Rate Filing of Blue Cross Hospital Service, Inc. with Ins. Commissioner, In re

• Decision Date: 04 April 1972
• Court: West Virginia Supreme Court
• Parties: In re RATE FILING OF BLUE CROSS HOSPITAL SERVICE, INC. WITH the INSURANCE COMMISSIONER of the State of West Virginia on

Page 339

214 S.E.2d 339

158 W.Va. 725

In re RATE FILING OF BLUE CROSS HOSPITAL SERVICE, INC. WITH

the INSURANCE COMMISSIONER of the State of West

Virginia on April 4, 1972.

No. 13460.

Supreme Court of Appeals of West Virginia.

April 8, 1975.

Syllabus by the Court

1. Under the provisions of Code, 33--24--6(c), as amended, the Insurance Commissioner has the duty to investigate the rates to be charged to the subscribers of a hospital service corporation after such rates have been filed with him, and approve them if such rates are not excessive, inadequate or unfairly discriminatory.

2. In approving or disapproving the rates of a hospital service corporation the Insurance Commissioner has the authority, and the responsibility, to look behind the figures submitted in the application for a rate increase and to determine the adequacy and reasonableness of the charges to be paid to the participating hospitals by the hospital service corporation on behalf of its subscribers. The Commissioner, in such cases, also has the authority to ascertain whether or not the hospital service corporation is operated properly and efficiently.

3. When it is apparent from the evidence introduced at a hearing conducted before the Insurance Commissioner upon an application by a hospital service corporation for a rate increase that the current rates are inadequate and continued losses can be anticipated until substantial rate increases are granted and that the hospital service corporation's inefficiencies in operations are not so significant as to obviate the necessity of an immediate rate increase, the proposed rate increase is not excessive and should be granted.

Chauncey H. Browning, Atty. Gen., William R. Wooton, Asst. Atty. Gen., Charleston, for appellant.

W. E. Mohler, Charleston, for appellee.

Wilson Anderson, Charleston, for amicus curiae Beckley Appalachian Regional Hospital, and others.

BERRY, Justice:

This is an appeal by the West Virginia Insurance Commissioner, hereinafter referred to as the Commissioner, from a final judgment of the Circuit Court of Kanawha County entered June 18, 1973, wherein the Circuit Court ordered the Commissioner to approve the rate filing application made by Blue Cross Hospital Service, Inc., hereinafter referred to as Blue Cross. The Commissioner contends that the proposed rates are excessive, and, therefore the application should not be approved. The Commissioner prays that the judgment of the Circuit Court be reversed and Blue Cross be directed to refund all additional premiums collected from its subscribers as a result of the rate increase ordered by the Circuit Court. This Court granted the Commissioner's appeal on March 18, 1974 and the case was submitted for decisions on January 21, 1975 upon the briefs and oral arguments on behalf of the parties and an amicus curiae brief filled on behalf of the twenty-six participating hospitals.

On April, 4, 1972 Blue Cross filed for a rate increase with the Commissioner. On May 17, 1972 the Commissioner disapproved the proposed rates, and pursuant to a written demand by Blue Cross public hearings were held on September 13, 1972 and September 27, 1972. The Commissioner contended that the proposed rate increase was not justified because of inefficiencies in Blue Cross administrative and investment policies, and because its reimbursement contracts with the various hospitals were not in the best interests of Blue Cross subscribers. The Commissioner listed six objections why the proposed rate increase should not be granted: (1) several members of the Board of Trustees were also hospital administrators and thus inherent conflicts of interests were present during the negotiation of hospital reimbursement contracts, (2) Blue Cross reimbursed hospitals for services afforded subscribers in accordance with a formula wherein hospital charges bore no reasonable relationship to costs, (3) there were inefficiences in the administration of subscriber claims, including unnecessary reimbursements to hospitals, (4) there were inefficiencies in the internal operations of Blue Cross, including the absence of standing committees within the board and inefficiencies in the electronic data processing system, (5) the management engaged in poor financial investment practices partly because of conflicts of interest, and (6) the schedule of fees to be paid to the hospitals was actuarially unsound.

Blue Cross properly assumed the burden of proof and introduced evidence at the hearing before the Commissioner which substantiated its position that a rate increase was needed. An actuary who testified on behalf of Blue Cross at the hearing stated the proposed rates were not excessive, and if not approved, Blue Cross would be insolvent by the middle of 1973. Other evidence was introduced that the current rates were inadequate. Evidence was introduced that Blue Cross administrative expenses were less than the average of all Blue Cross Plans throughout the country. The evidence indicated that the rates charged by the Charleston Blue Cross were less than those charged by Wheeling Blue Cross, although Wheeling's reimbursement contracts had a ceiling of 115% On the ratio of hospital charges to costs, whereas, the average ratio of hospital charges to costs of the Charleston Plan was 129% For those hospitals from which such information was obtained.

The Commissioner introduced into evidence a report prepared by the Blue Cross Association, the national organization representing Blue Cross Plans, which was requested by Blue Cross to make a study of its operations. This three week study produced a detailed written report which recommended that several changes be made in the local Blue Cross operations. The report stated that the Charleston Plan was an average plan, but was critical in some aspects, and made recommendations for the improvement of the services, some of which had been implemented before the hearing was held by the Commissioner. The reimbursement contracts between the hospitals and Blue Cross, which were negotiated in 1970, provided for the payment by Blue Cross of 93% Of the charges for the first year, and 97% For future years. The Blue Cross director stated that the new contract was not as good as the old one, but testified that it took eight months to obtain a new contract and that the present contract was the best contract to which the hospitals would agree.

It is the contention of the Commissioner that he had the right to go beyond the mere mathematical calculations of the rate application, and to determine whether inefficiencies in Blue Cross operations were resulting in higher costs which in turn increased the rate base from which the proposed rate increase was calculated. Additionally, the Commissioner argues that the reimbursement contracts with the hospitals should stipulate that there be a reasonable relationship of the hospitals' charges to the hospitals' actual costs, since hospital charges were shown to be excessive by the fact that the Blue Cross Association report showed that the average ratio of billed charges to hospital costs was 129%. The report recommended that in order to adequately protect the interest of the subscribers to the Blue Cross Plan, there should be effective measures taken to assure that the charges by the hospitals have a reasonable relationship to the hospitals' actual costs.

Moreover, the Commissioner contends that there were conflicts of interest on the board of Blue Cross itself, which resulted in Blue Cross not being able to negotiate the best contract possible with the hospitals. Consequently, the Commissioner contends that takng all these things into account the rate base of Blue Cross could be significantly lower and the resulting cost savings and increased efficiencies in the operation itself would negate a need for a present rate increase.

On August 28, 1972 another proposed rate increase was filed with the Commissioner by Blue Cross with proposed rates higher than the previously proposed rates filed April 4, 1972. The hearing on the April 4, 1972 rate increase was set for September 13, 1972, and at the time of the hearing the Commissioner had neither approved nor disapproved the August 28, 1972 rate increase and limited the hearing to the April 4, 1972 rate increase, which was objected to by Blue Cross. The ruling of the Commissioner confining the hearing to the April 4, 1972 rate increase request, which was approved by the Circuit Court, was proper under the circumstances of this case.

The parties to this proceeding apparently cannot agree upon the issues involved. Considering the contentions of both parties, a simplified statement of the issues to be considered in the determination of this case are as follows: (1) Are the proposed rates submitted to the Commissioner for approval excessive? (2) Does the Commissioner have the authority to inquire beyond the mere mathematical accuracy of the figures and to inquire into underlying factors upon which the schedule of rates is based?

The brief of Blue Cross and the amicus curiae brief assert that one of the issues is whether the Commissioner has the authority to control hospital charges for services rendered to Blue Cross subscribers. This is not an issue in this case. Not only does the Commissioner not have such authority, he admits that he does not have such authority. However, he does have the authority, and, the duty, to protect the subscribers of Blue Cross, and to ascertain that hospital charges paid by Blue Cross under its contracts with the participating hospitals have a reasonable relationship to the hospitals' actual costs.

The pertient part of the statute pertaining to the proposed rate increase involved in this proceeding, Code, 33--24--6(c), as amended, reads as follows:

No rates to be charged subscribers shall be used or established by any such corporation unless and until the same have been filed with the commissioner and approved by him. The procedure...