Speed read

The Supreme Court's decision to uphold the Federal Government's authority to charge persons who elected not to purchase health insurance also contained a ruling that might cause it to take a more active role in the regulation of the business of insurance. Essentially, the Court prohibited the Federal Government from coercing the States to regulate in a certain manner. It may be that the Federal Government will see that it needs to take a direct role to create uniform solutions and that it may be able to do so in a quicker manner than can be accomplished by the States.  


There has been much commentary on the constitutional issues decided in the Supreme Court's recent case on health care insurance, National Federation Of Independent Business v. Sebelius. A very divided court held that the Patient Protection and Affordable Care Act (ACA) was constitutional – not under the otherwise expansive umbrella of the Commerce Clause, but rather under Congress's more limited power pursuant to its taxing authority. While significant, we believe it is also important to recognize that the Court struck down provisions in the ACA that provided that an individual State that failed to alter its regulation of its Medicaid program to comply with the ACA could lose its existing Medicaid funding. That aspect of the Court's decision held that the Spending Clause was intended to create cooperative Federal/State programs, and that the threat of withdrawing established funding crossed the line from cooperation to coercion.

This is significant because the regulation of the business of insurance has historically been left to the States. Seventy years ago in US v South-Eastern Underwriters Association, the Supreme Court addressed as a question of first impression whether the business of insurance was subject to Federal regulation due to the Commerce Clause. At that time, another divided court decided that the business of insurance was interstate commerce and subject to the Commerce Clause, notwithstanding the predominantly local impact of issued policies. The majority stated that the power granted to Congress under the Commerce Clause is a “positive power” entitling Congress “to govern affairs which the individual states, with their limited territorial jurisdictions, are not fully capable of governing” and to be used “for the national welfare as Congress shall deem necessary”.

Notwithstanding the clarification of its insurance regulatory authority, Congress had generally declined to exercise it. Immediately following the US v South-Eastern decision, Congress passed the McCarran Ferguson Act. That Act effectively left to the States the regulation of the business of insurance except when Congress passed laws that specifically addressed insurance issues. With limited exceptions, Congress did not enact such type of laws despite the occasional political push for increased Federal regulation of insurance.

In 2010, however, Congress signaled an increased interest in the regulation of insurance. A newly-elected president had convinced Congress that it could effectively address the economic concerns arising out of health care coverage, and the ACA was promulgated in the beginning of the year. Later that year, Congress passed the Dodd-Frank Act, which included provisions pertaining to reinsurance and surplus lines insurance, in response to regulatory concerns relating to the economic collapse in 2008.

With the current Supreme Court’s instruction that the Federal Government cannot coerce the States to regulate as the Federal Government sees fit, we believe that Congress may become more inclined to regulate the business of insurance directly. Provided that it abides the McCarran Ferguson Act by explicitly extending the reach of proposed legislation to insurance matters, it can do so. Moreover, the infrastructure has begun to take shape because the Dodd-Frank Act created the Federal Insurance Office (FIO) within the Department of the Treasury. While the FIO is not authorized currently to regulate, that could be amended in the future. Indeed, on the FIO's current task list is drafting recommendations which lines of insurance business would benefit from Federal regulation.

The individual States’ departments of insurance and the National Association of Insurance Commissioners have always worked hard to resist the Federal Government’s efforts to overtake historical State insurance regulation. Nevertheless, many may see the Federal Government as the better vehicle to resolve wide reaching problems in the insurance market. Indeed, the Supreme Court's recent decision may also help convince Congress that it has to take a more direct role. So encouraged, Congress might take the view it can more quickly deliver a uniform solution to an insurance issue of national scope because it does not have to navigate the extended process for creating NAIC model laws and then having to enact such laws in the individual States. Areas that might benefit from Federal regulation include achieving conformity with international accounting standards, corporate governance, and uniform licensing.