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FRANKFORD HOSP. v. BLUE CROSS OF GREATER PHILADELP

June 8, 1976

FRANKFORD HOSPITAL
v.
BLUE CROSS OF GREATER PHILADELPHIA



The opinion of the court was delivered by: NEWCOMER

 Newcomer, J.

 This suit grows out of a controversy about the criteria for reimbursing hospitals for services rendered to Blue Cross subscribers. Frankford Hospital, individually, seeks damages and injunctive relief against Blue Cross of Greater Philadelphia on the ground that it has violated the federal antitrust laws. *fn1" On September 25, 1975, this court certified plaintiff the representative -- for the purpose of injunctive relief only -- of a class consisting of all Pennsylvania nonprofit hospitals, clinics, and medical centers that have had a hospital contract with defendant in force at any time during the period September 4, 1970 to September 4, 1974. Extensive discovery followed. At its completion defendant filed a motion for summary judgment. For the reasons stated below this motion will be granted.

 Defendant, Blue Cross of Greater Philadelphia, (hereinafter Blue Cross) is a nonprofit corporation which operates hospital plans whereby its subscribers are provided hospitalization and related health services. Defendant is certified to do business in the Commonwealth by the Pennsylvania Insurance Department. *fn2" Defendant, a member of the Blue Cross Association, headquartered in Chicago, Illinois, is the oldest of five Blue Cross plans in Pennsylvania, and has approximately 2,400,000 subscribers in the Philadelphia area.

 Blue Cross is not an insurer in the classic sense of that term. In its contracts with subscribers it agrees to furnish them needed health care services in return for premiums paid by them, or on their behalf (e.g. by employers). In order to carry out these obligations Blue Cross contracts with eligible hospitals. *fn3" In a typical situation, a subscriber goes to a member hospital, *fn4" presents his or her Blue Cross card, and receives health care services and the hospital sends the bill directly to Blue Cross. On the other hand, a patient insured under a traditional, private health insurance policy is billed for the services he receives and is entitled to receive cash indemnification by his insurer in an amount determined by his particular policy.

 Some of Blue Cross' subscriber agreements include indemnification provisions together with service benefit provisions. The indemnity clause comes into play when a subscriber receives care from a non-member hospital. Under most plans, Blue Cross' obligation is a relatively small fraction of the total charge for the service. For example, a subscriber may collect fifty dollars for the first day of hospitalization and twenty-five dollars for each subsequent day while the hospital's charge exceeds two hundred dollars per day. Blue Cross' role as an indemnity insurer of health care bills is relatively modest, compared to its service benefits business. Apparently, Blue Cross could -- as a legal, if not a practical matter -- refuse to underwrite any indemnity agreements.

 Both the rates Blue Cross charges to subscribers and its rates of payments to hospitals must be approved in advance by the Insurance Department before they can go into effect. 40 Pa. C.S.A. § 6124. At all times material to this action, the Pennsylvania Insurance Department has aggressively regulated Blue Cross' contractual relationships with subscribers and with hospitals. Prior to 1967, there were at least six different agreements between Blue Cross and various hospitals in the Philadelphia area. The Department instructed Blue Cross to develop a uniform contract. It particularly stressed that this contract should include the cost accounting principles upon which reimbursement under the federal Medicare Program was based. At the end of 1967, defendant submitted a proposed uniform cost contract between Blue Cross and Philadelphia area hospitals. The Insurance Commissioner, David O. Maxwell, disapproved it. In his notice of disapproval the Commissioner stated, inter alia, that Blue Cross should neither have to pay any portion of the hospitals' unreimbursed outpatient cost, nor to pay for depreciation or for miscellaneous unidentified costs under formulas which did not include specific incentives to hospitals to control costs. *fn5" Mr. Maxwell's successors -- Commissioners George F. Reed, Herbert S. Denenberg, and William J. Sheppard-- adhered to the position that any contract between Blue Cross and Philadelphia area hospitals must include quality controls and ceilings on total cost reimbursement. *fn6"

 After Commissioner Maxwell's rejection of the 1967 proposed Uniform Cost Contract, Blue Cross resumed negotiations with the hospitals and a new agreement *fn7" was reached by them and subsequently approved by the Commissioner. In 1971, Blue Cross resubmitted to the Pennsylvania Insurance Department for its approval a request for increases in rates charged to subscribers. Commissioner Denenberg's denial of the request sparked new, intensive negotiations between Blue Cross and the hospitals (which were represented in the negotiations by the Delaware Valley Hospital Counsel, hereinafter DVHC). The Commissioner attended many of the negotiating sessions. These efforts resulted in the Hospital Agreement of 1971, the terms of which reflected Commissioner Denenberg's negotiating guidelines.

 Negotiations to reach agreement on a contract to succeed the 1971 Agreement commenced in March 1973. The negotiations, however, were not very successful, and before they were completed the 1971 Agreement expired. At this juncture the hospitals split ranks. In September, 1974, a number of the DVHC-represented hospitals became non-member hospitals. A number of other DVHC-represented hospitals, including the Philadelphia medical school hospitals, agreed with Blue Cross to extend the terms of the 1971 Agreement during the pendency of negotiations. In November, 1974, a number of Philadelphia hospitals reached agreement with Blue Cross on a contract. The Insurance Department approved it. This "1974 Agreement," which was retroactive to July 1, 1974, has been adhered to by all Philadelphia medical school hospitals (including one which did not actually sign it) and has been signed by some DVHC-represented hospitals and a number of community hospitals. Approximately 40 DVHC-represented hospitals refused to sign it.

 The situation in which a large number of Philadelphia area health care facilities were not Blue Cross member hospitals created extreme problems for some subscribers in need of treatment. Both Blue Cross and the DVHC took out advertisements in newspapers at various times to inform the public about which hospitals were and were not under contract with Blue Cross to provide subscriber services. Some Blue Cross subscribers sought services in non-member hospitals either by mistake or because of the exigencies of medical emergencies, or for other reasons. It was an unhappy surprise to many when they learned that they were personally liable for substantial bills. On August 2, 1975, the Commonwealth of Pennsylvania enacted Act No. 94 of 1975, (40 P.S. § 6124[c]). It reinstated, retroactively, the 1971 Hospital Agreement between Blue Cross and the non-member DVHC hospitals. *fn8" Under Act 94, the Blue Cross hospital contracts may be terminated only after notice is first given to the Insurance Department which then can initiate various procedures during a "cooling off" period. Thirty-one hospitals sent notice to the Commissioner on and after August 25, 1975. In a decision rendered on May 21, 1976, Commissioner Sheppard ruled that he would not approve termination of the contractual relationship. At the same time, he set forth findings -- which are comparable to guidelines -- on the two remaining disputed areas in the negotiations. Clearly, state regulation of Blue Cross hospital contracts is still vigorous. *fn9"

 Frankford Hospital contends that the 1967 and 1971 Agreements were unreasonable because under them Blue Cross paid for less than its proper share of the operating cost attributable to the treatment of Blue Cross subscribers. It claims that Blue Cross used its position of power and dominance to coerce the hospitals into signing the agreements. The "discount" on hospital services Blue Cross achieved under the contracts, as compared to what non-subscribers and their private insurers had to pay, was allegedly exploited to Blue Cross' advantage in further consolidating a monopoly in the health insurance market. Frankford Hospital asks the court to find that the 1971 Agreement is illegal, and to order defendant Blue Cross to offer to enter into a superceding agreement with members of the plaintiff class. Under the court-ordered contract Blue Cross would pay a prorated share of all operating costs, which included bad debts, free care, and "working capital requirements." Thus, although the plaintiff's theory of liability relates to events occurring in the four years prior to September 4, 1974, its prayer for relief rests on the assumption that federal antitrust law preempts the Commonwealth's Act 94, and this court is therefore obligated to declare unreasonable and unlawful the very contract which the legislature recently reinstated. Blue Cross' principal defense is that the McCarran-Ferguson Act expressly exempts from the federal antitrust laws the activities of which the plaintiff complains. It argues that federal law has, by its own terms, reserved these areas in the first instance for state regulation. Because our decision is firmly grounded on the McCarran-Ferguson Act, we do not discuss Blue Cross' defense based on Parker v. Brown, 317 U.S. 341, 87 L. Ed. 315, 63 S. Ct. 307 (1943).

 McCARRAN-FERGUSON ACT

 Frankford Hospital has charged Blue Cross with restraining trade, in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1, *fn10" and with monopolizing and attempting to monopolize, in violation of Section 2 of that Act. *fn11" Blue Cross contends that it has not violated the precepts contained in these Sherman Act provisions and, in any case, these rules themselves are inapplicable to the actions ...


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