Medical Malpractice Liability Insurance and the McCarran-Ferguson Act

CRS Report for Congress
Medical Malpractice Liability Insurance and
the McCarran-Ferguson Act
Rawle O. King
Analyst In Industry Economics
Government and Finance Division
Volatility in prices and availability of medical malpractice liability insurance and
allegations that insurance companies may have colluded in raising current rates are
receiving attention from policymakers. As a result, Congress is considering the antitrust
exemption for the business of insurance provided under the McCarran-Ferguson Act of
1945. Historically, insurers have relied on the Act’s limited exemption from federal
antitrust law to engage in cooperative activities that allow them to identify and measure
risk, including joint collection, sharing, and analysis of loss cost data, and development
of standardized policy forms. Much of the policy debate concerns whether narrowing
the exemption from antitrust law would alleviate or aggravate the current problem of
high premiums and insurance coverage availability.
During the 108th Congress, several bills — H.R. 448, H.R. 1116, and S. 352 —
have been introduced to modify the McCarran-Ferguson Act to ensure that commercial
insurers do not engage in anti-competitive rate-making in the medical malpractice
insurance market to the detriment of consumers. These bills do not address other
antitrust laws, but is limited to price-fixing, bid-rigging, and market allocations, and
only in connection with the provision of medical malpractice insurance.
This report provides an overview of the current medical malpractice insurance
situation and insurance market structure, summarizes the provisions of H.R. 448,
H.R.1116, S. 352, and the McCarran-Ferguson Act of 1945, and examines arguments
for and against modifying the McCarran-Ferguson Act. This report will be updated as
developments warrant.
The Medical Malpractice Insurance Crisis
The U.S. is currently experiencing escalating premiums and reduction in the
availability of medical malpractice liability insurance coverage in many states. This
problem, however, is not new. During the mid-1970s, and in the mid-1980s, businesses
and municipalities experienced sharp price increases and shortages in commercial liability
insurance. More recently, physicians, hospitals, and other healthcare providers in a

Congressional Research Service ˜ The Library of Congress

number of states have experienced escalating premium costs and problems of availability.
According to a recent American Medical Association (AMA) survey of 50 states, some

18 states have a serious medical malpractice liability insurance problem.1

The search for a solution to the medical malpractice liability insurance problem has
been frustrated by a lack of consensus over which suggested causes are more central to
the problem, the scarcity and limitations of data, and contradictory results in different
empirical studies that seek to examine whether medical malpractice reforms implemented
by the states following the liability insurance crises in the 1970s and 1980s have had their
intended effects on premiums. At present, however, the medical malpractice insurance
debate is focusing on the extent to which instability of the medical malpractice liability
insurance market is a result of (1) inherent management problems that are driven by the
profitability cycle of the insurance industry, or (2) out-of-control medical litigation,
frivolous lawsuits, and high jury awards that have resulted in a dramatic increase in the
frequency and severity of paid claims. Both sets of views have strong proponents and
very different proposed solutions.
Profitability Cycle of the Insurance Industry. Proponents of limiting certain
insurance company pricing and accounting practices stress the insurance profitability
cycle and the manner in which insurance companies respond to it. They point to “cash
flow” characteristics and rising interest rates that attracted new insurers into then-
profitable medical malpractice line in the late-1980s and early-1990s. These insurers
pursued as much business as they could in order to have more funds to generate
investment income. Competition intensified as many insurers were convinced that they
could attract only the “good” business at lower prices and make up for any losses with
investments that appeared to be steadily rising in value. In this view, competition created
an environment of underpricing of the actual risks of the insurance.
From this scenario has come the argument that the problems of availability and
affordability in the medical malpractice insurance segment are attributable to poor
investments and that insurers are now employing certain alleged anti-competitive
practices to force premiums up and recover investment as well as insurance losses. These
practices, ranging from the methods of setting rates in the industry (i.e., price-fixing) to
collectively withdrawing capacity (i.e., restricting supply), are allegedly made possible by2
the industry’s antitrust exemption provided under the McCarran-Ferguson Act of 1945.
As a result, some observers have called for a modification of the insurance industry’s
federal exemption from antitrust laws.
Medical Litigation. Another approach that is supported by insurance industry
representatives and physician groups is based on the proposition that the current medical
malpractice liability insurance crisis is caused by out-of-control medical litigation,
frivolous lawsuits, and high jury awards that have resulted in a dramatic increase in paid
claim severity — i.e., the average amounts paid in indemnity to plaintiffs on behalf of

1 These 18 states are Arkansas, Connecticut, Florida, Georgia, Illinois, Mississippi, Missouri,
Nevada, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, Texas,
Washington, and West Virginia. This survey is available at http://www.ama-, visited March 4, 2003.
2 15 U.S.C. §§ 1011-1014, P.L. 79-15.

individual physicians. At the core of the argument is the belief that the tort system
functions unevenly and inequitably in resolving medical negligence cases.3 Medical
litigation, they argue, needs a predictable and consistent context. Supporters of this
argument view tort reform as the solution, and they want the medical litigation process
to be simplified, procedural laws streamlined, incentives to protracted and complicated
litigation eliminated, improvements to the courts’ case management role with regard to
complex multi-party litigation, and the implementation of alternatives to litigation, such
as arbitration, mediation, and a no-fault compensation system coupled with medical
review boards to regulate quality of care.
Proponents of the “litigation explosion” argument state that medical malpractice
insurers do not jointly set rates;4 thus, they argue, the assertion that insurers benefit from
the McCarran-Ferguson’s exemption to collude in the setting of rates is simply not
correct . 5
Medical Malpractice Liability Insurance Market
The medical malpractice insurance market consists of three separate types of
insurers: (1) traditional commercial multi-line property-casualty insurers that seek to earn
profits; (2) hospital-and physician-owned insurers (including multi-state physician
malpractice groups like PHICO in Pennsylvania and PIE Medical Mutual in Ohio that
started in the mid-1990s and expanded their business outside their state of domicile) that
focus on long-term market stability and affordably priced coverage; and (3) alternative
risk transfer entities that include self-insurance and pooling, captives, and risk retention
groups that provide coverage as a service to their parent organizations. The market in
which medical malpractice insurers operate is composed of five separate customer
markets: physicians, hospitals, managed care organizations, nursing homes, and allied
health care (i.e., non-M.D. practitioners).
To provide an alternative to traditional commercial insurers following the difficult
insurance cycles of the 1970s and 1980s, a number of states have created medical
malpractice insurance joint underwriting associations (JUA’s). A JUA is a private, non-
profit consortium of insurers operating under the aegis of state authority that jointly offers

3 Donald Palmisano, “A Special Medical Liability Monitor Report: Examining Today’s
Malpractice Problem — The Controversial Search for Solutions,” Medical Liability Monitor,
Aug. 2002, p. 6.
4 According to the Head Actuary in the Department of Insurance for the District of Columbia, the
joint development of rates does not apply to most medical malpractice insurers because these
firms tend to rely on their own company’s statewide or national loss cost data to support their
actuarial estimates and rate request submissions in a state, and do not rely on the loss cost data
of other insurers or rating agencies like Insurance Services Office (ISO) to pool historical loss
data to derive a pure premium. Insurers argue that this is prima facie evidence that medical
malpractice insurers do not collude in the setting of rates. (Discussion, February 25, 2003)
5 For many insurable lines, insurers rely on information from the ISO which pools, forecasts, and
make results available to companies at cost for use as they see fit. It does not, however, apply
to medical malpractice.

coverage to medical practitioners licensed by the state. It is an “insurer of last resort” in
that JUAs provide coverage to physicians and other healthcare providers who cannot
otherwise obtain coverage.
Some states have also established patient compensation funds to provide coverage
to physicians in excess of the coverage limits of a malpractice insurance policy.
Physicians can be assured that in the event their coverage limits are exceeded, there will
be money available for damages in medical liability cases. These funds are administered
by the state insurance department; others are administered by a quasi-legislative entity.
The fund is financed through fees or surcharges levied on all healthcare providers, but in
some states, like New York, the fund receives money from the state budget. Additionally,
self-insurance trust funds are often used by large hospitals and health maintenance
organizations (HMOs) to self-insure all or part of their risk; and, the Product Liability
Risk Retention Act of 1981 was enacted to permit the creation of risk retention groups (a
corporate entity) and purchasing groups that provide or obtain liability insurance for the
owners of the group. In terms of market share, physicians and hospital captives account
for roughly 50% to 60% of the malpractice insurance business, commercial insurers
account for 30%, and JUA’s and other arrangements account for the remaining 10%.
The McCarran-Ferguson Act of 1945
In1944, the U.S. Supreme Court reversed itself in the landmark case of United States
v. South-Eastern Underwriting Association 6 when it held that the sale of insurance across
state lines was interstate commerce and therefore subject to the federal antitrust laws. The
1944 decision meant that insurance sales, underwriting, rate-making, and investment
practices were subject to federal antitrust laws, and to any other federal laws that
conflicted with state insurance regulation. Realizing that appropriate underwriting and
risk-assessment for the business of insurance depended upon legitimate joint activities,
such as the collection of industry-wide loss data, residual market mechanisms, and pools
for jumbo risks that might have been challenged under federal antitrust laws, Congress
enacted the McCarran-Ferguson Act. (The Act did not reference any particular industry
segment; it referred generally to the business of insurance.)
The McCarran Act did three things: Section 1 of the Act reaffirmed the power of the
states to tax and regulate the business of insurance. Section 2 declared that Acts of
Congress, except those specifically relating to the business of insurance, did or would not
invalidate state laws regulating or taxing the business of insurance, and that the federal
antitrust laws — specifically, the Sherman Act, the Clayton Act, and the Federal Trade
Commission Act — did not apply to the business of insurance as long as such business
regulated by state law. Section 3(b) declared, however, that boycotts and acts of coercion
or intimidation remained subject to federal antitrust law. Thus, under current law, the
regulation of the business of insurance in the United States is carried out at the state level,
the business of insurance is substantially exempt from federal antitrust statutes, and
collective activities may qualify for an antitrust exemption, but the activity in question
must not be an act or agreement to boycott, coerce or intimidate.

6United States v. South-Eastern Underwriters Association (322 U.S. 533 (1944)).

Insurance Antitrust Legislation Involving Medical
On January 29, 2003, Representative Peter A. DeFazio introduced H.R. 448,
Insurance Competitive Pricing Act of 2003, to amend the McCarran-Ferguson Act to
eliminate the antitrust exemption applicable to the business of insurance where the
conduct involves price fixing, allocating geographical territories, unlawful tying
arrangements, monopolizing or attempting to monopolize. H.R. 448 specifically retains
the antitrust exemption with respect to (1) collecting and disseminating historical loss
data, (2) determining a loss development factor applicable to such data; (3) performing
joint actuarial services; and (4) determining a trend factor.
On February 11, 2003, Senator Patrick J. Leahy introduced S. 352, the Medical
Malpractice Insurance Antitrust Act of 2003, to amend the McCarran-Ferguson Act to
ensure that commercial insurers do not engage in anti-competitive rate-making in the
medical malpractice insurance market to the detriment of consumers. S. 352 does not
address other antitrust laws, but is limited to price-fixing, bid-rigging, and market
allocations, and only in connection with the provision of medical malpractice insurance.
Some observers are concerned that because S. 352 does not define what activities
constitute price-fixing, bid-rigging, and market allocation that would be subject to federal
antitrust laws, the bill could bring uncertainty to the state regulatory environment.7 For
example, joint activities by insurers involving insurance “pools”, such as JUAs, joint
reinsurance associations, and residual market mechanisms that have developed to address
market conditions in some states, might be vulnerable to an antitrust lawsuit.
On March 17, 2003, Representative John Conyers, Jr. introduced H.R. 1116, Medical
Malpractice Insurance and Litigation Reform Act of 2003, to specify that the McCarran-
Ferguson Act does not permit commercial insurers to engage in price fixing, bid rigging,
or market allocations in the sales of medical malpractice insurance, except with respect
to provisions in the bill referring to rate-making and rate approval by state regulators.
Under the bill, states would be required to establish provision for state-licensed health
care professionals to challenge a proposed medical malpractice rate increase. A Federal
Medical Malpractice Insurance Association would be established in the Department of
Health and Human Services to offer malpractice insurance in states where it is not
available at reasonable and customary terms. In the area of tort reform, H.R. 1116 would
prohibit victims from bringing a medical malpractice liability claim without an affidavit
from a qualified specialist attesting to the reasonableness of the filing. Finally, the bill
would require mediation before a trial.
Arguments In Support of Modifying The Act
Insurance consumer advocacy groups have argued that insurers have taken advantage
of the McCarran-Ferguson Act to raise prices and restrict coverage, as well as engage in

7 See statement of Lawrence E. Smarr, President of Physician Insurers Association of America,
before the U.S. Senate, Judiciary Committee and Health, Education, Labor, and Pensionsthst
Committee, “Patient Access Crisis: The Role of Medical Litigation,” 108 Congress, 1 sess.,
February 11, 2003.

other anti-competitive activities (except boycotts) that would be considered unlawful in
any other industry. When profitability is good, insurers actively compete by lowering
rates and expanding coverage in order to increase premium and investment income or
retain market share. But, when times are bad, the antitrust exemption allows insurers to
collectively raise premiums without fear of prosecution. Legal challenges involving
alleged price-fixing by insurers are typically dismissed by the courts because of the
industry’s special exemption from the antitrust laws.
Supporters of McCarran-Ferguson reform point to congressional testimony relative
to the “liability crisis” of the mid-1980s as evidence that the industry’s antitrust
exemption has allowed insurers to engage in collusion with respect to rate-making.8 In

1991 congressional testimony regarding the liability crisis of the mid-1980s, the then-

assistant attorney general of New York indicated that insurers had engaged in a wide
range of price-fixing schemes, and concluded that “the sharp swings within the industry
as a whole were not the result of mere coincidence, but rather evidence of a lockstep
mentality and an absence of real competition.” Furthermore, he stated “although there
were thousands of insurers in the market, the direction of the market was set by only a few
companies...and the smaller insurers followed the price increases and market withdrawals
of the largest competitors.” Some Members of Congress have noted that the median
market share of the top two medical malpractice writers within a state totals 59.2%, on
average, and inferred the continuing relevance of the 1991 statement.9 They support a
modification of the Act to ensure that insurers do not engage in price-fixing, bid-rigging,
or market allocation.
Arguments Against Modifying the Act
Insurance industry representatives and most state regulators oppose modification of
the Act, arguing that the factors that precipitated the malpractice insurance crisis — i.e.,
litigation, the economy, insurers, and physicians — have nothing to do with the industry’s
limited exemption from federal antitrust law, and that modifying the Act will not lead to
reductions in the price of insurance or an expansion of coverage. If anything, they argue,
modifying the Act would only create uncertainty for insurers and regulators about what
types of joint activities are permissible. It could, for example, threaten insurers’ ability
to pool historical loss cost data, which is necessary to actuarially sound pricing. In
addition, they contend disagreements over what price-fixing is and when it is illegal could
lead to massive litigation. Regulators note that medical malpractice insurance rates are
subject to state prohibitions on excessive, inadequate, or unfairly discriminatory rates.
The National Association of Insurance Commissioners (NAIC) has maintained that there
is no evidence that indicate medical malpractice insurers have engaged or are engaging
in price fixing, bid rigging, or market allocation.”

8 Statement of George W. Sampson, Assistance Attorney General of the State of New York on
behalf of Robert Abrams, Attorney General of New York, before the U.S. House of
Representatives, Committee on the Judiciary, Subcommittee on Economics and Commercial Law,
“H.R. 9: A Bill to Modify the Antitrust Exemption Applicable to the Business of Insurance,”ndst

102 Congress, 1 sess., June 13, 1991, (Washington: GPO, 1991), p. 20.

9 Blair E. Sanford, “Medical Malpractice: Pain Before the Gain,” National Underwriter: Property
& Casualty/Risk & Benefits Management Edition, May 6, 2002, p. 22.