In the ongoing health care overhaul drama, the Obama administration and the health insurance industry have gone from uneasy allies to bitter adversaries.

One result is that health insurers stand to lose a privilege their industry has enjoyed for the past 64 years: They, like Major League Baseball, have been exempt from federal antitrust laws. Congressional Democrats are now pushing to strip the health insurance industry of that exemption.

Things turned ugly earlier this month after the health insurance industry rejected the health care makeover it once supported. President Obama dedicated his most recent weekly address almost entirely to blasting those insurers; he accused them of skimming big profits off ever-escalating premiums.

“They’re earning these profits and bonuses while enjoying a privileged exception from our antitrust laws, a matter that Congress is rightfully reviewing,” the president said.

It was Congress, after all, that in 1945 overrode a Supreme Court ruling that the insurance industry was indeed part of interstate commerce and thus subject to federal antitrust laws. Lawmakers that year passed the McCarran-Ferguson Act; the law has ever since shielded insurance firms from federal prosecution for price fixing, bid rigging and carving out protected markets.

This week, Senate Judiciary Committee Chairman Patrick Leahy declared the time had come to do away with that protection.

“The antitrust laws exist to protect consumers, but also to promote competition,” he said. “You remove the antitrust laws, you don’t protect consumers, and you don’t promote competition.”

‘Allow competition to have a greater role’

Leahy held a hearing last week on ending the antitrust exemption for health and medical malpractice insurers. Christine Varney, who heads the Justice Department’s antitrust division, testified for the Obama administration.

“Repealing the McCarran-Ferguson Act would allow competition to have a greater role in reforming health and medical malpractice insurance markets than would otherwise be the case,” she said.

Varney’s assertion was roundly rejected by University of Arkansas business professor Lawrence Powell, who testified on behalf of the medical malpractice insurance industry.

“The best possible outcome from repealing McCarran is continuation of the status quo,” he said. “However, it is also likely that repealing McCarran would have negative consequences for consumers, by decreasing competition and accuracy in insurance pricing.”

Rhode Island Democrat Sheldon Whitehouse pointed out that the professor was relying on outdated information.

“You cite for the proposition that insurance markets are highly competitive an article by Paul Joskow. Do I have the date of that article correct, it’s 1973?” he asked Powell. “I believe so,” came the answer.

Whitehouse noted that in 39 states, two health insurers control at least half the market, while in nine states, one insurer controls at least three-quarters of the market.

Possible backfire?

Still, some health economists question whether breaking up big insurance companies with federal antitrust laws will help consumers.

“What you may find is that it’s the opposite – that you break them up and they can’t bargain down prices and, therefore, while they’re competing at the margin, they’re all competing at a higher level of premium than you had before,” says Austin Frakt of Boston University’s School of Public Health. “That’s certainly possible.”

It’s the states that regulate the insurance industry. Still, almost all the nation’s state attorneys general want to repeal the federal antitrust exemption.

“This gives us another tool in our arsenal to combat higher rates – proposed and accepted by companies that have a stranglehold in the market – in states like Maine, where basically one company controls the market,” says Maine Attorney General Janet Mills.

The push to repeal the antitrust exemption has gained momentum. This week, three Republicans joined Democrats to vote such a bill out of the House Judiciary Committee. A similar measure is planned as an amendment to the Senate’s health care overhaul.