Kartell v. Blue Shield of Massachusetts, Inc.

Citation749 F.2d 922
Decision Date28 November 1984
Docket NumberNos. 84-1241,84-1290 and 84-1303,s. 84-1241
Parties, 1984-2 Trade Cases 66,300 James P. KARTELL, M.D., et al., Plaintiffs, Appellees, v. BLUE SHIELD OF MASSACHUSETTS, INC., Defendant, Appellant. James P. KARTELL, M.D., et al., Plaintiffs, Appellees, v. BLUE SHIELD OF MASSACHUSETTS, INC., et al., Defendants, Appellees. Massachusetts Medical Society, et al., Intervenors/Plaintiffs, Appellants. James P. KARTELL, M.D., et al., Plaintiffs, Appellees, v. BLUE SHIELD OF MASSACHUSETTS, INC., et al., Defendants, Appellees. Commissioner of Insurance, Intervenor/Defendant, Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals (1st Circuit)

Daniel O. Mahoney, Boston, Mass., with whom Douglas H. Wilkins, Arthur P. Kreiger, Palmer & Dodge, and Reginald H. Howe, Boston, Mass., were on brief, for Blue Shield of Massachusetts, Inc., et al.

Helen E. Witt, James W. Rankin, Jack A. Rovner, Kirkland & Ellis, Marvin C. Reiter, Mary Ader, Chicago, Ill., on brief, for Blue Cross and Blue Shield Association, amicus curiae.

John R. Phillips, and Richard B. Rogers, Detroit, Mich., were on brief, for Ford Motor Company, amicus curiae.

H. Reed Witherby, Asst. Atty. Gen., Government Bureau, Boston, Mass., with whom Francis X. Bellotti, Atty. Gen., and Donna Arzt, Asst. Atty. Gen., Public Protection Bureau, Boston, Mass., were on brief, for Massachusetts Com'r of Ins.

Thayer Fremont-Smith, Boston, Mass., with whom Kenneth Laurence, Lee T. Gesmer, Michael K. Loucks, and Choate, Hall & Stewart, Boston, Mass., were on brief, for Massachusetts Medical Society, et al.

Kirk B. Johnson, Chicago, Ill., with whom, B.J. Anderson, American Medical Association, Newton N. Minow, Jack R. Bierig, Jeffrey R. Tone, James C. Dechene, and Sidley & Austin, Chicago, Ill., were on brief, for American Medical Association, amicus curiae.

Catherine W. Hantzis, Boston, Mass., on brief for Consumer Health Advocates, Inc., amicus curiae.

James vanR. Springer, Washington, D.C., with whom Dickstein, Shapiro & Morin, Washington, D.C., Stanley V. Ragalevsky, Christopher E. Nolin, and Warner & Stackpole, Boston, Mass., were on brief, for James P. Kartell, M.D., et al.

Before CAMPBELL, Chief Judge, COWEN, * Senior Circuit Judge, and BREYER, Circuit Judge.

BREYER, Circuit Judge.

Blue Shield pays doctors for treating patients who are Blue Shield health insurance subscribers, but only if each doctor promises not to make any additional charge to the subscriber. The basic issue in this case is whether this Blue Shield practice--called a "ban on balance billing"--violates either Sherman Act Sec. 1 forbidding agreements "in restraint of trade," 15 U.S.C. Sec. 1, or Sherman Act Sec. 2 forbidding "monopolization" and "attempts to monopolize," id. Sec. 2. The district court, 582 F.Supp. 734 (D.Mass.1984) held that the practice constituted an unreasonable restraint of trade in violation of section 1. We conclude that the practice does not violate either section of the Sherman Act; and we reverse the district court.

As the district court noted, the relevant facts are "not ... generally ... disputed." Blue Shield provides health insurance for physician services while its sister, Blue Cross, insures against hospital costs. The consumers of Blue Shield insurance, at least those who buy "full service" prepaid medical benefits, can see any "participating doctor," i.e., a doctor who has entered into a standard Participating Physician's Agreement with Blue Shield. (If a doctor has not signed the Agreement, Blue Shield will reimburse him only if he provides emergency or out-of-state services.) Under the standard agreement, a participating doctor promises to accept as payment in full an amount determined by Blue Shield's "usual and customary charge" method of compensation. The district court found that the method has evolved, through the use of various 'capping' devices, towards payment of a 'fixed fee,' determined by Blue Shield, for each particular type of service. Blue Shield pays this amount directly to the doctor; the patient pays nothing out of his own pocket and therefore receives no reimbursement.

The district court also found that Blue Shield provides some form of health insurance to about 56 percent of the Massachusetts population. (About 45 percent has coverage carrying a 'balance billing' ban.) If one subtracts from the total population universe those Massachusetts residents who rely on government sponsored health care (e.g., Medicare or Medicaid), then Blue Shield (and Blue Cross) provide insurance coverage for about 74 percent of the rest, namely those Massachusetts residents who privately insure against health costs. (About 23 percent of that group have coverage with commercial insurers; and about 4 percent subscribe to Health Maintenance Organizations.) Virtually all practicing doctors agree to take Blue Shield subscribers as patients and to participate in its fee plan. Blue Shield payments made under that plan account for about 13 to 14 percent of all "physician practice revenue."

The district court found that, because of the large number of subscribers, doctors are under "heavy economic pressure" to take them as patients and to agree to Blue Shield's system for charging the cost of their care. The court believed that the effect of this payment system, when combined with Blue Shield's size and buying power, was to produce an unreasonably rigid and unjustifiably low set of prices. In the court's view, the fact that doctors cannot charge Blue Shield subscribers more than the Blue Shield payment-schedule amounts interferes with the doctors' freedom to set higher prices for more expensive services and discourages them from developing and offering patients more expensive (and perhaps qualitatively better) services. For these and related reasons, the district court held that Blue Shield's ban on 'balance billing' unreasonably restrains trade, and thereby violates Sherman Act Sec. 1. Blue Shield appeals from this holding. The plaintiff doctors cross-appeal from other rulings of the district court in Blue Shield's favor.

On these appeals, the parties raise a host of issues not directly related to the antitrust merits, including the claim that a recently enacted state law, Mass.St.1984, ch. 192, Sec. 1, renders the case moot by immunizing Blue Shield's "balance billing ban" from the reach of the antitrust laws. The 'mootness' issue, however, is not a simple one. And even if we accepted the mootness claim, the new statute may not immunize the defendants from treble-damage liability for past conduct. In view of these legal and practical problems, and the fact that this case has been pending in the federal courts for more than seven years, we believe it simpler and more appropriate to proceed directly to the antitrust merits, which, on our view of the case, are dispositive.

I

We disagree with the district court because we do not believe that the facts that it found show an unreasonable restraint of trade. We can best explain our reasons by first discussing the basic antitrust issue in general terms, then turning to the specific, detailed arguments advanced by the parties, and finally noting several special reasons here that militate against a finding of liability.

A

We disagree with the district court's finding of "restraint." To find an unlawful restraint, one would have to look at Blue Shield as if it were a 'third force,' intervening in the marketplace in a manner that prevents willing buyers and sellers from independently coming together to strike price/quality bargains. Antitrust law typically frowns upon behavior that impedes the striking of such independent bargains. The persuasive power of the district court's analysis disappears, however, once one looks at Blue Shield, not as an inhibitory 'third force,' but as itself the purchaser of the doctors' services. See Group Life & Health Insurance Co. v. Royal Drug Co., 440 U.S. 205, 214, 99 S.Ct. 1067, 1075, 59 L.Ed.2d 261 (1979) (direct reimbursement to participating pharmacies for subscribers' drugs "merely [an] arrangement[ ] for the purchase of goods and services by Blue Shield"). Antitrust law rarely stops the buyer of a service from trying to determine the price or characteristics of the product that will be sold. Thus, the more closely Blue Shield's activities resemble, in essence, those of a purchaser, the less likely that they are unlawful.

Several circuits have held in antitrust cases that insurer activity closely analogous to that present here amounts to purchasing, albeit for the account of others. And, they have held that an insurer may lawfully engage in such buying of goods and services needed to make the insured whole. The Second Circuit has held lawful a Blue Shield plan requiring pharmacies to accept Blue Shield reimbursement as full payment for drugs they supply to Blue Shield subscribers. Medical Arts Pharmacy of Stamford, Inc. v. Blue Cross & Blue Shield of Connecticut, Inc., 675 F.2d 502 (2d Cir.1982). The Third Circuit has allowed a hospital cost insurer (Blue Cross) to reimburse hospitals directly (and apparently completely) for services to subscribers. Travelers Insurance Co. v. Blue Cross of Western Pennsylvania, 481 F.2d 80 (3d Cir.), cert. denied, 414 U.S. 1093, 94 S.Ct. 724, 38 L.Ed.2d 550 (1973). The Seventh Circuit has permitted auto insurance companies to furnish direct reimbursement to repair shops as payment for the repair services provided to policyholders. Quality Auto Body, Inc. v. Allstate Insurance Co., 660 F.2d 1195 (7th Cir.1981), cert. denied, 455 U.S. 1020, 102 S.Ct. 1717, 72 L.Ed.2d 138 (1982).

At the same time, the facts before us are unlike those in cases where courts have forbidden an 'organization' to buy a good or service--cases in which the buyer was typically a 'sham' organization seeking only to combine otherwise independent buyers in order to suppress their otherwise competitive instinct to bid up price....

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