The opinion of the court was delivered by: KELLY
On August 30, 1985, defendant Blue Cross and Blue Shield of Kansas, Inc. announced its intention to terminate its contracting provider agreement with Wesley Medical Center, effective January 1, 1986. Plaintiffs brought this action seeking damages and other relief under the federal antitrust laws,
and the laws of the State of Kansas. Blue Cross and Blue Shield answered and, with its subsidiary HMO Kansas, Inc., filed a counterclaim challenging certain business conduct and activities of the plaintiffs and Hospital Corporation of America. The court granted plaintiffs' motion for separate trials of their complaint and the counterclaim. Following a lengthy trial of plaintiffs' claims during the summer of 1986, and a significant period of deliberation, the jury returned a verdict in Wesley's favor finding Blue Cross and Blue Shield liable for anticompetitive conspiratorial restraint of trade violating Section 1 of the Sherman Act, monopolization of the relevant market violating Section 2 of the Act, and tortious interference with Wesley's present and prospective business relations violating Kansas law.
The months following the verdict were consumed with a host of motions. First, Blue Cross and Blue Shield moves under Fed.R.Civ.P. 12(b) to set aside the verdict and dismiss the case for lack of jurisdiction. Second, defendant alternatively moves for judgment notwithstanding the verdict or a new trial, under Fed.R.Civ.P. 50(b) and 59 respectively. Third, plaintiffs move for injunctive relief against Blue Cross and Blue Shield under Section 16 of the Clayton Act, 15 U.S.C. § 26. Fourth, plaintiffs move for an award of costs and attorneys' fees against defendant pursuant to Section 4 of the Clayton Act, 15 U.S.C. § 15. Finally, plaintiffs and Hospital Corporation of America move for summary judgment on the counterclaim, under Fed.R.Civ.P. 56. On January 16, 1987, the court heard oral argument on these motions. This memorandum and order will address each.
Before analyzing these issues, however, some discussion of the parties and the history of their disputes is necessary. Perhaps more so than any federal antitrust litigation to date, this case results from the unprecedented economic pressures and turmoil within the health care services and financing industries from the beginning of this decade. Although the suit focuses on participants and events in Sedgwick County, Kansas, it embraces difficult health care issues facing many areas throughout the country. All the principal players are present: hospitals and physicians as health care providers, struggling to cut costs while maintaining quality of care, adequate capital and a sufficient patient base; emerging alternative delivery systems, such as health maintenance organizations and preferred provider organizations, radically altering traditional notions about delivering and financing health care by merging those components into unified systems; a large nonprofit health care indemnity insurance plan, seeking both the lowest price for the benefit of its subscribers, and to maintain or increase its position in an ever changing market; and a large publicly held, for profit company owning and managing hospitals throughout the country, searching for the best ways to deliver low cost, quality health care to its patients, while maintaining or increasing its market position. Each of these players competes for the loyalty, and thus the dollars, of public consumers of health insurance products and health care services. All the players vigorously assert they have acted throughout in the best interests of those consumers.
This case is the consequence of the parties' perceptions and misperceptions of the public interest. The consuming public is the quintessential beneficiary of the federal antitrust laws. In its interests this case proceeded; through its interests are judged the legality of the parties' actions, and reactions, in the marketplace.
Wesley Medical Center ("Wesley") is a 760-bed tertiary care hospital located in Wichita, Kansas. Wesley provides sophisticated health care services to residents of Wichita, Sedgwick County, the State of Kansas, and out-of-state patients. (Dkt. 76, Pretrial Conf. Order, p. 4, Stip. d; hereafter "Stip. ".) It is a major teaching hospital, operating a number of graduate medical education residency programs in affiliation with the Wichita branch of the University of Kansas School of Medicine. Wesley additionally provides clinical services; medical research; and outreach care programs for Kansans. Six hundred and forty physicians are currently staff members at the hospital. Within the City of Wichita, Wesley competes against St. Francis Regional Medical Center, St. Joseph's Medical Center, and Riverside Hospital. A. B. Jack Davis, Chairman and Chief Executive Officer of Wesley, views the hospital's primary strength as the ability to provide quality care at reasonable cost. Wesley garners approximately 10 % of all patient admissions throughout the State of Kansas. (Dkt. 212, Tran. of Jury Trial, Vol. 1,
Blue Cross and Blue Shield of Kansas, Inc. ("BCBSK") was formed in 1983 by combining Blue Cross of Kansas, Inc. and Blue Shield of Kansas, Inc. pursuant to special enabling legislation. (Stip. m.) BCBSK is engaged in the business of providing private health care financing to businesses and individuals in Kansas, including Sedgwick County and the City of Wichita. (Stip. h.) Under its enabling legislation BCBSK is required to pursue health care cost containment as the primary goal in conducting its business. (Stip. o.) G. Wayne Johnston, the company's president, defines its business as making available to Kansans "a mechanism whereby we can provide good quality health care at very reasonable prices, as reasonable as we can possibly make it." (Tran. 3, p. 479; Tran. 4, p. 536.) BCBSK offered three principal health care financing products in 1985: conventional indemnity health insurance; a preferred provider organization called "Choice Care"; and a health maintenance organization through the company's wholly-owned subsidiary, HMO Kansas, Inc. ("HMOK"). (Tran. 3, p. 481.) BCBSK is the largest private health care financing organization in Kansas, and its service area includes the entire state except for Johnson and Wyandotte Counties in the northeast. In 1985, all hospitals and approximately 90 % of all physicians in this service area were under contract with BCBSK as providers of medical services to the company's subscribers. (Stip. j.) No other health insurance company has contracts with all of the hospitals in BCBSK's service area. (Tran. 3, p. 499.) BCBSK is also the federal Medicare intermediary in Kansas, administering the Medicare program throughout the company's service area; as well, it is one of the larger third-party administrators of self-insured programs in the state. (Tran. 3, pp. 495, 499; Tran. 4, p. 519.)
Conventional or "all provider" indemnity insurance, the mainstay of BCBSK's business and historical success in Kansas, is a third-party insurance contract paying, based on certain benefit levels, a predetermined portion of the actual charges for health care services the subscriber may receive from any hospital or any doctor of his choice. (Tran. 1, p. 24; Tran. 3, p. 487.) Hospitals and doctors, as contracting providers, are reimbursed by the insurance carrier for health care services rendered its subscribers on an "as needed" basis. There is no incentive to economize, using the most cost effective methods of practicing medicine, and conventional indemnity arrangements are perceived as contributing to the overuse and spiraling costs of medical services. Alternative delivery systems, such as health maintenance organizations ("HMOs") and preferred provider organizations ("PPOs"), emerged as a consequence of this and other trends in the health industries:
"In recent years increased emphas[is] has been placed on alternatives to conventional insurance with respect to both financing and delivery. The primary reason for this is a belief that conventional insurance is neither an efficient nor an effective method to finance and deliver health care. The recent recession caused business and government to focus more attention than ever on the necessity to control and reduce the cost of medical care. The result of this increased interest has been restructuring of the delivery system to include widespread availability of HMOs and PPOs. Containment efforts have also been incorporated in the traditional programs."
(Tran. 4, p. 593, quoting Pltfs.' Ex. 64, p. 4). In contrast to conventional indemnity arrangements, alternative delivery systems operate on selected contracting under which the subscriber is limited in his choices of medical care providers. (Tran. 3, p. 487.) By relinquishing his freedom of choice, an HMO or PPO subscriber pays less for his health care coverage; traditional indemnity insurance, with higher premiums, is more expensive. (Tran. 3, p. 490.)
Health Care Plus ("HCP") was created and developed in Wichita by Garland H. Bugg. (Tran. 17, pp. 2928-30.) HCP is a health maintenance organization engaged in the business of providing private health care financing to businesses and individuals in Kansas and elsewhere, including businesses and individuals in Sedgwick County and the City of Wichita. (Stip. e.) HCP contracts with doctors and hospitals to provide medical care to its members. HCP received federal qualification on July 1, 1981, at which time it operated only in Sedgwick County. Federal qualification designated the company had developed adequate quality assurance mechanisms, financial stability, and medical provider contracts. With this qualification HCP also received a federal loan to fund its expansion. (Tran. 17, pp. 2930-32.) The growth and success of alternative delivery systems such as HCP occur at the expense of traditional indemnity insurance arrangements (Tran. 4, p. 565), because of the historical predominance of the conventional plans.
HCP was a very early, if not the first, health maintenance organization to operate in Kansas. BCBSK did not enter the market for alternative delivery systems until three years later when its health maintenance organization, HMO Kansas, received federal qualification. (Tran. 4, p. 532.) HMOK competes with HCP in private health care financing in Kansas and Sedgwick County. (Stip. k.) As a health care financing option, HMOK also competes with BCBSK's conventional indemnity product. (Tran. 4, p. 518.)
Hospital Corporation of America ("HCA"), through its subsidiary corporations, is engaged in the business of providing health care services, private health care financing and hospital management services. (Stip. g.) From its Nashville, Tennessee headquarters, HCA owns or manages approximately 480 hospitals located in the United States and abroad. (Tran. 19, p. 3151.) The company's defined purpose is "'to attain international leadership in the health care field.'" (Tran. 19, p. 3154, quoting Pltfs.' Ex. 292, p. 4.) Measured in number of hospitals, HCA is the largest for profit hospital company in this country. (Tran. 21, p. 3320.) Dr. Thomas Frist, one of the founders of HCA and its current chairman and chief executive officer, acknowledges the company's hospital base may give it a "tremendous advantage" in other health care business opportunities. (Tran. 21, p. 3311.) But he also states HCA represents less than 3 % of the hospital business sector in this country, and almost half the company's total corporate revenue comes from third-party insurance carriers comprised largely of the various Blue Cross plans across the United States. (Tran. 19, p. 3187.)
New Century Life Insurance Company ("New Century") is a California corporation with principal executive offices in Nashville, Tennessee. New Century is engaged, inter alia, in the business of providing private health care financing to businesses and individuals. On June 16, 1983, the company received a certificate of authority to do business in Kansas. (Stip. f.)
Dr. Walter Reazin is a medical doctor and a partner in the Hillside Medical Office, a group practice in Wichita. Dr. Reazin is a medical staff member at Wesley; during much of the time period related to this suit he was also Chairman of the Wesley Board of Trustees. (Stip. c; Tran. 16, pp. 2664-65, 2669.) Dr. Reazin is a long-standing subscriber to BCBSK's indemnity insurance coverage; he is as well a contracting physician provider for BCBSK. (Tran. 16, pp. 2671, 2673.)
The court fully explored the recent economic upheaval in the health care service and insurance industries in its earlier memorandum and order on defendant's motion for summary judgment. Reazin v. Blue Cross & Blue Shield of Kansas, Inc., 635 F. Supp. 1287, 1297-1300 (D. Kan. 1986) (" Reazin I "). I will not repeat that background material here other than to note particular items underlying the parties' conduct.
Prior to its merger with Blue Shield, Blue Cross utilized retrospective reimbursement contracts with Kansas hospitals to provide medical services to Blue Cross subscribers, which services were covered by the subscribers' Blue Cross indemnity insurance policies. Under these contracts Blue Cross directly reimbursed the hospitals on the basis of 104% of allowable costs. (Stip. p.) In other words, for the greater part of Blue Cross' 40-year history the company simply paid hospitals and doctors their full charges for providing health service to Blue Cross' subscribers. (Tran. 4, p. 536.) Under such systems, hospitals had no incentive to keep prices down for the benefit of the consumer (Tran. 21, p. 3347); Blue Cross' retrospective reimbursement program simply did not contain costs (Tran. 4, pp. 536-37). In the mid-1970s, Blue Cross implemented a prospective rate review system for hospital reimbursement, and encouraged all Kansas hospitals to continue as participating providers under the new contract. (Stip. p.) Under the prospective rate contracts Blue Cross retained the right to approve hospital budgets and rate structures, and agreed to pay unlimited hospital charges based on approved rate structures. (Tran. 4, p. 537.) The program generated extreme variations in hospital charges for equivalent medical procedures and, similar to the earlier retrospective reimbursement system, failed to contain costs or utilization. (Tran. 4, pp. 537-39.) By the early 1980s utilization of hospital services in this state was the second highest in the entire country; Kansans were using approximately 1,000 days of hospital care for every 1,000 people. (Id.)
These and other trends in the health industries provided the catalyst for rapid development of alternative delivery systems, "brokered" arrangements for purchasing and providing health services. These arrangements are fueled both by demand (from consumers of health services and insurance) and supply (of increasing numbers of health care providers). Garland Bugg's development of Health Care Plus in Wichita and Sedgwick County was no different; he and HCP capitalized on opportunities arising from the inefficiencies of prevailing market conditions:
[It] seemed that insurance companies would not listen to physicians about where care could be cost effectively delivered. [The insurance companies] insisted on having care delivered on an in-patient basis . . . rather than in the doctor's office. One example of that, a surgeon who I talked to just to see if he would be interested in having a health plan in Wichita . . . said that there was one procedure, which is a proctosigmoidoscopy. For instance, Blue Shield would pay thirty-five dollars to do that procedure in his office. If he did the same thing in the hospital, they would pay him a larger amount, if I remember it was fifty-five dollars, plus they would pay for a procedure room of a hundred and twenty dollars. [There] really was no cost effectiveness in our [then] current system. In my opinion, that's how we got so many hospital beds today. More care really should be delivered out-patient, and the HMO concept sponsored that . . . .
[Employers] were saying that their health care costs were just going out of the sky. If I recall at the time . . . about twenty-eight percent was the average increase for a premium, and in cases where maybe a son of someone in the company would have a motorcycle accident, they might have a two or three or four hundred percent increase in their premiums from one year to the next. . . .
With HCP's federal qualification in early 1981 the company received the power to mandate employers, requiring the employers to make available an HMO program as an individual alternative for their employees. (Tran. 4, pp. 531-32.) HCP used the federal mandate capability extensively and successfully. By the end of 1983 HCP had acquired approximately 13,000 members (subscribers) in Sedgwick County. (Tran. 17, p. 2932.) HCP is an "individual practice association", or "gatekeeper", model HMO in which members must select a primary care physician from those under contract with HCP. A member's monthly premiums pay for all needed medical care so long as it is obtained from the chosen primary care physician, or a specialist or hospital authorized by that physician as needed. (Tran. 17, pp. 2938-39.)
Each physician contracting with HCP is paid a capitation fee, a specified amount for each member choosing that physician as his or her primary care provider. HCP does not separately contract with specialists; rather, each primary care physician determines in his own discretion whether to refer an HCP patient elsewhere for needed medical attention, upon which HCP pays the specialist's fees. HCP sets aside a portion of the capitation fund (the "withhold"), and a hospital fund, to cover specialist and hospital costs for services rendered HCP patients. Funds not used at the end of a year are returned to the contracting physicians, each of whom receives a prorata share of the refund based on the number of HCP patients treated.
Based on HCP's success in Sedgwick County, in 1983 company officials sought to expand into Lawrence, Salina, Hutchinson, Topeka and other Kansas cities. The officials explored the conversion of HCP from a nonprofit to a for profit company, and eventually issued a private stock placement to generate the roughly $ 2 million needed for expansion. (Tran. 17, pp. 2933-35.) Under securities regulations governing such limited offerings, HCP was confined to no more than 35 sophisticated investors. HCP offered the stock to wealthy individuals inside, or closely affiliated with, the company. (Id., p. 2936.) The stock was a "very risky" investment. (Id., p. 2937.) It was offered to a number of Wichita physicians, some of whom were under contract with HCP as primary care providers, and others who were not contracting providers. (Id., pp. 2937-40.) Among the contracting physician offerees, certain individuals and groups accepted the invitation and bought the stock, while others did not; all of the noncontracting physicians who were offered stock invested in HCP. (Id., p. 2941.)
The development and growth of alternative delivery systems were not the only results of the crisis in the health insurance and service industries. BCBSK faced criticism and demands for change from the Commissioner of Insurance of the State of Kansas, the Kansas Legislature, and BCBSK's own subscribers, all alarmed over increasing utilization and spiraling costs. From 1975 through 1982, in-patient utilization in Kansas was up to 38% higher than the national average. For the four year period from 1980 through 1983, BCBSK's premium rate increases to subscribers were 17%, 23%, 33% and 22% respectively, an overall rate increase of 95%. (Tran. 4, pp. 538-40, 543; Pltfs.' Ex. 191.)
On January 1, 1984, BCBSK responded to these problems by implementing a new contract, the "Contracting Provider Agreement (Hospital) of the Competitive Allowance Program ('CAP')", and encouraged all hospitals, including Wesley, to enter into the new agreement. (Stip. p; Tran. 4, p. 539.) CAP was a "severe change" to BCBSK's reimbursement system under the previous cost-plus arrangements. (Tran. 4, pp. 544-45.) The CAP program established the maximum amount BCBSK would reimburse a medical provider for services within particular diagnostic related group. (Tran. 4, pp. 546-47.) Providers contracting with BCBSK under the CAP program commit themselves to a maximum allowable payment ("MAP") for each service provided to the subscribers. The MAPs are based on uniform diagnostic-related groupings (DRGs) of medical services; thus, only a limited amount of money is paid to a provider for medical services which might be rendered. The MAP clause is one of the cost containment provisions of BCBSK's contracting provider agreements. The clause protects BCBSK's subscribers by assuring predictability of their health care expenses; the "hold harmless" provision ensures subscribers will not receive bills for covered medical services in excess of the contract amount BCBSK pays a participating provider. (Stip. o; Tran. 3, pp. 483-84; Tran. 4, pp. 546-47.) The CAP program was BCBSK's effort to develop a more cost effective reimbursement program; contracting hospitals agreed to the MAPs, the hold harmless provision, utilization review by BCBSK, and other programs designed to control health care costs. (Tran. 4, pp. 547-48.) CAP contracting provider agreements also contain a significant competitive advantage for BCBSK in the form of a "most favored nations" clause under which participating providers agree to "fully and promptly inform" BCBSK about, and make available to it, any rates lower than the MAPs the hospital might agree to charge competing insurance carriers. (Tran. 4, p. 596.) At least "one of the reasons" BCBSK uses the most favored nations clause is to forestall other insurance companies from receiving any better prices from a hospital, which would enable competitors to offer lower rates to subscribers for medical insurance; that "would be a disadvantage to our subscribers." (Tran. 4, pp. 596-98.) In 1984, all 104 Kansas hospitals in BCBSK's service area were contracting providers under the CAP program, including Wesley. (Tran. 4, pp. 558-59.) BCBSK's president is unaware of any other health insurance company in this area that has the advantage of a most favored nations clause in its provider contracts, with the exception of Delta Dental Insurance Company. (Tran. 4, p. 598.)
Slowly, BCBSK finally developed its own alternative delivery system for health care financing. (Tran. 4, p. 574.) HMO Kansas received state certification in February, 1984, and did not receive federal qualification until July, 1984, over three years after Health Care Plus. (Tran. 6, pp. 1036-37; Tran. 12, p. 2027; Knack Depo., p. 110.) Although HMOK was licensed to operate throughout the State of Kansas, BCBSK recognized HCP's earlier arrival and presence in Wichita placed HMOK at a considerable disadvantage here. (Tran. 4, pp. 533-34, 575; Tran. 6, p. 1038.)
From the outset, HMOK experienced difficulty penetrating the Wichita market. (Tran. 6, pp. 1079-80; Def's. Ex. 546.) HCP's early presence in this market allowed it to capture a significant membership base and develop a comprehensive physician provider list. (Id.) HMOK attempted to enter Wichita with the same HMO model as HCP (an IPA or gatekeeper model), offering substantially similar benefits. (Tran. 12, pp. 2027-28.) Employers are not required to offer more than one federally qualified HMO option to employees; only an HMO different in structure and benefit design than existing HMOs can mandate employers to offer its products as a second option to employees. (Tran. 4, p. 532; Tran. 12, pp. 2022-23.) Even after receiving federal qualification HMOK was therefore unable to mandate employers to offer HMOK to their employees along with HCP.
In addition to problems in attracting sufficient membership, HMOK experienced difficulties in securing an adequate physician provider base. Certain groups declined to do business with HMOK from the outset. Another disadvantage HMOK faced was the higher capitation paid to physicians by HCP. (Tran. 8, p. 1348.) HMOK offered two different risk packages to physician providers: full risk and partial risk contracts. (Tran. 16, pp. 2702-03; Tran. 29, p. 4762-63.) However, HMOK required physicians already under contract with HCP to accept HMOK's full risk contract in order to participate. (Tran. 29, pp. 4762-63.) Certain doctors objected to this requirement and declined to participate in the HMOK program. (Tran. 29, p. 4763.) Nevertheless, a number of primary care physicians and specialists in Wichita entered contracts with HMOK in late 1983 and early 1984. (Tran. 6, pp. 1037-38; Knack Depo., pp. 115-16.) Included in this number were the Hillside Medical Office and the Wichita Clinic, both of whom were already under contract with HCP when they entered separate contracts with HMOK in late 1983. (Tran. 16, pp. 2688, 2706; Tran. 26, pp. 4144-45.) Physicians in both practices subsequently purchased stock in HCP during early 1984.
HMOK's problems in attracting an adequate membership base proved insurmountable. When federally qualified in July of 1984, HMOK had enrolled 1800 members. By the end of that year, HMOK's Wichita enrollment totalled only 2000 members, while HCP had approximately 35,000. (Tran. 12, pp. 2027; Tran. 17, p. 3025; Pltfs.' Ex. 65, p. 9.) The Hillside Medical Office terminated its contract with HMOK on July 11, 1984. (Tran. 6, pp. 1065-66; Tran. 25, p. 4051.) The Wichita Clinic terminated its contract with HMOK on July 19, 1984. (Tran. 17, p. 2993; Tran. 25, p. 4051; Def's. Exs. 455, 456.)
In 1984 Wesley was the largest, strongest and most competitive low cost, nonprofit tertiary care hospital in this area. Concerned about Wesley's future, in the fall of 1984 the hospital's administrators began a feasibility study of the sale of its assets to a well-financed, investor-owned, for profit corporation. The factors motivating this decision included the market trends and economic forces previously discussed. Reactions to high utilization and rising costs of medical care were severely impacting the health care sectors; by that time Kansas in-patient utilization had decreased more than 50 %. (O'Brien Depo., p. 153.) In addition to reduced utilization, Wesley faced increasing regulatory controls and restricted revenue from third-party payors, increasing competitive forces, and increasing capital requirements. Sale of the hospital's assets to a profit corporation was perceived as offering the following advantages: unlimited access to capital; system efficiencies (purchasing, marketing, accounting, etc.); reduced economic risk; improved market position; preservation of quality; and an expanded, enhanced health care mission. (Stewart Depo., pp. 104-05; Def's. Ex. 31.) Wesley administrators approached HCA, "the best in the field," because the company possessed the quality care and administrative efficiencies Wesley sought. (Tran. 1, pp. 36-37.) At that time HCA was interested in adding tertiary care hospitals to its operations because of government deregulation programs and the emerging diagnostic-related group payment systems. Attempting to relate the growing cost effectiveness of the marketplace to quality health care, HCA was seeking "centers of excellence" around the country through which the company could develop a provider network to meet these needs. (Tran. 19, p. 3168.)
Negotiations between Wesley and HCA continued throughout the fall, and in November, 1984, they agreed to the sale of Wesley's assets for $ 265 million. (Tran. 1, p. 36; Tran. 19, p. 3174.) Dr. Thomas Frist, HCA's Chairman of the Board, lists the following as the factors supporting the company's decision: Wesley's past, present and projected future financial performance; the hospital's national reputation as a teaching school; the quality medical staff; the characteristics of the marketplace in which Wesley is located; HCA's ability to enter the midwest where it did not have a strong presence; and the strategic importance of Wesley, as a "center of excellence," to HCA's overall goals. (Tran. 19, pp. 3172-73.) On July 11, 1985, HCA, through its wholly-owned subsidiary HCA Health Services of Kansas, Inc., consummated the sale and acquired Wesley. (Stip. v.) Of considerable importance to Wesley's decision to sell was its understanding of HCA's operational philosophy of decentralized control and local autonomy for its hospitals. (Tran. 1, pp. 37-38.) Day to day operation of the hospital remains the responsibility of A. B. Davis, the chief executive officer, and control of the Medical Center remains the province of the Wesley Board of Trustees, the same local group of volunteers who likewise made hospital policies prior to the sale. HCA preserved existing Wesley management personnel following the sale because of HCA's confidence in Wesley's sound, proven management team. (Tran. 19, p. 3176.) Wesley's duties to HCA are primarily financial: providing financial information to the company and its shareholders, and participating in budget approval processes. (Tran. 1, pp. 38-39.)
During this time period Health Care Plus began exploring the possibility of expanding its HMO operations beyond Kansas, to a national scale. (Tran. 17, p. 2963.) Recognizing the additional capital needed to finance this expansion, HCP officials explored various opportunities with investment bankers, venture capitalists, and other institutional investors. (Id., pp. 2963-64.) Upon learning of HCP's plans, Wesley's Davis indicated HCA might be interested because that company was in the process of purchasing some HMOs and third-party administrators in other parts of the country. (Id., p. 2965.) In the spring of 1985 HCP began discussing its plans with HCA, initially focusing on the possibility of HCA making a limited investment in HCP. (Id., pp. 2966-67.) HCA lacked the expertise needed to successfully create and market its HMOs, and recognized it would take years to adequately develop the necessary internal management systems and guidance. (Tran. 19, p. 3180.) When HCA committed itself to the purchase of Wesley in late 1984, the company was not planning to purchase an HMO in Wichita. (Tran. 19, p. 3181.) With this new opportunity, however, HCA ultimately pursued HCP as a potential acquisition because HCP offered the most advanced, sophisticated management tools of any HMO under consideration. (Id., p. 3180.) For their part, HCP officials eventually discarded the idea of a limited investment, to avoid "creeping acquisition" as capital needs grew and the risk of ultimately realizing less than the full value of the company. (Tran. 17, p. 2967.) The sale of HCP to HCA was publicly announced in May, 1985; on August 14, 1985, HCA, through its wholly-owned subsidiary Health Care Plus of America, Inc., consummated the acquisition of HCP for approximately $ 41 million. (Tran. 17, p. 2970; Tran. 19, p. 3269; Stip. w.) The purchase price was the equivalent of $ 18.00 per share of HCP's outstanding stock. Corporate personnel and area physicians who previously bought that stock, at prices ranging from $ .25 to $ 1.00 per share, made substantial profits from the sale to HCA.
Following the acquisition, Garland Bugg was appointed President and Chief Executive Officer of HCP of America, Inc., with responsibility for overall management and development of HCP plans in the states assigned to that unit. (Tran. 17, p. 2971.) Much like the post-acquisition management of Wesley, HCP management remained decentralized and autonomous; its interaction with HCA was primarily financial. (Tran. 17, p. 2971.) HCP continues to contract with Wesley, St. Francis and St. Joseph Hospitals in Wichita to provide medical care to its members. (Tran. 1, p. 96; Tran. 17, p. 2970.)
Wesley, a contracting provider with BCBSK from the 1940s and a charter member of the original Blue Cross program formulated under the Kansas enabling statute, has participated in BCBSK's CAP program since its implementation in 1984. (Stip. q.) Five days after the effective date of Wesley's sale to HCA, BCBSK sent Wesley a revised CAP contract reflecting the hospital's name change. (Tran. 1, pp. 34, 36; Pltfs.' Exs. 6, 7.) Approximately two weeks later, on July 29, 1985, BCBSK sent Wesley the "Hospital Policies and Procedures and MAPs" (maximum allowable payments) materials for calendar year 1986. (Tran. 1, pp. 34-36; Pltfs.' Exs. 74, 75.) The materials reflected a 4% increase in the 1986 MAPs over the 1985 levels. (Tran. 1, p. 36.) The cover letter from BCBSK to Wesley stated in part:
No action is required, at this time, if your hospital desires to continue contracting with Blue Cross and Blue Shield of Kansas during calendar year 1986. We hope that you will find the 1986 Policies and Procedures and MAPs acceptable in order that we may continue our contractual relationship in 1986.
(Tran. 1, p. 35, quoting Pltfs.' Ex. 74.)
After abandoning HMOK in the Wichita area in early 1985, BCBSK attempted to re-enter the market with a preferred provider organization known as "Choice Care". (Tran. 4, p. 631.) BCBSK originally structured Choice Care to include no more than 35 % of the most cost effective area physicians as participating providers, with BCBSK exercising a stringent utilization review program and a significant capitation withhold for those physicians. (Tran. 2, pp. 248-49.) On this basis competitive bids were then solicited from all Wichita hospitals. (Tran. 4, p. 631.) BCBSK also represented that during the first year of Choice Care operation, from 40 % to 60 % of its current CAP subscribers would likely switch to Choice Care. (Tran. 2, pp. 249-50.) In May, 1985, Wesley, which seeks to participate in programs of all third-party payors likely to generate patient business, bid significant discounts from its regular charges, relying on BCBSK's announced structure of Choice Care. (Tran. 2, pp. 246-47; Tran. 16, p. 2821.) BCBSK received bids from all four Wichita hospitals, and chose Wesley and St. Francis as the successful bidders on Choice Care. (Tran. 4, p. 631; Tran. 7, pp. 1165-1169.) The Choice Care physician withhold provision proved too much, however, and BCBSK was unsuccessful in securing the participation of the necessary physicians. (Tran. 2, p. 250-51.) BCBSK then altered the Choice Care utilization review and physician payment mechanisms. (Tran. 7, pp. 1185-86.) Although the modified Choice Care program would have appealed to more physicians and subscribers, it exposed the bidding hospitals to greater financial risk for the same reasons. The bids were calculated on assumptions of a certain patient load; BCBSK's subsequent alterations meant the lower rates would be extended to more patients than the hospitals originally anticipated. (Tran. 16, p. 2822.)
Officials from Wesley and BCBSK met throughout June and July of 1985, attempting to resolve these problems. (Tran. 2, p. 251.) On July 24, John Knack, Vice President of Marketing for BCBSK, and Marlon Dauner, BCBSK Senior Vice President for External Affairs, met with Edmund Berry, Wesley's Senior Vice President and Chief Finance Officer, to discuss the Choice Care program. (Tran. 7, p. 1186; Tran. 16, p. 2818.) Knack and Dauner anticipated they could obtain Wesley's commitment to the Choice Care contract; they attempted to respond to Wesley's concerns about the contract and persuade Berry to act. (Tran. 7, p. 1190.) However, Berry lacked the authority to act alone on Wesley's behalf; he was authorized only to continue negotiations and attempt to resolve the financial discrepancies of the Choice Care contract. (Tran. 2, p. 253; Tran. 17, p. 2844.) The other Wesley officials responsible for the Choice Care contract, Robert O'Brien, Senior Vice President, and Donald Stewart, President and Chief Operating Officer, were not present at the July 24 meeting. (Tran. 2, pp. 251-53; Tran. 7, p. 1186.) Berry indicated he was facing problems with the HCA office in Dallas regarding the existing terms of the Choice Care contract as written, and asked how Wesley could rebid the program. The BCBSK representatives replied they would not reopen the program for new bids. At that point, Berry allegedly responded Wesley desired to participate as a Choice Care hospital because "'it was HCA's intention to put one of the other large hospitals in Wichita out of business and then work with the other.'" (Tran. 7, pp. 1190, 1193-94.) Berry acknowledges there was detailed discussion about other Wichita hospitals and possible adverse consequences of their present bids on Choice Care, but denies making any such statement about HCA's intent to put another hospital out of business, either at the July 24 meeting or at any other time. (Tran. 17, pp. 2852-53.) After further discussion, Berry concluded the July 24 meeting stating he needed to do more work on the Choice Care contract and would later contact BCBSK. (Tran. 7, p. 1203.)
Throughout early 1985 BCBSK was also attempting to reestablish HMO, Kansas in the Wichita area. (Tran. 7, pp. 1153-56.) Unlike the abandoned HMOK program, the "new" HMOK was designed as a staff model HMO, rather than an IPA or gatekeeper model; through the staff model, BCBSK sought to establish its own medical practice in the Wichita community, rather than contract with individual physicians. (Id., pp. 1155-56.) St. Joseph's Medical Center, and later St. Francis Regional Medical Center, both expressed enthusiasm for opportunities presented by the new HMOK. Officials from those hospitals and BCBSK periodically met during the late spring and summer of 1985 to discuss possible HMOK alternatives: selling financial interests in HMOK; forming another HMO; or developing a hospital-based HMO for the Wichita area. (Id., pp. 1156-59, 1213-15.)
On July 24, Knack and Dauner went from the Wesley meeting to another scheduled meeting with St. Joseph and St. Francis representatives regarding HMOK. Dauner told the hospital officials about the earlier meeting with Berry, expressing "alarm" over Berry's purported statement. (Tran. 7, pp. 1206-07.) However, there was no discussion at that time about the possibility of BCBSK terminating Wesley as a contracting provider. (Id., p. 1207.)
The Steering Committee of the BCBSK Board of Directors met on July 30, 1985. (Pltfs.' Ex. 167.) The steering committee is composed of Johnston, Dauner, Knack, and other senior management officials; they are not members of the board of directors, but are responsible for the decision-making process generating recommended policies which are then offered to the full board or its executive committee for approval and adoption. (Tran. 2, pp. 215-16; Tran. 4, p. 644.) Berry's alleged remarks at the July 24 meeting with Dauner and Knack were not mentioned at the July 30 steering committee meeting, and there was no discussion of the possible termination of Wesley. (Tran. 4, pp. 643, 652; Pltfs.' Ex. 167.) On July 31, Wesley received the proposed Choice Care contract from BCBSK. (Tran. 17, p. 2845.)
On August 1, 1985, an article entitled "Hospital Corp. to Market Group Health Insurance" appeared on page 19 of the Wall Street Journal. In its entirety, the article stated:
NASHVILLE, Tenn. -- Hospital Corp. of America said it will begin selling group health insurance and a preferred provider hospitalization plan in three cities this month.
Hospital Corp., a for-profit operator of hospitals and health-maintenance organizations, said it will offer the group health insurance through New Century Life Insurance Co., which it acquired earlier this year from E. F. Hutton Group, Inc. New Century has insurance licenses in 35 states.
The move is part of an industrywide trend to mesh health insurers with health-care providers. "Within the next six years, we expect to see two or three dominant fully integrated health-care companies," said Thomas F. Frist, Jr., chief executive and president. Hospital Corp. also eventually will offer life insurance, Mr. Frist said.
People covered by Hospital Corp. health insurance wouldn't be required to use Hospital Corp. facilities. But under the preferred provider plan also unveiled yesterday, Hospital Corp. will give financial incentives in the employees of eligible companies who use facilities designated by the chain.
Hospital Corp. will begin marketing both plans in Nashville and Chattanooga, Tenn., and Charleston, S.C. It plans to offer them to 15 to 20 additional cities within 18 months, a spokesman said.
Hospital Corp. is initially targeting the group health-care programs at companies with five to 250 employees, but eventually will seek larger employers, a company spokesman said.
In the preliminary meetings between BCBSK, St. Joseph and St. Francis concerning HMOK, the hospitals indicated they desired majority ownership of the HMO. BCBSK's Johnston, however, refused this idea. (Tran. 6, p. 962.) On August 4, 1985, administrative officials from both hospitals met in Wichita with Marlon Dauner, John Knack, and William Pitsenberger, BCBSK's general counsel, and presented the three men with a personal opportunity to leave their employment with BCBSK and join the hospitals in the creation, management and marketing of a new HMO which would be owned by the hospitals. (Tran. 6, pp. 959-964.) This HMO would have competed with all of the BCBSK health insurance products (CAP, HMOK and Choice Care), as well as HCP. (Id., p. 961.) Dauner, Knack and Pitsenberger indicated their interest in such a program, but required a firm commitment from the hospitals that same day. That commitment was not forthcoming, and the idea was dropped. (Id., pp. 965-66.) Wayne Johnston was not aware of this meeting when it occurred. (Id., p. 960.)
Immediately following that meeting, Dauner, Knack and Pitsenberger developed an alternative program to be owned and operated by BCBSK but which would be structured on a hospital-based HMO in conjunction with St. Joseph and St. Francis Hospitals. What emerged was a new HMOK product known as the "Kansas Health Plan", a corporation owned by St. Francis and St. Joseph Hospitals and under contract with HMO, Kansas. (Tran. 6, pp. 966-67.)
The next day, August 5, 1985, John Knack returned to Wichita to speak with St. Francis and St. Joseph representatives about the Kansas Health Plan concept. (Tran. 6, pp. 967-68.) The BCBSK steering committee met in Topeka at the same time, during which there was general discussion about the Wichita health care environment but nothing specifically related to Wesley, HCP or HCA. (Tran. 4, pp. 645-46; Tran. 6, pp. 968-69.) The headnote on the minutes of the August 5 steering committee meeting states:
PLEASE NOTE: On Monday, August 12, Steering Committee will have its usual meeting at 8:30 a.m. for which there will be an agenda. The meeting will be adjourned for lunch and meet again immediately thereafter, probably for the rest of the afternoon. The afternoon portion of the meeting will cover environmental changes occurring since the planning session and how these affect the direction of the Plan and plans for 1986.
The next BCBSK steering committee meeting occurred as scheduled on August 12, 1985. (Tran. 4, p. 647; Tran. 6, p. 969.) The relevant portion of the minutes of that meeting states simply: "The remainder of the afternoon was spent discussing various environmental changes in the health care scene." (Pltfs.' Ex. 169, p. 4.) What actually occurred that afternoon was anything but a casual discussion. Marlon Dauner went to that meeting prepared to recommend that the BCBSK Board of Directors terminate Wesley as a contracting provider under the CAP program. (Tran. 6, p. 970.) The proposal was made and that afternoon the steering committee decided to recommend "to the Executive Committee of our Board of Directors to cease contracting with Wesley." (Tran. 4, p. 647.) The steering committee also decided on August 12 to abandon the Choice Care PPO program in Wichita. (Tran. 4, p. 647; Tran. 6, pp. 969-70, 977.) The last decision made by the steering committee on August 12 is critical: the committee members, BCBSK's senior management staff, also decided to seek to negotiate reduced MAPs with the other Wichita hospitals in order to acquire a price competitive CAP insurance product without Wesley's participation as a contracting provider. (Tran. 6, pp. 969-70, 977-78.)
On August 13, 1985, the day after the steering committee meeting, BCBSK's Dauner and Knack met with representatives of St. Joseph and St. Francis Hospitals. Dauner and Knack opened that meeting by announcing that BCBSK was considering terminating Wesley's contracting provider agreement and, because that would result in a different CAP product, BCBSK wanted the hospitals to accept at least a 20 % reduction in the MAPs. (Tran. 6, pp. 980-81; but see Pltfs. Ex. 4 (BCBSK initially sought 25% discount).) The hospital representatives indicated at this meeting they were receptive to discounting the MAPs contingent upon Wesley's termination by BCBSK. (Tran. 15, pp. 2600-03.) After further discussion, Knack was asked to appear before the St. Francis executive committee the following day to discuss the proposed Wesley termination and MAPs reduction. (Tran. 15, p. 2498.)
Bruce Carmichael [St. Francis' Vice President of Planning] gave a brief update of the recent transactions between St. Joseph, Blue Cross & St. Francis. After a brief discussion, John Knack, Blue Cross, Marketing, was asked to join the group. He explained the CAP Program which would be a program signing contracts only with St. Joseph and St. Francis. The discussion of a discount was held. Steve Harris [St. Francis' Chief Financial Officer] was asked to work out what would be a percentage that SFRMC could live with. [Mr. Knack stated that an] answer would be necessary by August 16th so that Blue Cross could cancel the Wesley contract, giving 120 day notice. . . .
(Pltfs.' Ex. 3; Tran. 12, p. 2103.) BCBSK's contracting provider agreement with Wesley required 120 days' notice for termination without cause. BCBSK was accordingly required to give Wesley notice of termination no later than September 1, 1985, for an effective date of January 1, 1986.
Within a week after the August 14 meeting, Carmichael called Knack and told Knack that St. Francis did not want to give discounts on all MAP payments but would give discounts on any new business resulting from Wesley's termination. (Tran. 11, p. 1883.) Knack informed Carmichael that Carmichael's suggested modification of the arrangement was unacceptable to BCBSK. (Id., pp. 1884-85.) On August 21, Knack again met with representatives of St. Francis and St. Joseph and further discussions ensued concerning the Wesley termination/MAPs discount. (Id., p. 1889.) At the August 21 meeting, Knack indicated that Blue Cross would be making a similar proposal to Riverside Hospital. (Id.) At this same meeting BCBSK offered the hospitals another suggested modification: instead of terminating Wesley and obtaining reduced MAPs from the "Saints", BCBSK offered to market a PPO product featuring only St. Francis and St. Joseph as preferred providers. (Tran. 11, pp. 1889-90.) St. Francis and St. Joseph hospital officials responded they wanted no part of the suggested alternative because they preferred BCBSK's original proposal involving Wesley's termination as a contracting provider under the CAP program. (Id., pp. 1890-91.)
Two days later, on August 23, a meeting was held between representatives of St. Francis and St. Joseph Hospitals. At that meeting, St. Francis' agreement to accept a 20 % MAPs reduction may have been communicated to St. Joseph. (Tran. 14, pp. 2295-96.) That very day Wayne Johnston sent out a letter calling a special August 29 meeting of the BCBSK board of directors executive committee:
This will serve as a reminder following my telephone call to each of you that we have called a special meeting of the Executive Committee for Thursday, August 29, . . .
We have a critical decision to make regarding contracting with hospitals. We found it necessary to call a special meeting of the Executive Committee to consider this critical issue before the scheduled September meeting. We have discussed this with your Chairman, Pete Haas, and he agrees such a meeting should be called.
I'm enclosing a few articles that I hope will indicate to you some of the new competitive pressures we feel developing. If you have the opportunity to review this material, I think it will become evident that many new competitors are coming on the scene and we will see shortly health care cost price wars. This material will give you a better understanding of some of the recommendations we will be making on August 29.
(Pltfs.' Ex. 171.) Accompanying the letter were reports and articles detailing the plans and operations of the following health care and health insurance corporations: HCA; American Medical International; National Medical Enterprises; Humana; U.S. Health Care Systems; Prudential; and Cigna. (Id.)
What is happening is a total revolution is occurring in health care. The public is seeing rapid growth of for-profit hospital chains such as the Hospital Corporation of America (HCA), Humana and others. Not only is the rapid growth occurring but these for-profit hospital chains are developing very strong strategies toward what they call "vertical integration". These chains will not only supply health care, they will also provide insurance coverage and are in the process of buying PPO's, HMO's and developing third party administrators and doing it successfully.
The problems faced by Blue Cross and Blue Shield are not confined to these for-profit institutions. There are 450 to 500 major hospitals around the country that belong to the Voluntary Hospital Association. This Association will be entering into the same kinds of activities as the for-profit chains, but will be doing so through the commercial insurance company -- Aetna, another of Blue Cross and Blue Shield's competitors.
Physicians are equally responsive to the new competitive environment and are forming PPO's and HMO's. They feel strongly they must maintain control over programs being developed locally and nationally.
All kinds of joint ventures are being proposed among commercial insurance companies, Blue Cross and Blue Shield Plans, etc. said Johnston. There are probably many more on the drawing board today that staff isn't even aware of.
Johnston commented that the foregoing was a modest effort to describe the health care revolution. What will be the result of this revolution? There will be a wide choice of health care coverage for every individual in every business and the public will be confused about what to buy. In the short run, there will be a proliferation of alternatives which the consumer likes. Staff's assessment is that in the long run, many of those schemes will fail.
Johnston feels that health care price wars are coming and asked the question, "How do we react to that?" Some feel that health care costs will not skyrocket again, but staff feels this thinking is erroneous.
Johnston concluded by saying, with the review of the last three years . . . where Blue Cross and Blue Shield of Kansas stands today . . . and staff's perception of the future, the major question staff wants the Executive Committee to consider today is -- "Does Blue Cross and Blue Shield of Kansas wish to continue to do business with entities that openly desire to compete with the organization and enroll Blue Cross and Blue Shield subscribers in their programs? We think not. We believe now is the time to bite the bullet and work with providers who want to work with us to best serve our subscribers."
Johnston continued, saying, "HCA (Hospital Corporation of America) has a carefully structured and thought through strategy to dominate health care and health insurance in Wichita and surrounding areas. They have the experts and dollars to do it with. This has been demonstrated by aggressive actions taken in Wichita with the purchase of a prestigious hospital (Wesley Medical Center), the purchase of Health Care Plus (HCP) -- a competitive HMO -- purchase of an insurance company and the purchase of a third party to administer self-insured groups. While staff isn't aware of the future plans of HCA, it is apparent they have abundant capital to use in Wichita and perhaps other areas. With the present structure of Blue Cross and Blue Shield, the Plan doesn't have the capital to vertically integrate into the health care market as do the for-profit hospital chains.
Staff's recommendation to the Executive Committee is that Blue Cross and Blue Shield staff immediately inform the Hospital Corporation of America (HCA) that Blue Cross and Blue Shield will cease contracting with Wesley Medical Center effective January 1, 1986 with our CAP program. . . .
Staff feels the Plan can retain favorable CAP programs with the remaining hospitals in Wichita that will continue to be beneficial to Blue Cross and Blue Shield subscribers. Also, they believe a sufficient number of physicians will be interested to make the program successful. Johnston said, "This was a hard recommendation for staff to make, but we sincerely believe if we don't enter quickly into contracts with other hospitals not competing with us, they will make other arrangements and Blue Cross and Blue Shield will be left with no hospitals to have effective contracts with for our subscribers.["]
(Pltfs.' Ex. 10, pp. 3-6.)
One executive committee member inquired about the effect of such a decision on BCBSK subscribers who were accustomed to a close relationship between BCBSK and Wesley. In his response, Johnston noted:
Staff is not talking about Wesley Medical Center . . . they are talking about HCA and must talk about this issue from that perspective. . . . Wesley supported Blue Cross and Blue Shield through some tough years. It appears that HCA, Humana and other organizations have made strategic decisions that they are going to be the best in the health insurance field and plan to dominate it.
(Pltfs.' Ex. 10, p. 7.) The minutes of this meeting also contain the following points which bear note:
Johnston noted that when staff developed CAP it was felt it would be a program that would long accrue to the benefit of Kansans, but that hasn't turned out to be true and the Plan has to structure itself realistically. Staff doesn't see in the long run continuing as the organization is today since everyone will be working to form joint ventures or aligning to become more competitive. "If you do not make arrangements today, all the arrangements will be made and we will be without effective contracts for our subscribers," noted Johnston. Staff feels there is an opportunity with the remaining hospitals in Wichita, but if Blue Cross and Blue Shield waits until a year from now that opportunity will not be available.
Staff pointed out that HCA would not know any more about Blue Cross and Blue Shield's business if they were contracting than if they were not. The critical issue is a matter of alignment to solidify Blue Cross and Blue Shield's place in the market to retain its share of the market. The options will go very quickly.
Prior to the August 29 meeting, Johnston had approved staff's presentation of reduced MAPs to St. Joseph and St. Francis Hospitals in Wichita, and was aware that Dauner, Knack and Pitsenberger had already discussed with those hospitals the proposed Wesley termination and new MAPs. (Tran. 4, pp. 505-06; Tran. 5, pp. 674-76.) In fact, Johnston at that time believed the Saints would be willing, if Wesley were terminated, to consider lower MAPs because instead of BCBSK subscribers choosing among all three major Wichita hospitals (Wesley and the Saints), there would be an opportunity for St. Joseph and St. Francis to acquire more patients and thus a greater market share; Johnston also understood St. Francis' reaction to this concept to be "generally speaking favorable." (Tran. 5, pp. 676-79.) This information, however, was never presented to the executive committee on August 29. In fact, one of the members posed the question: "If the staff recommendation is the organization not go with Wesley, what does staff suggest be done as far as the other Wichita hospitals are concerned?" Johnston responded:
(Pltfs.' Ex. 10, p. 11; emphasis added.) Implicit, if not express, in Johnston's answer was his assurance to the executive committee that BCBSK's contacts with the Saints on the issue of reduced MAPs would take place "in the future" if the committee voted to terminate Wesley's contract, when in fact numerous, substantial and fruitful discussions between BCBSK senior staff and the other hospitals had been continuing for weeks before the August 29 meeting. (Tran. 4, pp. 506-08.)
Johnston also said to the executive committee on August 29:
The provider community has initiated the new environment we find ourselves in. Blue Cross and Blue Shield did not initiate it. The provider community is going into the insurance business and will control both the supply and demand. We have seen this coming for a long time. To date, we cannot think of another alternative. It is our assessment that time is of the essence. . . . The real issue is not HCA . . . it is not Wesley . . . but who do we align with while we still can and get a product with a price subscribers can afford.
(Pltfs.' Ex. 10, p. 11.) Robert O'Brien, Wesley's representative on the executive committee, commented on Wesley's need to remain competitive as a health care provider:
I have a lot of friends in this room and I hope to keep those friends. I have a lot to share having over 13 years with Blue Cross. I can probably show slides of the process [Wesley] went through in making the decision we did. I resent being singled out as a provider for that. I think providers reacted to a changing situation we found ourselves in because of governmental or third party payers. We were destined to say we were going to survive. One other resentment I have is that no one has contacted us to discuss this. I have no personal hurt and want you to understand that. In my personal judgment, singling out one institution, whether it is mine or someone else's is foreboding. I think it will send signals to providers that will not be accepted. That will be the real problem for the organization. I'm of the opinion that the line will be drawn with this decision . . . not for Wesley, but for the providers of the state of Kansas. There are a lot of others more formidable to Blue Cross and Blue Shield than HCA and Wesley. The decision this Board has to reach is whether to contract or not. We may some day see Blue Cross and Blue Shield buying a hospital. The name of the game is competition and we are going to be competitors.
(Id., p. 12.) Following further discussion, the executive committee voted, seven to three, with O'Brien abstaining, to terminate BCBSK's CAP contract with HCA and Wesley effective January 1, 1986. (Id., p. 15.)
The decision was not unexpected by the BCBSK staff; a prepared press release announcing Wesley's termination was immediately distributed to the committee members on August 29 for their review. (Pltfs.' Ex. 10, p. 12.) Wesley's O'Brien requested that the board delay any news releases or publicity about the decision to enable him to return to Wichita, meet with the Wesley management staff, and inform them of the decision. (Tran. 2, p. 279.) The board agreed (Tran. 2, p. 280), and because the committee members had other suggestions for the wording of the news release, requested that BCBSK staff not release news of the decision until the next morning. (Pltfs.' Ex. 10, p. 14.) The requests of O'Brien and the executive committee were ignored. On the morning of August 29, even before the executive committee began its meeting, John Knack had driven from Topeka to Wichita for a pre-arranged meeting with the public relations staffs of St. Francis and St. Joseph Hospitals. (Tran. 15, p. 2604.) Knack told those people he "needed some media contacts in order to deal with the questions that might arise." (Id., p. 2605.) Knack was later informed about O'Brien's request for some time prior to any public announcement of BCBSK's decision, but Knack recommended, and Dauner agreed, Knack should issue the press release on the afternoon of the 29th. (Id., p. 2606.) He was interviewed on film by local television reporters, both at BCBSK's Wichita building and at a parking lot across the street from Wesley; the announcement of Wesley's termination and Knack's interviews were carried on the evening news. (Tran. 2, p. 280; Tran. 15, p. 2606.) A letter notifying Wesley of its termination was prepared and sent by BCBSK the same day. (Pltfs.' Ex. 11.)
The BCBSK news release, sent to all Kansas newspapers and television stations, stated in part:
Beginning January 1, 1986, payment for all covered services at Wesley Medical Center will be essentially the same amount paid to a Contracting Hospital. However, payment will be sent directly to the subscriber and cannot be assigned. Also, any balance above the Blue Cross and Blue Shield allowance will be the subscriber's responsibility.
"In the last few months," said [Wayne] Johnston "HCA has clearly announced its intention to enter into all lines of insurance and become a direct competitor of [BCBSK]. Their recent purchase of Health Care Plus is clear evidence of this.
"We still have contracts with St. Francis, St. Joseph and Riverside Hospitals in Wichita. Therefore, our subscribers will be able to continue receiving care from a contracting hospital. We also feel we will be able to better negotiate better programs for our subscribers at the other hospitals which should provide a positive impact on our subscriber's cost of health care."
Wesley officials, shocked and angry over the announcement and the way it was handled by BCBSK, responded with their own media campaign to assure physicians, employers, and the community at large that notwithstanding the termination, beginning January 1, 1986, BCBSK policyholders were still welcome at Wesley; Wesley would bill BCBSK for any charges incurred; BCBSK's payment to the subscriber could be assigned or endorsed to Wesley; and other than standard deductibles or co-payments, the subscribers would not be held personally responsible for any excess charges. (Pltfs.' Exs. 14, 15, 19, 20, 226, 227.) BCBSK then informed its subscribers: "If Wesley's charges are more than [BCBSK] allowances to other hospitals for the same services, the subscriber will be responsible for the difference." (Pltfs.' Exs. 16; 18, p. 2.) BCBSK further directed its staff that payment for covered services received by subscribers at Wesley was to be sent directly to the subscriber "and cannot be assigned to the hospital." (Stip. y; Pltfs.' Ex. 17.)
During September, 1985, Wesley and HCA officials communicated with BCBSK senior management a number of times, attempting to persuade them to reverse their decision. In a meeting on September 5, and during telephone conversations September 9, Wayne Johnston said he might be willing to reconsider if he received assurances HCA "would not be competing with us in that environment," or that HCA would agree not to market its new products in competition with BCBSK. (Stips. z, aa; Tran. 4, p. 68.) Johnston also indicated BCBSK had been meeting with the Saints "developing . . . some basis of understanding," and "in a few years, one of the two, either St. Francis or St. Joseph might not be around and at that time perhaps we could get back together." (Tran. 1, pp. 65-66; Tran. 4, pp. 682-85.) During a September 10 telephone conversation between Johnston and David Williamson, HCA Vice Chairman, the following points were made:
Mr. Johnston : ". . . We'll have to align ourselves with hospitals that are not directly competing with us. We feel we have to align with these hospitals to get a very favorable contract."
Mr. Johnston : "Not necessarily."
Mr. Williamson : "Then it's the degree of competition?"
Mr. Johnston : "I think so."
Mr. Williamson : "My main objective is to try to determine if we can have some type of truce in this. If we went further, we'd have no choice but to pull out all the stops and fight this. And we don't want to do that.
I'd like to be partners with you rather than adversaries, because both Blue Cross and Wesley would be hurt. I think it is a lose/lose deal for all parties. Would you reconsider?"
Mr. Johnston : "Given what I know today, I don't think so. I don't hear you say that you are not going to compete with Blue Cross. . . ."
(Stip. bb; Pltfs.' Ex. 22; Tran. 4, pp. 687-89; Tran. 11, pp. 1796, 1799.)
Immediately following the executive committee's approval of Wesley's termination on August 29, BCBSK staff moved rapidly to implement the reduced MAPs with the remaining Peer Group V hospitals. The very next day, August 30, the BCBSK internal affairs staff met; its discussion included the following:
Discounts on St. Joseph and St. Frances [sic] Pitsenberger check to make sure we have fully executed contract.
Need to present to Executive Committee on September 19. Brungardt to have meeting to finalize. Adapt policy to change MAPs. Find out if Riverside [Hospital] is part of that.
(Pltfs.' Ex. 182, p. 2; Tran. 4, pp. 680-82.) Brungardt is BCBSK's Vice President of the Electronic Data Processing Department. (Tran. 4, p. 682.)
Wesley officials requested, and were reluctantly granted, permission to appear before the BCBSK executive committee at its September 19 meeting. Following Davis' remarks urging the committee to reconsider its approval of the termination, Johnston said:
I'm convinced more than ever that our decision was a proper one. I'm convinced that HCA will be vertically integrated and believe this was demonstrated by the fact they [sic] have already purchased an HMO and their strategy is to compete with [BCBSK].
(Pltfs.' Ex. 24, p. 11.) After Davis departed from the meeting, the committee approved the reduced MAPs for the remaining Wichita Peer Group V hospitals, subject to the Hospital Advisory Committee's review and advice. (Id., p. 22-23; Tran. 4, pp. 691-92.) The committee then voted to reaffirm its approval of Wesley's termination as a contracting provider effective January 1, 1986. (Pltfs.' Ex. 24, p. 24.) Johnston, again, did not inform the executive committee on September 19 that BCBSK staff had previously been meeting with St. Joseph and St. Francis officials regarding the reduced MAPs. (Tran. 5, p. 718.)
On September 25, 1985, Donald A. Wilson, President of the Kansas Hospital Association, sent a letter to Wayne Johnston requesting information about, and clarification of, the decision to terminate Wesley, and the following points in specific:
1) the decision that was made by Blue Cross;
2) the rationale supporting the decision; and
3) Blue Cross policy emerging from this decision and its implications on future Blue Cross relationships for hospitals as they also attempt to respond to this competitive environment that we all face.
(Stip. ff; Pltfs.' Ex. 468-B; Tran. 5, pp. 850, 857-58.) In a memorandum to all Kansas hospitals dated October 4, 1985, Johnston responded in part:
We believe a vigorous, multi-hospital environment is essential to the people of Wichita in order to preserve competitive hospital pricing and competitive health insurance rates.
Regarding our future relationship with Kansas hospitals, I would emphasize that we wish to continue our long and satisfactory relationship with each hospital. We do believe that to properly serve our subscribers, we must make available highly desirable health benefit products at reasonable and competitive prices. We cannot stand idly by and watch insurance-hospital corporations, such as HCA, monopolize the delivery and financing of care by seeking to enroll Blue Cross and Blue Shield subscribers in their insurance programs. Vertical integration is a strategy some hospitals may feel to be in their best interest. However, if hospitals decide to compete with Blue Cross and Blue Shield in the manner that HCA is competing, Blue Cross and Blue Shield must make a business decision about its future relationship with these entities. Hospitals that wish to continue their current relationship with Blue Cross and Blue Shield, that abide by the terms of our hospital agreement, that do not seek to enroll subscribers in other programs, and that wish to cooperate with Blue Cross and Blue Shield as a major marketing arm of the hospital, will experience no change in the contractual relationship that has historically served Kansans well.
(Pltfs.' Ex. 468-C, p. 2.)
BCBSK's approval and implementation of the reduced Peer Group V MAPs did not follow standard operating procedure. The company reviews and revises MAPs annually, and presents proposed revisions to the cost containment committee, the hospital advisory committee, and ultimately, the executive committee. (Tran. 4, p. 691.) Proposed MAPs are not discussed with hospitals individually; after approval by BCBSK they are sent out on a peer group basis, to be accepted or rejected by the hospitals. (Tran. 5, pp. 716-17.) BCBSK undertook this process for the 1986 MAPs in late spring and early summer, 1985; in July it sent out the 1986 CAP materials reflecting a 4% increase in the 1986 MAPs. (Pltfs.' Exs. 74, 75; Tran. 6, pp. 949-52.) This process, however, was disregarded for the later reduction of 1986 MAPs for Peer Group V. (Tran. 4, p. 691.) Even the executive committee's September 19 request that the reduced MAPs next be presented to the hospital advisory committee, for review and report back to the executive committee, was ignored. (Tran. 4, pp. 692-93.) Without consulting the hospital advisory committee, BCBSK sent revised 1986 CAP materials, with a 20 % reduction in MAPs, to St. Francis, St. Joseph and Riverside Hospitals on October 9, 1985. (Pltfs.' Ex. 33; Tran. 6, p. 953.) The hospital advisory committee met on October 22 and voted overwhelmingly "to strongly recommend to the Executive Committee that the revised MAPs for the Wichita peer group be rejected." (Pltfs.' Ex. 32, p. 4; Tran. 4, p. 695.) That response was reported to the executive committee on November 7, but no further action was taken. (Pltfs.' Ex. 163, pp. 9-10.) St. Francis, St. Joseph and Riverside Hospitals did not affirmatively reject the reduced MAPs, and thereby committed themselves to the new contracts on November 10, 30 days after they received these materials from BCBSK. (Tran. 12, pp. 1970-71.) The reduction affects only Wichita hospitals in Peer Group V; MAPs for other peer groups in Kansas remain unchanged. (Stip. ee.)
On November 12, 1985, plaintiffs filed a 17-count complaint against BCBSK. (Dkt. 1.) The thrust of the complaint was that defendant, in conjunction with St. Francis and St. Joseph Hospitals, had terminated Wesley as a contracting provider and drastically reduced the MAPs for the remaining Peer Group V hospitals, the effects of which were to restrain trade in the Kansas health care service and insurance industries, and to preserve, create or attempt to create defendant's monopoly of the Kansas health care insurance market, to the detriment of Kansas health care consumers generally and plaintiffs in particular. Counts I-III alleged restraint of trade violations of Section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1. Counts IV-VI alleged monopolization, attempt to monopolize, and conspiracy to monopolize, violating Section 2 of the Sherman Act, 15 U.S.C. § 2. Counts VII-XVII contained pendent state law claims, including allegations of state and common law violations, violations of Kansas public policy and defendant's enabling act, claims of breach of contract, and tortious interference with plaintiffs' present and future business relations with third parties. Plaintiffs requested injunctive relief under Section 16 of the Clayton Act, 15 U.S.C. § 26; actual damages under Section 4 of the Clayton Act, 15 U.S.C. § 15, and Kansas law; punitive damages for their state law tort claims; certain declaratory relief; and costs and attorneys' fees under federal law.
Three days later, on November 15, plaintiffs filed a motion seeking a preliminary injunction suspending defendant's termination of Wesley's contracting provider agreement on January 1, 1986, to preserve the status quo and protect plaintiffs from irreparable injury pending disposition of their complaint on its merits. (Dkt. 5-6.) This and other matters were argued to the court on November 21, 1985. Upon learning Wesley's CAP contract with BCBSK clearly permitted termination after 120 days' notice, the court closely questioned plaintiffs' counsel about the propriety of the requested injunction. (Dkt. 274; Tran. of In-Chambers Proceeding Nov. 21, 1985, pp. 3-6.) Defense counsel insisted the termination, unequivocably permitted by the terms of the contract, did not violate any laws, antitrust or otherwise. (Tran. Nov. 21, 1985, pp. 7-8.) The discussion then focused on the possibility of the parties voluntarily maintaining the status quo pending resolution of plaintiffs' claims. Defense counsel responded they had already discussed that approach with BCBSK officials, who were willing to hold Wesley's termination in abeyance so long as the case could be tried and resolved as quickly as possible. (Tran. Nov. 21, 1985, pp. 9-11.) The parties ultimately agreed to this, negating any need for a ruling on the preliminary injunction.
(Id., pp. 9-13.) Counsel also agreed to draft and distribute mutually approved communications to BCBSK subscribers and the entire Wichita community announcing Wesley would continue as a CAP contracting provider under the newly-reduced Peer Group V MAPs, pending hearing and disposition of plaintiffs' claims. (Id., pp. 12-14, 22-26.) The court and counsel then scheduled a pretrial conference on February 28, 1986, and trial for March 25. At that point in the discussion the court was, frankly, surprised to learn both sides insisted on a jury trial. (Id., pp. 17-18, 21, 23.) Counsel for both sides agreed to arrange an acceptable discovery schedule. (Id., p. 20.) Toward the end of the proceeding defense counsel requested that, unless plaintiffs' counsel would agree, the court order Hospital Corporation of America to respond to discovery in addition to the named plaintiffs. (Id., p. 30.) Plaintiffs' attorneys agreed to the request, however, and no ruling was needed. (Id.) The meeting concluded with no indication whatsoever BCBSK would be filing a counterclaim against plaintiffs and HCA. The court order reciting the parties' agreement and the procedural timetable was filed the next day. (Dkt. 9.)
On December 12, 1985, BCBSK moved the court to add HMO, Kansas, Inc. as an additional counterclaim plaintiff, and HCA as an additional counterclaim defendant. (Dkt. 13.) A copy of defendant's proposed answer and counterclaim was appended to the motion. In its answer BCBSK denied its conduct violated any federal or state laws as claimed by plaintiffs. Among its other defenses were the following: failure to state a claim; lack of subject matter jurisdiction; immunity from the federal antitrust laws by virtue of the McCarran-Ferguson Act, 15 U.S.C. §§ 1011-1015, and the state action doctrine of Parker v. Brown, 317 U.S. 341, 87 L. Ed. 315, 63 S. Ct. 307 (1943), and its progeny; lack of standing; failure to allege a "properly cognizable relevant market;" estoppel by virtue of unclean hands and inequitable conduct on plaintiffs' part; and immunity by reason of defendant's statutory duty to contain hospital and medical costs by preserving a competitive marketplace. (Dkt. 13, Ans. & Counterclaim, pp. 1-12.) In their counterclaim BCBSK and HMOK alleged plaintiffs and HCA had, during the summer of 1984, conspired with the Wichita Clinic and the Hillside Medical Office to illegally boycott HMOK, exclude it from the Wichita market, and refuse to do business with HMOK in the future, for the purpose and with the effect of restraining trade and eliminating competition for HMO services in Wichita. BCBSK and HMOK also claimed HCA's acquisitions of New Century, Wesley Medical Center and Health Care Plus were undertaken with the intent and actual effect of becoming vertically integrated in the market for health care services and health care financing in Wichita, "and for the anticompetitive purpose of eliminating competition from Blue Cross, HMO Kansas, other Wichita hospitals, and others in said market." Counterclaim defendants' activities vis-a-vis HMO Kansas were alleged to constitute a group boycott and concerted refusal to deal per se in violation of Section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1, as well as tortious interference with BCBSK's and HMOK's prospective advantages and contractual relations. Additionally, both the activities with the Hillside Medical Office and the Wichita Clinic, and HCA's acquisitions, were challenged as "a contract, combination, or conspiracy unreasonably to restrain trade in the market for health care financing and health care services" in Wichita, Sedgwick County, and the State of Kansas, in violation of the rule of reason under Section 1 of the Sherman Act; "monopolization, attempt to monopolize, . . . and/or a conspiracy to monopolize" that market in violation of Section 2 of the Sherman Act; and a violation of Section 7 of the Clayton Act, 15 U.S.C. § 18,
because the effect of HCA's acquisitions "has in fact been, and/or will be, substantially and unreasonably to restrain trade and eliminate competition in the market." (Dkt. 13, Ans. & Counterclaim, pp. 12-28.) Counterclaim plaintiffs requested actual damages, together with trebled damages as required by law; punitive or exemplary damages; injunctive relief; costs and attorneys' fees. (Id., pp. 28-29.)
Plaintiffs opposed defendant's motion to join HMOK and HCA, arguing the proposed counterclaim ought not to be considered in this action and joinder was therefore unnecessary. Plaintiffs alternatively requested that if the court admitted the counterclaim and permitted joinder, the court also order separate trials and discovery schedules for plaintiffs' claims and defendant's counterclaim. (Dkt. 20.)
On January 8, 1986, I upheld BCBSK's right to plead its permissive counterclaim under Fed.R.Civ.P. 13(b), and ordered joinder of HMO, Kansas as an additional counterclaim plaintiff, and HCA as an additional counterclaim defendant, under Fed.R.Civ.P. 13(h), 19(a) and 20(a). (Dkt. 24.) I also conditionally ordered separate trials of the complaint and counterclaim for reasons which assumed increasing importance as the case progressed, and which bear repeating now:
Unquestionably, the claims set forth in plaintiffs' complaint and defendant's counterclaims are different in character. Although there may be some duplication among the evidence supporting the parties' respective claims, specifically evidence relating to the parties' position in the industry, current market conditions, etc., by and large the evidence will be different. The acts and evidence supporting BCBS's counterclaims historically precede that company's termination of the Contracting Provider Agreement by a period of months or years. Further, it is well established the alleged illegal action of HCA and plaintiffs in violation of the antitrust laws cannot stand as BCBS's defense against the independent antitrust violations alleged in plaintiffs' complaint. See Kiefer-Stewart Co. v. Joseph E. Seagram & Sons, 340 U.S. 211, 214 [95 L. Ed. 219, 71 S. Ct. 259] (1951); Moore v. Mead Service Co., 190 F.2d 540 (10th Cir. 1951); Magna Pictures Corp. v. Paramount Pictures Corp., 265 F. Supp. 144 (C.D. Cal. 1967). Taking the allegations of both the complaint and counterclaims as true, it may well be both the plaintiffs and the counterclaim plaintiffs are entitled to relief.
Plaintiffs' last challenge to the motion is that it will escalate what is already complex litigation by the introduction of difficult issues requiring extensive discovery, delay, and a lengthy trial. Those concerns cannot prevent a defendant from pleading a counterclaim, but rather are properly addressed in a motion for separate trials. PIC, Inc. v. Prescon Corp., 77 F.R.D. 678, 680 (D. Del. 1977). Such relief has been requested in the alternative by plaintiffs, and at this stage of the proceedings appears justified. As previously noted, the alleged illegal conduct of a plaintiff in an antitrust action cannot legalize the alleged unlawful conduct of the defendant or immunize it against liability. Kiefer-Stewart, supra. Nor are the defenses of "unclean hands" and " in pari delicto " properly invoked in an antitrust suit for money damages. Pearl Brewing Co. v. Jos. Schlitz Brewing Co., 415 F. Supp. 1122 (S.D. Tex. 1976). In the Pearl Brewing case, after a thorough review of the limitations on a defendant's antitrust counterclaims in a suit of this type, the court said:
On the present record, the Court is unable to determine whether, and the extent to which, the same evidence would be presented by defendant for its counterclaim as for the plaintiffs' case-in-chief. Even accepting the premise of total dependency arguendo, the Court concludes that plaintiffs have demonstrated sufficient grounds to merit consecutive rather than concurrent presentation of the two cases. Simultaneous presentation of the claim and the counterclaim in this case could well confuse the jury into basing a decision, at least in part, upon the allegedly "unclean hands" of plaintiffs, in acting within the appropriate market, when the proper inquiry as to plaintiffs' entitlement to recovery should be whether the defendant has engaged in any activity violative of the Sherman Act so as to have caused injury and measurable damages to any or all of the plaintiffs. . . .
Not only to avoid confusion but also to preserve a logical presentation, defendant's case should be queued behind plaintiffs' case and not superimposed upon it. . . . Duplication of testimony may be avoidable in a second trial phase through utilization in transcribed form of pertinent testimony brought out in the case-in-chief. Thus, in the exercise of its discretion, . . . the Court concludes that separate trials are required here to avoid prejudice and confusion. . . .
415 F. Supp. at 1133-34 (citations omitted).
In this case, BCBS contends it is justified in terminating the contract with Wesley Medical Center because of HCA's acquisitions of health care and insurance providers, its vertical integration within the market, and the consequent competitive threat posed to BCBS. Assuming defendant can present evidence thereof to the jury as the underlying reason for its proposed termination of the contract, nevertheless to further permit the allegations those actions are themselves antitrust violations would unduly complicate and confuse the jury, much as it was found to in Pearl Brewing. Both the parties to the suit and the public at large have a pressing need to quickly resolve the matter of the Contracting Provider Agreement between BCBS and Wesley Medical Center. By contrast, the acts and occurrences implicated in defendant's counterclaims are a fait accompli and, while undeniably important, are not matters awaiting judicial action for their outcome in the same sense as the contract. Thus, considerations of both the public welfare and fairness to the parties point to separate trials.
That said, the Court acknowledges discovery is still in its initial stages. Subsequent proof by the counterclaim plaintiffs may demonstrate the need to reconsider this ruling. BCBS and HMO Kansas are granted leave to fully brief this issue and request reconsideration of the Court's ruling at or before pretrial conference.
(Dkt. 24, Memorandum & Order Jan. 8, 1986, pp. 2, 5-8.) Following extensions of time and the court's order, BCBSK formally filed its answer and counterclaim on January 13, 1986. (Dkt. 25.)
Throughout this period, in preparation for the March 25 trial date, counsel for the parties undertook the most intensive, thorough and productive discovery this court has ever supervised.
On March 3, 1986, defendant BCBSK moved for summary judgment on the entirety of plaintiffs' complaint. (Dkt. 50, 51.) The motion was premised on three arguments: first, plaintiffs HCP, New Century, and Dr. Reazin lacked standing to sue; second, Wesley had no viable federal antitrust claims; and third, the pendent state law claims were invalid under controlling case law from the Kansas Supreme Court. The March 25 trial setting was cancelled. Oral argument on the motion was heard May 9; my written opinion was filed May 23, 1986. Reazin v. Blue Cross & Blue Shield of Kansas, Inc., 635 F. Supp. 1287 (D. Kan. 1986). (Dkt. 135.) For reasons fully set forth in that opinion, I held HCP had standing to bring an action for actual damages under the federal antitrust laws, while New Century and Dr. Reazin had standing only to pursue injunctive relief.
Reazin, 635 F. Supp. 1287, 1309-1320. I disagreed with BCBSK's contention the Wesley termination was purely a unilateral act, holding the evidence, and derivative inferences, of defendant's interactions with the other Wichita hospitals sufficiently raised a jury question about the existence of a concerted refusal to deal and/or group boycott amounting to a per se violation of Section 1 of the Sherman Act. Reazin, 635 F. Supp. at 1320-27. Based on prevailing case law, I further held plaintiffs' antitrust damage claims under Section 1 would be presented to the jury with alternate instructions on the per se and rule of reason analyses. Id., pp. 1327-28. Although concerned about the sufficiency of plaintiffs' evidence supporting their claims under Section 2, specifically the disputed evidence BCBSK holds a 60% market share, I held defendant had not clearly shown it was entitled to judgment in its favor as a matter of law on plaintiffs' claims of monopolization, attempt to monopolize, and conspiracy to monopolize the relevant market. Id., pp. 1328-33. And, rejecting defendant's arguments, I concluded plaintiffs' pendent claims were not controlled by the two Kansas Supreme Court cases defendant relied on, and denied summary judgment on those issues as well. Reazin, 635 F. Supp. at 1333-35. Finally, based on my fuller understanding of the breadth and complexity of the issues the jury would address, I denied defendant's request for reconsideration of my order for separate trials of the complaint and counterclaim. Trial to the jury on Wesley's and HCP's complaint was set for July 22, 1986. Id., pp. 1335-36.
One of the most difficult analytical problems pervading this entire case is the conflict between defendant's inability to use the alleged antitrust violations of plaintiffs and HCA as its defense to plaintiffs' claims ( Kiefer-Stewart Co. v. Jos. E. Seagram & Sons, 340 U.S. 211, 214, 95 L. Ed. 219, 71 S. Ct. 259 (1951)), and defendant's right, under the rule of reason analysis, to show the factfinder the "real world scenario":
Chicago Board of Trade v. United States, 246 U.S. 231, 238, 62 L. Ed. 683, 38 S. Ct. 242 (1918). Prior to trial BCBSK gave the following indications of its defenses to plaintiffs' complaint:
The defense of this case will rest, in part, on Blue Cross' evidence that its termination of Wesley's agreement was in fact a legitimate and procompetitive response to a course of anticompetitive conduct entered into by HCA and the Plaintiffs that not only threatens to foreclose, but had in fact substantially foreclosed, competition for health care financing and health care services in Kansas.
In the present case, in order to show that the termination of Wesley does not violate Section 1 under the rule of reason analysis, Blue Cross will be permitted to show the history of and changes in the health care financing market in Wichita, including both the Health Care Plus boycott freezing HMO Kansas out of the market and the subsequent HCA acquisitions cementing the Health Care Plus monopoly position.
(Blue Cross' Memorandum in Support of Motion for Reconsideration of Court's Order of Separate Trials, pp. 3, 10.)
On July 11, 1986, plaintiffs filed a motion in limine seeking to prohibit any reference, in the jury's presence, to the counterclaims and the alleged illegal activities of plaintiffs and HCA. (Dkt. 154.) I entertained oral argument on this motion and other matters on July 21 and 22, 1986, immediately prior to trial. (Dkt. 292; Tran. of In Limine Proceedings, July 21-22, 1986.) Plaintiffs identified nine separate matters which they sought to exclude from the jury. I fully sustained plaintiffs' motion on four of those items:
Alleged price fixing by, or an alleged conspiracy to fix prices involving Wesley. The decision of the Federal Trade Commission rendered in Hospital Corporation of America, No. 9161 (FTC Oct. 25, 1985), or any conduct or allegations of conduct on the part of Hospital Corporation of America which are the subject of that proceeding or any other reference to HCA's having allegedly previously violated antitrust law.
HCA's alleged efforts to acquire American Hospital Supply Corporation and its alleged threat to cancel a supply contract with Baxter Travenol.
Alleged pressure from or upon doctors contracting with HCP not to hospitalize patients requiring hospitalization, and other alleged conduct relating to the quality of care provided by HCP contracting doctors.
(Tran. of In Limine Proceedings, July 21-22, 1986, pp. 40-49.)
The remaining in limine questions were more difficult, requiring reconciliation of defendant's evidentiary privileges under the rule of reason and plaintiffs' rights to a trial solely on their complaint, unimpeded by any consideration of the counterclaim. A balance was necessary, as I indicated at the hearing:
The defendants are at liberty to defend this case to the fullest, but we are going to defend the plaintiffs' case and not going to try the defendant's [counterclaim] in this case. This is a difficult case, to say the least. It's taken much of our time trying to come to grips with it. . . . I think there is a balance here. I think I have met it. In doing that, I have to say to all of you I never guarantee a perfect trial -- in this case, no way -- but just the fairest I know how, and simply suggest that what we should do is go slow, let me see how it plays and comes in and decide as it arises what is admissible, but somewhat within the[se] guidelines. . . .
Plaintiffs first sought to exclude all evidence and arguments concerning the allegations HCA's acquisitions of Wesley, HCP and New Century were illegal, anticompetitive, etc. Plaintiffs acknowledged defendant was entitled to show the facts and effects of HCA's activities in these markets; defendant agreed it would proceed without attempting to characterize the activities of HCA and HCP as violations of federal antitrust laws. (Tran. of In Limine Proceedings, July 21-22, 1986, pp. 15-18.) The second item concerned the alleged boycott of HMOK, involving HCP and physicians under contract with HCP. Plaintiffs argued this evidence was irrelevant because it was never given as a reason underlying Wesley's termination, but even if relevant, it was inflammatory and prejudicial. I again deferred to the broad rule of reason analysis, ruling defendant could present evidence and arguments about HCP's activities without referring to them as a "boycott" or otherwise illegal. (Id., pp. 19-22, 55-56.) Plaintiffs' third in limine item was the price HCP investors paid for the stock in the private placement, and profits they enjoyed from the sale to HCA. Defendant argued the stock was the mechanism by which HCP kept HMOK out of the market, and HCA, by purchasing HCP, effectively bought "the exclusive loyalty of the doctors." BCBSK insisted it had evidence certain providers were offered stock by HCP in exchange for taking adverse actions against HMOK. I permitted defendant to proceed with this, admonishing counsel to be sure that evidence truly supported their contentions because of the risk of unfair prejudice to plaintiffs' case if it did not. (Id., pp. 24-34, 57-68.) The fourth item of plaintiffs' motion concerned alleged contacts, relations and future plans between HCA and Physicians Corporation of America, a new organization founded by Dr. Stanley Kardatzke. Dr. Kardatzke worked closely with Gary Bugg in the development, marketing and ultimate sale of HCP, after which Kardatzke left HCP and began Physicians Corporation of America, which is pursuing other alternative delivery systems in the Wichita/Sedgwick County health care financing and services markets. Physicians Corp. had announced plans to start its own HMO program. I permitted defendant to use this evidence as it related to the presence or absence of market power and monopoly power by BCBSK, but prohibited any reference to an alleged relationship between Physicians Corp. and HCA because none was established by the evidence. (Id., pp. 34-38, 70-72.) The last item of the in limine motion concerned "an alleged policy of HCA, Wesley and HCP to channel patients to HCA hospitals and their alleged intention to take steps to cause another Wichita hospital to go out of business." I overruled plaintiffs' requested exclusion of this evidence, particularly in light of the testimony concerning Berry's alleged remark at the July 24, 1985 meeting with BCBSK's Dauner and Knack. (Id., pp. 38-40.)
Another matter I addressed before trial was the propriety of my earlier ruling plaintiffs' Section 1 claims would be submitted to the jury under alternate instructions on the per se and rule of reason analyses. The Supreme Court decided Federal Trade Comm. v. Indiana Federation of Dentists, 476 U.S. 447, 106 S. Ct. 2009, 90 L. Ed. 2d 445 (1986), ten days after my summary judgment ruling in this case. In Indiana Federation of Dentists, the FTC found the "work rule" of a professional dental association, which required members to withhold x-rays requested by dental insurers for use in evaluating claims, to be an unreasonable restraint of trade violating § 1. The Seventh Circuit Court of Appeals vacated the FTC's order, but the Supreme Court reversed. In the course of its opinion, the Court noted:
The policy of the Federation with respect to its members' dealings with third-party insurers resembles practices that have been labeled "group boycotts": the policy constitutes a concerted refusal to deal on particular terms with patients covered by group dental insurance. Although this Court has in the past stated that group boycotts are unlawful per se, we decline to resolve this case by forcing the Federation's policy into the "boycott" pigeonhole and invoking the per se rule. As we observed last Term in Northwest Wholesale Stationers, Inc. v. Pacific Stationery and Printing Co., 472 U.S. , 86 L. Ed. 2d 202, 105 S. Ct. 2613 (1985), the category of restraints classed as group boycotts is not to be expanded indiscriminately, and the per se approach has generally been limited to cases in which firms with market power boycott suppliers or customers in order to discourage them from doing business with a competitor -- a situation obviously not present here. Moreover, we have been slow to condemn rules adopted by professional associations as unreasonable per se, and, in general, to extend per se analysis to restraints imposed in the context of business relationships where the economic impact of certain practices is not immediately obvious. Thus, as did the FTC, we evaluate the restraint at issue in this case under the Rule of Reason rather than a rule of per se illegality.
Indiana Federation of Dentists, 476 U.S. 447 at , 90 L. Ed. 2d 445, at 456-57, 106 S. Ct. 2009 (certain citations omitted). In its rule of reason analysis, the Court found the federation's policy was a horizontal agreement among the participating dentists to withhold from customers a particular service, the forwarding of x-rays to insurance companies, and noted "'while this is not price fixing as such, no elaborate industry analysis is required to demonstrate the anticompetitive character of such an agreement.'" Indiana Federation of Dentists, 90 L. Ed. 2d at 457 (quoting National Society of Professional Engineers v. United States, 435 U.S. 679, at 692, 55 L. Ed. 2d 637, 98 S. Ct. 1355 (1978)). The federation advanced no countervailing procompetitive effects of its agreement, but argued there was no unreasonable restraint of trade because the FTC had not engaged any detailed market analysis, the FTC made no finding the federation's activities resulted in higher cost dental care, and the FTC failed to consider "quality of care" justifications for the federation's policy. The Supreme Court rejected all three arguments, and made the following significant observations about the first:
"As a matter of law, the absence of proof of market power does not justify a naked restriction on price or output," and . . . such a restriction "requires some competitive justification even in the absence of a detailed market analysis." [ NCAA v. Board of Regents of Univ. of Okla.,] 468 U.S. , at 104-110, 82 L. Ed. 2d 70, 104 S. Ct. 2948 [(1984)]. Moreover, even if the restriction imposed by the Federation is not sufficiently "naked" to call this principle into play, the Commission's failure to engage in a detailed market analysis is not fatal to its finding of a violation of the Rule of Reason. . . . Since the purpose of inquiries into market definition and market power is to determine whether an arrangement has the potential for genuine adverse effects on competition, "proof of actual detrimental effects, such as a reduction of output" can obviate the need for an inquiry into market power, which is but a "surrogate for detrimental effects." 7 P. Areeda, Antitrust Law para. 1511, p. 429 (1986). In this case we conclude that the [FTC's] finding of actual, sustained adverse effects on competition in those areas where IFD dentists predominated, viewed in light of the reality that markets for dental services tend to be relatively localized, is legally sufficient to support a finding that the challenged restraint was unreasonable even in the absence of elaborate market analysis.
Indiana Federation of Dentists, 90 L. Ed. 2d at 457-58.
The Tenth Circuit Court of Appeals decided Westman Com'n. Co. v. Hobart Intern., Inc., 796 F.2d 1216 (1986), approximately three weeks later. That case involved a kitchen equipment distributor's Section 1 claims against the manufacturer, Hobart, for its refusal to grant plaintiff a distributorship. A competing distributor urged Hobart to deny plaintiff the distributorship, and Westman claimed Hobart's compliance with that request amounted to a conspiracy to prevent plaintiff from competing in the Denver-area market. The trial court determined Hobart's refusal to deal was a per se violation of Section 1 and, even under a rule of reason analysis, defendant's conduct violated the antitrust laws. Hobart, 796 F.2d 1216, at 1219-20. The Circuit reversed, holding that the Section 1 per se analysis applies to vertical restraints only where there is evidence of intent to raise prices:
Since the record reveals not the slightest hint of price maintenance or price fixing, Hobart's refusal to deal cannot be illegal per se. Of course, if there were allegations of retail price maintenance, price fixing, or tying arrangements, our analysis would be quite different.
Hobart, 796 F.2d at 1224. In its rule of reason analysis the circuit pointed to the procompetitive benefits of a manufacturer limiting the number of its distributors, and held:
Because we believe that manufacturers should be free to choose and terminate their distributors free of antitrust scrutiny so long as their motivation does not involve illegal pricing or tying arrangements, we hold that section one of the Sherman Act does not proscribe refusals to deal absent a showing of monopoly or market power on the part of the manufacturer. See [ United States v. Arnold, Schwinn & Co., 388 U.S. 365, at 376, 18 L. Ed. 2d 1249, 87 S. Ct. 1856 (1967), overruled on other grounds by Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 53 L. Ed. 2d 568, 97 S. Ct. 2549 (1977).] The evil to be avoided is the reduction of interbrand competition between the manufacturer's distributors, not the reduction of intrabrand competition. The trial court's findings in this case compel the conclusion that, on an interbrand basis, the restaurant equipment supply market in the Denver area is highly competitive. Moreover, nothing in the record demonstrates that Hobart had market power. Thus, Hobart's refusal to grant Westman a distributorship at the insistence of Nobel [the competing distributor] did not violate section one of the Sherman Act. If Westman has any remedy against Hobart or Nobel, it must resort to state law.
Hobart, 796 F.2d at 1229 (emphasis original). The court defined "market power" as " either 'power to control prices' or 'the power to exclude competition,'" distinguishing it from "monopoly power" which for purposes of a Section 2 analysis requires proof of both elements together. Id., pp. 1225-26, n. 3. The Tenth Circuit, in Hobart, did not address the Supreme Court's statements in Indiana Federation of Dentists that a market analysis is "but a 'surrogate for detrimental effects,'" and is therefore unnecessary where there is evidence of actual, sustained adverse effects on competition. 90 L. Ed. 2d at 457-58 (quoted supra).
It was the two courts' treatment of the per se analysis that immediately concerned me. BCBSK argued Hobart clearly meant Section 1 challenges to termination of vertical relationships, absent price fixing, must be treated under the more lenient rule of reason standard. Plaintiffs countered that Hobart did not prohibit application of the per se analysis in this case; while Hobart involved a purely vertical arrangement between the manufacturer and distributor, the arrangement at issue here has horizontal ramifications in both the hospital market and the health care insurance/financing market. I permitted plaintiffs to go forward with their evidence and attempt to show the applicability of the per se analysis. (Tran. of In Limine Proceedings, July 21-22, 1986, pp. 2-12.)
Prior to trial, plaintiffs and HCA filed a motion for summary judgment on the counterclaim. (Dkt. 160-61.) The motion was held in abeyance pending trial of plaintiffs' complaint.
That trial began July 22, 1986. After four days of testimony from as many witnesses, defendant moved for a directed verdict on all of plaintiffs' Section 1 claims, the conspiracy to monopolize claim under Section 2, and the state law civil conspiracy claim. (Dkt. 184-85.) That motion was taken under advisement. (Dkt. 206.) On August 18, defendant moved to allow the counterclaim to be decided by the jury or, in the alternative, to retain the jury and proceed with the counterclaim following the verdict on plaintiffs' claims. (Dkt. 192-93; Tran. 19, pp. 3124-30.) I denied that motion (Dkt. 194; Tran. 20, pp. 3298-3305), after which defendant sought mandamus from the Tenth Circuit Court of Appeals (Dkt. 198). The petition was likewise denied. (Dkt. 201.)
Trial lasted for six weeks; defendant rested on September 2, 1986. I ruled that plaintiffs' evidence, in light of Hobart, was insufficient to go to the jury on their claims of per se violations of Section 1. Plaintiffs voluntarily limited their numerous pendent state law claims to two: tortious interference, by BCBSK, with Wesley's and HCP's present and prospective business relationships. At the conclusion of all evidence, defendant renewed its motion for directed verdict, seeking judgment on plaintiffs' Section 1 claims under the rule of reason; the claims of monopoly, attempt to monopolize, and conspiracy to monopolize under Section 2; and the pendent claims. (Dkt. 252; Tran. of Post-Trial Motions Sept. 2, 1986, pp. 3-10.) I took under advisement defendant's motion with regard to plaintiffs' Section 1 claims, expressing misgivings about the sufficiency of their conspiracy evidence, and overruled the motion as to plaintiffs' Section 2 and pendent claims. (Dkt. 243; Tran. of Rulings & Findings on Post-Trial Motions Sept. 2, 1986, pp. 2-22.) Plaintiffs' own motion for directed verdict in its favor was also overruled. (Id., p. 21.)
The jury began its deliberations on September 3, and consumed a full month with its labors. During this 4-week period, the court received over 20 written inquiries from the jury ranging from requests for supplies, through requests for particular testimony, and including intricate, probing questions relating to the substantive law the jury was to apply. (Dkt. 211.) On September 30, 1986, the jury returned its verdict:
A. SHERMAN ACT, SECTION 1: RESTRAINT OF TRADE.
1. Did Blue Cross engage in a contract, combination or conspiracy with St. Francis and/or St. Joseph Hospitals, encompassing within its terms the termination of Wesley as a contracting provider, and the reduction of the MAPs for the remaining Peer Group V hospitals?
[If you answer "no" to this question, do not respond to Nos. 2 through 5, but instead proceed directly to No. 7 relating to plaintiffs' monopolization claim. If you answer "yes" to this question, then proceed to No. 2].
2. What do you find to be the relevant geographic market at issue in this case? (check one.)
x The State of Kansas, excluding Johnson and Wyandotte Counties
The relevant market is the private health care financing market in the geographic area you identify.
3. Does Blue Cross possess market power in the relevant market, that is, either the power to control prices or the power to exclude competition?
4. Did Blue Cross' participation in a contract, combination or conspiracy result in a restraint of trade in the relevant market?
5. If, in No. 4 you find a restraint of trade, was the restraint unreasonable?
6. If you answered "yes" to Nos. 1, 3, 4 and 5, has either of the plaintiffs shown that it has suffered injury to, or loss from, its business or property as a direct or proximate result of Blue Cross' unreasonable restraint of trade?
HCA Health Services of Kansas,
Inc., d/b/a Wesley Medical
B. SHERMAN ACT, SECTION 2: MONOPOLIZATION.
7. What do you find to be the relevant geographic market at issue in this case? (Check one.)
The relevant market is the private health care financing market in the geographic area you identify.
8. Does Blue Cross possess monopoly power in the relevant market identified in No. 7, that is, both the power to control prices and the power to exclude competition? (You must answer "no" to this question if you answer "no" to No. 3.)
9. If you answer "yes" to No. 8, is this monopoly by Blue Cross the result of willful acquisition, maintenance or use of that power by exclusionary or anticompetitive means?
10. If you answer "yes" to Nos. 8 and 9, has either of the plaintiffs shown that it has suffered injury to, or loss from, its business or property as a direct or proximate result of Blue Cross' monopolization of the relevant market?
HCA Health Services of Kansas,
Inc., d/b/a Wesley Medical
[If you answer "yes" to Nos. 8 and 9, and you find that either or both plaintiffs have suffered injury to their businesses or property as a direct result of Blue Cross' actual monopolization, then do not respond to Nos. 11 through 19 below, but proceed directly to No. 20 for a determination of damages. However, if you find no actual monopolization by Blue Cross, you should next consider Nos. 11 through 19.]
C. SHERMAN ACT, SECTION 2: ATTEMPT TO MONOPOLIZE.
11. Is there a dangerous probability that, if unchecked, Blue Cross will succeed in monopolizing the relevant market?
12. Did Blue Cross engage in predatory, exclusionary or anticompetitive conduct in furtherance of its attempt to monopolize?
13. Did Blue Cross have the specific intent to monopolize the relevant market?
14. Did Blue Cross' attempt to monopolize occur in the relevant market?
15. If you answer "yes" to Nos. 11 through 14, has either plaintiff shown that it has suffered injury to, or loss from, its business or property as a direct or proximate result of Blue Cross' attempt to monopolize the relevant market?
HCA Health Services of Kansas,
Inc., d/b/a Wesley Medical
D. SHERMAN ACT, SECTION 2: CONSPIRACY TO MONOPOLIZE.
16. Was there a conspiracy between Blue Cross and others to monopolize trade and commerce in the relevant market?
17. Did both Blue Cross and its co-conspirators enter into the conspiracy with the specific intent of monopolizing commerce?
18. Was one or more of the acts at issue done in furtherance of this conspiracy to monopolize?
19. If you answer "yes" to Nos. 16 through 18, has either plaintiff shown that it has suffered injury to, or losses from, its business or property as a direct or proximate result of Blue Cross' conspiracy to monopolize?
HCA Health Services of Kansas,
Inc., d/b/a Wesley Medical
[Answer the following questions only if you find plaintiffs have proven by a preponderance of the evidence all of the elements of one or more of their federal antitrust claims, as those claims and elements are identified in Sections A, B, C and D above. In other words, answer these questions only if you find in plaintiffs' favor on one or more of their claims of restraint of trade, actual monopolization, attempted monopolization, or conspiracy to monopolize.]
20. If you find that plaintiff Health Care Plus was injured in its business or property as a direct or proximate result of any antitrust violations by Blue Cross [see Nos. 6, 10, 15 and 19 above], please state the amount of damages, if any, suffered by Health Care Plus.
21. If you find that plaintiff HCA Health Services of Kansas, Inc., d/b/a Wesley Medical Center, was injured in its business or property as a direct or proximate result of any antitrust violations by Blue Cross [see Nos. 6, 10, 15 and 19 above], please state the amount of damages, if any, suffered by HCA Health Services of Kansas, Inc., d/b/a Wesley Medical Center.
F. STATE LAW: TORTIOUS INTERFERENCE.
-- Plaintiff Health Care Plus --
22. Did there exist a present business relationship and/or the expectancy of future relationships with economic benefit between Health Care Plus, hospitals and other health care providers?
23. Did Blue Cross actually know of this present business relationship and/or the expectancy of future relationships between Health Care Plus, hospitals, and other health care providers?
24. Was Health Care Plus reasonably certain to have continued in its existing relationship, or realized future expectancies, but for Blue Cross' termination of Wesley as a contracting provider, and defendant's related acts and practices?
25. Did Blue Cross undertake this conduct with the wrongful intent of injuring or destroying the business of Health Care Plus?
26. If you answered "yes" to Nos. 22 through 25 above, did Health Care Plus suffer injury, loss or damage to its business relations as a direct or proximate result of this misconduct of Blue Cross?
-- Plaintiff HCA Health Services of Kansas, Inc., d/b/a Wesley Medical Center --
27. Did there exist a present business relationship and/or the expectancy of future relationships with economic benefit between Wesley Medical Center and Blue Cross' subscribers?
28. Did Blue Cross itself actually know of this present relationship and/or the expectancy of future relationships between Wesley and Blue Cross' subscribers?
29. Was Wesley Medical Center reasonably certain to have continued in its existing relationship, or realized future expectancies, but for Blue Cross' deliberate use of the media and other efforts to discourage its subscribers from using Wesley for medical services?
30. Did Blue Cross undertake this conduct with the wrongful intent of injuring or destroying the business of Wesley Medical Center?
31. If you answered "yes" to Nos. 27 through 30 above, did Wesley Medical Center suffer injury, loss or damage to its business relations as a direct or proximate result of this misconduct by Blue Cross?
32. If you answered "yes" to Nos. 22 through 26 above, that is, if you find Health Care Plus has established by a preponderance of the evidence the elements of its claim of tortious interference by Blue Cross, please state the amount of actual damages, if any, suffered by Health Care Plus as a consequence of Blue Cross' tortious interference [keep in mind any damages you award Health Care Plus on this claim may not duplicate any damage award it may receive from you on its federal antitrust claims against Blue Cross].
33. If you answered "yes" to Nos. 27 through 31 above, that is, if you find HCA Health Services of Kansas, Inc., d/b/a Wesley Medical Center, has established by a preponderance of the evidence the elements of its claim of tortious interference by Blue Cross, please state the amount of actual damages, if any, suffered by Wesley as a consequence of Blue Cross' tortious interference [keep in mind any damages you award Wesley Medical Center on this claim may not duplicate any damage award it may receive from you on its federal antitrust claims against Blue Cross].
34. If you have found plaintiff Health Care Plus is entitled to an award of actual damages (even nominal damages) in response to No. 32 above, you are to decide whether to award Health Care Plus punitive damages from Blue Cross.
a. Is plaintiff Health Care Plus entitled to an award of punitive damages for conduct by Blue Cross that was willful or wanton with regard to the rights of Health Care Plus?
b. If your answer to the previous question is "yes", please state the amount of punitive damages to be awarded Health Care Plus.
35. If you have found plaintiff Wesley Medical Center is entitled to an award of actual damages (even nominal damages) in response to No. 33 above, you are to decide whether to award Wesley Medical Center punitive damages from Blue Cross.
a. Is plaintiff Wesley Medical Center entitled to an award of punitive damages for conduct by Blue Cross that was willful or wanton with regard to the rights of Wesley?
b. If your answer to the previous question is "yes", please state the amount of punitive damages to be awarded to Wesley Medical Center.
BCBSK's first challenge to this verdict is that the court lacks jurisdiction. (Dkt. 249.) Defendant contends that because the relevant market was defined as "health care financing", defendant's conduct is exempt from federal antitrust scrutiny under the McCarran-Ferguson Act, 15 U.S.C. §§ 1011-1015.
This statutory scheme erects three requirements which must be met to obtain the McCarran-Ferguson exemption. The challenged practices (1) must constitute the "business of insurance" under § 2(b) [ 15 U.S.C. § 1012(b)]; (2) must be regulated by state law pursuant to § 2(b); and (3) must not amount to "boycott, coercion or intimidation" under § 3(b) [§ 1013(b)]. See Union Labor Life Insurance Co. v. Pireno, 458 U.S. 119, 124, 73 L. Ed. 2d 647, 102 S. Ct. 3002 (1982); Hahn v. Oregon Physicians Service, 689 F.2d 840, 842 (9th Cir. 1982), cert. denied 462 U.S. 1133, 77 L. Ed. 2d 1369, 103 S. Ct. 3115 (1983).
BCBSK points out that well into the trial of this case, plaintiffs Wesley and HCP asserted its conduct illegally restrained trade in two relevant product markets: private health care financing; and health care services. Defendant argues that once the court limited and defined the relevant product market as "private health care financing,"
only an insurance market remained at issue; the McCarran Act preserves this market for state regulation, and precludes plaintiff's recovery under the Sherman Act.
Where the challenged activities of an insurance company do not meet the "business of insurance" criterion of § 2(b), but are alleged to anticompetitively restrain trade in the market for insurance, does the McCarran Act shield the company's activities from scrutiny under the federal antitrust laws? In the context of this case, defendant's argument is based on three premises: (a) the market for private health care financing is a pure insurance market within the ambit of the McCarran Act; (b) so long as there exists a scheme for state regulation of insurance companies the McCarran Act immunizes a company's efforts to privately regulate competition in the insurance market; and (c) a "market impact" analysis can be readily substituted for the "business of insurance" analysis required under § 2(b) because Congress intended to foreclose application of the federal antitrust laws to all activities of an insurance company affecting the insurance market.
There are serious questions about each of these premises; defendant has not shown the McCarran Act shields the conduct and activities at issue. Congress provided only a qualified antitrust immunity for insurance companies through the McCarran Act. Courts have carefully defined the "business of insurance" requirement to effect the limited congressional purposes behind the act, and for the same reasons consistently use a fact-based conduct analysis to determine whether that requirement is met in a particular case; they have never utilized the "market impact" analysis BCBSK now requests. Absent any controlling precedent on this question (and defendant acknowledges there is none), I am left attempting to reconcile defendant's novel approach with the established purposes of the McCarran Act, the Sherman Act, and the Clayton Act. It cannot be done.
The initial premise of defendant's argument is that the market for "health care financing" is a pure insurance market. But for purposes of the McCarran Act, the insurance "market" is narrowly defined as the "business of insurance", with the primary elements being the "spreading and underwriting of a policyholder's risk." Group Life & Health Insurance Co. v. Royal Drug Co., 440 U.S. 205, 211, 59 L. Ed. 2d 261, 99 S. Ct. 1067 (1979). Plaintiffs respond, and I agree, there are two immediate problems with defendant's attempt to equate the market for private health care financing to an insurance market qua the "business of insurance." This case proceeded under all parties' agreement "private health care financing" includes "self-insurance and self-insured administration" products. (Tran. 6, p. 1013; Tran. 10, pp. 1659-65; Tran. 28, p. 4565; Tran. 30, pp. 4842-43.) From the standpoint of BCBSK, "self-insurance" is not "insurance" at all because it involves no underwriting or spreading of risk by that company, and because this aspect of defendant's business [functioning as a third-party administrator (TPA) for self-insured plans] is "entirely unregulated" by the Commissioner of Insurance for the State of Kansas. (Memorandum in Support of Motion to Set Aside the Verdict and Dismiss, p. 16.) Defendant's TPA activities are not the "business of insurance" after Royal Drug,10 and their inclusion in the market for private health care financing distinguishes that market from those to which the McCarran Act applies. Secondly, defendant's activities in private health care financing affect entities beyond the business of insurance because the formerly distinct boundaries among hospitals, physicians and insurers are "blurring" with the emergence of HMO, PPO and other new financing arrangements attempting to obtain health services for less than full retail price, adopting benefit options restricting consumer choice to a select provider panel, and implementing management systems designed to insure cost effective utilization of health services. See Reazin I, 635 F. Supp. at 1298-99. The market for private health care financing embraces defendant's activities with and through its subsidiary, HMO Kansas. Defendant's activities beyond traditional indemnity coverage merit careful consideration of the following observations:
Prepaid health care provider plans are difficult to analyze because they go beyond the normal insurance function of insuring against specific casualty losses, and may also provide routine health care services. Courts should be careful not to allow insurance companies to broaden the antitrust exemption [of the McCarran Ferguson Act] by simply diversifying into areas not traditionally considered to be the business of insurance.
Hahn v. Oregon Physicians Service, 689 F.2d at 843 n. 2. The market for private health care financing, embracing defendant's HMO, PPO and TPA activities, is not an "insurance" market within the exemption from federal antitrust laws for the business of insurance.
This holding negates any need for analysis of defendant's remaining arguments concerning jurisdiction. Nevertheless, to show the McCarran-Ferguson Act does not in any way apply to defendant's conduct, let us assume arguendo private health care financing might fall within § 2(b), and discuss whether BCBSK's illegal activities are exempt from antitrust scrutiny under the Sherman and Clayton Acts.
The second premise of BCBSK's argument is that, so long as there exists state regulation, the McCarran Act was designed to insulate an insurance company's activities even to the extent of attempts to privately regulate competition in the insurance market. Of course, the presence of the "boycott, coercion or intimidation" exception in § 3(b) of the McCarran Act is clear evidence Congress never intended the exemption to cripple application of the Sherman Act to activities restraining trade in an insurance market. See St. Paul Fire & Marine Ins. Co. v. Barry, 438 U.S. 531, 548-49, 57 L. Ed. 2d 932, 98 S. Ct. 2923 (1978). But even confining the analysis to § 2(b) itself, it is highly doubtful whether plenary state regulation extends so far as defendant intimates, that is, to preclude Sherman Act scrutiny of an unsupervised agreement between an insurance company with others outside that industry. Section 2(b) was designed both by representatives of the insurance industry and Congress to exempt from the antitrust laws cooperative efforts for statistical and ratemaking purposes. Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. at 221-22; see also Union Labor Life Ins. Co. v. Pireno, 458 U.S. at 133. Congress did not intend, through § 2(b), to foreclose all federal antitrust scrutiny of private conspiracies of insurers simply because a state has enacted generally comprehensive regulation. St. Paul Fire & Marine Ins. Co. v. Barry, 438 U.S. at 551, n. 24.
Given [the legislative history, the McCarran Act does] not purport to make the States supreme in regulating all the activities of insurance companies ; its language refers not to the persons or companies who are subject to state regulation, but to laws "regulating the business of insurance." Insurance companies may do many things which are subject to paramount federal regulation; only when they are engaged in the "business of insurance" does the statute apply.
SEC v. National Securities, Inc., 393 U.S. 453, 459-60, 21 L. Ed. 2d 668, 89 S. Ct. 564 (1969) (emphasis original). The McCarran Act does not recreate a broad field for state regulation of the insurance industry free from federal intervention. Women in City Government United v. City of New York, 515 F. Supp. 295, 304 (S.D. N.Y. 1981) (citing Hamilton Life Ins. Co. v. Republic National Life Ins. Co., 408 F.2d 606, 611 (2d Cir. 1969)). Thus,
the fact that Sherman Act violations are committed by insurance companies does not render those violations exempt from federal regulation. Rather, the anti-competitive acts must be within "the business of insurance" as that phrase is used in § 1012(b). The Supreme Court made [this] point very clearly in SEC v. National Securities, Inc., . . .
Ray v. United Family Life Ins. Co., 430 F. Supp. 1353, 1357 (W.D. N.C. 1977) (holding insurance company's refusal to deal with its agent is not the "business of insurance" under § 2(b), and denying defendant summary judgment on plaintiff agent's federal antitrust claims alleging, inter alia, defendant's restraint of trade in the burial insurance market).
In American Family Life Assur. Co. v. Planned Marketing Associates, Inc., 389 F. Supp. 1141, 1146 (E.D. Va. 1974), the court stated:
It is true that the Court in National Securities noted that Congress had in mind anti-trust laws at the time it enacted the McCarran-Ferguson Act. But the Court did not conclude that Congress was concerned with the anti-trust laws per se, but instead the Court observed that "Congress was mainly concerned with the relationship between insurance ratemaking and the antitrust laws . . . ." This observation by the Court coupled with its clear holding that the focus of the term "business of insurance" as used in the McCarran-Ferguson Act "was on the relationship between the insurance company and the policy holder," compels this Court to conclude that a complaint based upon the Sherman Act and the Clayton Act involving interactions between two insurance companies, as distinguished from transactions between an insurance company and its policy holders, is not barred from federal jurisdiction by the McCarran-Ferguson Act.
The only market restraint at issue was in the "insurance market", yet the court declined to forego a fact-based "business of insurance" analysis to determine application of the § 2(b) exemption. That requirement was not met. Thus, noting the complaint alleged activities on the part of defendant insurance company, and its officers and agents, proscribed by the Sherman Act, the court held § 2(b) did not bar federal jurisdiction regardless of the fact Virginia had state legislation similar to the Sherman and Clayton Acts. American Family Life Assur. Co., 389 F. Supp. at 1146.
BCBSK's argument suggests § 2(b) shields all activities of an insurance company privately regulating competition in an insurance market, so long as (a) there is existing state regulation, and (b) no act or agreement of boycott, coercion or intimidation under § 3(b). The principles previously set forth, however, negate this argument. Section 2(b) was enacted principally to preserve state regulatory and taxation efforts, and only secondarily to afford insurance companies limited relief from federal antitrust laws. Even absent § 3(b) considerations, neither an insurance company's activities regarding one of its agents ( Ray v. United Family Life Ins. Co., supra), nor an insurance company's conduct regarding a competitor ( American Family Life Assur. Co., supra) are shielded from federal antitrust scrutiny simply because the restraints allegedly occur in an insurance market. In both cases the courts held defendants' conduct must comply with the business of insurance requirement of § 2(b) before the McCarran-Ferguson exemption would attach; in both cases that requirement was not satisfied. Defendant BCBSK's presumption all activities of an insurance company are protected by § 2(b), especially when they are alleged to restrain trade within an insurance market, is simply false. The McCarran Act itself, and voluminous case law construing and applying the statutory language, make clear the facts of each case must be evaluated to determine whether the conduct in question is the "business of insurance", thereby invoking the shield of § 2(b).
This leads me to defendant's third and final premise: a "market impact" analysis can be readily substituted for the "business of insurance" analysis under § 2(b) in light of the congressional purposes underlying the McCarran Act. The cases already noted, principally SEC v. National Securities, Inc., supra, dispel the notion Congress intended to protect all activities of insurance companies affecting insurance markets. To come within the McCarran exemption, the activities must constitute "the business of insurance" as that term is used in § 2(b). The Supreme Court has carefully defined "the business of insurance", and consistently distinguished it from the "business of insurance companies". The focus of the statutory term is on the relationship between the insurance company and the policyholder; the core of "the business of insurance" is the relationship between insurer and insured, the type of policy which can be issued, its reliability, interpretation and enforcement. National Securities, 393 U.S. at 460.
There is no question that a health insurer's provider agreements, entered into to secure health care services and products for the insurer's policyholders, are not "the business of insurance" under § 2(b). Royal Drug, 440 U.S. at 205.
The Pharmacy [provider] Agreements [entered into by Blue Shield] . . . do not involve any underwriting or spreading of risk, but are merely arrangements for the purchase of goods and services by Blue Shield. By agreeing with the pharmacies on the maximum prices it will pay for drugs, Blue Shield effectively reduces the total amount it must pay to its policyholders. The Agreements thus enable Blue Shield to minimize costs and maximize profits. Such cost-savings arrangements may well be sound business practice, and may well inure ultimately to the benefit of policyholders in the form of lower premiums, but they are not the "business of insurance."
In that sense, every business decision made by an insurance company has some impact on its reliability, its ratemaking, and its status as a reliable insurer. The manager of an insurance company is no different from the manager of any enterprise with the responsibility to minimize costs and maximize profits. If terms such as "reliability" and "status as a reliable insurer" were to be interpreted in the broad sense urged by the petitioners, almost every business decision of an insurance company could be included in the "business of insurance." Such a result would be plainly contrary to the statutory language, which exempts the "business of insurance" and not the "business of insurance companies."
Id. at 216-17. Given that the derivative, positive "market impact" of provider agreements on health insurance consumers is insufficient to bring those agreements within the "business of insurance" exemption, it is inconceivable that the negative "market impact" of manipulated provider agreements, adversely affecting health insurance consumers by restraining competition within that market, is somehow different and analytically sufficient to invoke the McCarran-Ferguson exemption.
Focusing on the congressional purposes underlying the McCarran Act, the Court in Royal Drug next noted Congress had rejected proposed legislation which would have totally exempted the insurance industry from federal antitrust laws. Congress' principal concern was to ensure the states' continued ability to tax and regulate the business of insurance; the secondary concern was the degree to which antitrust laws apply to the insurance industry.
There is no question that the primary purpose of the McCarran-Ferguson Act was to preserve state regulation of the activities of insurance companies, . . . The power of the States to regulate and tax insurance companies was threatened after [ United States v. Southeastern Underwriters Assn., 322 U.S. 533, 88 L. Ed. 1440, 64 S. Ct. 1162 (1944)] because of its holding that insurance companies are in interstate commerce. The McCarran-Ferguson Act operates to assure that the States are free to regulate insurance companies without fear of Commerce Clause attack. The question in the present case, however, is ...