In Matter of Proposed Affiliation of BCBSD, Inc., C.A. No. 04A-07-004-JRS (DE 10/4/2004)
| Decision Date | 04 October 2004 |
| Docket Number | C.A. No. 04A-07-004-JRS. |
| Parties | IN THE MATTER OF: PROPOSED AFFILIATION OF BCBSD, INC., d/b/a BLUE CROSS AND BLUE SHIELD OF DELAWARE, WITH CAREFIRST, INC., |
| Court | United States State Supreme Court of Delaware |
W. Harding Drane, Jr., Esquire and Sarah E. DiLuzio, Esquire, Potter, Anderson & Corroon, LLP, Wilmington, Delaware; George A. Nilson, Esquire and Natalie F. Zaidman, Esquire, Piper Rudnick, LLP, Baltimore, Maryland. Attorneys for Appellant, CareFirst, Inc.
David S. Swayze, Esquire and Michael W. Teichman, Esquire, Parkowski, Guerke & Swayze, Wilmington, Delaware. Attorneys for Appellee, Blue Cross and Blue Shield of Delaware.
Grover C. Brown, Esquire, Gordon, Fournaris & Mammarella, P.A., Wilmington, Delaware. Attorney for Appellee, Blue Cross and Blue Shield of Delaware.
Michael J. Rich, Esquire, Department of Insurance, Dover, Delaware. Attorney for Appellee, the Delaware Department of Insurance.
A. Gilchrist Sparks, III, Esquire, Michael Houghton, Esquire and Patricia R. Uhlenbrock, Esquire, Morris, Nichols, Arsht & Tunnell, Wilmington, Delaware. Attorneys for Appellee, the Delaware Department of Insurance.
Marsha Kramarck, Esquire, Department of Justice, Wilmington, Delaware. Attorney for the Delaware Department of Justice.
In this appeal from a decision of the Delaware Insurance Commissioner ("the Commissioner" or "the Delaware Commissioner"), the Court addresses the scope of the Commissioner's authority to consider and approve a unique structural affiliation between two non-profit health service plans, the appellant, CareFirst, Inc. ("CareFirst") and one of the appellees, Blue Cross and Blue Shield of Delaware, Inc. ("BCBSD"). The affiliation created by the parties and submitted to the Commissioner for approval resulted in a transaction not specifically addressed, and perhaps not even contemplated by, the statutory scheme that regulates the health insurance industry in Delaware. The Commissioner approved the affiliation in March, 2000. By order dated June 30, 2004, the Commissioner withdrew her approval after concluding that recently enacted legislation in Maryland rendered the affiliation no longer in the best interests of BCBSD or it Delaware subscribers.
CareFirst now argues that the Commissioner lacked the authority to approve the affiliation in 2000 and lacked the authority subsequently to withdraw her approval in 2004. According to CareFirst, neither act was within the Commissioner's statutorily prescribed power. CareFirst also argues that even if the Commissioner was authorized to approve and then disapprove of the affiliation, her decision to order the disaffiliation of BCBSD and CareFirst was not supported by substantial evidence.
For the reasons that follow, the Court finds that the Commissioner was authorized both to approve the affiliation with conditions and subsequently to withdraw that approval when a dramatic change in circumstances compelled her to do so. In addition, the Court is satisfied that the Commissioner's decision to order disaffiliation is supported by substantial evidence. Accordingly, the decision must be AFFIRMED.
The parties to this appeal are the appellant, CareFirst, and the appellees, the Delaware Department of Insurance (the "Department"), the Delaware Department of Justice, and BCBSD. CareFirst is a non-profit Maryland corporation regulated as a health service plan under the Maryland Insurance Code. CareFirst operates as a holding company that originally was formed by an affiliation between CareFirst of Maryland, Inc. ("CFMD") and Group Hospitalization and Medical Services, Inc. ("GHMSI"), two non-profit subsidiaries that provide Blue Cross and Blue Shield services in the State of Maryland and the District of Columbia, respectively.1 BCBSD is a non-profit Delaware corporation regulated as a health service corporation under the Delaware Insurance Code.2 The Commissioner is the "chief officer" of the Department and is charged with regulatory responsibility over domestic and foreign "insurers" as provided by the Delaware Insurance Code.3
On December 23, 1998, CareFirst and BCBSD executed an Affiliation Agreement (the "Agreement") to capitalize on marketing and administrative synergies between the two companies and to allow BCBSD to remain competitive and economically viable through its relationship with the larger and more resourceful CareFirst.4 Prior to entering into the Agreement, the BCBSD board conducted extensive due diligence on CareFirst, the CareFirst Board and its management. BCBSD felt comfortable at the time of the Affiliation that CareFirst was a company focused on fiscal discipline and market competitiveness, that it understood and would respect the unique Delaware market, and that it shared BCBSD's vision for the future.5
Under the Agreement, CareFirst would become the sole member of BCBSD as well as the primary licensee for use of the Blue Cross and Blue Shield service trademarks (the "Marks") in Delaware. BCBSD would become an affiliate of CareFirst and would maintain "controlled affiliate" licenses to use the Marks in Delaware. CareFirst paid no consideration for either its membership interest in BCBSD or the primary licenses for use of the Marks in Delaware. The Agreement required BCBSD and CareFirst to amend their respective charters and bylaws to implement this unique affiliated structure. Despite the structural changes, BCBSD remained a locally-controlled entity with its own Delaware-based board of directors.6
The Agreement contemplated three classes of CareFirst directors comprised in total of twenty-one members, including six "Class I Directors" from the District of Columbia affiliate, twelve "Class II Directors" from the Maryland affiliate, and three "Class III Directors" from the Delaware affiliate. Under the Agreement, each class of directors maintained the exclusive right to elect or remove any director within its class.7 Moreover, the size of the CareFirst Board could not be changed without the approval of each class of directors, and the existence and powers of the separate classes of directors or members could not be altered in any manner, directly or indirectly, without the consent of the potentially effected class of directors.8
In 1999, BCBSD and CareFirst requested approval of the Agreement from the Commissioner under Chapters 3 and 50 of the Delaware Insurance Code. The parties believed this approval to be necessary and in concert submitted themselves and the Affiliation they had constructed to the jurisdiction of the Commissioner.9 Even though it was understood by all concerned that the Affiliation was not a "change in control" transaction or merger of the companies, the parties agreed that the provisions of the Delaware Insurance Code relating to such transactions may provide helpful guidance to the Commissioner as she considered the unique transaction they had submitted to her for approval.10
In October 1999, a public hearing was held on the matter before the Honorable Battle R. Robinson, the Hearing Officer appointed by the Commissioner to consider the transaction in the first instance. Three months later, on January 4, 2000, the Hearing Officer issued her findings and conclusions in which she recommended approval of the Affiliation with several conditions. On March 20, 2000, the Commissioner issued her Order in which she adopted most of the Hearing Officer's recommendations as conditions to her approval of the Affiliation (the "Affiliation Order").11 The following conditions, to which the parties agreed, are relevant here:
• CareFirst and BCBSD must comply with the provisions of 18 Del. C. Ch. 50, and CareFirst must further agree to the "general supervisory authority" of the Commissioner pursuant to 18 Del. C. Ch. 3.12
• The CareFirst and BCBSD boards of directors must be restructured to comply with the terms of the draft amended certificates of incorporation and bylaws submitted for approval by the parties. Any change in the corporate structure of either CareFirst or BCBSD "must receive prior approval of the [Department]."13
• Certain transfers of assets are now subject to the prior approval of the Commissioner.14
• CareFirst and BCBSD must maintain their separate corporate identities for legal, financial, accounting, tax, and insurance regulatory purposes.15
• BCBSD must maintain its not-for-profit status for at least two years from the date the Affiliation becomes effective. Thereafter, it may not convert to for-profit status without the approval of the Commissioner.16
• Any change in the corporate structure of CareFirst or any of the affiliates which is required to be filed with another regulator must also simultaneously be filed with the Department.17
• The conditions to the approval of the Affiliation are "subject to further order as circumstances may require." The Hearing Officer's Report and Affiliation Order "are subject to further modification or amendment or further review either sua sponte by the Commissioner or by motion of a party."18
After the Affiliation was approved by the Commissioner, the parties continued to deliver services to BCBSD subscribers in accordance with the terms of the Agreement and the Affiliation Order. By all accounts, the Affiliation has been and continues to be a success.
In response to growing concerns of the Maryland Insurance Commissioner ("the Maryland Commissioner") regarding a perceived change in the focus and direction of CareFirst, on May 22, 2003, the Maryland General Assembly enacted legislation addressing the regulation of nonprofit health service plans incorporated in or licensed by the State of...
To continue reading
Request your trial