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08/12/97 PHILADELPHIA COUNTY MEDICAL SOCIETY v.

COMMONWEALTH COURT OF PENNSYLVANIA


August 12, 1997

PHILADELPHIA COUNTY MEDICAL SOCIETY, RAYMOND J. LODISE, M.D., PENNSYLVANIA SOCIETY OF INTERNAL MEDICINE, AND ROBERT B. SKLAROFF, M.D., PETITIONERS
v.
LINDA S. KAISER, COMMISSIONER, INSURANCE DEPARTMENT OF PENNSYLVANIA, RESPONDENT

Appealed From No. MS96-04-098. State Agency Insurance Department.

Before: Honorable James Gardner Colins, President Judge, Honorable Joseph T. Doyle, Judge, Honorable Bernard L. McGINLEY, Judge, Honorable Doris A. Smith, Judge, Honorable Dan Pellegrini, Judge, Honorable Rochelle S. Friedman, Judge, Honorable Jim Flaherty, Judge. Opinion BY Judge Pellegrini. Judge Leadbetter did not participate in the decision of this case.

The opinion of the court was delivered by: Pellegrini

OPINION BY JUDGE PELLEGRINI

FILED: August 12, 1997

The Pennsylvania Society of Internal Medicine and Robert B. Sklaroff, M.D. (Opponents) petition for review of the November 26, 1996 decision and order of Linda S. Kaiser (Commissioner), Commissioner of the Insurance Department of The Commonwealth of Pennsylvania (Department). That decision and order approved the change in control of six subsidiaries of Blue Cross of Western Pennsylvania (Western Blue Cross) and Pennsylvania Blue Shield (Blue Shield), and approved the proposed bylaws of Highmark, Inc., the consolidated entity and corporate successor of the former Western Blue Cross and former Blue Shield. Opponents are the Philadelphia County Medical Society, the Pennsylvania Society of Internal Medicine, Robert B. Sklaroff, M.D., a corporate member of the former Pennsylvania Blue Shield, and Raymond J. Lodise, M.D., also a corporate member of the former Pennsylvania Blue Shield.

I.

A.

Western Blue Cross and Blue Shield were each organized under the Pennsylvania Nonprofit Corporations Law (Nonprofit Law). *fn1 Western Blue Cross provided hospital care coverage to subscribers in 29 counties throughout Western Pennsylvania, under that part of the Health Plan Corporations Act commonly known as the Hospital Act. *fn2 Blue Shield provided physician care coverage to subscribers throughout the state, under that part of the Health Plan Corporations Act commonly known as the Health Service Plan Act. *fn3

Western Blue Cross and Blue Shield decided to merge their organizations and operations into a single corporate entity to be called Highmark, Inc. (Highmark). The stated purpose of the consolidation was to offer health care insurance, especially managed care, and integrated products, as a single corporate entity, as well as to operate more efficiently so as to better serve their subscribers. To effectuate the consolidation, Western Blue Cross and Blue Shield (collectively, Consolidating Companies) submitted their consolidation plan to the Commissioner for approval. *fn4

By that plan, the Consolidating Companies proposed to consolidate to form Highmark and submitted the proposed bylaws for the new corporation to the Department. *fn5 Under the consolidation, *fn6 Highmark would operate both a hospital plan and a professional health service plan. *fn7

B.

To consolidate, Western Blue Cross and Blue Shield were required to receive the Department's approval under the Insurance Holding Companies Act and the Health Plan Corporations Act. Because the consolidation involved the change in control of the insurance company subsidiaries, Section 1402(a)(1) of the Insurance Holding Companies Act, 40 P.S. 991.1402(a)(1), required that any proposed merger or other acquisition or control of an insurance company must first be approved by the Department. Western Blue Cross and Blue Shield would not be covered under Section 1401, which specifically excludes "nonprofit medical and hospital service associations" from the definition of "insurer". Under Section 1402(a), the Commissioner has the authority to review the statements filed with it by the person or entity with whom the domestic insurer is to merge or be controlled by. Under Section 1402(f)(1), the Commissioner must approve a change in control unless she finds:

(i) that the insurers will not be able to satisfy the requirements for the issuance of a license to operate the line or lines of business for which they are presently licensed;

(ii) that the change in control will substantially lessen competition in health care insurance in the Commonwealth or create a monopoly therein;

(iii) that the financial condition of the acquiring party may jeopardize the financial stability of the insurer or prejudice the interests of its policyholders;

(iv) that any plans to liquidate the insurers, sells their assets, or consolidate or merge them with any person or to make material changes in their business or corporate structure or management are unfair and unreasonable to policyholders and not in the public interest;

(v) that the competence, experience and integrity of those persons who would control the operation of the insurers are such that it would not be in the interest of policyholders of the insurer and not in the public interest;

(vi) or that the acquisition is likely to be hazardous or prejudicial to the insurance buying public.

Highmark's proposed bylaws, submitted by the Consolidating Companies, Section 6328 of the Health Plan Corporations Act, 40 Pa. C.S. § 6328, also needed to obtain approval. Section 6328 provides that the bylaws of every nonprofit corporation must provide appropriate procedures for the nomination and election or appointment of the directors, and election or appointment of committees of the board so that the interests of the subscribers of the corporation will be represented in a just and reasonable manner. Section 6328(b)(6) gives the Commissioner, after a hearing, the authority to determine whether the bylaws of a corporation operating a professional health service plan have met these requirements as to the size and composition of its board of directors, as well as representation of subscribers. That section states:

In the event that the Insurance Commissioner or the Secretary of Health find, after notice to the corporation and hearing, that a general medical service corporation has not met the requirements of this section, the commissioner or secretary shall notify the corporation of the findings and order the corporation, in specific terms, to meet the requirements of this section. Such findings and order shall be subject to judicial review in the manner and within the time provided by law. (Emphasis added).

40 Pa. C.S. § 6328(b)(6).

C.

The Department convened a "public informational hearing" which it was not required to hold, and was pursuant to Section 1402(f)(2) *fn8 of the Insurance Holding Companies Act, as part of the Department's review of the filings received under that section. A notice was published in the Pennsylvania Bulletin that a "public informational hearing" would be held on April 26, 1996, where representatives of the Consolidating Companies would speak as to the proposed plan of consolidation. Also, interested persons were invited to attend that hearing and to submit written comments within 30 days after the hearing.

Prior to the hearing, the Department received comments from 25 individuals and organizations in support of the proposed consolidation, and from eight individuals and organizations in opposition to the proposed consolidation. Those opposing the consolidation made comments as to the statutory basis for the consolidation itself, and whether any statutory basis existed for the operation of both a hospital plan and a health services plan by a single entity. Also raised were concerns about the consolidations' affect on the social mission of the Consolidating Companies, as well as its anti-competitive effect on the health care industry throughout the state. Among those comments in opposition were seven separate comments from Opponent Robert B. Sklaroff, M.D.

At the April 26, 1996 public informational hearing, representatives of the Consolidating Companies spoke regarding the proposed consolidation and resulting changes in control of the six affected subsidiaries. No one else was permitted to present statements or ask questions. The record was held open for 30 days, during which interested persons had the opportunity to submit additional comments regarding the proposed consolidation. During that period, the Department again received comments in opposition to the consolidation from Dr. Sklaroff.

D.

After the comment period was closed, the Commissioner approved the change in control of the subsidiaries as required under Section 1402(a) of the Insurance Holding Companies Act. *fn9 She also approved the bylaws of Highmark, as required by Section 6328 of the Health Plan Corporations Act. In making that determination, she found that pursuant to Section 1402 of the Insurance Holding Companies Act, 40 P.S. § 991.1402, she had the authority to approve or disapprove the change in control of affected subsidiaries previously owned by Western Blue Cross and Blue Shield and proposed to be owned by Highmark. However, because she found that Section 201 of the GAA Amendments, *fn10 15 P.S. § 21201, specifically excluded health plan corporations from the definition of "insurance corporation", she held that review of consolidations and other fundamental corporate changes of health plan corporations was not included in the authority granted to her by the GAA Amendments, 15 P.S. §§ 21201-21207.

Finally, because she found that the consolidation of Blue Shield and Western Blue Cross constituted a fundamental corporate change permitted by Chapter 59 of the Nonprofit Law, 15 Pa. C.S. §§ 5921-5929, and because under Section 5929(a) of the Nonprofit Law, 15 Pa. C.S. § 5929(a), two or more corporations have the power to consolidate and form a new corporation, she concluded that she had no jurisdiction over the consolidation *fn11 as it was controlled by the Nonprofit Law.

Despite concluding that she lacked jurisdiction over the proposed consolidation of Western Blue Cross and Blue Shield because that consolidation was solely controlled by the Nonprofit Law, a statute over which she had no jurisdiction, the Commissioner then found that under the Section 1402(f)(1)(v) of the Insurance Holding Companies Act, 40 P.S. § 991.1402(f)(1)(v), she had the authority to disapprove a filing by the Consolidating Companies for change in control. She would disapprove the filing if the integrity of the management of the acquiring company is such that the change in control would not be in the best interests of the policyholders and the public. Based on her finding that the Members of the Boards of each Western Blue Cross and Blue Shield had voted to consolidate, and that they felt consolidation was in the best interests of the Members, with which she agreed, she concluded that the standard for integrity of Highmark was satisfied by that vote.

Addressing other concerns raised by the comments of the Opponents to consolidation, the Commissioner found:

. that the procedures outlined in Highmark's proposed bylaws for nominating, electing and appointing its directors, as well as the proposed proportionate representation of professionals and subscribers (by which the Board of Directors will be composed of 75% lay members and 25% health care professionals) complied with the Health Plan Corporations Act because that fell within the terms of that Act's requirements for size and composition of the Board.

. that Highmark would be subject to the requirements of both the Hospital Plan Act and the Health Service Plan Act because it proposed to operate both a health service plan and a hospital plan.

. that the existing certificates of authority of each Western Blue Cross and Blue Shield, as property rights, passed to Highmark by operation of law, *fn12 so that no new certificate of authority was required.

. that the competitive standards contained in the Insurance Holding Companies Act were not applicable to the consolidation, and, even if they were, that the proposed consolidation complied with those standards. *fn13

. that the proposed consolidation would still fulfill the charitable and benevolent purposes of the Consolidating Companies, because Highmark, as the successor corporation, would still be bound by the same statutory requirements of the Health Plan Corporations Act as Western Blue Cross and Blue Shield, mandating that nonprofit corporations operating hospital and professional health service plans be charitable and benevolent institutions, and maintain open enrollment.

She also approved the proposed bylaws of Highmark under Section 6328 of the Health Plan Corporations Act, because those bylaws complied with the Law's specific requirements for the composition of the board of directors, as well as the procedures for the nomination, election and appointment of directors.

II.

All the parties, in some form or another, contend that this case is not ready for or subject to judicial review. *fn14 Opponents contend that the matter is not ready for appellate review because the record below is inadequate because there is no formal record for us to review. Highmark also agrees that the appeal is not ready for appellate review because Opponents were required to exhaust their internal appeals within the agency before appealing to this court. For her part, the Commissioner contends that there is nothing to appeal because her determination to allow the consolidation is not appealable because it is not an adjudication, but a determination, from which no party can appeal, not even Highmark, had she denied its request.

To determine whether it is ready for judicial review, we must first determine whether the Commissioner's order is an "adjudication." If the agency action is not an "adjudication", then it is not subject to judicial review by way of appeal. Baker v. Human Relations Commission, 507 Pa. 325, 489 A.2d 1354 (1985). 42 Pa. C.S. § 702.

Section 101 of the Administrative Agency Law defines an "adjudication" as:

Any final order, decree, decision, determination or ruling by an agency affecting personal or property rights, privileges, immunities, duties, liabilities or obligations of any or all of the parties *fn15 to the proceeding in which the adjudication is made. (Emphasis added).

Because, by definition, an agency action only results in an adjudication when there is a final order, see Stone and Edwards Insurance, Inc. v. Department of Insurance, 161 Pa. Commw. 177, 636 A.2d 293 (Pa. Commw. 1994), affirmed and remanded, 538 Pa. 276, 648 A.2d 304 (1994), only when those administrative appeals have been exhausted will the agency action become an adjudication subject to judicial review. See Killian v. Unemployment Compensation Board of Review, 405 A.2d 1372 (Pa. Commw. 1979); Allegheny Ludlum Steel Corp. v. Public Utility Commission, 501 Pa. 71, 459 A.2d 1218 (1983). Of course, if a party does not timely seek to have a hearing from an adverse agency adjudication, the adjudication becomes final and unappealable. Martin v. Commonwealth, Department of Environmental Resources, 120 Pa. Commw. 263, 548 A.2d 672 (Pa. Commw. 1988), citing, Commonwealth v. Derry Township, 466 Pa. 31, 351 A.2d 606 (1975). *fn16

Even though the agency action has a direct impact on the person's rights or privileges, and is final so as to fall within the definition of an "adjudication", the action is not "valid as to any party unless he shall have been afforded reasonable notice of a hearing and an opportunity to be heard." 2 Pa. C.S. § 504. Until a hearing is held before the administrative agency and a record of that hearing made, Section 504 of the Administrative Agency Law provides that the adjudication is not valid or effective. Turner v. Public Utilities Commission, 683 A.2d 942, 946 (Pa. Commw. 1996). The reason behind this requirement is that judicial review, absent a valid administrative adjudication or proper record, is a "premature interruption of the administrative process." Id., citing, Canonsburg General Hospital v. Department of Health, 492 Pa. 68, 422 A.2d 141 (1980). Moreover, until a hearing, and, if necessary, the taking of evidence where facts are disputed, the issues cannot be properly clarified, whether there is a direct interest of the party taking the appeal and questions of fact sufficiently resolved to create a record upon which judicial review can be conducted. *fn17

Opponents contend that they have a "direct interest" in the Commissioner's decision to allow consolidation, making them a "party" to the proceeding below, yet they have sought to directly appeal to this court an "adjudication", and, even if so, that it is not yet valid as to them and unappealable before us. Consequently, we will transfer this case back to the Department to consider whether Opponents' interests are sufficiently direct so as to be a "party" and, if so, conduct sufficient hearings to resolve any factual disputes. Because in the absence of a hearing before the Department, no "final order" of the Department is before us, Opponents' judicial review is premature and we will transfer the case to the Department for such a hearing. See Norwood A. McDaniel Agency v. Foster, 117 Pa. Commw. 227, 543 A.2d 155 (Pa. Commw. 1988).

Accordingly, Opponents' appeal is transferred to the Department for a hearing pursuant to Section 504 of the Administrative Agency Law, 2 Pa. C.S. § 504.

DAN PELLEGRINI, JUDGE

Judge Leadbetter did not participate in the decision of this case.

ORDER

AND NOW, this 12th day of August, 1997, the appeal of Opponents is transferred to the Insurance Department for a hearing pursuant to Section 504 of the Administrative Agency Law, 2 Pa. C.S. § 504. Jurisdiction relinquished.

DAN PELLEGRINI, JUDGE


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