In their latest anti-insurer jag, Democrats have been talking about eliminating the insurers’ anti-trust exemption. I asked an expert on what that would mean and this is the e-mail he sent back explaining the whole business:

Historically, the Supreme Court had said that insurance was not interstate commerce, so the federal antitrust laws had no application. Then, in a case called South Eastern Underwriters in 1944, the Supreme Court reversed course, and said insurance was interstate commerce (which was clearly the right interpretation), which meant that the federal antitrust laws should apply with full force.
In response, Congress enacted the McCarran-Ferguson Act, which created a limited exemption from federal antitrust law for the business of insurance, except for acts of boycott, coercion or intimidation. To qualify for exemption, each state had to engage in oversight of the insurance market — which they did, by setting up state insurance commissioners and regulating conduct. That’s what they’ve done for the past 65 years — with much of their regulation cost-increasing, but that is another matter.
The logic of the McCarran-Ferguson exemption was two-fold: as noted above, insurance had traditionally been regulated by the states anyway, and there was (at the time) no compelling felt need/reason for the feds (and more importantly, for private litigants, deploying federal antitrust law) to get into the picture. The second issue was that insurance pricing works better if insurers can share information on their actuarial experience. This is less of a problem for a big insurer, which has enough information to do its own pricing, but it is very significant for a small or mid-size insurer. Allowing the sharing of information (which may or may not actually be an antitrust problem, depending on how it is done), allows for more accurate pricing of risk. So, McCarran-Ferguson created a safety zone for insurers to share info and do a bunch of other things, without worrying about private antitrust exposure — while still subjecting them to regulatory oversight at the state level, and to federal antitrust scrutiny for matters that don’t involve “the business of insurance.” So, for example, the federal government can always scrutinize mergers among insurers for anticompetitive consequences.
The obvious question is what turns on the exemption, and what should we expect if it is removed. The answer is probably not much in terms of increased competition in the health insurance market. The states already have plenary oversight of conduct and mergers, and the feds can challenge mergers — so adding federal antitrust exposure for conduct that falls within “the business of insurance” doesn’t seem likely to result in much change. Of course, there may be increased private litigation, at least some of which will be the equivalent of “strike suits” and it will cost money to defend those cases. There isn’t any real evidence I’m aware of that insurers have colluded or divided markets, but of course you never know what a whistleblower will turn up with — and insurers have done plenty of stupid things before. Removal of the exemption could also reduce competition, if enough small and mid-size insurers decide they can’t enter the market without the ability to share information, but it isn’t clear how many insurers are in the “sweet spot” of “too small to have enough information to do risk rating themselves, but big enough to want to enter the market as long as they can share information” for the removal of the exemption to matter. Also, as noted above, there are ways to share information without running afoul of the antitrust laws, and courts have grown more accepting of such arrangements than was the case when McCarran-Ferguson was enacted.
The insurers obviously don’t want to lose this exemption, because it means they have one primary regulator to appease — and it limits their exposure to private antitrust suits under federal (but not state) law. State insurance commissioners don’t want to get the feds involved, because they prefer to remain the dominant regulator. The DOJ wants to get rid of this because it doesn’t like exemptions from antitrust — although they didn’t seem to be claiming that it would actually result in increased competition. And, the Obama administration is doing this as pure political payback — you kick my cat, I’ll kill your dog.
To summarize, the exemption makes sense mostly as a long-standing political deal, but not as a matter of antitrust, where exemptions are presumptively bad. But, its hard to see much turning on this in terms of the likely outcome for consumers — specifically, whether eliminating the exemption will actually increase competition in the market for health insurance.