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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.
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.
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.