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decided: November 13, 1985.


Appeal from the Order of the Secretary of Health in the case of In Re: The Complaint of KGD OB-GYN Associates, P.C., against Pennsylvania Blue Shield, Formal Complaint No. 82-3.


Thomas E. Wood, with him, William H. Wood and William E. Miller, Jr., Keefer, Wood, Allen & Rahal, for petitioner.

Christine S. Dutton, Assistant Counsel, with her, Ruth M. Siegel, Chief Counsel, for respondent.

Fred Speaker, Pepper, Hamilton & Scheetz, for Amicus Curiae, Pennsylvania Medical Society.

Thomas A. Beckley, with him, Jeffrey W. Davis and John G. Milakovic, Beckley & Madden, for Amicus Curiae, Pennsylvania Dental Association.

President Judge Crumlish, Jr. and Judges Rogers, Craig, MacPhail, Doyle, Colins and Palladino. Opinion by Judge Craig.

Author: Craig

[ 93 Pa. Commw. Page 3]

In view of provisions of the participating-physician contract of Pennsylvania Blue Shield (PBS), approved by the Department of Health, which stated

     when requested, a doctor must substantiate to PBS's satisfaction by any mutually accepted method that his usual charge of record is the most frequent made to all parties*fn*

     may the department order Blue Shield to refund to a group of physicians a sum representing the excess of the medical fees which those physicians charged for a medical procedure to their insured patients at a clinic ($155 each) over the fees which those physicians charged for identical service to their uninsured patients at the same clinic ($30 each)?

Pennsylvania Blue Shield, a professional health service corporation, appeals from a final order which the Pennsylvania Department of Health issued on February 16, 1984,*fn1 pursuant to a complaint which a group of Blue Shield participating physicians known as KGD OB-GYN Associates, P.C. (KGD) had filed with the

[ 93 Pa. Commw. Page 4]

    department against Blue Shield under the General Rules of Administrative Practice and Procedure, 1 Pa. Code § 35.9.*fn2 We affirm in part and reverse in part.

[ 93 Pa. Commw. Page 5]

The applicable Blue Shield contract provisions, in effect at the time of this dispute and previously approved by the department, read:


20. All matters, disputes or controversies related to the services performed by Participating Doctors or any questions involving professional ethics shall be considered, acted upon, disposed of and determined only by doctors in the manner provided by the By-Laws of PBS.


2. Payment will be made by PBS under this program according to the following criteria :

Usual: The fee which an individual doctor most frequently charges to his patients for the procedure performed.

Customary : The customary range of usual fees charged by doctors of similar training and experience in a given geographic area for the procedure performed.

Reasonable : The fee which differs from the usual or customary charges because of unusual circumstances involving medical complications which require additional time, skill and experience.

[ 93 Pa. Commw. Page 6]

4. A doctor's usual charge of record for any procedure will be determined from charges actually submitted by that doctor for all PBS Doctor's Service Reports and on all Medicare Requests for Payment and CHAMPUS (Civilian Health and Medical Program of the Uniform Services) claim forms. However, when Page 6} requested, a doctor must substantiate to PBS' satisfaction, by any mutually accepted method, that his usual charge of record is the most frequent made to all patients. If a review of a doctor's records indicates any usual charge is not valid, PBS may use this additional information in its determination of a usual charge. (Emphasis added.)

Thus to qualify for reimbursement, the doctor's charge for any single class of service (e.g. all KGD patients at the Center) cannot depart from the usual fee.

KGD, a professional corporation owned by three physicians, maintains a private practice in obstetrics and gynecology. During the period involved in this payment dispute, from 1978 through June 1981, the KGD physicians were charging their patients $300 for an abortion performed in their private offices. KGD also had a contract with a clinic known as the Northeast Women's Center (Center). The contract between KGD and the Center provided that any patient treated at the clinic having insurance coverage would be considered a "private" patient of KGD. KGD billed the abortion patient's health insurance carrier its "private" fee of $300, from which KGD paid $145 to the Center for overhead costs and retained the remaining $155 as its doctor's fee. On the other hand, the arrangement labeled cash-paying patients at the clinic as "Center" patients, even though KGD's doctor-patient relationship with those patients was exactly the same as the relationship with the insured patients. The Center charged the cash-paying patients $175 for an abortion, $145 of which the Center retained for its overhead costs, with the remaining $30 being paid to KGD as doctor's fee.

Tabulated, the fee-charging pattern was as follows:

[ 93 Pa. Commw. Page 7]

KGD Clinic Patients

Cash-Paying Third-Party Payor

$175Charge $300Charge

-$145Clinic Overhead Fee -$145Clinic Overhead Fee

$30KGD Doctor's Fee $155KGD Doctor's Fee

KGD Private Office Patients


-300KGD Overhead and Doctor's Fee

All patients treated at the Center, whether designated as "Center" patients or "private" patients, received precisely the same services from KGD and the Center. The only standard used to differentiate between the "Center" and "private" patients was whether the fee was to be paid by the patient or submitted to a third-party payor. However, the medical fee which KGD charged Blue Shield for its insured patients at the clinic was five times greater than the fee charged to the cash-paying clinic patients.

Blue Shield's Medical Review Committee, composed of physicians, met on May 5, 1981, and determined that KGD had overcharged Blue Shield. A KGD physician presented their position regarding the overcharges to the Medical Review Committee on September 15, 1981. The Medical Review Committee reaffirmed its determination of an overcharge. Ultimately, in October 1981, Blue Shield set up a separate Center assignment account for abortions which KGD performed at the Center, under which KGD now charges a uniform medical fee of $32.50 ($195 total clinic fee) to both the insured and uninsured patients at the Clinic.

An assignment account is an administrative creation within Blue Shield's files which allows accumulation and attribution of charge data to some entity

[ 93 Pa. Commw. Page 8]

    other than the name of an individual participating doctor actually rendering a covered service.

Although Blue Shield and KGD presented some conflicting testimony to the Department of Health, the facts indicate that Blue Shield was not forthcoming with the idea of identifying KGD's patient classes with different assignment accounts. On the other hand, the facts do not indicate that the KGD physicians definitively communicated to Blue Shield their questions or concerns regarding the classification of patients for fee purposes. All parties agree that KGD indeed provided services to two distinct classes of patients. One class of patients consisted of those treated in KGD's private offices for a $300 fee each. This $300 fee reflected KGD's overhead costs and a doctor's professional fee. The other class of patients consisted of those treated at the clinic where the fee charge reflected the Center's overhead costs and the doctor's professional fee. Of course, in professional truth, every woman to whom KGD rendered service was a KGD patient whether KGD rendered the service at its private offices or at the Center.

The Medical Review Committee determined the total overpayment amount which KGD owed Blue Shield to be $59,947. Because KGD refused to refund this amount to Blue Shield, Blue Shield began to withhold monies from both the KGD account and the Center account.

In March, 1982, KGD filed its formal complaint with the Secretary of Health regarding Blue Shield's withholding of earned fees. In June, 1982, the department ordered Blue Shield to cease withholding from the Center and KGD accounts. Blue Shield did not comply.

In September, 1982, the department issued a subpoena to Blue Shield requesting information relating

[ 93 Pa. Commw. Page 9]

    to KGD's overcharge dispute. This court enforced the subpoena by order issued December 18, 1982.*fn3 By the order involved in this appeal, the department directs Blue Shield to: (1) refund the $59,947 which the department decided was improperly withheld from KGD and the Center; (2) revise for approval its usual charge and withholding provisions and; (3) revise for approval its methods relating to the usual charge provisions to allow participating physicians involved in overpayment disputes a fundamentally fair procedure for defending themselves.

Fee Discrimination Against Insured Patients at the Center

We reverse the department's decision that Blue Shield improperly withheld $59,947.

When the KGD physicians became participating doctors of Blue Shield, they agreed to comply with Blue Shield's contract provisions which the department had reviewed and approved. Among those provisions is the "usual charge" restriction which, in essence, guarantees Blue Shield that each participating doctor will charge a standard fee to all patients receiving like services under like circumstances. The undisputed facts indicate that the KGD physicians did not comply with this usual charge restriction when

[ 93 Pa. Commw. Page 10]

    they charged their insured clinic patients $155 for an abortion while charging their uninsured clinic patients $30 for an abortion. KGD provided the same service and used the same facility for all the patients at the clinic. KGD's fiction of separate patient designations, based on the patient's means of payment, was the main cause of this dispute. The department appears to justify KGD's creation of that fiction by attributing it to a failure of Blue Shield to create alternate billing arrangements for KGD's patients at the Center. The facts do not justify that faulty characterization.

In June, 1977, approximately one month after KGD had contracted with the Center to perform abortions there, the KGD physicians followed formal Blue Shield procedures and applied for a billing account for their private offices. KGD never mentioned the arrangement with the Center at that time. In July 1977, Blue Shield set up a billing account for KGD and identified the person to whom the KGD physicians were to direct any inquiries concerning their billing account. KGD never asked that person how to make a separate billing arrangement for Blue Shield patients at the clinic. The Center contacted Blue Shield in May of 1977 to obtain an assignment account for its Blue Shield patients. Blue Shield denied the Center's request for an assignment account, but expressly stated that Blue Shield would permit the Center's employed doctors to bill for any covered service under their own names. Blue Shield had no knowledge at that time of the contractual relationship between KGD and the Center.

The KGD physicians never definitively contacted their designated Blue Shield representative to inform Blue Shield of their perceived predicament. A KGD physician testified that KGD did telephone Blue

[ 93 Pa. Commw. Page 11]

Shield about their problem, but that whoever answered the phone merely told them that Blue Shield could not accommodate their special billing problem. A group of professional physicians who had already displayed their ability to request and receive a Blue Shield billing account must be presumed capable of communicating a billing problem to their designated Blue Shield representative. The record contains too many formal communications between KGD and Blue Shield to allow testimony as to an anonymous Blue Shield telephone response to substantiate a finding that Blue Shield denied KGD a separate assignment account for their Blue Shield patients treated at the clinic. Once the KGD physicians clearly requested a separate classification an assignment account for their Blue Shield patients at the Center, Blue Shield accommodated their request. The KGD physicians' lack of information as to how to bill their Blue Shield patients at their private offices one fee and to bill their Blue Shield patients at the Center another fee does not warrant their faulty characterization of patient classes at the Center.

The department contends that Blue Shield could have cured this problem by simply creating an assignment account for KGD's Blue Shield patients at the clinic. Yet, the cure was not just another assignment account, but to charge all the patients at the clinic the same fee for the same service. An assignment account which permitted KGD to charge its Blue Shield patients at the clinic $155 while charging its cash-paying patients at the clinic $30 still would have been discriminatory.

The department also contends that KGD's treatment of insured patients at the center could not have constituted a violation of Blue Shield's contract because now, after the establishment of a separate center

[ 93 Pa. Commw. Page 12]

    assignment account for the insured patients at the center, Blue Shield allegedly is condoning and approving the same discrimination as that which it previously condemned. The record flatly contradicts the factual basis for that contention. Under the revised accounting approach now in effect, the present charging pattern is that which Blue Shield has sought: at the Center, insured patients pay KGD the same amount for the abortion service as cash-paying patients, with KGD's patients elsewhere paying, as always, a higher fee because KGD's overhead is involved.

The department also erred as a matter of law. Careful review of the governing statute establishes that the department has no authority to issue money judgments in favor of health providers against Blue Shield.

The department's statutory authority to supervise and regulate professional health service corporations is found in 40 Pa. C.S. §§ 6301-6335. The rights of doctors in relationship to a professional health service corporation are set forth in 40 Pa. C.S. § 6324.*fn4 The department asserts that its power to approve Blue Shield's regulations would be useless, if, once approved,

[ 93 Pa. Commw. Page 13]

    regulations could be violated or applied inappropriately with no oversight by the department. The department retains the authority to oversee the implementation of health service plans. However, the legislature did not confer upon the department a power to determine culpability and award damages should a dispute arise involving an approved contract provision. In 40 Pa. C.S. § 6324(c), the law expressly authorizes health service doctors (as prescribed in the professional health service corporation by-laws) to hear and decide disputes between the doctors and the professional health service corporation. In this case, Blue Shield's Medical Review Committee performed that function by hearing and deciding this overcharge dispute. Health service "regulations" which the department must review and approve are no more than contractual agreements between the doctor and the professional health service corporation. A doctor can always seek review of an unfavorable Medical Review Committee decision concerning a contractual provision with the professional health service corporation in the

[ 93 Pa. Commw. Page 14]

    appropriate state court with jurisdiction over contract disputes. Nowhere did the legislature confer upon the department a power of appellate review of the Medical Review Committee's decisions.

The department asserts that this court held in Pennsylvania Dental Association v. Department of Health, 75 Pa. Commonwealth Ct. 7, 461 A.2d 329 (1983), that the department had the authority to settle disputes between doctors and professional health service corporations through the complaint and hearing process, but that interpretation is too expansive. This court held that the Department of Health, pursuant to section 6324(a), could require the inclusion of certain elements in a professional health service corporation's method of reviewing the professional fees of its participating doctors, without transgressing the privacy rights of patients. This court did not hold that the department had authority to adjudicate specific contract disputes between doctors and their professional health service corporations.

The department also interprets 40 Pa. C.S. § 6310*fn5 as giving it authority to settle disputes and grant relief. Because that section authorizes the department to commence an action in mandamus or for an injunction to prevent any violation of a professional health service corporation provision, "in addition to all other remedies in law or equity," the department asserts

[ 93 Pa. Commw. Page 15]

    that the legislature has conferred upon it all legal and equitable remedial authority. The department has incorrectly interpreted this enforcement provision. The reference to "other remedies" clearly means that the department has available to it all other judicial remedies at law or in equity.

The department also contends that 40 Pa. C.S. § 6332*fn6 gives it power to adjudicate and award damages. That section authorizes the department to regulate and supervise professional health service corporations to insure adequate services to subscribers in accordance with the best professional health service

[ 93 Pa. Commw. Page 16]

    practice in the community. The department argues that to exclude from it the power to award relief to an aggrieved party would defeat the purpose of this statute. However, section 6332 authorizes the department to order a professional health service corporation to extend or improve the services it furnishes should the department determine, upon review, that the professional health service corporation was not providing service to its subscribers in accordance with the best professional health service practice in the community. This section of the statute states the extent and limits of the department's examination of a professional health service corporation's business, authorizes the department to order improved service, and specifically allows judicial review of the department's orders. Clearly, the section gives the department administrative powers, not judicial functions. The department does not need any implied power to issue money judgments in order to effectuate the policy of insuring subscribers adequate professional health service care.

Next, the department argues that section 35.9 of the General Rules of Administrative Practice and Procedure*fn7 under which KGD filed its complaint should be read together with the statutory provisions to authorize the department's action in this case. Section

[ 93 Pa. Commw. Page 1735]

.9 pertains to alleged violations of a "statute or regulation administered or issued" by a state agency. Here, the complaint actually alleged a violation of a Blue Shield contract provision called a "regulation." Although the department had approved this contract provision or "regulation", it is neither a statute nor a regulation administered or issued by the department. Hence, the language of section 35.9 cannot be construed to authorize the department's actions.

Finally, the department urges that this court's enforcement*fn8 of the department's subpoena to Blue Shield to produce documents relating to the KGD billing dispute is indicative of the department's authority to adjudicate this dispute. This court's order enforced the subpoena on the basis that the agency had power to review "the application and impact of regulations previously approved by the Department." The order did not imply that it is within the department's power to adjudicate a dispute and grant relief in the nature of a money judgment.

Fair Contract Procedures

The department has also ordered Blue Shield to revise its internal procedures for participating doctors regarding assignment accounts, the usual charge restrictions, and involuntary withholding of funds, and to submit these revisions to the department for review and approval. Additionally, the department ordered Blue Shield to revise its internal procedures regarding overpayment disputes in order to provide participating doctors an adequate and fundamentally fair opportunity to defend themselves.

The issue thus presented is: Where a statute authorizes the department to approve contract provisions

[ 93 Pa. Commw. Page 18]

    between a professional health service corporation and its participating doctors, may the department require the professional health service corporation to revise its contract provisions to insure that in the future a professional health service corporation will be more forth-coming and helpful to its participating doctors as to how appropriate fees are determined and to accommodate their special billing problems, as well as to provide the participating doctors a fair opportunity to express their position on a dispute? We conclude that the department has such powers, even though we reject KGD's contention that constitutional due process concepts are applicable between these private contracting parties.

The department was legitimately disturbed with Blue Shield's professed attitude that a participating doctor could always withdraw from Blue Shield's participating doctor program if the doctor was not satisfied with the implementation of Blue Shield's participating doctor regulations. Obviously, encouraging non-participation is not conducive to implementing the policy behind the creation of professional health service corporations which is to provide adequate health service care to those who are unable to provide it for themselves.*fn9 A better policy is to insist that professional health service corporations implement internal procedures which openly provide the participating doctor

[ 93 Pa. Commw. Page 19]

    with a full range of available billing alternatives. In fact, such up-front disclosure could have avoided this dispute. The better policy is to require a professional health service corporation to provide its participating doctors a fair opportunity to address alleged violations. As noted above, the department has power under 40 Pa. C.S. § 6332*fn10 to order Blue Shield to improve its professional health services. By requiring Blue Shield to be more forthcoming with its participating doctors regarding available billing alternatives, and methods of determining appropriate fees, and to insure a fundamentally fair opportunity to justify alleged violations, doctors will be more likely to maintain their relationship as participating physicians. Surely, encouraging doctors to continue their participation with Blue Shield is beneficial to Blue Shield as well as an effective way for the department to effectuate the policy of providing affordable health care to citizens of the Commonwealth.

Accordingly, we reverse the order of the department to the extent it requires Blue Shield to refund the $59,947 which it withheld from the KGD and Center accounts; we affirm the order of the department to the extent it requires Blue Shield to revise its internal procedures regarding assignment accounts, fee determinations and physician participation in disputes presented to the Medical Review Committee.

[ 93 Pa. Commw. Page 20]


Now, November 13, 1985, we reverse the order of the Department of Health, dated February 16, 1984, to the extent it required Blue Shield to refund the amount of $59,947 to KGD and the Center. We affirm the remainder of that order.


Affirmed in part and reversed in part.

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