The opinion of the court was delivered by: SORG
The record, which includes the transcript of a comprehensive non-jury trial held before the undersigned, reveals that Blue Cross subscribers and their covered dependents number more than half the population of the relevant market area -- namely, twenty-nine counties in Western Pennsylvania -- and that during the period 1965-1969, they were the recipients of 62% of all hospital days of service to Western Pennsylvania patients covered by hospitalization insurance. Hospitals accept from Blue Cross in full payment for their services to Blue Cross subscribers their audited costs of service to Blue Cross subscribers as a unit, under the terms of a standard form of contract between Blue Cross and 101 hospitals in and about the relevant market area. In order to cover their financial requirements not incurred by reason of services to Blue Cross subscribers -- such as the cost of services to indigent and defaulting patients -- the same hospitals charge policyholders of Travelers and other commercial carriers an average of 14% more for their services than they accept as full payment from Blue Cross. Travelers' "cost of claims", therefore, for the same hospital services is 14% higher than that of Blue Cross. Inasmuch as the cost of claims of both Travelers and Blue Cross accounts for 90% or more of their income from subscribers or policyholders, as the case may be, the 14% differential subjects Travelers to a substantial price disadvantage in its quest for hospitalization insurance business. It is also to be noted that Blue Cross' promotional activities, prior to the filing of the instant action, featured the ability of its subscribers to acquire hospital services at rates lower than those charged by hospitals to their other patients and, further, that those hospitals which do not enter into the Blue Cross contract are paid a per diem rate for their services to Blue Cross subscribers which is substantially less than their costs of service. Hence, Travelers presents Blue Cross as a dominant competitor monopolizing hospital insurance coverage by inducing the providers of hospital service into a discriminatory arrangement in favor of Blue Cross subscribers and against the commercial insurance carrier's policyholders.
On the other hand, the activities of Blue Cross in all respects material to this case, including the terms of the contract under attack, are regulated and directed by the Insurance Department of the Commonwealth of Pennsylvania in strict conformity with the provisions of the Nonprofit Hospital Plan Act of 1937, 40 P.S. § 1401 et seq., enacted by the Pennsylvania General Assembly to meet a public health problem described in "The Middle Road", a study report of the Pennsylvania Economy League, as follows:
"In the early 1930's, when the United States experienced one of its worst economic depressions, hospital financing in Western Pennsylvania, as in the country in general, was in difficulty. Voluntary hospitals were under-financed, and it was common for people to forego needed hospitalization because they lacked money to pay the bills. Forced economies resulted in the discontinuance of some hospital services and retarded development in other services.
As a result, the community of Western Pennsylvania as a whole was not receiving adequate hospital care even by the standards of those days."
In the words of The Honorable Herbert B. Cohen, Majority Leader of the Pennsylvania House of Representatives, and sponsor of the aforesaid Act:
Under the terms of the said Act, Blue Cross, having been previously organized under the Pennsylvania Nonprofit Corporation Law, approved May 5, 1933, P.L. 289, for the purpose of establishing, maintaining and operating such a non-profit hospital plan became subject to regulation by the Pennsylvania Insurance Department in the following respects: "the rates charged to subscribers . . ., all rates of payments to hospitals . . ., all acquisition costs in connection with the solicitation of subscribers . . ., the reserves to be maintained . . ., the certificates issued . . ., representing subscribers' agreements, and any and all contracts entered into . . ., with any hospital." (In the same Act, Blue Cross was extended an exemption from taxation and from "all other of the insurance laws of this Commonwealth.") The Blue Cross hospital contract is, therefore, an integral part of Pennsylvania's regulated hospital plan. By reason of the interrelationship of hospital payments and Blue Cross subscriber rates the contract also falls within the ambit of "insurance business". As stated in Securities and Exchange Commission v. National Securities, Inc., et al., 393 U.S. 453, 89 S. Ct. 564, 21 L. Ed. 2d 668 (1969):
"The relationship between insurer and insured, the type of policy which could be issued, its reliability, interpretation, and enforcement -- these were the core of the 'business of insurance' . . . . Statutes aimed at protecting or regulating this relationship, directly or indirectly, are laws regulating the 'business of insurance'."
Blue Cross accordingly asserts two defenses -- (1) an exemption under the McCarran-Ferguson Insurance Regulation Act and (2) a general denial of any acts which constitute monopolization or restraint of trade within the meaning of the Sherman Act.
Section 2(b) of the McCarran-Ferguson Insurance Regulation Act, 15 U.S.C.A. § 1012, provides:
"No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating ...