State-created insurance residual market mechanisms are typically designed to address flaws in markets in which a significant number of purchasers have difficulty obtaining affordable insurance; such programs, however, have often led to crises in such markets, and occasionally to economic catastrophe.

(1) In this Paper, particular attention will be paid to New York's Medical Malpractice Insurance Plan (MMIP or Plan), which presents the latest warning that there will be widespread market failures unless greater thought is given to the dynamics of such programs. (2) If the best teacher of the right way is the wrong way, then the MMIP is an excellent source of instruction. Laden with features that have resulted in hundreds of millions of dollars in losses, the MMIP has been a financial debacle that invites the attention of the legal and economic communities. Although the MMIP is susceptible to attack on several levels, (3) the MMIP's shortcomings are particularly obvious when analyzed through the prism of antitrust law principles, specifically those used in construing the Sherman Act (the Act). (4) To be certain, residual market programs, including the MMIP, may be largely exempt from the antitrust laws, as two recent federal circuit court decisions have noted; (5) yet, the application of the Act's legal and economic tests to the MMIP's operations provides learning opportunities, and suggests the need for reform. For a greater appreciation of the subject matter, this Article will: (1) consider the nature of insurance as a commodity, (2) discuss residual market mechanisms in general and the MMIP program in particular, (3) evaluate the MMIP on the basis of economic and legal tests developed in applying the Act, (4) address relevant exemptions that place aspects of residual market programs beyond the reach of the antitrust laws, and (5) suggest ways that the MMIP and similar programs can be improved through remedial legislation.

I. NATURE OF INSURANCE AS A COMMODITY

A. Markets for Goods in General

Insurance may be viewed as a commodity, and as with any good, the market for its purchase and sale can be visualized in terms of classic supply and demand curves. Figures 1 and 2 are graphs representing the purchase and sale of insurance in the voluntary market from one individual insurer, and from all insurers in the voluntary market, respectively. (6) In each graph, the vertical axis shows the premium, which in the insurance market is the equivalent of price, charged per $1,000 of insurance coverage written by the insurer(s). (7) Premiums for each individual insured, in turn, are calculated based on formulas known as rates, which are often subject to governmental approval. The horizontal axis represents the total amount of insurance coverage written by the insurer(s) (or, viewed alternately, purchased by insureds), the equivalent of output in the insurance market. (8) The demand curve (DD in Figure 1 and [D.sub.I][D.sub.I] in Figure 2) represents "the quantity of [the] good that [consumers will] purchase at each price." (9) The supply curve (SS in Figure 1 and [S.sub.I][S.sub.I] in Figure 2) shows "the quantity of [the] good that suppliers ... [will] sell at each price." (10)

There are two categories of production costs: fixed costs (FC) and variable costs (VC). An illustration of the former, which is unrelated to the quantity produced, would be the rent for the firm's premises. (11) The latter varies with the firm's "level of output." (12) An example of VC is a firm's payroll. (13)

Marginal cost (MC) is the expense of producing one additional unit of the product offered for sale. (14) In Figure 1, the marginal cost curve (MC curve) represents the MC at every level of output. (15) Since FC does not change with output, MC consists entirely of VC. At low levels of output the MC curve is downward-sloping (i.e., falling from left to right). (16) This reflects the fact that as a firm initially starts producing, increases in the amount of one input, such as capital or labor, while holding the others constant, will lead to proportionately greater increases in output. (17) This phenomenon is called increasing marginal returns. (18) At higher levels of output, this curve becomes upward-sloping. (19) This is because as output increases beyond a certain level, increases in the amount of any one input, while holding the others constant, will lead to proportionately smaller increases in output. (20) This circumstance is called diminishing marginal returns. (21) Because increasing marginal returns exist at low levels of production, and decreasing marginal returns prevail at high levels, the MC curve will have a U-like shape. (22) This has been empirically shown to be true of the insurance industry specifically. (23)

When prices are set by competitive market forces, the firm's supply curve (SS) will be identical to the upward-sloping portion of the firm's MC curve. (24) This identity results from the fact that as long as the cost of each additional unit of a good produced is less than the price at which the good is sold, the seller will continue to produce. (25)

The average cost (AC) curve (AC curve) represents the average cost of production among all the units a given firm produces, or put another way, the "total cost divided by the number of units produced." (26) Its U-like shape corresponds to the U-like shape of the MC curves. Because AC is merely the sum of the FC and the average of the MC of all of the units produced, AC will fall whenever MC is below it, and rise whenever MC lies above it. (27) Consequently, MC will intersect AC at AC's lowest point. (28)

To arrive at the market-wide figures for cost in Figure 2, one adds up each firm's output as it corresponds to a given level of that firm's cost (be it AC or MC). (29) The sum of these outputs is the market's output, as a whole, associated with that cost. The market supply curve is derived by adding together each firm's supply curves in the same manner. (30) As each individual firm's cost and supply curves have similar shapes (i.e., U-like MC, AC, and SS), so will the corresponding market curves ([MC.sub.I], [AC.sub.I], and [S.sub.I][S.sub.I]).

In Figure 2, the demand curve ([D.sub.I][D.sub.I]) represents the aggregate amount of insurance that will be purchased from all insurers at any given price level. (31) For most products at the market level, the demand curve is downward-sloping, i.e., as a consumer buys more units of a good, he is not willing to pay as much on average for each individual unit thereof. (32) This reflects that the more units of a given product a consumer purchases, the less enjoyment, or utility, the consumer will derive from each additional unit. (33) As he would receive less utility from another unit, he is not willing to pay as much for it as he paid for its predecessors. (34) Because the market demand curve is simply the sum of all consumers' individual demand curves, and each consumer's demand curve is downward-sloping, the market demand curve is downward-sloping as well. (35) In Figure 1, however, which represents an individual insurer's market, the demand curve is horizontal. (36) This reflects the assumption that one individual producer (here, insurer) is too small, in proportion to the aggregate of all producers in the market, to be able to affect market price, regardless of how much such firm produces. (37)

In a free-market setting, the market equilibrium point is where the curves in the market graph intersect, i.e., where the forces of supply and demand coincide. (38) The equilibrium point sets the premium that insureds are willing to pay for and the aggregate coverage that insurers are willing to write. (39) In Figure 2, this equilibrium, [E.sub.I], is the point where supply meets demand, i.e., consumers are willing to pay for the same amount of output as suppliers are willing to sell. (40) At [E.sub.I], the price, [P.sub.I], is $2.50 (per $1,000 of insurance coverage), and output, [Q.sub.I], is $250 billion (of aggregate insurance coverage). (41)

As long as the AC curve remains below the premium charged at the equilibrium, there will be a profit on the insurance written. (42) In Figure 2, the AC curve intersects the equilibrium output level at point B, which is below [E.sub.I]. (43) The area [AE.sub.I]BC shows the aggregate profits realized by all insurers, i.e., price ($2.50) minus average cost ($2.25) equals profit ($0.25 per $1,000 in coverage purchased); $0.25 profit multiplied by 0.001 (per $1,000) multiplied by $250 billion (aggregate of insurance coverage purchased) equals $62.5 million in profit for the industry. (44)

As described above, the firm in Figure 1 is a price taker that cannot affect the market price arrived at in Figure 2, so the price charged in Figure 1 is the same as that in Figure 2, i.e., $2.50 per $1,000 in insurance written. (45) To maximize its profits, the firm will produce up to the point at which the marginal cost of the last unit produced equals the price received from the sale of the last unit produced. (46) This is the level of output at which the MC curve intersects the DD curve, at point E, which is $250 million in Figure 1. (47) The individual firm's profit is the area of the rectangle AEBC in Figure 1. (48)

B. Distinguishing Characteristics of Insurance as a Good

Insurance policies are not widgets, i.e., they are not simple articles as to which value is easily determinable. The value of liability insurance is the insurer's contractual obligation to satisfy losses within the limits of the policy, here assumed to be claims-made. (49) Over its fixed term, an insurance policy covering liability claims is, from the insured's perspective, a wasting asset that over time declines in value. A claims-made liability policy has intrinsic worth only as a source of protection against risk during the time that the policy is in force. Any premium paid in advance of the coverage period is earned by the insurer with the passage of time over the life of the policy, and in the defense and indemnification of covered claims.

The cost of issuing policies is comprised of many components, some readily calculable, others quite difficult to assess. With regard to VC, insurers vary significantly from other producers. This is because insurers, unlike other producers, incur significant costs related to their products even after their sale. Insurers' VC includes claims resolution costs, which are the insurers' cost of honoring the policy. The seller of a typical commodity, the cost of which is incurred prior to sale, is relieved of liability upon transfer of title and, therefore, is indifferent to whom the product is sold. (50)

With insurance, the precise opposite occurs. Claims resolution costs arise when events trigger the insurer's obligation to defend, and possibly indemnify, the insured. Unlike other commodities, the cost of this "good" is not incurred prior to "sale," but only after the policy is issued. (51) Insurers are, therefore, very concerned about the identity of the persons to whom they issue their product, and use underwriting guidelines to screen applicants based on the potential risk posed by insuring them. Insureds that are high risks (52) will increase VC and AC and thereby reduce, or eliminate, insurer profitability (53) For this reason, under ordinary market conditions, insurers will charge high risks greater premiums for policies which provide the same coverage as those issued to lower risks.

In addition, the uncertainties of claims trends, that is, the frequency with which claims occur and their severity, make estimation of future claims resolution costs quite difficult. Consequently, insurers need to be able to collect somewhat more in premiums--from both high risks and low risks--than would be necessary to cover expected losses. This "cushion" ensures that they will be able to cover losses that exceed those expected. The fewer insureds an insurer has, the greater the chance is that cumulative losses among those insureds will exceed the average. This is due to the law of large numbers: the more insureds, the greater likelihood that any upward deviations from average losses incurred by one insured will be balanced out by below-average losses of another insured. Consequently, to cover this greater possibility of catastrophic losses, small insurers may seek a greater cushion, which is reflected in a higher premium than is charged by large insurers. (54) As a general proposition, this makes competing in terms of price difficult for small insurers. Moreover, if small insurers cannot charge higher premiums to create an appropriate cushion, they are placed at greater risk of being driven out of business by greater-than-average losses.

Also impacting price and output is government activity, which includes, for example, enacting laws making insurance coverage compulsory with respect to certain types of risks (which is reflected by the demand curve being fixed at a certain quantity level). Government activity also includes regulating insurance rates. This sets market price at a specific price and output is then where the supply curve intersects that price instead of where it intersects the demand curve. Governments also mandate that carriers in the voluntary market assume responsibility for insuring high risks that they would otherwise decline to cover, i.e., the risks which represent the residual market (which generally shifts insurers' MC and supply curves upward). (55) As will be discussed, New York State's Superintendent of Insurance ("Superintendent"), in essence, sets rates for determining premiums, so the supply curve will not be set by market forces. (56) As a consequence of practical considerations, the demand curve will not be set by market forces, either. (57)

II. NATURE OF INSURANCE RESIDUAL MARKET MECHANISMS AND OF THE MMIP

A. Insurance Residual Market Mechanisms

Currently, there are scores of insurance residual market mechanisms operating throughout the United States. Many states require persons or entities to obtain liability insurance in order to engage in certain activities. For example, as of 1997, forty-five states require that all licensed motor vehicles be covered by minimum insurance, to ameliorate the hardship of accident victims who might otherwise be unable to collect judgments for injuries sustained in car accidents. (58) The compulsory nature of automobile insurance makes it a prerequisite for the often-necessary activity of driving a motor vehicle. Similarly, most states require employers to purchase workers' compensation insurance or to qualify as an approved self-insurer. (59) Other activities, such as the practice of medicine, may not have compulsory insurance requirements, but present such substantial risks of liability that, for all practical purposes, those exposed to potential loss will obtain insurance before engaging in such activities. (60)

Unless they receive premiums commensurate with the greater potential liability, however, insurers are not willing to cover those would-be insureds who are regarded as unfavorable risks. Where insurance is a de jure or a de facto requirement of doing business, those high risk potential insureds that cannot obtain coverage may be forced to withdraw from the market. (61) Moreover, those that might otherwise come into the subject jurisdiction to engage in the insured activity may not do so without the availability of affordable insurance.

To deal with this dilemma, states have established insurance residual market mechanisms in certain fields to guarantee the availability of insurance to those unable to obtain coverage in the voluntary market at "affordable" prices. (62) Such mechanisms may take the form of assigned-risk plans. These plans require licensed carriers to issue policies to those risks directly in proportion to the amount of business in the state which each such insurer writes voluntarily. Another common form of residual market mechanism is the joint underwriting association (JUA), in which responsibility for high risks is "pooled." (63) In the context of a JUA, either "a limited number of [carriers] act as servicing carriers" in writing insurance for high risks, or policies are issued by an entity sustained by the plan. (64) In both instances, the JUA must write insurance for all insurance consumers unable to obtain insurance in the voluntary market, (65) and all licensed carriers writing a certain class of insurance (66) are JUA members, and as such share in the profits or losses from such underwriting in proportion to their voluntary business. (67) The JUA establishes underwriting guidelines for writing assigned-risk coverage within the parameters set by the state. (68) In contrast to an assigned-risk program, the JUA pools all high risks and spreads the aggregate risk among all of its members. By joining a JUA, insurers can therefore avoid the possibility that the risks they would otherwise be directly assigned would generate higher losses than would be expected from the statistical average loss of the residual market.

Although they vary considerably in the details surrounding their structures and operations, residual market mechanisms share certain basic characteristics. They are typically instituted in situations where a lack of coverage of high-risk insureds presents a potential public problem. The most common of these residual market mechanisms concerns automobile insurance. Forty-three U.S. jurisdictions (69) allocate these risks through assigned-risk programs. (70) A handful of states have instead established JUAs. (71)

In addition to automobile coverage, residual market mechanisms for workers' compensation insurance, which covers employees for on-the-job injuries, have been established in all states. (72) Where such coverage is compulsory, employers are faced with a dilemma when workers' compensation insurers refuse to write policies at rates that such employers can afford. Workers' compensation residual market mechanisms offer such employers a means of obtaining the required workers' compensation insurance policies.

Residual market mechanisms have also been established for medical malpractice insurance. (73) High-risk healthcare providers are afforded the opportunity to obtain insurance when licensed insurers are given the Hobson's choice, discussed above, of either writing assigned risks directly, or covering high risks through a JUA in which admitted carriers share responsibility for income and losses in proportion to the volume of business they write in the voluntary market. (74) For simplicity's sake, the remainder of this Article will generally refer to residual market mechanisms only in the context of JUAs, although assigned-risk programs are an alternative form of those mechanisms.

All JUAs have benefited and burdened classes. The benefited class includes those who receive some direct financial advantage through the mechanism, that is, those who are better off than if the mechanism did not exist. By contrast, those who are worse off than they would be in the mechanism's absence constitute the burdened class. Since a legal or practical requirement of obtaining insurance is not an aspect of the JUA itself--though it very well might be the inspiration for the JUA's creation--any comparison of JUA versus non-JUA situations must assume that the requirement exists either in both circumstances or in neither.

Those receiving insurance through the JUA, which enables them to engage in their desired activity, are direct beneficiaries. (75) There are also indirect beneficiaries. For example, in the case of automobile residual market mechanisms, some indirect beneficiaries would be accident victims, a broad group that can be characterized as the general public. In the absence of the JUA, individual members of this group might otherwise be unable to collect money judgments compensating them for injuries caused by car accidents involving uninsured motorists. Notably, these beneficiaries do not directly pay for any part of the cost of the programs.

Under the right circumstances, JUA members themselves may also be part of the benefited class. (76) Rate regulation sets a limit on the premium that can be charged in the voluntary market. An insurer may be unwilling to insure a particular insurance consumer at that premium level. It may be willing to insure at a higher premium which the insurance consumer is actually willing to pay, and which makes the sale of such insurance profitable to the insurer. Because rates are regulated, though, the insurer cannot sell insurance at such a premium, and therefore the insurance consumer cannot obtain insurance in the voluntary market. When a JUA exists and is able to charge higher premiums than the voluntary market, insurers (through the JUA) are theoretically able to write insurance profitably to such insurance consumers, whereas they could not have done so otherwise. (77) Whether the JUA is able to make such a profit depends on how high the regulators set the JUA's rates. If they exceed the cost of providing such insurance, then the JUA is profitable; if not, as in the case of the MMIP, the JUA loses money.

Moreover, other than the rate differential from the voluntary market, JUA members receive a number of advantages over writing insurance directly. First, as mentioned above, the spreading of risk across the entire JUA membership decreases the chance that an individual member will experience losses from the JUA that significantly exceed the average expected loss from such business. This doubly benefits the member, which then will not need to charge a higher premium on its voluntary market policies to account for the possibility of a catastrophic loss from its payments on residual market business.

Second, due to increasing marginal returns from writing insurance business, at least at low levels of output, the JUA may be able to write high-risk business at a lower administrative cost. The JUA, therefore, realizes greater profits (or smaller losses) than individual carriers. Whether this occurs depends on whether the JUA would be producing in the area of increasing or decreasing marginal returns. Also relevant is whether the administrative aspects of the writing of high-risk business are sufficiently different from those of voluntary market business so that a JUA member writing only in the former market will have a marginal cost advantage over an insurer that writes primarily in the latter, but writes more insurance business overall than does the JUA.

Third, a state may offer the JUA financial benefits that are unavailable to individual insurers. For example, JUA profits may be partly or wholly tax-exempt. (78) Alternatively, the state could reimburse a JUA or its members for net losses incurred. These compensating benefits shift to the government (and, by extension, the taxpaying general public) a portion of the burden of the JUA which would otherwise be borne by the JUA's members. Even if these advantages over voluntary-market insurance writing exist, whether a JUA member receives a net benefit from such membership depends in part on the JUA rates. If such rates are grossly inadequate, the advantages discussed in this paragraph will be insufficient to place the JUA members in a better position than they would be in were there no JUA. This is true unless the state covers not only JUA losses, but also provides members with some form of compensation for being a JUA member.

All residual market mechanisms also have a burdened class or classes. Certainly, the burdened class includes all those who have direct financial responsibility for any losses incurred in residual markets. If rates for JUA business are set significantly below the rates the individual insurers could obtain by writing the same insurance directly in the voluntary market, then the JUA will receive a lower profit (or greater loss) than if such business was insured in the voluntary market. This burden would be shared proportionately amongst the JUA's members (by virtue of their sharing proportionately in the profits and losses of the JUA), leaving them as members of the burdened class. The degree to which such burden falls upon the JUA's membership is dependent not only on the relative inadequacy of rates, but also upon the size and scope of such membership. Such programs can include all property and casualty companies doing business within the state as constituents. For example, New York's now-dissolved Medical Malpractice Insurance Association (MMIA), the immediate predecessor to the MMIP, included all licensed property and casualty carriers except assessment cooperative fire insurers. (79) In such a situation, the overall burden is spread widely, and, thus, the burden on each individual insurer is likely to be small. More often, JUA membership is confined to those writing the same type of insurance. For instance, the MMIP is restricted to medical malpractice insurance carriers. (80) The smaller the size of the membership, the greater the burden is on each individual insurer.

Additionally, the public itself may be burdened by the residual market program if the costs of the program are passed along to them. This might happen if, as discussed earlier, JUA profits are tax-exempt; in that case, the government passes the cost along to the public. (81) In the case of workers' compensation insurance, employers could shift part of the cost of the program to their customers by raising prices. (82) Similarly, if members of a medical malpractice insurance JUA attempted to cover losses from the JUA by increasing their own insureds' premiums, and those insureds (healthcare providers) then tried to make up the difference by increasing the fees they charge patients for services, the public (those patients) would be burdened.

The degree of governmental involvement in insurance markets varies significantly. In many cases, the state adjusts supply and/or demand curves to produce conditions under which coverage is compulsory, but can be afforded. Often, the state enacts legislation compelling insureds to purchase minimum coverage that, in essence, artificially establishes demand at that minimal level. At the same time, the state artificially creates supply through legislation creating the JUA, thus compelling insurers to fund the writing of coverage at a set premium. (83)

Figure 3 shows these forces in the form of a graph of a residual market; the only consumers (insureds) served by this market are high-risk insureds that could not obtain coverage in the voluntary market. (84) Suppliers (insurers) are compelled by law to participate in the JUA that issues policies to high-risk insureds. When either the law or practical considerations compel coverage, (85) insurance must be purchased regardless of the price. (86) The minimum insurance purchased per insured, irrespective of price, aggregates to a vertical demand curve ([D.sub.J][D.sub.J]) (87)--here, hypothetically at $400 billion in aggregate coverage. (88) The supply curve ([S.sub.J][S.sub.J]) is a horizontal line that reflects that insurers must write all assigned risks (insureds) who pay the regulator-set premium--here, hypothetically $4.50 per $1,000 in coverage. (89) The intersection of these two curves is point [E.sub.J]. (90) Note that in the absence of this state-created market, given the industry's market supply curve of [S.sub.I][S.sub.I], insurers would offer a premium of $6.50 per $1,000 in coverage (see Point K) when an aggregate of $400 billion is purchased. (91) Given the industry demand curve ([D.sub.I][D.sub.I]), however, in a free market, insureds would voluntarily pay only $1.50 per $1,000 of insurance when $400 billion in aggregate insurance coverage is written (Point M). (92)

The $4.50 premium shown in the graph may have been set in any of a number of ways. (93) In some cases, an initial rate is proposed by insurers and approved by regulators, with any increases subject to prior approval. In other instances, rates may be set by the insurer in the first instance, but may subsequently be challenged by the Superintendent or Commissioner of Insurance if found excessive or discriminatory. There are even situations where the actual premiums, as opposed to the rates, are set by regulators. (94) The question of paramount importance is whether the rates are adequate to maintain program self-sufficiency. (95) Where the rates are inadequate, not only is the program threatened, but so are JUA members, that may be responsible for the JUA's losses.

As Figure 3 shows, the premium for residual market risks will be higher than that for the voluntary market because such risks present the potential for greater frequency and severity of claims and, therefore, justify a higher premium. (96) Although such higher premium may still be inadequate and generate losses, it is possible to realize a profit in the residual market. (97) ACL represents a cost curve in which average cost is less than premiums charged at the aggregate quantity of insurance written. (98) Using that AC curve in Figure 3, the AC at point N, the intersection of [AC.sub.L] and [D.sub.J][D.sub.J], is $4.40, and there will be a profit of $0.10 on every $1,000 in coverage written, for a total profit of [RE.sub.j]NW. (99) Assuming that the market return--the profit on favored risks--on policies written by a hypothetical individual carrier in the voluntary market is $0.25 per $1,000 in coverage, the rate of profit for the individual firm on JUA business is forty percent of that for business written in the voluntary market. (100) It must be borne in mind that JUA business is not written directly by the JUA member, however, and that the additional JUA business does not impact any JUA member's voluntary premium level or its AC. (101) Therefore, the profit on the business written through the JUA is pure; once the member receives its share of the JUA's profits, such share is not offset by any costs or any reductions in its own premiums. (102)

On the other hand, if average cost exceeds premiums at the aggregate quantity of insurance written, such as represented by the [AC.sub.H] curve in Figure 3, there is a loss. (103) As shown, average cost is $6.00 at the intersection of the ACH curve and the [D.sub.J][D.sub.J] curve at Point Y, resulting in a $1.50 loss on every $1,000 in insurance coverage written. (104) The rectangular area [TYE.sub.J]R shows the loss written on JUA business, that is, the difference between premiums collected and costs incurred. (105)

As shall be discussed, the imposition of JUA losses can have a substantial adverse competitive effect on not only JUA members, but also upon those insured by JUA members, particularly if such insureds own the JUA member. It is worthwhile to turn now to the MMIP, in which setting such consequences will be reviewed.

B. New York's Medical Malpractice Insurance Markets and the MMIP

1. New York's Medical Malpractice Insurance Markets

Three basic markets compose New York State's medical malpractice insurance industry. In insurance parlance, there are voluntary, residual, and alternative markets. As discussed below, the term "market" has a particular antitrust meaning which may not necessarily coincide with the meaning that it has in the insurance industry. For the time being, we will refer to these three medical malpractice insurance markets, but with the understanding that they may be market groups made up of actual markets or submarkets. Moreover, as will be discussed, a market or submarket may be further distinguished by the activity insured, e.g., performing anesthesiology. (106)

a. The Voluntary Market

The voluntary market, consisting of domestic licensed medical malpractice carriers, is composed of what are sometimes called admitted carriers, including Medical Liability Mutual Insurance Company (MLMIC), which has approximately fifty-seven percent of the state's medical malpractice insurance market, (107) Physicians' Reciprocal Insurers (PRI), and Academic Health Professionals Insurance Association, a Reciprocal Insurer (Academic), who are reciprocal insurers (108) with market shares of roughly twenty-seven and two percent, respectively. (109) Because MLMIC, PRI, and Academic are member-owned, (110) their insureds are also insurers. There is also Hospitals Insurance Company, Inc. (HIC), a private stock insurance company that insures approximately five percent of the market. (111) These are the primary admitted carriers writing medical malpractice insurance for individual physicians and, in the case of MLMIC, PRI, and Academic, dentists in New York State. (112)

Each of New York's licensed medical malpractice carriers has membership qualifications that render its underwriting practices selective. To a significant extent, MLMIC, PRI, and Academic are in competition for the insurance business of physicians and dentists. (113) Although Academic's book of business is primarily limited to healthcare professionals who are in academia and engage in the clinical practice of medicine and dentistry under the auspices of a university medical teaching system, (114) PRI and MLMIC could provide coverage to Academic's insureds. MLMIC and PRI could also provide coverage to each other's insureds. Perforce, the three should be treated as economic rivals.

All of New York's admitted carriers are subject to a high degree of state regulation. Admitted carriers are required to file quarterly and annual financial statements with the Superintendent (115) and are subject to extensive audits by State-retained auditors. (116) Moreover, requests for rate increases are subject to prior approval by the Superintendent. (117) When each carrier submits its annual request for an increase in rates, it files its own loss data with the Superintendent. (118) Pursuant to the power vested in the Superintendent under Chapter 266, Laws of 1986 (the 1986 Law), (119) the Superintendent (120) has usually denied all or a part of every requested rate increase (121) by such carriers. (122) Each admitted carrier must also contribute to a state guaranty fund, which will honor the policies of any admitted carrier that becomes insolvent. (123)

To a large extent, the terms and conditions of policies are also addressed by statute or regulation. (124) This results in policies that are largely homogenous in nature. As a consequence, competition between admitted carriers is less a matter of the product, namely, the policy offered, than of the service provided and of the credibility of the insurer that may be called upon to honor claims against insureds. Competition among admitted carriers is blunted by the fact that ownership of carriers by their own insureds provides an insured with an incentive to remain with its own insurer, and to promote its success. (125)

b. The Residual Market

The second basic market in New York State is the residual market. As of December 31, 2006, this market, embodied in the MMIP, included 894 individuals receiving primary insurance coverage, (126) including 578 physicians, 209 dentists, 80 podiatrists, 5 nurse-anesthetists, and 22 nurse-midwives, as well as 34 professional corporations. (127) Also receiving primary coverage from the MMIP were 340 medical facilities. (128) This market is beset by the same problems that affect the voluntary market, e.g., increasing frequency and severity of claims, the long period over which such claims develop, (129) and great difficulty in predicting the value of claims, (130) only such problems are more pronounced.

Created by statute in 2000, and commencing its operations on July 1 of that year, the MMIP is a medical malpractice insurance residual market program prompted by New York State Insurance Law section 5502(c)(2)(D). This section instructs the Superintendent to create a plan for the equitable distribution to admitted medical malpractice carriers of medical malpractice insurance risks which the voluntary market refuses to cover. After receiving this direction, the Superintendent promulgated Part 430 of Title 11 of New York State's administrative code. The regulation, providing for compulsory membership in the MMIP of all admitted medical malpractice carriers (MMIP members), (131) defines the Plan's responsibilities, (132) and specifies the composition of its Board of Directors. (133) This regulation permits Plan members either to write assigned risks directly (134) or to become part of a JUA that creates a pooling mechanism, subject to the Superintendent's approval. (135) Members of this JUA would share proportionately in its income, costs, expenses, and losses. (136) Because of the benefits of pooling high risks as discussed above, (137) all MMIP members have chosen Scylla over Charybdis in satisfying their state-imposed MMIP obligation by participating in such a JUA (the MMIP Pool). (138)

c. The Alternative Market

The third market for medical malpractice insurance in New York consists of the non-admitted, or the so-called alternative, market. Non-admitted medical malpractice carriers insure approximately 5,000 physicians in New York through trusts created by or affiliated with hospitals through which these physicians practice. As of 1997, there were also twelve risk retention groups (RRGs) insuring healthcare providers in New York. (139) These are member-owned insurers licensed pursuant to the Federal Liability Risk Retention Act, (140) which sets forth certain basic parameters that facilitate the formation and operation of RRGs, and exempts RRGs from much of the regulation of states other than those in which they are chartered. (141) Such exemption bars state agencies from regulating the rates RRGs charge. (142) States may require RRGs to participate in residual market mechanisms, (143) though New York has declined to do so. (144) On the other hand, RRGs are not eligible for the protection of state insolvency guaranty funds. (145) As a consequence, RRGs and New York captives (146) provide an alternative to the admitted market, and can compete with licensed carriers, even though the policies they offer may be less desirable.

2. The MMIP

State involvement in the MMIP is extensive. The Superintendent's broad mandate that insurance through the MMIP is to be offered to virtually all healthcare providers that cannot obtain insurance in the voluntary market is a sweeping directive that dramatically disables MMIP members in setting underwriting guidelines. MMIP policy provisions are also the subject of the insurance law and regulations, and must be approved by the Superintendent. (147) Within the framework established by the Superintendent, the insurer-member's role is largely administrative. As noted above, the power to set rates, which overshadows all others, is exclusively in the Superintendent. (148)

Insurance Law section 5502(c) is silent as to the MMIP's purpose, and the legislative history thereof is not revealing. (149) Three interrelated motives are likely behind this program. The first is to maintain the availability of medical services offered by healthcare providers that, in the absence of affordable insurance, might withdraw from the market. This was the stated purpose of the 1975 formation of the MMIA, which was created at a time when soaring medical malpractice rates and unaffordable insurance posed the threat that healthcare providers might retire early from the practice of medicine, leave the state, or be discouraged from initially establishing practices in New York. (150) The New York State Legislature also cited this as a factor in its passage of medical malpractice reform legislation in 1985 (151) and 1986. (152)

When the MMIA was abolished and replaced by the MMIP in 2000, however, New York's then-Governor Pataki justified it as an adjustment to a marked improvement in the condition of the voluntary market since the passage of the 1975, 1985, and 1986 malpractice reform legislation. (153) Under such circumstances, there was no reason to believe that without the MMIP, there would be significant withdrawals from the market. In 2000, it was entirely possible that the assigned risks of the MMIP would continue serving patients, while obtaining insurance from other sources, albeit at higher premiums. There was also no basis for concluding that, to the extent there were any withdrawals, existing healthcare providers could not service all patients. Currently, such basis is still lacking. Among New York State's 50,000 actively practicing physicians, (154) only 578, or roughly one percent, receive primary insurance coverage from the MMIP. (155) Even in the event of a mass exodus of physicians from the residual market because of higher premiums, it would therefore appear that the voluntary market and the thousands of physicians in the alternative market could address such withdrawals.

A second possible reason for the MMIP is to reduce health care costs to the public. The Legislature cited this as an additional rationale for the 1985 (156) and 1986 (157) medical malpractice reform legislation. It is unclear, however, whether this was a reason for the provisions therein regarding the MMIA specifically, or for other provisions in that legislation (such as, e.g., changes in substantive and procedural tort law).

The third possible purpose behind the MMIP was to ensure that patients are able to collect money judgments against healthcare providers who would otherwise be without medical malpractice coverage. This goal is mentioned in New York's 1985 medical malpractice reform law. (158) There have been no studies concerning whether plaintiffs could satisfy claims against high-risk healthcare providers who would lack insurance in the absence of the MMIP. There is good reason, however, to conclude that such providers would obtain insurance even if premiums were quite high. These providers have licenses, earn income well above the national median, (159) and are likely to have substantial assets. (160) These wealth-related factors invite insurance protection. Moreover, for at least the past thirty-two years, there has been some state-created residual market program pursuant to which they have obtained insurance, i.e., the MMIA or the MMIP, so the economic culture includes acquiring protection. (161)

Regardless of which of the three aforementioned purposes is the genuine goal of the MMIP, the public is the ultimate beneficiary class, and MMIP insureds are, at best, incidental beneficiaries. Concern over the withdrawal of physicians as healthcare providers focuses upon the impact of such withdrawal upon the public. Similarly, the issue of how to provide financial recourse to plaintiffs injured as a result of medical malpractice is public in nature, and any legislation answering the problem benefits the public.

In part, both the public and the insureds, though beneficiary classes, also potentially bear the burden of the MMIP. In the case of the public, such onus will occur if healthcare providers are able to pass the cost of the MMIP onto their patients. (162) With respect to whether insureds pay for the MMIP, the issue turns upon the same considerations that apply to whether the insureds of any residual market program pay its cost, viz., the issue is based on the level at which MMIP rates are set and upon one's perspective as an insured or insurer. As will be discussed below, MMIP rates, particularly at the first excess layer, are below those that would have been set if the insurer's supply curve had been followed. (163) Because the MMIP is compelled to offer insurance below the premium its members would otherwise demand, MMIP insureds may be considered part of the benefited class.

In practice, the MMIP has operated at a substantial loss. From its inception through December 31, 2006, Pool costs have exceeded revenues by approximately $507.4 million. (164) The chief cause of the MMIP's financial problem is the Superintendent's inadequate rate setting, despite the fact that, as with all other medical malpractice insurance rates in New York, the MMIP's rates are supposed to be calculated to provide adequate reserves and to assure continued solvency. (165) Rate setting in the New York medical malpractice field essentially begins when a carrier is first licensed and seeks approval of rates by which premiums are calculated. (166) Thereafter, pursuant to the 1986 Law, each year the admitted medical malpractice carriers in New York file advisory rates with the New York State Department of Insurance, and the Superintendent ultimately sets the base rates. (167) Rates are based upon specialties and territory. (168) MMIP rates, initially approved by the Superintendent pursuant to the 1986 Law, have increased in the face of rising severity and frequency of claims, but for the most part not as much as requested by MMIP members. (169) In practice, the Superintendent has set rates so low that the MMIP has sustained losses (170) for each of the years that it has been in existence. (171)

Although rate inadequacy is the most significant factor in MMIP's losses, (172) the MMIP was also financially challenged from the outset by virtue of its lack of initial capitalization. The MMIP's predecessor, the MMIA, was capitalized by advances and surcharges imposed upon high-risk insureds. (173) Even so, and despite the fact that the Superintendent will not license a carrier unless it is adequately funded, (174) this approach was abandoned when the MMIP was formed. This lack of capitalization resulted in the absence of a financial base upon which carriers traditionally rely not only for investment income, but also as a cushion to guard against insolvency if rates are set too low.

The inadequate rates, combined with a lack of initial capitalization, pose a potential liability for MMIP member-insurers, that are made responsible for the MMIP's losses, (175) and are required to report MMIP Pool losses on their financial statements as liabilities. (176) If MMIP members are called upon to pay this loss, it will result, in effect, in a forced subsidization by MMIP members of MMIP insureds. In the case of the mutual and reciprocal insurers that are MMIP members, the real cost of the MMIP will fall upon MMIP member-insurers' owner-insureds, because of their equity interest in such insurers as set forth above. (177) To the extent such owner-insureds have a financial interest in the MMIP member-insurer, such interest would be threatened by any imposition of the MMIP's losses upon their insurer. MMIP members have vainly attempted to avoid losses by urging rate adequacy, but have been generally unsuccessful in convincing the Superintendent that higher rates are needed. (178)

In part, this forced subsidization could involve what might be called intra-class subsidization. The latter occurs when one insured (Subsidizing Insured) is compelled to pay part of the cost of another insured (Subsidized Insured) who is also a competitor in the market in which the Subsidizing Insured conducts business (Insureds' Market). Providing intra-market coverage is the very essence of the business of insurance and is to be expected in the context of a particular insurer. For example, a medical malpractice insurer is likely to cover more than one anesthesiologist practicing in a particular geographic area, and anesthesiologists in such geographic area may be in competition with one another. When the insureds are not covered by the same carrier, however, but are forced to subsidize their competitors, this indirect, discriminatory "tax" raises issues of both fairness and economics. If, to change slightly the illustration given, lower-risk upstate anesthesiologists who are members of an admitted carrier were forced to subsidize higher-risk upstate anesthesiologists who were part of the residual market, an issue would be presented as to whether this compelled transfer of risk was fair and efficient. The imposition of MMIP losses upon MMIP members involves a transfer of cost and of risk within the market in which the insurers compete (the "Insurers' Market," the sum of the voluntary, residual and alternative markets discussed above), and a forced subsidization of costs involves a transfer within the Insureds' Market, which raises concerns relating to competition.

Any subsidization would also involve inter-class cross subsidies, where lower-risk members of one specialty would be subsidizing higher-risk healthcare providers practicing in another specialty. An illustration of inter-class subsidization would be low-risk upstate anesthesiologists paying higher premiums to cover the losses of high-risk downstate obstetricians. This form of forced subsidization also has anticompetitive effects to the extent that only some low-risk class members are forced to subsidize high-risk insureds, e.g., anesthesiologists who are members of admitted carriers which are MMIP members are subject to such subsidization, while anesthesiologists who are insured by RRGs are not.

The requirement that admitted carriers shoulder the burden of MMIP losses effectively shifts upward the individual carriers' MC curves in the voluntary market. This is because, at each level of insurance written by an admitted carrier in the voluntary market, the carrier must also assume a proportional percentage of MMIP's losses, which can be thought of as added costs that increase the individual carriers' marginal costs. An individual carrier's share of MMIP losses may reduce any profit it generates in the voluntary market, or even exceed such profit so that the carrier runs at a loss overall.

The MMIP's inadequate rates, the challenged medical malpractice market in New York, and the significant administrative barriers to entry into the medical malpractice market are reflected in the fact that since the MMIP was formed seven years ago, no new medical malpractice carriers have entered the voluntary market. (179) The lack of entry of new carriers into the field at least theoretically deadens initiative, lessens competition, and harms insureds by potentially reducing services. (180)

III. THE ANTI-COMPETITIVE NATURE OF THE MMIP

A. Introduction

Although nothing herein is meant to suggest that the antitrust laws should be applied to MMIP members that are compelled to become parties to its operations and have been unfairly made responsible for its losses, principles developed in the application of these laws provide great insight into the deficiencies of the MMIP. These deficiencies frustrate basic objectives of the Act, while the MMIP fails to accomplish the goals it was presumably created to achieve. As shall be discussed, the MMIP turns antitrust law policy on its head, (181) but because of perceived immunities, New York's half-baked residual market creation has not been subject to antitrust enforcement that would reintroduce free-market forces. When the MMIP is evaluated against legal and economic standards that are applied in cases brought under the Act, however, its shortcomings are apparent.

Although there is far from universal agreement on all of the Act's ends, there is a significant consensus that one of its primary missions is to preserve competition through the price system, which is the mechanism by which society places relative values upon goods and services, and allocates scarce resources. (182) There is also widespread agreement that the ultimate societal benefit of the price system is the maximization of consumer welfare, which is often considered in the application of the antitrust laws. (183) How to achieve the goal of preserving competition through the pricing system is a matter of debate, however. Economic and political theory are both implemented in the application of the Act, which was passed at a time when Congress was concerned with concentration of business power that was sometimes accompanied by predatory practices. (184) There was concern over the loss of entrepreneurial freedom, and of the redistribution of wealth from consumers to monopolists. (185)

The sponsor of the Act acknowledged that the statute does not clearly demarcate between lawful and unlawful acts and combinations. (186) In light of the Act's generality, there has been significant controversy over the way in which it is to be implemented. One school of thought believes that in preserving competition through the price system, the sole focus of the Act should be efficiency, (187) but even here there are competing contentions. Essentially, two categories of efficiency are considered in the application of the Act. (188) The first is allocative, and relates to the use of goods and services in those ways "in which they [will] have the highest value." (189) It has been said that "allocative efficiency concerns overall placement of resources in the economy." (190) There is, however, a tendency to confuse the aggregate welfare of society (both consumers and producers), which is maximized by optimum allocative efficiency, with consumer welfare alone. (191)

Monopolists have a propensity to reduce allocative efficiency by reducing output and, thereby, generating what is called deadweight loss. Deadweight loss results from a firm's tendency to continue to produce only provided that the change in the firm's total revenue from selling the last unit of the good, i.e., the marginal revenue (MR), (192) exceeds the MC of that unit's production. (193) In most cases, a good's MR is equal to its price. This is true of any firm operating under the classical model of perfect market competitors in atomistic competition, (194) as in Figures 1 and 2. (195) Any one such small firm, which cannot produce a significant portion of the products in its market, cannot affect the market's total production of the good in question, or the market's supply. (196) Since price is set by the intersection of the supply and demand curves, and such firm alone cannot affect either curve, the firm cannot affect the market price of the good, either. Its only incentive to restricting output is to avoid continuing to produce after its marginal cost has equaled price.

In contrast, as depicted in Figure 4, (197) a graph contrasting perfectly competitive and monopoly markets, the monopolist produces the entire supply in a given market. Since the price of a good depends on how many units of the good are offered for sale--the greater the number of units produced, the less the demand for each unit and the lower the price per unit--and the monopolist controls market production, the monopolist's actions affect the good's price. (198) The more units the monopolist produces, the lower the price each one will have. (199) Perforce, the marginal revenue the monopolist receives for its last unit sold will not simply be that one unit's price because the sale of the last unit decreases the price of all the units produced earlier. (200) For a monopolist, then, marginal revenue is the price of the last unit it sells, less the decline in the aggregate value of all of its previous production as a result of the last unit's production. (201) The monopolist's marginal revenue curve will lie below the industry demand curve, because its revenue from selling any unit after its first will be less than that individual unit's price. (202) As a perfect competitor does, a monopolist will stop producing when "marginal revenue equals ... marginal cost," (203) assuming the monopolist has the same marginal cost curve as the perfectly competitive firm. This intersection, however, will occur at a lower level of output. (204) Thus, production in Figure 4 (205) in a perfectly competitive market is where MC=D, or at point [E.sub.I], output ([Q.sub.I) being $250 billion in insurance, the same as in Figure 2; (206) whereas when a monopoly exists, the monopolist will stop selling where MC=MR, or at point H, where output is [Q.sub.M], (207) approximately $180 billion in insurance. (208) As consumers who wish to purchase the product must buy from the monopolist, however, consumers will purchase at the price on the demand curve corresponding to the new output level, i.e., [P.sub.M], which is $2.75 per $1,000.00 of insurance sold. (209)

Ordinarily, societal welfare is maximized at the level of production of the perfectly competitive market. (210) Societal welfare can be thought of as total economic surplus, consisting of two forms of surplus. (211) One type is consumer surplus. (212) As indicated by the downward-sloping demand curve, the more units of a particular good that are in existence, the less value consumers place on each individual unit. (213) Thus, the buyer of the first unit will place a greater value on the good than will the buyer of, e.g., the hundredth unit. (214) Yet, under the assumption that in a perfectly competitive market all units are sold at the same price, each consumer pays the same amount for his or her unit. (215) Thus, all but the last consumer of the good, e.g., the one hundredth, will buy his or her unit at a price less than the value such ninety-nine consumers ascribe to it. Such ninety-nine consumers obtain a greater value than that for which they paid. (216) This value, realized by the first ninety-nine consumers, is the consumer surplus, (217) which is a way of measuring consumer welfare. It is represented in Figure 2 by the area of the triangle [FE.sub.I]A, (218) and in Figure 4, in the event of a competitive market, by the triangle [FE.sub.I]A. (219)

The second type of economic surplus is producer surplus. (220) Because the MC curve is upward-sloping, and a producer continues producing until its MC equals its MR, the revenue for each unit it produces (221) until the last exceeds the cost of such unit. Producer surplus is the sum of these differences between the prices and marginal production costs of each unit. (222) In Figure 2, this is the area of the shape [AE.sub.I]X, where the lower boundary of this shape is the [MC.sub.I] curve between [E.sub.I] and X. (223) In Figure 4, if the market is competitive and output is at [Q.sub.I], this is the area of the shape [AE.sub.I]X, where the lower boundary of this shape is the [MC.sub.I] curve between [E.sub.I] and X. (224) Economic surplus, the sum of the consumer and producer surpluses, is the area of the shape [FE.sub.I]X in Figure 2, (225) or of the shape [FE.sub.I]X in Figure 4 when the market is competitive. (226)

When a monopolist restricts its output, there is a loss of the difference in the incremental surplus that would be realized at output levels between that of the monopoly and that in a competitive market. (227) The monopolist aggregates to itself the benefit of the higher price it charges at the expense of the consumer, without providing any countervailing advantage to offset the loss in total surplus stemming from the output restriction. (228) As alluded to earlier, this loss in total surplus is deadweight loss, and exists to the detriment of allocative efficiency. (229) In Figure 4, if the market is a monopoly, output is reduced to [Q.sub.M]. (230) As noted above, at this output, price is $2.75 per $1,000.00 of insurance sold. (231) Consumer surplus is now represented by the triangle [FE.sub.M]G. (232) Producer surplus is now the shape [GE.sub.M]HX, where the lower boundary is the [MC.sub.I] curve running from H to X. (233) Total surplus is now the area of the shape [FE.sub.M]HX. (234) It is now less than F[E.sub.I]X, surplus in the competitive equilibrium, by an amount equal to the area of [E.sub.M][E.sub.I]H. (235) Although the monopolist's price increase has enabled it to transfer [GE.sub.M]RA from consumer surplus to producer surplus, its reduced production has made [E.sub.M][E.sub.I]H unavailable either to itself or to consumers. (236)

Deadweight loss does not occur only in the context of a monopoly, however. (237) Other market distortions which cause marginal revenue to lie below the demand curve will also cause deadweight loss. (238) For example, if an excise tax is imposed on a given product (e.g., gasoline), and the producers are required to collect it, they will increase their prices by the amount of the tax at each level of output. (239) This change is represented by an upward shift in the supply curve by the amount of the tax. (240) Because the demand curve is downward-sloping and not flat, some consumers will not buy the product at the higher price, so the price will not increase by the full amount of the tax. (241) The new equilibrium, however, will be at a lower level of output with a resultant deadweight loss, just as in the monopoly example given above. (242) In this instance, there is a shift in the remaining total surplus, but rather than going from consumers to producers, it goes from both to the government. (243)

The second type of efficiency is productive efficiency, which refers to "individual firms' use of their resources in the most effective manner." (244) Where producers minimize their cost in using goods or services, productive efficiency is achieved. (245) Although productive efficiency was one of the goals considered by Congress in passing the Act, it was not a prime consideration. (246) The concept is of assistance, however, in screening out claims of antitrust injury which are actually the consequence of greater productive efficiency on the part of the claimants' competitor. (247) Productive efficiency is also considered in relation to market concentration, it being generally believed that with greater concentration, there is likely to be greater productive efficiency. (248) Thus, the antitrust laws will not be used to condemn monopolies which exist by virtue of economies of scale, (249) i.e., the circumstance that increasing all factors of production in the same proportion (in effect, increasing the size of the monopoly company) has resulted in an increase in productivity or decrease in average cost of a product. (250) Antitrust laws have also been applied in such a way as to avoid other disincentives to productive efficiency. An illustration of this is Broadcast Music, Inc. v. CBS, Inc. (251) There, the Supreme Court applied the rule of reason test, rather than the per se rule, (252) to the blanket licensing of copyrighted musical recordings. (253) It did so in part because of the prohibitive costs involved in obtaining licensing on the traditional song-by-song basis. (254)

Another consideration of the Act is whether there is market concentration, that is to say, how great a share one firm has of the market, (255) and whether that concentration was the product of anticompetitive behavior. Although the Jeffersonian vision of atomistic markets is not a primary goal in applying the Act, an approach that protects small competitors may be considered. (256) Doing so, however, may be in tension with the goal of promoting productive efficiency, because greater concentration in an industry may lead to economies of scale which enhance productive efficiency. In any event, the greater a dominant firm's share of the market, the more closely its actions will be scrutinized. Some antitrust scholars have even advocated "no-fault" monopoly liability, (257) i.e., enforcement of the Act against any firm that achieves a dominant share of the relevant market. Violations of Section 2 of the Act, however, have been found only where there has been willful acquisition or maintenance of monopoly power. In effect, a distinction has been drawn between monopoly power achieved through a better product, business acumen, or productive efficiency, which we may refer to as "benign concentration," and that which has been obtained through anticompetitive behavior, which can be referred to as "malignant concentration."

The kind of anti-competitive behavior that the Act condemns is that which includes exclusionary conduct, i.e., acts designed to discourage other companies from entering the relevant market, or conduct which is predatory, that is, acts intended to drive existing competitors out of the market. An illustration of anti-competitive conduct that is predatory in nature is below-cost pricing. (258) This misconduct occurs when a firm cuts price to a level below its "cost," with the expectation that by doing so, the cost-cutting firm will drive competitors from the market, and then will be able to raise its prices. (259)

B. The Application of Principles Developed Under [section] 1 of the Act

The objectives of the Act are imperfectly reflected in two sections thereof. Section 1 declares illegal "[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce." (260) This language has been construed to prohibit concerted activity pursuant to which competitors agree to reduce competition among themselves, or to hinder others from competing, and which results in an "antitrust injury." (261) By acting in concert, erstwhile economic rivals can enjoy the resulting benefits of market dominance when individually they could not have had such an impact on the relevant market. Such concerted activities are anathema to the idealized eighteenth century concept that efficiency is best achieved when there is an atomistic market in which a vast number of sellers compete against each other.

Were it not immune from antitrust prosecution, and not the case that the MMIP member-carriers are blameless in establishing and enforcing the MMIP Pool, the MMIP would not fare well if scrutinized under Section 1. Ordinarily, an organization composed of competitors who charge a uniform price to a segment of the market, and who coordinate their activities to sell their product through a jointly operated association, would clearly fall within the ambit of Section 1 as a per se violation. (262) As a general proposition, residual market programs encourage the kind of interference with the pricing system that raises the possibility of antitrust abuses, and in the absence of state involvement, for which there is immunity from prosecution, (263) the typical residual market insurance program would be subject to prosecution under Section 1. (264) Indeed, because the product sold (i.e., MMIP insurance) is essentially homogenous, and the MMIP's premiums are determined only after MMIP members jointly submit requests for rate increases and the Superintendent then establishes the rates, the MMIP presents some classic elements of price fixing. (265) Such concerted activity interferes with the forces of supply and demand and leads to inefficiency in the production and allocation of limited resources. (266) Price is a reflection of supply and demand forces that express the economic will of the marketplace. (267) External influences that establish prices frustrate the operation of such forces, and may be challenged under the Act as a form of price fixing. (268)

As noted above, carriers which are part of the MMIP collectively write much of the same type of insurance (269) in the voluntary market. This means they are involved in implementing a residual market program which, in the absence of administratively-set inadequate rates, would at least potentially be in competition with their voluntary business. In the absence of some form of immunity, these activities minimally would be tested under a rule of reason. This standard questions whether the challenged activity has a procompetitive purpose. It is hard to conceive how the MMIP would satisfy a rule of reason test, given the adverse effect on competition which follows from its rate inadequacy. (270) The MMIP is being implemented in a manner that satisfies neither the goal of efficiency, nor the goal of protecting small competitors. It is destroying both.

Inadequate rates lie at the core of the MMIP's problems, which is a reflection of the fact that a price system free from interference is the bedrock of economic efficiency in competitive markets. When the government takes the approach of setting prices so artificially low, it dramatically deviates from the basic principles that typically govern the marketplace. Even in light of the objective that medical malpractice rates be set at the lowest possible levels to insure continued solvency, the MMIP's rates fall short of that target. In the past, most state governments have been more careful to establish rates that at least do not cripple those carriers which are compelled to participate in the residual market. When they have failed to do so, disaster has followed in the wake of price inadequacy. (271)

Putting aside for the moment the issue of the MMIP's rating deficiencies, there are many instances where the rate set by the government for a residual insurance market generates a profit. As discussed above in reference to Figure 3, if the average cost of residual market business is low relative to where the rate is set, a JUA can turn a profit from writing such business. (272) In addition, as discussed above, the government has the means of increasing such profitability, such as making such profits tax exempt. (273)

When a JUA realizes a profit for its members, competing carriers may act in concert to protect these profits. The caselaw illustrates that agreements between JUA members, which compete in the voluntary market and act in concert in the residual market, can take many forms, from agreements to set the prices of insurance policies, (274) to agreements to reduce services offered in the residual market so as to increase members' profits. (275) Section 1 of the Act is designed to prevent competitors from combining their economic power in ways that injure competition. As discussed above, in the absence of immunity, such activities could be challenged under the Act. (276) Even in a setting where a profit is being earned in the residual market, however, consideration must be given to the fact that the carriers are being compelled to participate in a program in which profits are substantially less than what the carriers could earn in that market absent governmental intervention in the form of the JUA and rate regulation in the voluntary market. Under free-market conditions, these admitted carriers would not write residual market business without a greater increase in premiums. Consequently, such carriers should not be liable under Section 1.

C. The Application of Principles Developed Under Section 2 of the Act

The type of analysis that is sparked when, as in the case of the MMIP, a JUA incurs losses rather than profits may invoke considerations that are associated with Section 2, which makes it illegal to "monopolize" or "attempt to monopolize" a relevant market. (277) Three elements of Section 2 will now be discussed in the context of the MMIP.

1. Defining the Relevant Market

Under the Act, a "market is composed of products that have reasonable interchangeability for the purposes for which they are produced--price, use and qualities considered." (278) In addition, the definition of a market has a geographic component: "The geographic market extends to the area of effective competition ... where buyers can turn for alternative sources of supply. The product market includes the pool of goods or services that enjoy reasonable interchangeability of use and cross-elasticity of demand." (279) Defining the term "market" for the purposes of the Act, thus, involves determining whether a homogenous product is sold within a geographic area in which consumers will purchase the product in preference to a substitute. In addressing this question, courts inquire whether products differ in nature and function, and whether consumers will treat them as substitutes. (280) These aspects of the definition of "market" raise interrelated concepts, e.g., whether one product can replace another is determined, in part, by functional interchangeability, which in turn involves the physical characteristics of the products used, but also includes the product's perceived use by consumers. Regarding the product's physical characteristics, the nature of the product and the purposes it serves are considered. (281)

An insurance "product" consists of a combination of factors. The most obvious is policy provisions. Other characteristics involved are the quality of the insurer's service, however, including the insurer's facilitation of the application and renewal processes, the claims-handling and resolution, and the quality of defense counsel retained. Another factor is the ability of the insurer to meet its defense and indemnification obligations, or, in the event of such inability, the existence of a state guaranty fund to fulfill those obligations. Whether products are interchangeable depends on how similar they are as to each of these factors.

Whether consumers perceive products as interchangeable is addressed by the concept of cross-elasticity of demand, which describes a buyer's willingness to substitute one product for another. (282) Cross-elasticity of demand is high if buyers are willing to purchase substitutes based upon slight changes in price. (283)

Defining the relevant market is a flexible process. Courts have recognized that the approach is fact-sensitive and takes into account numerous factors. (284) When appropriate, it may be necessary to consider whether a submarket exists. Characteristics used in assessing the boundaries of a submarket include "industry or public recognition of the submarket as a separate economic entity, the product's peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes, and specialized vendors." (285) Key considerations include "the uniqueness of the product's functions and ... uses." (286)

2. New York's Medical Malpractice Insurance Markets

Turning to New York's medical malpractice industry, these concepts should first be applied to the three markets that were previously discussed, i.e., the voluntary market, residual market, and alternative market. (287) With respect to the voluntary market of admitted medical malpractice insurance carriers, they all, in essence, offer a homogenous product, particularly insofar as statute and insurance regulation mandate the inclusion of certain policy provisions and regulators must approve changes to the policies. This is not to say that the products are homogenous outside distinct groups. Product categorization must be made on the basis of fundamentally different roles the insured plays, e.g., hospitals as opposed to physicians. Within these broad groups, however, policies may have significant similarities.

The rates for policies also vary among groups and among specialties, e.g., rates upon which anesthesiologists' premiums are based will be lower than those upon which obstetricians' are based. Moreover, premiums will vary among insurers with respect to the same specialty. Since rates must be pre-approved by the Superintendent, however, there is some similarity within specialties. Insofar as there are differences between specialties, the voluntary medical malpractice insurance market should, where appropriate, be viewed as consisting of numerous smaller markets or submarkets, based on geography and rates. For example, premiums for anesthesiologists practicing in upstate New York will not compare with premiums for obstetricians practicing in Brooklyn. When deciding from whom to purchase insurance, however, practitioners in these separate specialties will be interested in the offerings of all carriers within their geographic areas. (288)

As a consequence of differences between the basic policy offered by an admitted carrier and that offered by a non-admitted carrier, competition among admitted carriers is more probable than that between admitted carriers and non-admitted carriers. (289) What largely distinguishes admitted carriers from one another are the services they provide and the ways they are structured. The first issue is self-explanatory; with respect to the second, PRI and Academic are reciprocals, while MLMIC is a mutual. With both reciprocals and mutuals, a form of investment is made at the inception of the policy, but there are differences in the way that investment is treated while the insured is a subscriber. In all instances, a certain degree of inertia surrounds the subscriber's continued membership in an organization in which the insured has an ownership interest and in which there is a degree of self-governance.

Another source of inertia is that no new insurers have entered the voluntary market since the MMIP was formed. In the last seven years, the only change in the composition of the voluntary market's producers has been Frontier Insurance Company's 2001 insolvency. (290) The potential burden of compulsory MMIP Pool membership discourages new carriers from entering the voluntary market. (291)

Turning to the residual market, all insureds within the same specialty are offered, at a set rate, the same product through the MMIP Pool. There is no competition within this market itself, and there is no competition between this market and the voluntary market. The absence of such competition is based upon the fact that before any insured can be written in the residual market, the insured must be turned down by insurers in the voluntary market. (292) There is theoretical competition, however, between the residual market and the alternative market. Insureds are not required to be turned down by the alternative market, as opposed to the voluntary market, before obtaining insurance through the residual market. If the alternative market can charge lower rates than the MMIP, then it has the ability to entice away MMIP insureds. This would only occur in a case where the voluntary market either has no product to offer the insured or has refused to insure, and an alternative market insurer believes that it can realize a profit even at rates lower than those charged by the MMIP Pool. Where an alternative market insurer is able to identify situations where the voluntary market has not been able to recognize an opportunity, and the MMIP's rates are adequate with respect to the particular risk insured, then such a non-admitted carrier may compete against the MMIP Pool. This is an unlikely scenario, given the inadequacy of the MMIP's rates. Consequently, there is little competition between the MMIP Pool servicing the residual market and carriers issuing policies in the alternative market.

This lack of competition reflects the fact that the MMIP does not promote competition through the pricing system. By setting inadequate MMIP rates, the Superintendent has created an environment where premiums charged in the residual market reflect neither supply nor demand, and which discourages other carriers from competing for business in the residual market in New York, as set forth above. While it is recognized that by their nature, residual markets involve price interference, when such interference is significant it becomes destructive of the primary goal of antitrust law, by hindering rather than promoting competition.

Not only does rate inadequacy discourage alternative market insurers from competing within the residual market, the potential burden of compulsory MMIP Pool membership discourages new carriers from entering the voluntary market and, therefore, the MMIP Pool. Just like the voluntary market, the residual market has had no new entrants in seven years. (293) With the lack of recent market entry, and rate inadequacy continuing to discourage new entrants, there has been a total lack of innovation in the residual market. Innovation in the setting of an insurance market might be reflected in programs designed to control risks, offer consumers a better insurance product, provide superior services, or streamline claims processing. Studies show, however, that where there is rate inadequacy, or where components by which rates are set do not provide incentives for innovations, carriers will not improve their product. (294) The inadequacy of rates strips the JUA of any funds that could be used to initiate programs to reduce losses, provide better administration of the program, or incentivize JUA members to provide better service.

There is potential competition, however, between carriers in the alternative and the voluntary markets. As discussed earlier, the products sold in the three insurance "markets" are not homogenous because the policies of admitted carriers are backed by the state guaranty fund and such carriers are highly regulated, leading to greater assurance that they will honor their contractual commitments to insureds. (295) The greater desirability of policies issued by voluntary carriers, however, is tempered by economic considerations. Admitted carriers are saddled with expenses that are not imposed upon non-admitted carriers. These include payments to the state guaranty fund and costs associated with compliance with state regulations, such as auditing costs. One of the most significant potential costs is the responsibility that admitted carriers have for the MMIP Pool. With admitted carriers collectively reporting aggregate losses of over $507 million on their balance sheets, (296) the financial indicators that are used to evaluate those carriers' financial stability have been adversely affected. As a consequence, independent rating organizations that assess the financial strength of insurance carriers have reduced their ratings of New York admitted medical malpractice carriers, some of which in response have chosen not to be rated altogether. (297) Ratings that are reduced, or outright absent, have negatively impacted the ability of these carriers to attract new business, insofar as these ratings are considered by prospective insureds. At the point where the advantages afforded by admitted carrier policies are outweighed by the additional costs and the potential burden facing such carriers, consumers will purchase in the alternative market to the extent they are able to do so. Many insurance consumers will choose not to be insured by admitted carriers, knowing that such carriers are operating under the shadow of the MMIP Pool. (298)

3. Applying Section 2 Economic Principles to the MMIP

When economic principles developed in applying Section 2 of the Act are considered in relation to the competitiveness of the voluntary market, an irony is presented. Ordinarily, increased industry concentration results in a strengthening of the remaining individual competitors' financial well-being, with oligopolists enjoying a superior status to that afforded by atomistic competition, and with monopolists enjoying even greater benefits than oligopolists. As discussed earlier, a monopolist can, by restricting output, raise prices and transform consumer surplus into producer surplus. (299)

The concentration among MMIP insurers, however, produces economic weakness, not strength. As noted above, by discouraging new entrants into the voluntary market because of potential exposure to the MMIP Pool's losses, the Superintendent has maintained a de facto oligopoly of admitted carriers, albeit an involuntary one. (300) At the same time, the MMIP has eroded the capital base of the already financially challenged admitted carriers. Continued rating inadequacy will lead to the progressive failure of such admitted carriers, which will be unable to absorb their proportionate share of MMIP Pool losses because of diminishing reserves. As each carrier is unable to pay such losses, it will fail or withdraw from the market, leaving fewer remaining admitted carriers to shoulder the burden of the MMIP. Eventually, only one carrier may remain in the market, or none at all if the burden of the MMIP becomes too great to bear. (301)

This is precisely how predatory pricing impacts upon a market and results in concentration, except that in the typical predatory pricing situation, it is the last remaining competitor that has generated the conditions which drove competitors from the market, and with the knowledge that its own financial strength will ultimately enable it to increase prices when there is no competition. Here, the state has performed that function, but in the process, it has weakened all admitted carriers, perhaps leading to a situation where there are no survivors. Presumably, the way in which this condition can be corrected is if the state, at some point, raises MMIP rates to ensure adequacy. In the meantime, all that the Superintendent would have accomplished during this time period is to defer a problem, weaken the voluntary market, and possibly lead to its greater concentration because carriers may fail between now and the time rates are raised to an adequate level.

The kind of concentration resulting from the Superintendent's inadequate rate setting is not benign concentration because such concentration is not achieved through a superior product, business acumen, or productive efficiency. While it cannot be termed malignant concentration insofar as it has not been achieved through its members' anti-competitive behavior, any concentration brought about because the MMIP insulates its members from competition warrants comparison to malignant concentration because it is achieved through a pricing mechanism that discourages competition.

In the event that all carriers fail, the state's anti-competitive actions will result in an implosion when the last carrier is unable to recoup losses and is overwhelmed by the inadequate rate structure imposed by the Superintendent. During the time that this completely perverse process occurs, there would be more and more pressure for insureds to look to the alternative market. When any admitted carrier fails, it is unlikely that its insureds will choose to be covered by another admitted carrier that may very well be the next to be overwhelmed by the same adverse forces that drove their previous carrier into insolvency.

The three insurance markets are not the only ones affected by the MMIP Pool. Consideration must be given to the Insureds' Market. (302) As has been noted, imposing the losses of the MMIP Pool upon low-risk insureds would force the three insurance markets to subsidize high-risk insureds. (303) To the extent such losses are actually paid, MMIP member-owner insureds will be burdened with the financial onus of assuming losses of the MMIP Pool's insureds, with some of whom they are in competition. In this context, such subsidization works counter to the free enterprise model that encourages efficiency, rather than rewards inefficiency. (304) The imposition of MMIP losses upon MMIP member insurers would decrease the competitiveness of the insureds of such carriers. The subsidizing carrier's insureds would either be forced to raise their fees, or realize reduced profits, for reasons unrelated to the quality of their services. Ironically, health care providers incur the MMIP burden when the health care providers are superior risks.

A recent study of workers' compensation insurance programs, those that are state-dominated plans that force subsidization of various classes of insureds, concluded that such programs were inefficient in several respects. (305) Moreover, the programs were self-defeating because they not only failed to achieve their ostensible purpose of reducing workers' compensation insurance costs, they actually increased such costs. (306) The same anti-competitive qualities arising from forced subsidization are attributes of the MMIP Pool, which leads us to the following discussion of the objectives the MMIP Pool seeks to achieve.

D. The MMIP Has Failed to Accomplish the Presumed Goals of Its Creation, While at the Same Time Frustrating the Economic Aims of the Act

Even in terms of the objectives its creation was presumably intended to accomplish, the MMIP is self-defeating. The first possible objective of the MMIP was to prevent high malpractice insurance rates from deterring healthcare practitioners from starting or continuing to practice in New York. To the extent the MMIP results in financial injury to admitted medical malpractice carriers or their healthcare providers, it may have the additional unintended negative impact of precipitating a decline in the number of favorable risks, who would be discouraged either by the loss of equity in their member-owned carriers or, as explained below, by being excluded from the voluntary market entirely. The Superintendent's excessive interference with natural market forces in the Insurers' Market may thereby result in a reduction of services afforded in the Insureds' Market, leading to injury to the public.

Of course, if an admitted carrier's insureds are able to pass the cost of the MMIP on to the public, then such insureds would not be discouraged. The burdened class of the MMIP, however, would then be patients who would pay the price of the MMIP's losses, thus defeating the MMIP's second possible purpose of discouraging increases in health care costs.

The MMIP's third possible purpose, ensuring the ability of healthcare providers to honor judgments to injured patients, is also foiled. The MMIP places admitted carriers at a disadvantage in competing with the alternative market, thus encouraging healthcare providers to opt for the latter. Unlike admitted market carriers, however, alternative market RRGs are not protected by state guaranty funds, so claims against their insureds will go unpaid if those RRGs become insolvent. Consequently, the MMIP-induced shift toward alternative market carriers also increases the chance that claims against providers will go unpaid.

The MMIP may also be exposing patients to a greater degree of risk from healthcare providers more prone to commit medical malpractice. If MMIP insureds are high risks primarily because they are poor healthcare providers, rather than because they practice risky specialties, either such insureds should be driven out of the market by economic forces or there should be better policing of the medical malpractice professions by the State Education Department, which is responsible for identifying substandard licensed professionals. If the problem is more fundamental and implicates inherent deficiencies in the legal system, such as judicial or jural disregard of the law governing malpractice claims, then reformation of the tort system and improved quality of justice are required.

By failing to address directly the reasons MMIP insureds are high risks and the MMIP Pool is showing losses, this State-created program has sidestepped addressing the harder issues that invite long-term solutions to the medical malpractice crisis. Unfortunately, residual market programs are often influenced by political, not economic or legal, considerations. (307) The insureds of residual market programs are numerous and are able to promote their own agendas. The result is a patchwork of incomplete measures, such as the MMIP and limited tort reform, that lie at the periphery of the problem and often exacerbate it. Another example of this is recent New York legislation which, without addressing the root causes of insolvency, prohibited, for a period of two years, the Superintendent from liquidating insolvent medical malpractice carriers. (308)

The forced subsidization of MMIP losses by admitted carriers may result in substantial weakening of not only admitted carriers and their member insureds but even MMIP insureds. At the present time, the MMIP has presented the medical malpractice insurance market with a malignant growth of rising liability. If this shortsighted solution is not followed by a permanent remedy, a catastrophe that challenges the financial stability of admitted carriers is likely. This in turn would prevent them from continuing to underwrite MMIP losses.

The forced subsidization of high risk MMIP Pool insureds by MMIP members' favorable risk member-owners should be evaluated by the economic yardsticks of productive efficiency and allocative efficiency. Under the former touchstone, the MMIP is a failure because it forces its members to use their resources inefficiently. Rather than improve the services it renders to its owner-insurers, the MMIP compels its insurers to expend resources in addressing coverage problems associated with poor risks, thereby stripping the MMIP insurers of funds necessary to implement programs designed to improve the quality of insurance they offer their owner-insureds. (309)

When measured in terms of allocative efficiency, the MMIP has also been unsuccessful. The MMIP's use of resources has not promoted the overall well-being of society. As set forth above, it has failed to address the cause of high risks; (310) rather, it provided what was at best a stopgap measure that burdened favorable insureds with a problem not of their own making. One of the reasons that monopoly power has been tolerated is because it rewards efficiency with the temporary benefit of monopoly profits. (311) In contrast, the MMIP discourages efficiency because favorable risks are weighed down by MMIP Pool losses. The only incentives MMIP members have are to petition the Superintendent to increase the rates of the MMIP Pool and to make the Pool's underwriting guidelines more restrictive so as to exclude the very worst of the bad risks. The MMIP has not resulted in allocative efficiency when consideration is given to the effect it has upon the admitted market. In the long run, the threat the MMIP poses may well be passed along to the public in the form of higher taxes to make good the losses that MMIP members cannot satisfy, or the loss of qualified physicians who, discouraged from practicing in the New York market, will choose other states where the environment is more favorable.

Additionally, the imposition of MMIP losses creates deadweight loss. Recall from the discussion of deadweight loss earlier in this Article that market distortions tend to induce drops in output, which in turn lead to deadweight loss. Here, imposition of the MMIP's losses on carriers in proportion with their shares of the voluntary market would effectively increase those carriers' costs at each aggregate amount of insurance they write in the voluntary market. Figure 5 depicts the effect on the voluntary market in the event MMIP losses were to be imposed on voluntary market carriers. (312) The graph assumes that the premium set by the Superintendent, Ps, is $2.50 per $1,000 of insurance purchased, equal to [P.sub.I], the price derived from the market equilibria in Figures 2 and 4. (313) Before imposition of losses, the market equilibrium is at Point [E.sub.I]. (314)

The imposition of MMIP losses makes writing insurance in the voluntary market more expensive for carriers at every level of output; the more voluntary market insurance written, the greater a portion of the MMIP's losses a carrier must absorb. This is represented in the graph as a shift of the industry's MC curve from MCI to [MC.sub.J]. (315) As a result, the industry's AC curve also shifts upward, from [AC.sub.I] to [AC.sub.J]. (316) In the absence of rate regulation, the new equilibrium, [E.sub.J1], would be where [MC.sub.J] intersects [D.sub.I][D.sub.I], which corresponds to a lower aggregate amount of insurance written (approximately $220 billion), [QJ.sub.1], and a higher premium per $1,000 of insurance provided (about $2.65), [P.sub.J1]. (317) As output is reduced, a deadweight loss has been created, as in the monopoly example in Figure 4. (318) The reduction in output means that some insureds would no longer be insured within the voluntary market; instead, they would be forced into the residual market. Empirically, those insureds would experience a welfare loss from no longer being insured by a carrier in which they own a share of equity.

Unlike the case of a monopoly, however, insurers are not necessarily better off. While the price increase has transferred some surplus from consumers to producers, this is offset at least partly by a decline in producer surplus because the industry's marginal cost curve has shifted upward. In the monopoly example in Figure 4, the MC curve remained unchanged, unaltered by the mere fact that a monopoly existed. (319) Since producer surplus is the difference between the price and MC curve, and since the MC curve has shifted closer to the price, producer surplus may be considerably smaller than in the case of a mere monopoly, depending on the relative sizes of the changes in price and in the MC curve. The area of surplus between MCI and [MC.sub.J] is transferred from insurers to the MMIP, similar to the transfer of surplus to the government in the event of an excise tax. (320) Assuming no price regulation by the Superintendent, consumer surplus has shrunk from [FE.sub.I]A to [FE.sub.J1]G. (321) Producer surplus has changed from [AE.sub.I]X to [GE.sub.J1]L. (322) The MMIP receives [LE.sub.J1]ZX. (323) Economic surplus, once [FE.sub.I]X, is now [FE.sub.J1]ZX. (324) The deadweight loss is [E.sub.J1][E.sub.I]Z. (325)

This situation is further compounded by the existing rate controls. Because the Superintendent, rather than the insurers, sets rates, the insurers cannot simply charge a higher premium. The premium continues to be fixed at Ps. (326) As a result, to maximize profits the industry would need to move to the left along the [MC.sub.J] curve until [MC.sub.J] intersects [P.sub.I] at [E.sub.J2], corresponding to an output of [Q.sub.J2], approximately $200 billion in insurance sold. (327) This further reduction in output would cause a more pronounced shift to the residual market, and a bigger deadweight loss. Consumer surplus is now [FVE.sub.J2]A; producer surplus, [AE.sub.J2]L; surplus to the MMIP, [LE.sub.J2]HX; economic surplus, FVHX. (328) Deadweight loss is now [VE.sub.I]H. (329) Since they cannot increase rates, the insurers, unlike typical monopolists, cannot transfer any consumer surplus from voluntary market insureds to themselves, which might compensate for their losses due to their reduction in output and the increase in their marginal costs. (330) The insurers are therefore unambiguously worse off. This is another manifestation of the MMIP's effect of eliminating competition while at the same time weakening rather than strengthening the remaining competitors, as discussed above. (331)

In the insurance context, reducing output in the voluntary market means declining to sell insurance to those risks which present the high end of risks in that market ("marginal insureds"), where previously the marginal cost had been just below the price, i.e., the premium generated. If, however, the added MMIP Pool loss cost is imposed on the MMIP member insurers, MC may exceed price. By declining to write marginal insureds, an admitted carrier also avoids the MMIP Pool loss associated with such marginal insureds.

As a practical matter, however, carriers cannot always do this. For numerous reasons, an insurer cannot choose at will to reduce the amount of insurance it provides. To begin with, as noted earlier, the insurer's responsibility for claims against the insured does not end when the product is "sold"; rather, it lasts for years thereafter. Furthermore, practical considerations impede insurers' ability to choose not to renew insureds' policies at the end of their policy periods. Individual insureds, in their dual role as owners of the insurers, could attempt to foil any effort to cease insuring them. In addition, even if such nonrenewal is possible, it is not necessarily in the interest of the insurer. These marginal insureds may have made contributions of capital surplus to those insurers upon becoming members. To drop these members, insurers would need to return those contributions. Losing this capital, as well as the income derived therefrom, would make it more difficult for the insurer to pay for claims in the event such claims are significantly greater than expected (a distinct possibility, given the substantial uncertainty as to claim frequencies and severities as described above). (332) Even after a nonrenewal, the insurer would need to avoid this possibility in another manner, such as by obtaining more reinsurance.

Additionally, given the existence of the MMIP, ceasing to insure a marginal insured is not the end of the story. An insured that cannot obtain insurance from another insurer in the voluntary market may enter the MMIP Pool, in which case the insurer will then bear part of the losses incurred in the MMIP's insuring that former insured anyway, in proportion to the insurer's share of the voluntary market. Furthermore, an insurer may be reluctant to cease insuring an insured, so as not to lose an opportunity to service that insured profitably in the event the Superintendent should later permit a rate increase.

If admitted carriers continue to service the marginal insureds, however, they may lose money on such provision upon the imposition of MMIP losses, although a portion of the deadweight loss would be avoided. Moreover, the upward shift in MC has also caused AC to shift upward to [AC.sub.J]. (333) If, at the present level of output, [AC.sub.J] now lies above the premium established by regulator-set rates, admitted carriers may lose money on their overall business, perhaps severely enough to drive individual firms out of business. The amount of such deficit is the area of rectangle [TNE.sub.I]A. (334) This is another way in which the MMIP can eliminate competition while at the same time weaken rather than strengthen the remaining competitors, as discussed above. (335)

The MMIP also fails to satisfy the Act's goal of promoting the well-being of small competitors. To the contrary, those MMIP members which have smaller numbers of insureds and are, therefore, likely to have relatively smaller reserves will likely suffer a greater burden if the MMIP losses are imposed upon them, because their reserves are more sensitive to losses unassociated with their actual operations. (336)

IV. ANTITRUST IMMUNITY

A. Introduction

On the basis of the states' historic interest in insurance regulation and the difficulties in applying antitrust laws to the relationships between insurers and insureds, immunities to prosecution have been developed. Insurance-related activities may be beyond the reach of federal antitrust laws on two distinct grounds. The first of these is based upon a federal statute which "reverse preempts" Congress from interfering with qualified state insurance regulatory laws. (337) The second source of immunity is a doctrine shaped by the courts to give deference to the exercise of state powers when a federal statute does not specifically provide for its application to states. (338) As recent case law demonstrates, on the bases of these fountainheads of state immunity, even behavior which is patently anti-competitive may be outside the ambit of federal antitrust law. On the other hand, courts will readily hold that there is no protection from antitrust prosecution when an insurance-related activity does not qualify for immunity. Therefore, insurers that fail to appreciate the contours of these sanctuaries from prosecution expose themselves to criminal penalties and private treble damage claims.

The author's purpose in reviewing these immunities is to ascertain if the MMIP is immune from scrutiny under the Act, and if so, whether the law should be amended to nullify such immunity.

B. The McCarran-Ferguson Act's Antitrust Exemption

The more formidable of the immunities is the Federal McCarran-Ferguson Act (McC-F). (339) In 1944, overruling its own precedent, (340) the Supreme Court found that the business of insurance constituted interstate commerce, and consequently was within the power of Congress to regulate. (341) In reaction to this ruling, Congress promptly enacted McC-F, a statute recognizing that because states have an interest in insurance-related activities conducted within their borders, for the most part regulation of such activities should be left to state government. (342) Balancing federal and state interests, McC-F provides that a federal statute may invalidate, impair, or supersede a state insurance law only where the former "specifically relates to the business of insurance." (343) In a proviso, McC-F states that federal antitrust laws do not apply to the business of insurance unless a state has elected not to regulate the field. (344) In relevant part, the statute reads:

      No Act of Congress shall be construed to invalidate, impair, or
   supersede any law enacted by any State for the purpose of
   regulating the business of insurance, or which imposes a fee or tax
   upon such business, unless such Act specifically relates to the
   business of insurance: Provided, That ... [federal antitrust laws]
   shall be applicable to the business of insurance to the extent that
   such business is not regulated by State Law. (345)

The portion of this statute quoted before the "[p]rovided" shall be referred to hereinafter as the "General Exemption." The portion including the "[p]rovided" and what follows shall be called the "Antitrust Exemption."

McC-F has been broadly construed to place beyond the reach of federal antitrust laws those areas of "the business of insurance" which the state has chosen to regulate. (346) Even where by virtue of failing to comply with state law regulating insurance, a party has violated Sections 1 or 2 of the Act, the Antitrust Exemption immunizes the perpetrator from prosecution under the Act. The exemption applies if state law addresses an issue as part of the regulation of the business of insurance. As Areeda and Hovenkamp state in their treatise, Antitrust Law, "if the state's insurance industry is 'regulated by state law,' then the antitrust laws simply do not apply, notwithstanding that the application of antitrust law in [a] particular case in no way 'invalidate[s], impair[s], or supersede[s]' state law and may even be consistent with it." (347) Even a practice which would otherwise be anathema under the antitrust laws, such as horizontal price fixing, would be exempt from prosecution under McC-F if state law regulated the premiums charged to insureds. (348)

1. "State Law"

A threshold issue that arises under McC-F is what constitutes a "state law" for the purposes of the Antitrust Exemption. The New York State Legislature did not create the MMIP. Section 5502(c)(2)(D) of New York Insurance Law merely authorizes the Superintendent to

   promulgate regulations prescribing a plan for the equitable
   distribution to authorized medical malpractice insurers[,] ...
   the insureds of the [MMIA,] and health care practitioners
   and facilities which are otherwise unable to secure coverage
   in the voluntary market following the dissolution of the
   [MMIA].... [T]he superintendent may designate, in lieu of
   the plan for the equitable distribution of policies from the
   [MMIA,] ... a single entity or entities to provide such
   coverages consistent with such a plan if the superintendent
   determines that such entity or entities can provide the
   coverages necessary to meet the purposes and objectives of
   an equitable plan of distribution.... (349)

Rather than a statutory scheme, it is the Superintendent's regulations that created the MMIP and compelled admitted medical malpractice carriers to operate the residual market and absorb its losses. It is arguable whether such actions of the executive branch of government qualify under the Antitrust Exemption as "state law." (350)

Although the Supreme Court has not spoken on the issue, some decisions have held that the phrase "law enacted by any State" in the General Exemption means only statutes. (351) If this interpretation applies to the Antitrust Exemption as well, the MMIP (or at any rate the Superintendent's regulatory scheme regarding sharing of losses) may not fall within the McC-F exemption.

The Antitrust Exemption's reference