Blue Cross & Blue Shield of Kansas, Inc. v. Praeger

• Decision Date: 06 August 2003
• Docket Number: No. 89,075.,89,075.
• Parties: BLUE CROSS AND BLUE SHIELD OF KANSAS, INC., Appellee/Cross-Appellant, v. SANDY PRAEGER in her official capacity as Commissioner of Insurance for the State of Kansas, Appellant/Cross-Appellee, and ANTHEM INSURANCE COMPANIES, INC., Appellee/Cross-Appellant, v. SANDY PRAEGER in her official capacity as Commissioner of Insurance for the State of Kansas, Appellant/Cross-Appellee.
• Court: Kansas Supreme Court

276 Kan. 232

75 P.3d 226

BLUE CROSS AND BLUE SHIELD OF KANSAS, INC., Appellee/Cross-Appellant, v. SANDY PRAEGER in her official capacity as Commissioner of Insurance for the State of Kansas, Appellant/Cross-Appellee, and ANTHEM INSURANCE COMPANIES, INC., Appellee/Cross-Appellant, v. SANDY PRAEGER in her official capacity as Commissioner of Insurance for the State of Kansas, Appellant/Cross-Appellee.

No. 89,075.

Supreme Court of Kansas.

Opinion filed August 6, 2003.

Dan Biles, of Gates, Biles, Shields & Ryan, P.A., of Overland Park, Kansas, argued the cause, and Brent Getty, of Kansas Insurance Department, was on the briefs for appellant/cross-appellee Commissioner of Insurance for the State of Kansas.

Gary D. McCallister, of Gary D. McCallister & Associates, Ltd., of Chicago, Illinois, argued the cause, and Eric I. Unrein, of Davis, Unrein, McCallister, Biggs & Head, L.L.P., of Topeka, William H. Pitsenberger, general counsel, of Blue Cross and Blue Shield of Kansas, Inc., of Topeka, Sidney A. Shapiro, of Lawrence, and James C. Scoville and Carl Micarelli, of Debevoise & Plimpton, of New York, New York, were with him on the briefs for appellee/cross-appellant Blue Cross and Blue Shield of Kansas, Inc.

Kevin M. Fowler, of Frieden, Haynes & Forbes, argued the cause, and Randall J. Forbes and John C. Frieden, of the same firm, were with him on the briefs for appellee/cross-appellant Anthem Insurance Companies, Inc.

Ross S. Myers, of Kansas City, Missouri, was on the brief for amicus curiae National Association of Insurance Commissioners.

Dawn Touzin, of Boston, Massachusetts, was on the brief for amicus curiae Community Catalyst, Inc.

Douglas Laird, and William W. Sneed, of Polsinelli, Shalton, & Welte, P.C., of Topeka, were on the brief for amicus curiae Kansas Medical Society.

Charles R. Hay and Steve A. Schwarm, of Goodell, Stratton, Edmonds & Palmer, L.L.P., of Topeka, were on the brief for amicus curiae Kansas Hospital Association.

Per Curiam:

These appeals arise out of proceedings wherein Kathleen Sebelius, Kansas Commissioner of Insurance, denied the request by Anthem Insurance Companies, Inc. (Anthem), to acquire health insurance company Blue Cross and Blue Shield of Kansas, Inc. (BCBSKS). Anthem and BCBSKS then filed petitions for judicial review with the Shawnee County District Court based on five different reasons under K.S.A. 77-621 of the Kansas Act for Judicial Review and Civil Enforcement of Agency Actions (KJRA). The district court reversed the Commissioner's decision on the single issue of an erroneous application or interpretation of the law and declined to rule on the remaining issues presented. The Commissioner appealed, the other parties cross-appealed, and the case was transferred to us from the Court of Appeals on the Commissioner's motion. Our jurisdiction is pursuant to K.S.A. 20-3017.

For the reasons set forth in the opinion, we disagree with the district court's narrowly based decision and reverse. Under our obligation to make the same review of the administrative agency's actions as does the district court, and pursuant to our review under K.S.A. 77-621, we will address the questions asked of the district court which it left unanswered. Those KJRA issues, and this court's accompanying holdings, are as follows:

1. Did the Commissioner erroneously interpret and apply K.S.A. 40-3304 of the Kansas Insurance Holding Companies Act ("the acquisition statute")? No.

2. Did the Commissioner act beyond the jurisdiction conferred by the acquisition statute? No.

3. Is the Commissioner's order unreasonable, arbitrary, or capricious? No.

4. Is the Commissioner's order based on a determination of fact that is not supported by substantial evidence when viewed in light of the record as a whole? No.

5. Are K.S.A. 40-3304(d)(1)(C) and (E) unconstitutional delegations of a legislative function under Art. 2, § 1 of the Kansas Constitution? No.

See K.S.A. 77-621(c)(1), (2), (4), (7), and (8).

Consequently, the judgment of the district court is reversed, and the Commissioner's order is affirmed. The cross-appeals of Anthem and BCBSKS, based upon an alleged erroneous remand to the Commissioner by the district court, are rendered moot.

FACTS

The Companies' Backgrounds

BCBSKS evolved from two nonprofit service corporations, Blue Cross of Kansas and Blue Shield of Kansas, which were formed in the 1940's. Consolidation of the two companies in 1983 created BCBSKS. In 1992, BCBSKS terminated its nonprofit status and became a mutual insurance company. In order to extinguish its charitable obligations, BCBSKS made a one-time special payment of approximately $75 million for charitable purposes which was judicially approved.

Today BCBSKS is the largest health insurer in Kansas, with a 67% market share in the areas in which it operates. BCBSKS provides or administers private health care coverage for more than 715,000 Kansas residents in all Kansas counties except Johnson and Wyandotte. In addition, BCBSKS administers Medicare and Medicaid health care coverage for another 640,000 Kansans.

In 2000, BCBSKS had premiums of $873 million, surplus of $328.5 million, net income of $5.8 million, and assets of $730.8 million. For the 6 months ended June 30, 2001, BCBSKS had premiums of $484.1 million, surplus of $310.4 million, net loss of $14.4 million, and assets of $698.1 million.

Anthem developed from a mutual insurance company known as Blue Cross of Indiana. In 1985, Blue Cross of Indiana merged with the mutual insurance company known as Blue Shield of Indiana to create a company called Associated Insurance Companies, Inc. (Associated).

Associated began a series of mergers and acquisitions in 1993 with the merger of Blue Cross and Blue Shield of Kentucky into Associated. In 1995, Community Mutual Blue Cross and Blue Shield of Ohio was merged into Associated. In 1996, Associated changed its name to Anthem Insurance Companies, Inc. In 1997, Blue Cross and Blue Shield of Connecticut, Inc., was merged into Anthem. In 1999, Anthem purchased Blue Cross and Blue Shield of New Hampshire and Blue Cross and Blue Shield of Colorado and Nevada. In 2000, Anthem purchased Blue Cross and Blue Shield of Maine. In 2001, Anthem converted from a mutual insurance company to a stock insurance company. Anthem became a wholly owned subsidiary of Anthem, Inc., which was created as a public holding company for the Anthem companies.

In 2000, Anthem had revenues of $8.7 billion, surplus of more than $1.9 billion, net income of $226 million, and assets of $5.7 billion. For the 6 months ended June 30, 2001, Anthem had revenues of $5.1 billion, surplus of more than $2 billion, net income of $143 million, and assets of $5.8 billion.

Sponsored Demutualization

In May 2001, BCBSKS and Anthem entered into an Alliance Agreement (Agreement) under which Anthem or its designated affiliate would acquire ownership and control of BCBSKS. The Agreement contemplates a two-step transaction, which the parties refer to as a sponsored demutualization. The first step is BCBSKS's conversion from a mutual insurance company owned by its policyholders to a stock insurance company. The second is Anthem's purchase of all shares of common stock authorized and issued by BCBSKS after its conversion. Under the Agreement, Anthem is to pay $190 million for BCBSKS's stock.

The Board of Directors of BCBSKS adopted a formal plan of conversion and submitted it to the Commissioner for approval in October 2001. Anthem filed a "Form A-Statement Regarding the Acquisition of Control of or Merger with a Domestic Insurer" with the Commissioner, seeking approval of its acquisition of BCBSKS.

The applications state that BCBSKS would convert to a stock company upon the approval of the Commissioner and BCBSKS policyholders eligible to vote, as determined under the Plan (Eligible Policyholders). Conversion would extinguish all policyholders' membership interests. Eligible Policyholders would receive a special cash distribution from BCBSKS limited to the amount by which BCBSKS's book value upon conversion exceeds $155 million. This specific amount was later calculated as $131 million.

In addition to the $131 million, Eligible Policyholders also would receive $142 million of the $190 million purchase price paid by Anthem. The remaining $48 million of the purchase price would be deposited into an escrow fund pending resolution of the Contingent Litigation Matter. Any money left in the escrow fund after that resolution and satisfaction of certain related liabilities would be distributed to Eligible Policyholders. This proposal eventually was approved by the required percentage of Eligible Policyholders.

BCBSKS engaged Dresdner Kleinwort Wasserstein, Inc. (DKW), an investment firm, to evaluate whether the total consideration to be distributed to Eligible Policyholders under the Agreement was equitable. DKW concluded that, from a financial point of view, the aggregate of the purchase price and the special distribution to be paid to Eligible Policyholders was fair. BCBSKS also engaged the actuarial firm of Milliman, USA, to devise an equitable method of allocating consideration to Eligible Policyholders.

The Commissioner considered the applications as a single transaction and consolidated them for further proceedings. To assist in her review, she formed a Kansas Insurance Department Testimonial Team (KID testimonial team) which consisted of independent special counsel and advisors as well as members of her staff. The Commissioner also held public comment meetings in five locations throughout the state. The examination process covered a period of several months, involving attorneys, investment bankers, actuaries, tax specialists, certified public accountants, and health care and planned development specialists.

The Commissioner presided over a public evidentiary hearing in Topeka from January 7-9, 2002. On February 11, 2002, she issued a 45-page final order containing 66...