Correctly Political: Wealth Care, a Historical Note

~by jfxgillis

Okay. So here’s the thing about the health care industry in the USA, especially the insurance sector. It stinks. Everyone knows it. Everyone feels it. We pay more for what we get, and we get less for what we pay for, than virtually any other developed country by any systemic measure. Even people with gold-plated policies they have by virtue of highly remunerative employment know those policies are overpriced even as they benefit from them.

The old World Health Organization rankings rated us 37th in the world. Granted, there’s honest dispute about that, but still, massaging the figures in our favor doesn’t get you that far up the rankings. We still stink. And the Commonwealth Fund’s ranking of 19 developed countries puts us dead last. And I do mean dead.

I believe in USA Number One!! and all, but I could live with it if we were say, fourth or ninth, or maybe even just outside the top ten, but  being number one only in per capita health care expenditures while last in health care outcomes isn’t just atrocious. It’s irrational. It’s a mystery. The odd thing is, the resolution to the puzzle doesn’t seem to be amenable to ideological explanation. On the one hand, we spend more on taxes on provision of health care through the public sector than many of the nominally more socialist countries ahead of us on the Commonwealth Fund chart. On the other hand, our health care is more dominated by the private sector than any other country on the list. Both Left and Right can agree that there’s something weird about being last in outcomes and first in expenditures.

I was watching Bill Moyers interview conservative David Frum last week when he said something I agreed with. That was something of a shock to my system, and I assumed I had simply misheard him, so I hit rewind on my Tivo and played it again. Whoa there. I was right—he had actually, probably for the first time, said something I agreed with. Here it is:

Why is the American health system so crazy? Why do Americans spend so much more than anybody else for outcomes that aren’t a lot better? Well, we talk about the health market. We don’t have a health market. We have 50 state markets.

And although there are many, many insurers, in many states there are only one or two who are active. So what we need to do, first of all, is create a national market. I would like to see the responsibility for regulating health care removed from the states entirely and put in the hands of the federal government.

He went on to justify his argument in terms absolutely consistent with the business- and Capital-oriented conservatism he’s always espoused, based on the boringly ordinary model of economies of scale:

[T]hink about it. If we had 50 different mileage standards in this country, if we had 50 different sets of rules to describe what could and couldn’t go into toothpaste, we would just collapse the national market. The reason almost every product is cheaper and better and more convenient in the United States than it is in other places is because of the size of the national market. No surprise that when the national market is cut up for one product, that is the product that is the most troublesome.

But why is that? If the conservative Frum could offer an argument in favor of Federal regulation that the liberal Moyer could embrace, and if the forces  they each favor, economic efficiency and social justice, will have been operating for a century or so, how did we end up with a fragmented system of insurance riddled by conflict, injustice and inefficiency? Turns out, there’s a good reason for that.

Whenever there’s some aspect of American government that’s blindingly stupid, disturbing amoral or simply downright crazy, you can bet there’s some stupidass Supreme Court dung piled in a dark corner somewhere stinking up the joint. In this instance, it goes back to 1869, to a case called Paul v. Virginia, in which the ability of states to interfere in the underwriting of insurance across state lines was challenged, as when a company in one state insures a property in another. Here’s what the Court held:

The defect of the argument lies in the character of their business. Issuing a policy of insurance is not a transaction of commerce. The policies are simple contracts of indemnity against loss by fire, entered into between the corporations and the assured, for a consideration paid by the latter. These contracts are not articles of commerce in any proper meaning of the word. They are not subjects of trade and barter offered in the market as something having an existence and value independent of the parties to them. They are not commodities to be shipped or forwarded from one State to another, and then put up for sale. They are like other personal contracts between parties which are completed by their signature and the transfer of the consideration. Such contracts are not interstate transactions, though the parties may be domiciled in different States. The policies do not take effect — are not executed contracts — until delivered by the agent in Virginia. They are, then, local transactions, and are governed by the local law. They do not constitute a part of the commerce between the States any more than a contract for the purchase and sale of goods in Virginia by a citizen of New York whilst in Virginia would constitute a portion of such commerce.

Is that not the stupidest thing the Supreme Court has ever said? Well, okay, Bush v. Gore was stupider, but other than that, is that not the stupidest thing the Supreme Court ever said? Well, okay, Dred Scott was stupider than both, but … well, okay, is that not one of the many stupidest things the Supreme Court has ever said?

But the Court’s holding was so unequivocal that it was unassailable for decades afterward. The irony, if I may indulge a counterfactual, is that the case was heard so early in the Industrial Age that corporations had not yet fully consolidated their influence and dominance of the political and judicial branches; had the case been heard even ten years later, the insurance companies would most certainly have won. But they lost, and so had to construct their industry around it, quite to the detriment of, well, interstate commerce.

By the end of the 19th century, as “Your Correspondent” reminds the New York Times in the letter reproduced above, the patchwork of regulation was already so unworkable that the large insurance companies, with the full support of the 26th President and his Cabinet, were desperate for Congressional intervention, even against the express ruling of the Supreme Court. President Theodore Roosevelt in his 1904 State of the Union Message, declared:

The business of insurance vitally affects the great mass of the people of the United States and is national and not local in its application. It involves a multitude of transactions among the people of the different States and between American companies and foreign governments. I urge that the Congress carefully consider whether the power of the Bureau of Corporations can not constitutionally be extended to cover interstate transactions in insurance.

But nothing was ever done and the Supreme Court’s precedent held until 1944 when the Court finally overturned Paul in United States v. South-Eastern Underwriters. That case has two interesting aspects. First, the ultimate assertion of Federal authority arose because of a conviction of the company under the Sherman Anti-Trust Act for engaging in monopolistic practices, rather nasty ones at that, including blacklisting, boycotts, and intimidation, according to the Supreme Court’s statements of fact:

The member companies of SEUA controlled 90 percent of the fire insurance and “allied lines” sold by stock fire insurance companies in the six states [Alabama, Florida, Georgia, North Carolina, South Carolina, and Virginia] where the conspiracies were consummated. Both conspiracies consisted of a continuing agreement and concert of action effectuated through SEUA. The conspirators not only fixed premium rates and agents’ commissions, but employed boycotts together with other types of coercion and intimidation to force nonmember insurance companies into the conspiracies, and to compel persons who needed insurance to buy only from SEUA members on SEUA terms. Companies not members of SEUA were cut off from the opportunity to reinsure their risks, and their services and facilities were disparaged; independent sales agencies who defiantly represented non-SEUA companies were punished by a withdrawal of the right to represent the members of SEUA, and persons needing insurance who purchased from non-SEUA companies were threatened with boycotts and withdrawal of all patronage. The two conspiracies were effectively policed by inspection and rating bureaus in five of the six states, together with local boards of insurance agents in certain cities of all six states.

One interesting thing about that which is quite relevant to the current debate over the health insurance reform is that the company defendant here was exploiting a high degree of market concentration to impose monopoly prices. And the current health care insurance market, according to a report released earlier this year Health Care for America NOW, is highly concentrated. No one health insurance company dominates the national market, but don’t let that fool you–remember, as Frum pointed out, we don’t have a national market. Of the 50 state markets,94% are now “highly concentrated.”

What South-Eastern was doing back in 1944 was nothing less than a protection racket perpetrated across state lines–and perfectly legal until then because “insurance is not a transaction of commerce.” Well, the obvious stupidity and accumulated inefficiencies of that doctrine just got to be too much for an ordinary human, even a Supreme Court Justice, to bear (though we’ll see in a minute what that says about Congress) and the Court simply tossed Paul:

Our basic responsibility in interpreting the Commerce Clause is to make certain that the power to govern intercourse among the states remains where the Constitution placed it. That power, as held by this Court from the beginning, is vested in the Congress, available to be exercised for the national welfare as Congress shall deem necessary. No commercial enterprise of any kind which conducts its activities across state lines has been held to be wholly beyond the regulatory power of Congress under the Commerce Clause. We cannot make an exception of the business of insurance.

Whew. Okay. Stupidity overthrown, progress now possible, right? Wrong. By then the insurance companies had figured out the advantages of state-level regulation (hint: do what South-Eastern did but just don’t push it so far) and the state insurance bureaucracies meanwhile had become so entrenched and entranced (by easy tax revenues if they were honest, kickbacks and more if they were dishonest) that together they raised a holy ruckus and Congress the next year passed the McCarran-Ferguson Act, which effectively returned the status quo that had prevailed for the seventy years prior. And why not? The companies make money on the pass line, the state commissions make money on the come line, and the rest of us fools keep the crap table solvent by trying to make our point. Now that’s what I call Wealth Care Insurance.

Basically, states which were regulating could keep regulating as long as they kept regulating, except for boycott, coercion and intimidation. So we’re back to Stupid. And you want to know what’s really stupid? Congress still has the authority, reserved in the McCarran Act, to impose Federal regulation on the insurance market whenever and however they want. All they have to do is write the law specifically to apply to the “business of insurance.” All they have to do is, well, Act.

Health care stupidity of course entails more than simply fractured markets, such as the accident of employer-based provision, and some of our problems aren’t because of stupidity at all but rather advances in knowledge and technology that turn out to be expensive.

But that’s the stupid history of how the stupid Supreme Court and a stupid Congress wound up saddling us with such a stupid system for regulating the insurance market.