Travelers Ins. Co. v. Blue Cross of West. Pennsylvania

• Decision Date: 10 July 1973
• Docket Number: No. 72-1209.,72-1209.
• Citation: 481 F.2d 80
• Parties: The TRAVELERS INSURANCE COMPANY, a corporation, Appellant, v. BLUE CROSS OF WESTERN PENNSYLVANIA, a corporation.
• Court: U.S. Court of Appeals — Third Circuit

481 F.2d 80 (1973)

The TRAVELERS INSURANCE COMPANY, a corporation, Appellant, v. BLUE CROSS OF WESTERN PENNSYLVANIA, a corporation.

No. 72-1209.

United States Court of Appeals, Third Circuit.

Argued April 24, 1973.

Decided July 10, 1973.

Frank L. Seamans, Donald C. Winson, Dale Hershey, David E. Tungate, Eckert, Seamans, Cherin & Mellott, Pittsburgh, Pa., and George D. Brodigan, Hartford, Conn., for appellant.

Robert J. Bagdasarian, Charles Kadish, Donald B. Da Parma, William B. Sneirson, Breed, Abbott & Morgan, New York City, and Edward L. Springer, Springer & Perry, Pittsburgh, Pa., for appellee.

Before VAN DUSEN, ALDISERT and ROSENN, Circuit Judges.

OPINION OF THE COURT

VAN DUSEN, Circuit Judge.

Travelers Insurance Company appeals from the January 6, 1972, district court order dismissing its complaint against Blue Cross of Western Pennsylvania, which order was entered after a trial to the court, 361 F.Supp. 774. Travelers had charged Blue Cross with restraining trade, in violation of section 1 of the Sherman Act, 15 U.S.C. § 1 (1970),¹ and with monopolizing and attempting to monopolize, in violation of section 2 of that Act.² To prevail, Travelers had also to establish that either Blue Cross' conduct did not come within the protective umbrella provided by the language of the McCarran-Ferguson Act, 15 U.S. C. § 1011 et seq. (1970),³ or was excluded from the protection of that Act by the presence of boycott, coercion, or intimidation, see 15 U.S.C. § 1013(b) (1970).⁴ After a lengthy non-jury trial, the district court concluded that Blue Cross' conduct was immunized by the McCarran-Ferguson Act and that, even absent such protection, the conduct did not violate the antitrust laws. See Travelers Ins. Co. v. Blue Cross of Western Penn., 361 F.Supp. 774 (W.D.Pa. 1972) (1972 Trade Cas. ¶ 73,311, at 91,428).⁵ We agree with the district court on both points.

The relevant market consists of 29 counties in Western Pennsylvania. Blue Cross provides hospitalization insurance for 51% of the population of this area; and during a relevant period Blue Cross accounted for 62% of all the patient days which were covered by commercial insurance.⁶

Travelers objects to a standard contract which Blue Cross has with 101 hospitals in this area which prescribes the amounts and terms under which Blue Cross pays for the services rendered its subscribers. Blue Cross reimburses hospitals only for audited costs subject to a ceiling;⁷ and these costs do not include any portion of the general hospital expenses of capital construction, of providing free services to indigents, and of providing service to patients who default. Because of these limitations, Blue Cross pays some 14-15% less than the amounts that non-Blue Cross patients are charged.⁸ Consequently, Blue Cross quotes rates for hospitalization insurance correspondingly lower than the rates of private insurance companies such as Travelers.

Whether the McCarran-Ferguson Act exempts Blue Cross' arrangement with these hospitals from antitrust scrutiny depends, first, on the scope of the statutory term "business of insurance," second, on the extent of state regulation of this arrangement, and, third, on the presence or absence of boycott, coercion or intimidation.

The Supreme Court's most recent interpretation of the McCarran-Ferguson Act appears in SEC v. National Securities, Inc., 393 U.S. 453, 457-461, 89 S.Ct. 564, 21 L.Ed.2d 668 (1969), where the Court held that a state insurance department's approval of a merger of insurance companies would not exempt the merger from the federal securities laws. The Court reasoned that regulation of the "business of insurance" meant control over the relationship between the insurance company and its policyholders; the term did not encompass regulation of the relationship between the company and its shareholders. However, although the Court fashioned this dichotomy, it did not fix the exact contours of the term "business of insurance." Rather, it indicated activities clearly covered—fixing rates, selling and advertising policies, licensing companies and agents, prescribing the types of permissible policies, etc.—and suggested the possibility of additional ones, using this language:

"Undoubtedly, other activities of insurance companies relate so closely to their status as reliable insurers that they too must be placed in the same class." 393 U.S. at 460, 89 S.Ct. at 568.

Two district court cases which predated SEC v. National Securities, Inc., nevertheless are useful for comparison with the present case. In California League of Independent Insurance Producers v. Aetna Casualty & Surety Co., 175 F.Supp. 857, 860 (N.D.Cal.1959), the "business of insurance" was held to include the size of commissions paid by companies to agents, because commissions were a vital factor in the companies' ratemaking structure. In contrast, the district court in Hill v. National Auto Glass Co., 293 F.Supp. 295 (N.D. Cal.1968), held that the McCarran-Ferguson Act would not protect Allstate, an automobile liability insurer, which allegedly secured installation jobs for selected automobile glass dealers. It can be surmised that the impact on Allstate's rates of the expense of replacing automobile glass, while it might be direct, would not be substantial.

In the present case, the district court found that the interrelationship of hospital payments and subscribers' rates was such that Blue Cross' arrangement with hospitals should be considered part of the "business of insurance." This conclusion is a sound construction of the law and is amply supported by the evidence.⁹

Also, the evidence supports the district court finding that the state regulates the arrangement here in question. Section 4 of the Nonprofit Hospital Plan Act, Penn.Stat.Ann., tit. 40, § 1404, provides that:

"The rates charged to subscribers by nonprofit corporations, . . . all rates of payments to hospitals made by such corporations pursuant to the contracts provided for in this act, . . . and any and all contracts entered into by any such corporation with any hospital, shall at all times, be subject to the prior approval of the Insurance Department."¹⁰

One recent case suggests that the mere existence of such a scheme of regulation, even if ineffective and unenforced, is sufficient to invoke the McCarran-Ferguson Act. Ohio AFL-CIO v. Insurance Rating Board, 451 F.2d 1178 (6th Cir. 1971), cert. denied, 409 U.S. 917, 93 S. Ct. 215, 34 L.Ed.2d 171 (1972). However that may be, the record here shows aggressive state regulation.¹¹ In fact, as the district court found, the features of the contract which Travelers finds objectionable were mandated by Insurance Department guidelines designed to encourage high quality care at reasonable costs. Auditing hospital costs and establishing a ceiling were thought to help hold down rising hospital costs by forcing administrative efficiency. Blue Cross was not to contribute to the care of indigents because this responsibility belonged to the state, not to the subscribers of Blue Cross. Finally, Blue Cross was not to support hospital construction for two reasons: such construction was usually financed by the state, the federal government, or private philanthropy; and, historically, hospitals serving the same area have needlessly duplicated expensive specialized services.

By its terms the McCarran-Ferguson Act does not protect "boycott, coercion, or intimidation." Travelers has not challenged the finding of the district court that Blue Cross at no time tried to influence the relationship between hospitals and other insurance companies. Instead, Travelers asserts that Blue Cross used "coercion" to extract concessions from the hospitals. The district court held, and we agree with its conclusion, that the economic inducements which made the Blue Cross contract acceptable to hospitals¹² did not amount to "coercion." Especially is that true where, as here, the hospitals negotiated jointly and the resulting contract was approved by the Insurance Department.

Even if the McCarran-Ferguson Act were inapplicable and Blue Cross was subject to antitrust scrutiny, we agree with the district court that Blue Cross could withstand such scrutiny. In arriving at this result, we have not reached the determination of whether Blue Cross possesses enough market power to have "monopoly power." Even assuming that such power exists, we have concluded that Blue Cross' arrangement with hospitals neither illegally restrains trade in violation of section 1 of the Sherman Act nor constitutes, in violation of section 2, "the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident." United States v. Grinnell Corp., 384 U.S. 563, 570-571, 86 S.Ct. 1698, 1704, 16 L.Ed.2d 778 (1966).

Our section 1 analysis begins with the recognition that the situation here does not involve a vertical restraint which has achieved garden variety status. That is, it is not a tie-in, an exclusive dealing arrangement, etc. Consequently, as the district court indicated, it must be carefully looked at on its own facts, in order to reveal whether any restraint of trade it causes is "reasonable." See Northern Pacific Railway Co. v. United States, 356 U.S. 1, 4-5, 78 S.Ct. 514, 2 L.Ed.2d 545 (1958); cf. Chicago Board of Trade v. United States, 246 U. S. 231, 238, 38 S.Ct. 242, 62 L.Ed. 683 (1918).

In its negotiating with hospitals, Blue Cross has done no more than conduct its business as every rational enterprise does, i. e., get the best deal possible. This pressure encourages hospitals to keep their costs down; and, for its own competitive advantage, Blue Cross passes along the saving thus realized to consumers. To be sure, Blue Cross' initiative makes life harder for commercial competitors such as Travelers. The antitrust laws, however, protect competition, not competitors; and stiff competition is...