it. All levels of our government do great things and terrible things, but we get to look over their shoulders, not so insurance companies. In California, Blue Cross just decided to become a for profit company, they are now Anthem Blue Cross, they would not do that if there was not A LOT of money in it for them. Here's my very radical idea - all 300,000,000+ Americans pay $5 a month for insurance that lets them go to doctors when they are sick and get preventive care, the doctors all go on salary of whatever would be fair, and the insurance companies can go get rich off of some other industry besides health care.

  • Report this Comment On April 19, 2010, at 1:50 AM, kkmail wrote:

    Let us fools relax..90 percent of ALL fools can afford any health package Mr. Obama throws at us. And thats a wrap !!

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