Ocean State Physicians Health Plan, Inc. v. Blue Cross & Blue Shield of Rhode Island, 88-1851

• Decision Date: 05 April 1989
• Docket Number: No. 88-1851,88-1851
• Citation: 883 F.2d 1101
• Parties: , 1989-2 Trade Cases 68,718 OCEAN STATE PHYSICIANS HEALTH PLAN, INC., et al., Plaintiffs, Appellants, v. BLUE CROSS & BLUE SHIELD OF RHODE ISLAND, Defendant, Appellee. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 1101

883 F.2d 1101

58 USLW 2133, 1989-2 Trade Cases 68,718

OCEAN STATE PHYSICIANS HEALTH PLAN, INC., et al Plaintiffs, Appellants, v. BLUE CROSS & BLUE SHIELD OF RHODE ISLAND, Defendant, Appellee.

No. 88-1851.

United States Court of Appeals First Circuit.

Heard April 5, 1989.

Decided Aug. 21, 1989.

Stuart M. Gerson with whom William G. Kopit, Epstein, Becker & Green, P.C., Washington, D.C., Thomas E. Lynch and Lynch and Greenfield, Providence, R.I., were on brief, for plaintiffs, appellants.

Steven E. Snow with whom James E. Purcell, Partridge, Snow & Hahn, Elia Germani, Providence, R.I., Joshua F. Greenberg, Michael Malina, and Kaye, Scholer, Fierman, Hays & Handler, New York City, were on brief, for defendant, appellee.

Before CAMPBELL, Chief Judge, BOWNES, Circuit Judge, and CAFFREY, ^* Senior District Judge.

LEVIN H. CAMPBELL, Chief Judge.

Plaintiffs, Ocean State Physicians Health Plan, Inc. ("Ocean State") and a certified class of Ocean State's participating physicians, brought suit against Blue Cross & Blue Shield of Rhode Island ("Blue Cross"), alleging that Blue Cross had acted unlawfully to exclude Ocean State from the health care insurance marketplace. A jury found that Blue Cross was guilty of violating section 2 of the Sherman Act, 15 U.S.C. Sec. 2 (1982) and also was liable under Rhode Island common law for tortiously interfering with the contractual relationships between Ocean State and the physicians. The district court subsequently ruled, however, that the challenged conduct was legitimate competitive activity of a sort that is favored--not prohibited--by the antitrust laws. Accordingly, the court granted judgment notwithstanding the verdict to Blue Cross on both the antitrust and tortious interference claims. We affirm the district court's judgment.

I. FACTUAL BACKGROUND

Defendant Blue Cross, a non-profit corporation established in 1939, has long been the largest health insurer in Rhode Island. It purchases health services from physicians hospitals, and other health care providers on behalf of its subscribers. Blue Cross underwrites the cost of these purchases by spreading the risk of health care expenses among its subscriber groups. Plaintiff Ocean State is a for-profit health maintenance organization ("HMO") that began operations in 1984. Like Blue Cross, Ocean State contracts with physicians to provide medical care to its subscribers, and then pays its contracted physicians on a fee-for-service basis. While Blue Cross will reimburse its subscribers even for certain services performed by non-participating physicians, Ocean State does not pay for services by non-participating physicians. Eighty percent of the shares of the Ocean State corporation are owned by its participating physicians. A physician may participate in more than one health insurance program. Thus, a physician may contract with Blue Cross, with Ocean State, or with both.

From its inception, Ocean State grew rapidly. Like Blue Cross, it was offered to subscribers through employers. Apparently because Ocean State provided more coverage and charged lower premiums, many subscribers switched from Blue Cross to Ocean State. By the spring of 1986, Blue Cross had lost approximately 30,000 of its 543,015 enrollees, while Ocean State's enrollment had exceeded all expectations, growing to 70,000. See Ocean State Physicians Health Plan, Inc. v. Blue Cross & Blue Shield of Rhode Island, 692 F.Supp. 52, 57 (D.R.I.1988). Because Blue Cross was experiencing financial problems, it had to raise its premiums in order to maintain adequate financial reserves. As it raised its premiums, it lost more enrollees--which, in turn, forced further rate increases. In short, Blue Cross "was faced with a serious competitive problem." Ocean State, 692 F.Supp. at 57.

In the spring of 1986, to meet the challenge presented by Ocean State, Blue Cross instituted a three-pronged attack:

First, Blue Cross launched its own HMO "look-alike," dubbed HealthMate, which it marketed to employers who were offering the Ocean State plan to their employees. Like Ocean State, HealthMate provided 15 percent more coverage than the standard Blue Cross plan, including such added benefits as office visits, prescription drugs, and "good health" benefits. Like Ocean State, but unlike traditional Blue Cross, HealthMate paid only for services provided by participating physicians. In those employer groups in which employees were required to contribute to their premiums, HealthMate was offered at 5 percent below the cost of traditional Blue Cross. 692 F.Supp. at 58.

Second, Blue Cross instituted an "adverse selection" policy of pricing. "Adverse selection" refers to the tendency for younger and healthier people to opt for HMOs such as Ocean State when they are made available, leaving older and sicker people (on the average) in the standard Blue Cross pool. Because of such adverse selection, Blue Cross expected the health care costs for standard Blue Cross to be higher in those employer groups that offered an HMO option than in those employer groups that did not. With the approval of the Rhode Island Department of Business Regulation ("DBR"), Blue Cross instituted a pricing plan that took account of this projected difference in health expenses. ¹ Under this policy, employers were offered three different rates for traditional Blue Cross coverage. The rate was lowest for an employer who offered only traditional Blue Cross, intermediate for an employer who also offered a competing HMO (usually Ocean State) and HealthMate, and highest for an employer who also offered a competing HMO but declined to offer HealthMate.

Third, Blue Cross initiated a policy, which it called "Prudent Buyer," of not paying a physician more for any service or procedure than that physician was accepting from any other health care cost provider (such as Ocean State). Blue Cross established this policy after it became apparent that Ocean State's contracting physicians were accepting about 20 percent less for their services from Ocean State than they were receiving from Blue Cross. Ocean State had withheld 20 percent of its physicians' fees in 1985, with the expectation that if the corporation made a profit the withhold would be returned. Ocean State did not turn a profit, however, and the withhold was not returned. In 1986 Ocean State again withheld 20 percent of its physicians fees, which it again failed to return after the end of the year. In order to ensure that it was getting the physicians' best prices, Blue Cross required each of its participating physicians to certify that he or she was not accepting any lower fees from other providers than he or she was receiving from Blue Cross for the same service. If the provider failed to provide such certification, Blue Cross reduced that physician's fees by 20 percent. As a result of the Prudent Buyer policy, Blue Cross achieved significant cost savings. After the implementation of Prudent Buyer, about 350 of Ocean State's 1200 physicians resigned, in many cases apparently in order to avoid a reduction in their Blue Cross fees.

II. PROCEDURAL BACKGROUND

Ocean State, together with a certified class of its participating physicians, brought this suit against Blue Cross. Ocean State ² alleged that Blue Cross's conduct violated, inter alia, section 2 of the Sherman Act, which makes it unlawful to "monopolize ... any part of the trade or commerce among the several States." 15 U.S.C. Sec. 2. ³ Ocean State charged that Blue Cross launched HealthMate not because it was a viable long-term product, but in order to put Ocean State out of business. Through the adverse selection policy, Ocean State claimed, Blue Cross was able to raise its rates for standard Blue Cross for employer groups offering HealthMate--which, in turn, influenced employers not to make HealthMate available. ⁴ Finally, Ocean State claimed that Blue Cross instituted the Prudent Buyer policy not in order to save money, but rather to induce physicians to resign from Ocean State. Plaintiffs also raised a pendent state law claim: that Blue Cross's conduct tortiously interfered with the contractual relationships between Ocean State and the members of the class of Ocean State physicians.

After a lengthy trial, the jury found Blue Cross "guilty" on the section 2 claim, but it awarded no damages on this claim. The jury also found that Blue Cross had tortiously interfered with plaintiffs' contractual relationships. On the latter claim it awarded the Ocean State Physicians Health Plan $947,000 in compensatory damages and $250,000 in punitive damages; and it awarded the members of the physician class $1,746,437 in compensatory damages. Following the verdict, Blue Cross moved for judgment notwithstanding the verdict on both claims and, in the alternative, for a new trial on the tortious interference claim. Ocean State, for its part, moved for an injunction against Blue Cross's continuation of the challenged policies, as well as for a $1.9 million additur to the jury award to the physician class.

In its opinion, 692 F.Supp. at 74, the district court granted Blue Cross's motion for judgment notwithstanding the verdict on both the antitrust and tortious interference claims. The court reached its result with respect to the antitrust claims on alternative grounds. First, the court reasoned that the jury's award of "no damages" on the antitrust claim meant that plaintiffs had failed to prove that they had been injured by any illegal conduct by Blue Cross. Second, the court held that, quite aside from the "no damages" verdict, Ocean State plaintiffs had failed to show that Blue Cross's actions were anything other than legitimate acts of competition. Having determined that Blue Cross had not violated the antitrust laws, the district court also granted Blue Cross judgment notwithstanding the verdict on the state law claim of interference with contractual relationships. The court noted that Blue Cross's...