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Travelers Insurance Co. v. Blue Cross of Western Pennsylvania

decided: July 10, 1973.



Van Dusen, Aldisert and Rosenn, Circuit Judges.

Author: Van Dusen


VAN DUSEN, Circuit Judge.

Travelers Insurance Company appeals from the January 6, 1972, district court order dismissing its complaint against Blue Cross of Western Pennsylvania, which order was entered after a trial to the court, 361 F. Supp. 774. Travelers had charged Blue Cross with restraining trade, in violation of section 1 of the Sherman Act, 15 U.S.C. § 1 (1970),*fn1 and with monopolizing and attempting to monopolize, in violation of section 2 of that Act.*fn2 To prevail, Travelers had also to establish that either Blue Cross' conduct did not come within the protective umbrella provided by the language of the McCarran-Ferguson Act, 15 U.S.C. § 1011, et seq. (1970),*fn3 or was excluded from the protection of that Act by the presence of boycott, coercion, or intimidation, see 15 U.S.C. § 1013(b) (1970).*fn4 After a lengthy non-jury trial, the district court concluded that Blue Cross' conduct was immunized by the McCarran-Ferguson Act and that, even absent such protection, the conduct did not violate the antitrust laws. See Travelers Ins. Co. v. Blue Cross of Western Pennsylvania, 361 F. Supp. 774 (W.D. Pa. 1972) (1972 Trade Cas. para. 73,311, at 91,428).*fn5 We agree with the district court on both points.

The relevant market consists of 29 counties in Western Pennsylvania. Blue Cross provides hospitalization insurance for 51% of the population of this area; and during a relevant period Blue Cross accounted for 62% of all the patient days which were covered by commercial insurance.*fn6

Travelers objects to a standard contract which Blue Cross has with 101 hospitals in this area which prescribes the amounts and terms under which Blue Cross pays for the services rendered its subscribers. Blue Cross reimburses hospitals only for audited costs subject to a ceiling;*fn7 and these costs do not include any portion of the general hospital expenses of capital construction, of providing free services to indigents, and of providing service to patients who default. Because of these limitations, Blue Cross pays some 14-15% less than the amounts that non-Blue Cross patients are charged.*fn8 Consequently, Blue Cross quotes rates for hospitalization insurance correspondingly lower than the rates of private insurance companies such as Travelers.

Whether the McCarran-Ferguson Act exempts Blue Cross' arrangement with these hospitals from antitrust scrutiny depends, first, on the scope of the statutory term "business of insurance," second, on the extent of state regulation of this arrangement, and, third, on the presence or absence of boycott, coercion or intimidation.

The Supreme Court's most recent interpretation of the McCarran-Ferguson Act appears in SEC v. National Securities, Inc., 393 U.S. 453, 457-61, 21 L. Ed. 2d 668, 89 S. Ct. 564 (1969), where the Court held that a state insurance department's approval of a merger of insurance companies would not exempt the merger from the federal securities laws. The Court reasoned that regulation of the "business of insurance" meant control over the relationship between the insurance company and its policyholders; the term did not encompass regulation of the relationship between the company and its shareholders. However, although the Court fashioned this dichotomy, it did not fix the exact contours of the term "business of insurance." Rather, it indicated activities clearly covered -- fixing rates, selling and advertising policies, licensing companies and agents, prescribing the types of permissible policies, etc. -- and suggested the possibility of additional ones, using this language:

"Undoubtedly, other activities of insurance companies relate so closely to their status as reliable insurers that they too must be placed in the same class." 393 U.S. at 460.

Two district court cases which pre-dated SEC v. National Securities, Inc., nevertheless are useful for comparison with the present case. In California League of Independent Insurance Producers v. Aetna Casualty & Surety Co., 175 F. Supp. 857, 860 (N.D. Cal. 1959), the "business of insurance" was held to include the size of commissions paid by companies to agents, because commissions were a vital factor in the companies' ratemaking structure. In contrast, the district court in Hill v. National Auto Glass Co., 293 F. Supp. 295 (N.D. Cal. 1968), held that the McCarran-Ferguson Act would not protect Allstate, an automobile liability insurer, which allegedly secured installation jobs for selected automobile glass dealers. It can be surmised that the impact on Allstate's rates of the expense of replacing automobile glass, while it might be direct, would not be substantial.

In the present case, the district court found that the interrelationship of hospital payments and subscribers' rates was such that Blue Cross' arrangement with hospitals should be considered part of the "business of insurance." This conclusion is a sound construction of the law and is amply supported by the evidence.*fn9

Also, the evidence supports the district court finding that the state regulates the arrangement here in question. Section 4 of the Nonprofit Hospital Plan Act, Penn. Stat. Ann., tit. 40, § 1404, provides that:

"The rates charged to subscribers by nonprofit corporations, . . . all rates of payments to hospitals made by such corporations pursuant to the contracts provided for in this act, . . . and any and all contracts entered into by any such corporation with any hospital, shall, at all ...

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