Nankin Hospital v. Michigan Hospital Service, Civ. A. No. 32630.

• Decision Date: 17 July 1973
• Docket Number: Civ. A. No. 32630.
• Citation: 361 F. Supp. 1199
• Parties: NANKIN HOSPITAL, a Michigan nonprofit hospital corporation, Plaintiff, v. MICHIGAN HOSPITAL SERVICE, a Michigan nonprofit corporation, et al., Defendants.
• Court: U.S. District Court — Western District of Michigan

361 F. Supp. 1199

NANKIN HOSPITAL, a Michigan nonprofit hospital corporation, Plaintiff, v. MICHIGAN HOSPITAL SERVICE, a Michigan nonprofit corporation, et al., Defendants.

Civ. A. No. 32630.

United States District Court, E. D. Michigan, S. D.

July 17, 1973.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Larry S. Davidow, Davidow & Davidow, Detroit, Mich., for plaintiff.

Grady Avant, Jr., Long, Preston, Evans & Kinnaird, Detroit, Mich., and Harold F. Baker, Washington, D. C., for defendants.

MEMORANDUM OPINION

(Findings of Fact— Conclusions of Law)

DeMASCIO, District Judge.

The defendant, Michigan Hospital Service Corporation (Blue Cross), is in the business of insuring pre-paid hospital care for its subscribers. It was incorporated pursuant to Act 109 (Public Acts 1939, M.C.L.A. § 550.501 et seq.) which provides for the establishment and regulation of nonprofit hospital service corporations.¹ The clear intent of Act 109 is to provide a voluntary nonprofit plan for financing health care at the lowest possible cost. To that end, hospital service corporations are subject to detailed regulation by the Michigan Commissioner of Insurance.² For example, Act 109 provides that ". . . the rates charged to subscribers for hospital service, and the rates of payment by such corporation to the contracting hospitals, shall at all times be subject to the approval of the commissioner of insurance." (Sect. 3.) Act 109 also restricts the class of hospitals with which a hospital service corporation may contract. Specifically, Blue Cross may "enter into contracts for the rendering of hospital service to any of its subscribers only with hospitals maintained by the state, or any of its political subdivisions . . . or . . . a non-profit corporation . . ." (Sect. 3). Nonprofit hospitals which have such contracts with Blue Cross are referred to as participating hospitals.³

In 1951, Dr. Rene Archambault purchased Nankin Hospital, a two-story structure located in Wayne County, Michigan. The hospital can accommodate 43 bed patients (TR 1304-05)⁴ and houses Dr. Archambault's Industrial and General Clinics. The hospital and general clinic share the same entrance and lobby, and have identical telephone numbers⁵ (TR 1307-08, 1321-23). From 1952 until terminated in 1966, Nankin was a participating Blue Cross hospital. As a consequence of that termination, Nankin filed this antitrust action claiming that defendants⁶ violated Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2.⁷

Section 1 of the Sherman Act, 15 U. S.C. § 1, provides:

"Every contract, combination . . . or conspiracy, in restraint of trade or commerce among the several States . . . is declared to be illegal."

Section 2 of the Sherman Act, 15 U. S.C. § 2, defines as a misdemeanor the act of any person:

". . . who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States. . . ."

During the trial, defendants moved, pursuant to Fed.R.Civ.P. 12, to dismiss the action on the following grounds: (1) failure to prove restraint of trade under Section 1 of the Sherman Act; (2) failure to prove a monopoly under Section 2 of the Sherman Act; and (3) lack of subject matter jurisdiction because defendants' acts (a) have not affected or substantially restrained plaintiff's interstate trade or commerce; (b) are excepted from antitrust actions under the McCarran-Ferguson Act; and (c) were regulated by the Hospital Service Corporation Act and therefore constitute "state action" not subject to antitrust regulations. In order to resolve these issues additional facts as found by the court are set forth.⁸

Prior to 1963, any hospital with a nonprofit charter was accepted as a participating hospital by Blue Cross (TR 362). However, with concern over rising costs of hospital care between 1950 and 1960, the Insurance Commissioner required Blue Cross to adopt certain procedures and standards for the protection of its subscribers (Def.Exh. 40, p. 2).⁹ Blue Cross adopted a tentative set of qualification standards on January 28, 1960 (Def.Exh. 19) and, on October 10, 1962, participating hospitals were notified that the standards had received final approval (Def.Exh. 30).¹⁰ The pertinent standards provided that: (a) a participating hospital must be a community supported or a voluntary or tax-supported general hospital and must be responsive to community needs; (b) the governing body of the hospital must be responsible for the operation of the hospital; (c) the responsibility for administration of the hospital must be vested in an administrator responsible only to the governing board; and (d) the hospital must be owned and operated by a nonprofit corporation or by the State of Michigan.¹¹ In light of these standards, which we find to be reasonable, Blue Cross surveyed its participating hospitals (TR 467-68) and determined that Nankin did not meet the qualifications.¹² Blue Cross then engaged in negotiations with Nankin to maintain it as a contracting hospital. Blue Cross finally notified Nankin that its participating status would be terminated unless, within six months, Nankin complied with the qualification standards (Def.Exh. 48, p. 4). After several extensions (Def.Exh. 57, 63-67) Nankin was granted a participating contract for one year conditioned upon the employment of a full-time administrator (Def. Exh. 73-75), and Nankin was advised that Dr. Archambault could not continue as the administrator or serve on the Board of Directors (Def.Exh. 70, 76 TR 544, 670). In an attempt to conform to the standards, Dr. Archambault suggested that he would sell Nankin's facilities to the corporation. Despite Nankin's failure to comply at the end of this one-year contract, Blue Cross again extended the contract for 90 days to permit Nankin to complete the changes it had promised. At the end of this 90 day period, the contract was not extended (Def.Exh. 121).

It is clear on this record that Blue Cross had ample basis for withdrawing Nankin's participating status. Dr. Archambault is the treasurer and full-time administrator of Nankin.¹³ He alone controls Nankin's finances and may draw funds in any amount "as long as it does not create an insolvency." (TR 911-13, 1108-10.)¹⁴ As administrator, for which he receives a salary,¹⁵ he exercises complete authority over the hospital employees.¹⁶ Dr. Archambault continually refused to hire an independent administrator even though an administrator's salary would be included in the costs reimbursed by Blue Cross.¹⁷

With respect to the nonprofit character of Nankin, the following facts are relevant.¹⁸ Dr. Archambault owned the hospital's laboratory and derived substantial income from the sale of laboratory services to the hospital (Def. Exh. 229, 231; TR 1387-90). He also owned the hospital pharmacy. From this pharmacy, Dr. Archambault obtained drugs which he sold at a profit to his clinic patients (TR 1355, 1507-08, 1522-23). Dr. Archambault did not reimburse the hospital in cash for the drugs obtained. Rather, the cost of the drugs he obtained was debited to a hospital account payable to him.

The hospital also paid Dr. Archambault for anesthesia services (TR 1430-32) and for parking and storage facilities (TR 1466-67). The Nankin medical staff were all employees of Dr. Archambault including a full-time physician and a number of part-time doctors (TR 1331-43). The record further discloses that Dr. Archambault performed substantially all of the surgery (TR 1342, Def. Exh. 132) and that he and the full-time doctor were the only physicians authorized to admit patients to Nankin (TR 902-03, 1335-36).¹⁹ Dr. Archambault not only decided whether the patient should be admitted but also the length of stay. After admission, all patients, even those admitted by the full-time physician, were considered as Dr. Archambault's (TR 1335). Fees received by the full-time physician, were deposited to Dr. Archambault's personal account (TR 1326-27). It is also clear that the income of the hospital as well as that of Dr. Archambault was dependent upon admissions (TR 1559-60). Further, it is noteworthy that Nankin's application for a charitable exemption under Section 501(c)(3) of the Internal Revenue Code of 1954 (26 U.S.C. § 501(c)(3)) was, on four occasions, denied on the ground that Nankin was operated for Dr. Archambault's personal benefit (Def.Exh. 168, 169, 170; TR 1481-82, 1487-88). After the first denial by the Internal Revenue Service, Dr. Archambault restructured Nankin's Board of Directors. The new Board consisted of seven members, each was either a friend, patient, legal counsel, business associate or employee of Dr. Archambault.²⁰ It was thus apparent after restructuring that Dr. Archambault continued to control the Board of Directors.²¹ In December 1971, the Internal Revenue Service denied Nankin's fourth application for a Section 501(c)(3) exemption because:

". . . a hospital controlled by doctors who limit the care provided by the hospital to their own patients and where use of the hospital by other doctors is unsubstantial is a hospital which does not qualify for exemption under § 501(c)(3). . . ." (Def. Exh. 184)

The extent of Dr. Archambault's control and financial interest in Nankin is most clearly demonstrated by the negotiations for a land contract evidencing his sale of Nankin's facilities to the Corporation. As noted above, Dr. Archambault suggested such a transfer as a compromise to Blue Cross (supra, p. 7).

The first land contract was dated February 1, 1965. The Board of Directors agreed to accept the contract at the value appraised by Dr. Archambault of $449,000 (TR 1411-12) but this contract was never executed because Mrs. Archambault refused to sign (Def.Exh. 69; TR 1415). The face amount of the land contract was later questioned by Blue Cross resulting in an independent appraisal which valued the land and building at $325,800. The...