by Matt Taibbi
McCarran might have been the Joe McCarthy of his era if McCarthy hadn’t been more of a press hound, though he did achieve another sort of fame. He was the model for the horny extortionist character Senator Pat Geary in The Godfather: Part II, whose great onscreen moment came when he tried to shake down Michael Corleone for a gaming license, saying: “I despise the way you pose yourself. You and your whole fucking family.”
To which Al Pacino offered the classic reply: “Senator, you can have my answer now, if you like. My final offer is this: nothing. Not even the fee for the gaming license, which I would appreciate if you would put up personally.”
In any case, in addition to being the inspiration for one of the great iconic corrupt politicians in the history of cinema, McCarran spent much of his career tilting at communist conspiracy windmills and with great fanfare got passed the McCarran-Walter Act, which imposed quotas on certain types of immigrants. He also passed the McCarran Internal Security Act, which forced political parties like the American Communist Party to register with the federal government.
Despite his fetish for wielding federal power, McCarran had a very different opinion about its purview over business and worked feverishly to keep the government off the backs of the insurance companies. In 1944 he teamed up with Homer Ferguson, a Michigan senator who also had a flair for the anticompetitive, to pass the McCarran-Ferguson Act.
Hilariously, Ferguson too was the inspiration for a corrupt senator of cinema yore. If you’ve seen the underrated Jeff Bridges movie Tucker, the Ferguson character is played by Lloyd Bridges; he’s the federal heavy working with the big automakers to make sure the upstart automaker/inventor Preston Tucker spent his days battling phantom federal investigations instead of making cheap, efficient cars that might have challenged the big three, which incidentally are basically all bankrupt now.
Working together, these two dumbasses McCarran and Ferguson passed their law, which essentially invalidated the U.S. v. South-Eastern Underwriters Association Supreme Court decision and established the ground rules for decades of insurance robbery.
Even the way this unseemly mess of a bill was passed was an embarrassment to the whole concept of democracy. The bill that McCarran and Ferguson introduced to the Senate and which also passed in the House was originally written to maintain the authority of the states over the insurance industry, but it also expressly included a provision maintaining that the Sherman Act would apply if and when the state laws proved inadequate.
The original McCarran-Ferguson Act was also intended, quite explicitly, to be temporary, and according to the original text was supposed to expire in 1947. Because the bill as written did not seem all that controversial, and would in any case be temporary, it sailed through both the House (where it was passed by the Judiciary Committee without a debate) and the Senate with very limited discussion, to say nothing of opposition. Even Franklin Roosevelt, when he signed the bill into law, was absolutely explicit that it was designed to expire in the near future.
“After a moratorium period, the antitrust laws,” Roosevelt said at the signing ceremony, “will be applicable in full force and effect to the business of insurance.”
But here’s the thing about Congress. No matter how much any bill is debated in either the House or the Senate, it can always be rewritten, even written to have an opposite meaning, in the conference committee process, which takes place after bills have been passed in both houses.
In this case, the McCarran-Ferguson Act emerged from conference with an important new clause added: it said that after January 1, 1948, the Sherman, Clayton, and Federal Trade Commission acts “shall be applicable to the business of insurance to the extent that such business is not regulated by State law.”
In other words, instead of being a temporary moratorium designed to explicitly allow the Sherman Act to come into play when state laws proved inadequate, the law now was a permanent act that explicitly excluded the application of the Sherman Act, the Clayton Antitrust Act (an extension of Sherman that prohibited other forms of collusion and intimidation), and the FTC Act in any case where there were already existing state laws.
Thus the insurance industry was given a permanent license to steal. There were all sorts of ways in which insurance companies, freed of federal regulatory authority, could collude to manipulate prices. Among other things, they pooled loss information and were allowed legally to set prices through cartel-like organizations such as the Insurance Services Office (ISO).
The same sorts of corporate-crime activities that are outlined in great cloak-and-dagger detail in books like Kurt Eichenwald’s The Informant—which described the high-stakes efforts of a group of agricultural conglomerates to evade the FBI and foreign police agencies while they surreptitiously colluded to set the prices of a feed product called lysine—are done openly and legally in the insurance world.
“If a bunch of construction contractors got together and decided to set the prices of bricks and mortar, they’d all go to prison,” says Robert Hunter of the Consumer Federation of America, who served as a federal insurance administrator under President Ford. “But in insurance, it’s all legal.”
Insurance companies could also collude to threaten boycotts or worse, depending on (a) how big their market share was or (b) how small a state they were dealing with, meaning how totally they had the local population by the balls.
A great example of the kind of bullshit that goes on all the time in insurance is the state of Mississippi, which became famous as one of the racketeering capitals of America even before Katrina.
Back in 2003 there was a much-ballyhooed malpractice crisis in which newspaper and TV reporters flooded the state to describe a tort system run amok, where patients in pursuit of big malpractice claims—what was called “jackpot justice” by groups like the U.S. Chamber of Commerce and repeated by their stooges in the media and Congress—hit up doctors for bogus settlements. While some of this undeniably went on, what was far less publicized was the insurance industry’s unique response to this crisis.
“We had a malpractice crisis in Mississippi,” says Brian Martin, an aide to Congressman Gene Taylor. “The insurance companies basically said, ‘We’re going to stop issuing malpractice insurance to ob-gyns, neurosurgeons, and emergency room doctors, unless Mississippi passes tort reform.’ ”
Crucially, this wasn’t one company making the threat, and the threat wasn’t to pull insurance for doctors who’d been sued. This was a whole group of supposed competitors acting in concert, threatening to abandon whole classes of doctors, regardless of their records.
Taylor had been a state senator in Mississippi and in that capacity had actually supported tort reform to rein in excessive settlement awards, which he believed were a real problem. But once he reached Congress he started to notice a pattern.
“As soon as the stock market started going in the tank and insurance companies weren’t making enough money, suddenly there was always a tort reform crisis,” explains his aide Martin.
Then in 2005 Katrina happened, and that’s where we really saw the fangs of the antitrust exemption. Government agencies determined that there were at least four hours of hurricane-force winds during the storm surge, and it was obvious to everyone in the area that wind accounted for much of the damage—I myself was in the Biloxi area shortly after the storm and saw houses miles inland simply blown down.
“You had people who were standing in their houses when the wind blew them down,” Marvin Koury, a real estate adviser in Gulfport, Mississippi, told me back then, “and the insurance companies were trying to tell them it was flood.”
Despite that fact and despite the fact that in larger, better-regulated states like Louisiana insurance companies paid out huge claims to homeowners for wind damage, in Mississippi the local insurance cartel—in this case an ad hoc union of State Farm, Allstate, Nationwide, USAA, and many others—decided en masse to deny all claims for wind damage except for those that the homeowner could demonstrate took place s
eparate from flood damage.
State Farm’s statement right after Katrina went as follows:
Where wind acts concurrently with flooding to cause damage to the insured property, coverage for the loss exists only under flood coverage, if available.
Nationwide issued a similar statement, telling adjusters that “if loss is caused by wind and flood there is no coverage.”
Why pass the buck from wind to flood? That’s easy—there was a federal, taxpayer-backed program to cover flood damage! In this case the National Flood Insurance Program issued many ruined homeowners checks from Uncle Sam to repair their flooded houses. And in a supreme bit of irony, the federal government contracted out to private companies to issue those rewards, even as some of those same companies were denying their own wind coverage.
“So here’s State Farm,” explains Martin, “running around, saying, here’s your $250,000 from the government for your flood damage, but oh, by the way, we don’t see any wind damage.”
Taylor’s home was one of the ones State Farm decided not to cover, which was bad enough—messing with a U.S. congressman. But the insurers were so brazen they denied coverage to Trent fucking Lott, who at the time was not very far removed from being the Senate majority leader, undoubtedly one of the most powerful men in America (to say nothing of Mississippi).
What was State Farm’s final offer to Trent Lott, who wanted this out-of-state insurer to pay the claim on his home? Its final answer was:
Nothing. Not even the fee for the gaming license, which I would appreciate if you would put up personally …
And that’s not even a joke. Lott ultimately was forced to sue State Farm for refusing to pay up for wind damage to his home. He later issued a statement:
Today I have joined in a lawsuit against my longtime insurance company because it will not honor my policy, nor those of thousands of other South Mississippians, for coverage against wind damage due to Hurricane Katrina.
The thing of it was, neither Lott nor anyone else could do a damn thing, legally, about these sorts of moves by insurance companies. Way back in 1980, an amendment to the Federal Trade Commission Act had been passed making it basically illegal for the federal government not only to investigate the insurance industry but even to conduct studies in that area.
That change had come about when the FTC had begun making noise about investigating the industry’s practice of charging higher property and casualty insurance premiums based on credit scores. Almost immediately the industry had lobbied to preempt this investigation, and section 6 amending the FTC Act was passed.
In the report accompanying the amendment it was written that “under the amendment, the FTC’s investigative and reporting powers [emphasis mine] are made explicitly inapplicable to the business of insurance.”
Any industry that basically has government license to (a) fix prices and (b) refuse to uphold legal contracts is going to make money almost without regard to the economic climate.
That helps explain why in 2005, despite the fact that it was blindsided by Katrina, one of the biggest natural disasters in American history, the property/casualty industry made an after-tax profit of $48.8 billion—a new record, beating out the previous year’s record of $40.5 billion.
In 2006, with no hurricane to muddy the waters, the industry made a whopping after-tax profit of $68.1 billion. They were able to get away with this despite taking a dump on two sitting members of Congress, who found themselves with absolutely no way to successfully fight back.
The only way to get at this sort of crap was to overturn the entire McCarran-Ferguson Act. Fortunately, that crazy episode in 2005 in which the insurers decided to fuck with Trent Lott led to an unprecedented left-right coalition in Congress that was bent on repealing those antitrust laws. In 2007 Taylor teamed up with Oregon’s Pete DeFazio and Louisiana Republican Bobby Jindal to propose a repeal of McCarran-Ferguson. In the Senate, Lott teamed up with Mary Landrieu of Louisiana and Pat Leahy of Vermont to go after McCarran-Ferguson.
They failed. Not even the specter of poor Trent Lott getting up and personally telling his sob story about getting fucked around by State Farm could move the Senate to do something about the situation, not even out of corporate loyalty.* In fact, neither the House nor the Senate bill ever made it out of committee. The bill was opposed by basically every single insurance industry lobbying arm in the country. The insurance industry that cycle spent more than $46 million in political contributions. Notably, Pat Leahy, chair of the Judiciary Committee at the time, received a grand total of $4,500, in contrast to the $287,000 they gave to fellow committee member John Cornyn, who came out in opposition to the gambit.
Then Barack Obama got elected, with a strong mandate to reform American health care. Surely something could be done this time, right? After all, how was it even possible—theoretically—to pass a massive new federal health care bill giving the federal government regulatory authority over the health insurance industry without touching the insurance industry’s antitrust exemption? Leaving aside for a moment the obvious point that including anything less than a full repeal of McCarran-Ferguson in a health care bill would be pointless, how could such an insane move even be accomplished logistically?
Well, Barack Obama and the Democrats figured out a way. And how they handled this issue perfectly symbolized what this whole thing was about, from the start.
At the very beginning of the process, there was a meeting on the House side for staffers of the three committees that would be crafting health bills—Energy and Commerce, Ways and Means, and Education and Labor. And at that conference, the subject of the insurance industry’s antitrust exemption came up. At first, the Democrats had no plan whatsoever to take on the exemption.
Taylor’s aide Martin was there, and he explains what the leadership’s thinking was.
“Well, first of all, their thinking was, this is a Judiciary Committee issue, and here we are, Ways and Means and Energy and Commerce and whatnot, so it’s not our problem,” he says. “That was one thing. The other thing was, they thought there was going to be a strong public option, so that was their way of guaranteeing competition.”
There probably isn’t a better example of how the Democratic Party thinks, or nonthinks as it were, than this. Instead of repealing a grossly anticompetitive law that was passed basically by mistake sixty years ago, the party decided to try to ensure private competition in the health insurance industry by creating a state-run insurance plan. “They basically didn’t want to pick another fight,” says Martin.
Dumb as this idea was, it didn’t hold. The heads of both the House and the Senate Judiciary committees—John Conyers in the House and Pat Leahy in the Senate—decided to introduce amendments to the various health care bills (which did not address the issue originally) that would have repealed one tiny little slice of McCarran-Ferguson.
“Both amendments only pertained to the health insurance industry and the medical malpractice insurance industry,” says Erica Chabot, an aide to Senator Leahy.
“And not only that,” says Martin. “Not only did they not repeal the exemption for all other types of insurance, but they also included a provision that said, basically, that this repeal only applies to price-fixing, bid-rigging, and market allocation. Anything that didn’t fall into those categories, those were still legal.”
So, really, Leahy and Conyers were trying to score one small victory: instead of establishing primacy over the entire insurance industry, they merely wanted to pass laws making it illegal for health or medical malpractice insurers to fix prices, rig bids for contracts, or divide up markets among themselves. They didn’t even attempt to broadly outlaw unfair anticompetitive practices.
“But what if, for instance, an insurer says, ‘You can’t buy this product unless you also buy this other product’? Is that covered or not covered?” says Martin.
If you’re wondering why a law like that would even be necessary, since there are all sorts of federal laws that broadly outlaw fra
ud and unfair practices, here’s the problem: even though those laws exist, there’s no federal agency that legally has jurisdiction over the insurance industry, again thanks to that FTC law.
So, to recap: none of the five congressional committees that originally put together health care bills (the three in the House, and then in the Senate Max Baucus’s Finance Committee and Tom Harkin’s Health, Education, Labor, and Pensions, or HELP, Committee) even tried at the start to do anything about the antitrust exemption enjoyed by the health insurance industry.
Here you have a cartel system in which individual customers, hospitals, and doctors alike are at the mercy of an unaccountable industry that can deny coverage or fix prices as it pleases, resulting in the crappy or even openly threatening service and ballooning costs that necessitated the call for health care reform in the first place. And all that is because of one law, and this law is the one that none of the five reigning Democratic committee chairmen thought prudent to touch as they “took on” the problem of health care reform.
So after these five committees whiff on the issue, in step Leahy and Conyers with amendments that address the problem in, to put it politely, the least aggressive way possible. They offer mini-repeals of the exemption, little rubber rafts they then attempt to tack on to the great tanker-bills moving their way through the process. In the first version of the first attempt to merge the three different bills from the different House committees (called the manager’s amendment), the watered-down Conyers amendment was in there.
But in the House, some members fought back. After a tough August in which the teabagger movement forced Democratic members to go home and deal with pitchfork-wielding wingers in furious town hall meetings where the representatives were attacked as socialist brigands, a few more aggressive members were emboldened. In a meeting with the Democratic Caucus, DeFazio made one last play for a stronger bill.