Appendix — Arizona v. Maricopa County Medical Soc.

Supreme Court brief1982

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No. 80-419

IN THE

JUN 15 1981

Supreme Court of the United sratet ALEXANDER L. STEVAS,

OctToser TERM, 1980

CLERK

STATE OF ARIZONA,

Petitioner,

vs.

Maricopa County Mepicau Society,

Maricopa FounDATION For

MeEpICcAL CarE, and

Pima Foundation For Medical Care,

Respondents.

ON WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

JOINT APPENDIX

Vol. 1 Pages 1-274

Ropert K. Corsin

Attorney General

KENNETH R. Reed

Special Assistant

Attorney General

114 West Adams,

Suite 760

Phoenix, Arizona 85003

Counsel for Petitioner

(602) 254-1973

Of Counsel:

Auison B. SWAN

Chief Counsel

Antitrust Division

Cuarves L. Ecer

Assistant Attorney General

Antitrust Division

114 West Adams, 6th Floor

Phoenix, Arizona 85003

(602) 255-4751

Puiuie P. BERELSON

Brown & Bain, P.A.

222 North Central Avenue

Phoenix, Arizona 85004

(602) 257-8777

Counsel for Respondent

Maricopa Foundation for

Medical Care

Rosert O. LesHer

Lesher, Kimble & Rucker, P.C.

3773 East Broadway

Tucson, Arizona 85716

(602) 795-1470

Counsel for Respondent Pima

Foundation for Medical Care

Danie. J. MCAULIFFE

Snell & Wilmer

3100 Valley Bank Center

Phoenix, Arizona 85073

(602) 257-7211

Counsel for Respondent

Maricopa County Medical

Society

PETITION FOR CERTIORARI FILED SEPTEMBER 16, 1980

CERTIORARI GRANTED MARCH 9, 1981

Oflice-Supseme Court, us. |

FILED

‘

PO ree ae: <e emer ee

No. 80-419

IN THE

Supreme Court of the United States

Ocroser TERM, 1980

STATE OF ARIZONA,

Petitioner,

vs.

Maricopa County Mepicat Society,

Maricopa FouNDATION For Mepicat Care, and

Pima Foundation For Medical Care,

Respondents.

ON WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

INDEX

Chronological List of Relevant Docket Entries

Antitrust Complaint and Demand for Jury Trial,

Filed October 17, 1978 (CR 1)*

Order [U.S. District Court], filed November 2,

1978 (CR 18)

PPP)

SERRE EERE EERE EERE REET E EEE E EEE E EE Eee

Answer of Defendant Pima Foundation for Medical

Care, Filed November 15, 1978 (CR 20)

COOH Renee eee eeeee

Defendant Maricopa Foundation for Medical

Care's Motion to Dismiss the Complaint, Filed

November 17, 1978 (CR 25)

FORE EE EERE E EERE EERE EERE Ee

Circuit Court of Appeals.

*References are to the Clerk's Record designated in the Ninth

Memorandum in Support of Defendant Maricopa

Foundation for Medical Care’s Motion to Dismiss

the Complaint, Filed November 17, 1978 ...............

Affidavit of Anthony D. Mitten ...........:csssssesseeeees

Deposition of Mary Gerdonics, Filed November 20,

SOT Tae TED scoccscatesucsctienlltestsecsesdsinedtoctemaistansenenbscenstity

Plaintiff's Motion for Partiai Summary Judgment

on the Issue of Liability and Notice of Hearing,

Filed November 20, 1978 (CR 30) .....:ccssssscecsesseeeeee

Memorandum in Support of Plaintiff's Motion for

Partial Summary Judgment on the Issue of Liabili-

ty, Filed November 20, 1978 (CR 30) ......:.scssessosseeee

Response to Plaintiff's Motion for Partial Sum-

mary Judgment on the Issue of Liability [Pima

Foundation], Filed December 7, 1978 (CR 39) .......

Opposition to Plaintiff's Motion for Partial Sum-

mary Judgment on the Issue of Subject Matter

Jurisdiction, Filed December 7, 1978 (CR 40) ........

Exhibit “A”: omitted in printing .........:0sssree

Exhibit “B”: Affidavit of Thomas P. Finley ........

Response of Defendant Maricopa County Medical

Society to Plaintiff's Motion for Partial Summary

Judgment on the Issue of Liability, Filed

December 11, 1978 (CR 48) rccccccccoscsscccssrsececescesescsoees

Defendant Maricopa County Medical Society’s

Response to Plaintiff's Statement of Undisputed

Material Facts on its Motion for Partial Summary

Judgment on the Issue of Liability, Filed

December 11, 1978 (CR GO). .cccccccccescorsrsccescesccecsosetnces

Page

Defendant Maricopa Foundation for Medical

Care’s Statement of Material Facts as to which

there is a Genuine Issue Precluding Partial Sum-

mary Judgment in Favor of Plaintiff on the Issue

of Subject Matter Jurisdiction, Filed December 12,

RSS aE RM ee er

Affidavit of Anthony D. Mitten .................cccceeeeee

Affidavit of Gary L. Swingle ..............:csscesscsseeeees

Exhibit A: Medical Fee Schedule adopted by the

Industrial Commission of Arizona .............00000e

Defendant Maricopa Foundation for Medical

Care’s Statement of Material Facts as to which

there is a Genuine Issue Precluding Summary

Judgment in Favor of Plaintiff on the Issue of Lia-

bility, Filed December 12, 1978 (CR 54) .............000

Maricopa Foundation for Medical Care’s Memo-

randum in Opposition to Plaintiff's Motion for

Partial Summary Judgment on the Issue of Liabil-

ity Filed December 12, 1979 (CR 55) .......:sscsseseeeeees

Statement of Undisputed Facts Supporting Plain-

tiff’s Motion for Partial Summary Judgment on the

Issue of Liability with Supplemental References,

Filed December 21, 1978 (CR 66) .........cccccccsseeeeseeeee

Exhibit A: Response of Defendant Pima Foun-

dation for Medical Care to Plaintiff's First

Request for Admissions and Interrogatories ........

Exhibit B: Plaintiff's First Request for Admis-

sions and Interrogateries and Responses of

Defendant Maricopa Foundation for Medical

IID deans at ons oi Sivas Shluninedatnsoseeiodnossonniansiahininbebes ;

Exhibit C: Defendant Maricopa County Medical

Society’s Responses to Plaintiff's First Request

for Admissions and Interrogatories .................000

Page

123

136

144

156

189

272

Exhibit D: [Attorney Correspondence and Stipu-

lations with Respect to Exhibits], (contents

GRATIOT TD UII cess chinese ccsnssasivnpsesovsteaninsnsabines

Exhibit E: Maricopa Foundation for Medical

Care 1970 [containing California Relative Value

Studies], (contents omitted in printing) ...............

Exhibit F: Radiology Relative Values, (contents

I ik IIE cetaiscncssecseinsasavccsesccaassediialintessies

Exhibit G: American Society of Anesthesiolo-

gists, Relative Value Guide 1973, (contents omit-

I IIE seinnrd:thntisceasssuasagninsodgsnacectbdesieiibceaibers

Exhibit H: California Relative Value Schedule

Conversion Manual 1977 - 1969 - 1964, (contents

SIE TA IE) irhceetins nin evccclscscrccnsccntitstngsnssescaces

Exhibit I: Maricopa Foundation for Medical

Care Conversion Factors for all New or Renewed

Groups after December 1, 1977, (contents omit-

ted in printing) samnblaiebiacvats i

Exhibit J: Letter from Lawrence J. Shapiro,

President of the Maricopa Foundation for Medi-

cal Care, dated September 30, 1977, to all Foun-

dation doctors together with a ballot for the ap-

proval or disapproval of new conversion factors .

Exhibit K: Minutes of the Maricopa Foundation

for Medical Care Board of Trustees, dated

October 17, 1977, reporting on the fee schedule

ENE sdiciidacesea cnplicpintdeeadiliaasiontssteteonsepseckabgeocciabsainaeeln

Exhibit L: Pima Foundation for Medical Care,

Maximum Fee Schedule for Preventative Child

SITS ES TEESE CRD Ae ORI Nn

Exhibit M: Minutes, Maricopa Foundation for

Medical Care Fee Reimbursement Committee,

I II i SPUEN chatnnscsshcoiincncnocesenancsighecnssiibainieteines

Page

274

275

277

279

280

Exhibit N: By-Laws of Pima Foundation for

II Gi csnth ic saiicieiecdieddicbencuaptieelihenbigheignaens

Deposition of Anthony D. Mitten (Vol. I), Filed

Se TE ST SUF Ge. ethcccecccccsncseinsossusbicciantenceite

Deposition of Anthony D. Mitten (Vol. II), Filed

i Re At ys ) epee

Affidavit of Anthony D. Mitten, Filed April 19, 1979

Order [U.S. District Court], Filed April 30, 1979

CE ID ssessabneneabeleileabiiesnipahactndintehlititilipaitinsenneguebiaiiient

Separate Answer of Maricopa County Medical So-

ciety to Complaint, Filed June 15, 1979 (CR 100)..

Answer of Defendant Maricopa Foundation for

Medical Care, Filed June 15, 1979 (CR 101) ...........

Motion of Defendant Maricopa Foundation for

Medical Care to Vacate Temporary Restraining

Order of April 30, 1979 and Notice of Submission

without a Hearing, Filed June 27, 1979 (CR 103) ..

Memorandum in Support of Defendant Maricopa

Foundation for Medical Care’s Motion to Vacate

Temporary Restraining Order of April 30, 1979,

Filed June 27, 1979 (CR 103) ..........scs-sscsscessersesseeses

Affidavit of Anthony D. Mitten ..............0...0.c008

Motion of Defendant Pima Foundation for Medical

Care to Vacate Temporary Restraining Order of

April 30, 1979, and Notice of Submission without a

Hearing, Filed June 29, 1979 (CR 104) .......... cece

Affidavit of Thomas P. Finley © ...............:ccceeees

Memorandum and Order [U.S. District Court],

yok, ee ft Ot | ae

Plaintiff's Motion for Summary Judgment and

Permanent Injunction, Filed July 6, 1979 (CR 105)

322

323

332

334

335

337

339

Memorandum in Support of Plaintiff's Motion for

Summary Judgment and Permanent Injunction,

Pe I Ms I Ee BOI ccacsccscteccccncevsscsnoevesccvoeccees

Statement of Undisputed Facts Supporting Plain-

tiff’s Motion for Summary Judgment and

Permanent Injunction, Filed July 6, 1979 (CR 106)

Exhibit A: Articles of Incorporation of the Ari-

zona Medical Association, INC. .............:sseseeeseeeeee

Fxhibit C: Agreement Containing Consent Order

to Cease and Desist, Jn the Matter of California

I NIT iincathnchchsensnecucoccciccectooenencecceseees

Exhibit D: Agreement Containing Consent Order

to Cease and Desist, Jn the Matter of the Ameri-

can College of Radiology ESS

Exhibit E: Affidavit of Alice McLain (with at-

tachments) iii tsnenpnecetnes

Exhibit F: omitted in printing ..........ccscsceseseeeees

Plaintiff's Motion for Reconsideration of Memo-

randum and Order of June 5, 1979, or, Alternatively,

Motion for Certification for Interlocutory Appeal

Pursuant to 28 U.S.C. § 1292(b) of Memorandum

and Order of June 5, 1979, Filed July 6, 1979 (CR

Ia dcesecncsonnsccneee

Memorandum of Points and Authorities (CR 107) .

Supplementa! Response of the State of Arizona to

Defendant Maricopa Foundation for Medical

Care's First Set of Interrogatories, verified July 13,

GEE ciissittibnineneies Tisdale dina aiintthdtheneninese

Memorandum and Order [U.S. District Court],

Filed July 18, 1979 (CR 111) ....ccscscsscccsssssssessessssseeees

Notice of Appeal, Filed July 19, 1979 (CR 112) .....

Page

340

377

397

404

427

428

429

471

480

482

Vii

Page

Defendant Maricopa Foundation for Medical

Care’s Response to Plaintiff's Motion for Summary

Judgment and Permanent Injunction, Filed

PRINT Ay LUT Ie EID aii casccscceststssbsccscintdeveccessersesssies 483

Defendant Maricopa Foundation for Medical

Care’s Memorandum in Opposition to Plaintiff's

Motion for Reconsideration of Memorandum and

Order of June 5, 1979, Filed July 23, 1979 (CR

A PF: sascecigpiineasansscedieaininplataslibbschesvecsedbibabditiateiantedsaibdbasies 502

Defendant Maricopa Foundation for Medical

Care’s Statement of Material Facts as to Which

There is a Genuine Dispute Precluding Summary

Judgment in Favor of the Plaintiff, Filed July 31,

Ter a BI ic hiicsesiclsupint cthncacnniielivatsblanastdaiaatialntotetiinns 511

Emergency Motion of Appellees Maricopa Founda-

tion for Medical Care and Pima Foundation for

Medical Care to Vacate Injunction and Dismiss

Appeal and for Expedited Hearing and Accelerated

Briefing, Filed August 22, 1979 ..........ccccsesceseeeseees 527

Affidavit of Lawrence Shapiro ...............scscsessesees 529

Affidavit of Anthony D. Mitten ............cccccessee 532

Affidavit of Thomas P. Finley ...................ccseseeee 535

Affidavit of Arthur Dudley, Jr. .............cccseceeseeeees 538

Order of Court of Appeals (affirming district

court), Filed November 19, 1979 .............cs00 Pet. App. A36

Opinion of Court of Appeals, Filed March 20,

NOTIN ichcssstith ccatetsvadsktaladibdhaativeatesenileidebininddingrseadoceinn Pet. App. Al

Order of Court of Appeals, Filed April 28, 1980

(supplementing the Opinion) ........................ Pet. App. A33

Order [Ninth Circuit Court of Appeals}, Filed

NE UND clash ectisstpsiscicissscasssbbinner-osihicieuladiabadetioasys 541

Order [Ninth Circuit Court of Appeals], Filed

ID BURG I ch cetnteces stv nciqnindninncdbccoadhsnensthibinaeseanate: 541

viii

CHRONOLOGICAL LIST GF RELEVANT

DOCKET ENTRIES

October 17, 1978—Antitrust Complaint and Demand for

Jury Trial (CIV. 78-800 PHX WPC)

November 15, 1978—Answer of Defendant Pima Founda-

tion for Medical Care

November 17, 1978—Judgment (Pima County Medical

Society)

November 20, 1978—Plaintiff’s Motion for Partial Sum-

mary Judgment on the Issue of Liability and Notice of

Hearing

November 20, 1978—Memorandum in Support of Plain-

tiff’s Motion for Partial Summary Judgment on the Issue of

Liability

December 7, 1978—Defendant Pirna Foundation’s Re-

sponse to Plaintiff’s Motion for Partial Summary Judgment

on the Issue of Liability

December 11, 1978—Response of Defendant Maricopa

County Medical Society to Plaintiff's Motion for Partial

Summary Judgment on the Issue of Liability

December 11, 1978—Defendant Maricopa County Medi-

cal Society’s Response to Plaintiff's Statement of

Undisputed Material Facts on its Motion for Partial Sum-

mary Judgment on the Issue of Liability

December 12, 1978—Defendant Maricopa Foundation for

Medical Care’s Statement of Material Facts as to Which

There is a Genuine Issue Precluding Summary Judgment in

Favor of the Plaintiff on the Issue of Liability

Decembez 12, 1978—Defendant Maricopa Foundation’s

Memorandum in Opposition to Plaintiff's Motion for Par-

tial Surnmary Judgment on the Isaue of Liability

December 12, 1978—Affidavit of Anthony D. Mitten

December 21, 1978—Reply Memorandum in Support of

Plaintiff's Motion for Partial Summary Judgment on the

Issue of Liability

December 21, 1978—Statement of Undisputed Facts

Supporting Plaintiff's Motion for Partial Summary Judg-

ment on the Issue of Liability with Supplemental

References

Exhibits are attached separately (A-N)

July 6, 1979—Plaintiff’s Motion for Reconsideration of

Memorandum and Order of June 5, 1979, or, Alternatively,

Motion for Certification for Interlocutory Appeal Pursuant

to 28 U.S.C. §1292(b) of Memorandum and Order

July 17, 1979—Notice of Appeal—from the Order grant-

ing defendanis’ motion to vacate the April 30, 1979

temporary restraining order

August 6, 1979--Minute Entry: Motion for Reconsidera-

tion denied; Motion for Summary Judgment [under rule of

reason] denied; interlocutory appeal granted

August 8, 1979—Certificate and Order that the Order

entered June 5, 1979 is amended and is certified for inter-

locutory appeal

August 8, 1979—Order Staying Proceedings mending the

final determination of the Court of Appeals with respect to

the interlocutory appeal

November 19, 1979—Order of the Court of Appeals for

the Ninth Circuit

March 20, 1980—Opinion of the United States Court of

Appeals for the Ninth Circuit

April 28, 1980—Order of the United States Court of -

Appeals for the Ninth Circuit [Modifying the Opinion]

June 18, 1980—Order of the Court of Appeals for the

Ninth Circuit [Denying Petition for Rehearing and Sugges-

tion of Appropriateness of Rehearing In Banc]

Filed - OCT 17, 1978

w. J. Furstenau, Clerk

U. S. District Court

For The District of Arizona

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF ARIZONA

STATE OF ARIZONA,

Plaintiff, | NO. CIV.

vs. 78-800

Maricopa County MEDICAL SOCIETY, an PHX WPC

Arizona non-profit corporation; Maricopa | ANTITRUST

FOUNDATION FOR MEDICAL Care, an / COMPLAINT

Arizona non-profit corporation; PIMA AND

County Mepicat Society, an Arizona DEMAND

non-profit corporation; and Pima FOR JURY

FOUNDATION FOR MeEpIcaL Care, an TRIAL

Arizona non-profit corporation,

Defendants.

The STATE OF ARIZONA, on its own behalf and as

parens patriae on behalf of the citizens of the State of Ari-

zona, brings this action for injunctive and declaratory relief

and alleges as follows:

COUNT ONE

JURISDICTION AND VENUE

1. Count One of this Complaint is brought and the juris-

diction of this Court is invoked under 28 U.S.C. §) 1331

and 1337 and Section 16 of the Clayton Act, 15 U.S.C. \ 26,

for injunctive and declaratory relief against the defendants’

continuing violations of Section 1 of the Sherman Act, 15

U.S.C. 4 1.

2. The claims for relief set forth in Counts One and Two

of this Complaint are derived from a common nucleus of

operative facts involving substartially identical issues of

fact and law. The entire action constitutes a single case

which ordinarily would be tried in one judicial proceeding.

For the interests of judicial economy, covenience and fair-

ness and in order to avoid unnecessary duplication and

multiplicity of actions, this Court’s jurisdiction over Count

Two is pendent to this Court’s jurisdiction over Count One.

3. Venue as to each defendant is laid in this judicia! dis-

trict pursuant to 28 U.S.C. §§ 1391(b) and (c) and Section

12 of the Clayton Act, 15 U.S.C. § 22. Each of the defen-

dants is incorporated, maintains an office, and transacts

business within the District of Arizona. The claims for relief

alleged herein arose within the District of Arizona. Each of

the defendants, together with its members, is within the

jurisdiction of this Court.

4. The interstate trade and commerce described herein is

conducted into, within and from the District of Arizona.

The acts complained of herein are within the flow of inter-

state trade and commerce and have a direct and substantial

effect on that trade and commerce.

DEFINITIONS

5. As used herein:

(a) “Doctor” means a Doctor of Medicine (M.D.), Doctor

of Osteopathy (D.O.) or Doctor of Podiatry (D.P.M.) who is

duly licensed to practice in the State of Arizona.

(b) “Doctor’s service” means any medical, surgical or

other health care procedure or service performed by a doc-

tor or person working under the supervision of a doctor in

return for a price based on that procedure or service.

of doctor’s services which sets comparative unit values for

those services.

(d) “Unit conversion factor” means a number or dollar

figure used to multiply the unit value for any docter’s ser-

vice into a dollar figure payable for that service.

(e) “Health insurance” means a system of protection in

which periodic payments (premiums) are made to an in-

surer in return for that insurer’s underwriting the risk of

certain medical costs that may be incurred by the policy-

holder.

(f) “Foundation Plan” means a health insurance plan

endorsed by Defendant Maricopa Foundation for Medical

Care or Defendant Pima Foundation for Medical Care.

(g) “Foundation policyholder” means any person whose

medical expenses are insured in whole or part through a

Foundation Plan, whether or not that person pays the

premium for such insurance.

(h) “Foundation member” means any participating or

cooperating member of Defendant Maricopa Foundation for

Medica! Care or Defendant Pima Foundation for Medical

Care.

(i) “Foundation subscriber” means any individual, group,

employer or governmental entity that paid all or part of the

premium for any Foundation plan.

Ill

PLAINTIFF

6. Plaintiff, the State of Arizona, brings this action on its

own behalf and as parens patriae on behalf of the citizens

of the State of Arizona.

7. The State of Arizona and its citizens purchase substan-

tial amounts of doctors’ services and health insurance and

have been and continue to be injured by the violations of

the antitrust laws alleged herein. In 1977 the State of Ari-

zona alone paid $7,615,536 for health insurance premiums.

The State of Arizona has also paid substantial sums di-

rectly to doctors for services, goods and equipment.

DEFENDANTS

8. Each of the corporations named below is made a de-

fendant herein.

(a) The Maricopa County Medical Society (hereinafter

the “Maricopa Society”) is an Arizona non-profit corpora-

tion with its principal place of business in Phoenix,

Arizona. The Maricopa Society is an association of licensed

practitioners of medicine or surgery in Maricopa County,

Arizona.

(b) The Maricopa Foundation for Medical Care

(hereinafter the “Maricopa Foundation”) is an Arizona

non-profit corporation with its principal place of business

in Phoenix, Arizona. The Maricopa Foundation is an asso-

ciation of doctors having four classes of members. Its

“administrative members” are the members of the Board of

Directors of the Maricopa Society. Its “participating mem-

bers” are doctors who are qualified to be or are active

members of the Maricopa Society or another county medi-

cal society in the State of Arizona or the Arizona

Osteopathic Society. Its “cooperating members” are mem-

bers of the Arizona Podiatry Society or the Arizona Society

of Oral Surgeons. Its “PSRO members” are providers of

doctor’s services to Federal Medicare patients. The Mari-

copa Foundation is controlled by the Maricopa Society. The

Executive Director of the Maricopa Society is also the Ex-

ecutive Director of the Maricopa Foundation. Over 70

percent of the doctors practicing in Maricopa County are

participating or cooperating members of the Maricopa

Foundation having a right to vote on the adoption of uni-

form, average or median fee schedules.

“Pima Society”) is an Arizona non-profit corporation with

its principal place of business in Tucson, Arizona. The

Pima Society is an association of licensed practitioners of

medicine or surgery in Pima County, Arizona.

(d) The Pima Foundation for Medical Care (hereinafter

the “Pima Foundation”) is an Arizona non-profit corpora-

tion with its principal place of business in Tucson, Arizona.

The Pima Foundation is an association of doctors having

four classes of members. Its “administrative members” are

the members of the Board of Directors of the Pima Society.

Its “participating members” are doctors who are qualified

to be or are members of the Pima Society or the county

medical society in any county contiguous to Pima County,

Arizona. Its “cooperating members” are members of the

Arizona Osteopathic Society or the Arizona Podiatry So-

ciety who reside in Pima County or in any county

contiguous to Pima County, Arizona. Its “PSRO members”

are providers of doctor’s services to Federal Medicare pa-

tients. The Pima Foundation is controlled by the Pima

Society. Over 70 percent of the doctors practicing in Pima

County are participating or cooperating members of the

Pima Foundation having a right to vote on the adoption of

uniform fee schedules.

CO-CONSPIRATORS

9. Various individuals, partnerships, corporations and

associations not named as defendants herein have partici-

pated as co-conspirators in the violations alleged herein and

have performed acts and made statements in furtherance of

those violations. Such co-conspirators include, without limi-

tation, individual members, officers, directors, trustees and

employees of each of the defendants; various doctors’ asso-

ciations and individual members and officers of those

associations; and various individuals and corporations en-

gaged in selling and underwriting health insurance in the

State of Arizona.

NATURE OF TRADE AND COMMERCE

10. Health care is a substantial industry in the United

States and in the State of Arizona. In 1976, national health

care expenditures totalled approximately $140 billion, while

health care expenditures in the State of Arizona totalled

approximately $1.3 billion. Health care costs have been in-

creasing at a substantially greater rate than costs in other

sectors of the economy. The disproportionate increase in

health care costs has caused significant displacement in the

economy of Arizona. In 1971 health care expenditures ac-

counted for 7.4 per cent of Arizona’s gross state product

and 7.6 per cent of the gross national product; by 1976

health care expenditures accounted for 10.4 per cent of Ari-

zona’s gross state product, compared to 8.7 per cent of the

gross national product. Between 1974 and 1976, the in-

crease in health care expenditures in Arizona was 357 per

cent greater than the increase in Arizona’s gross state prod-

uct.

11. There are approximately 3,750 doctors engaged in the

practice of medicine in the State of Arizona; approximately

60 percent of those doctors are members of the Maricopa

Society or Pima Society. During the period from 1966 to

1975, payments to doctors in the State of Arizona nearly

tripled, climbing from approximately $75,867,000 in 1966 to

approximately $218,379,000 in 1975. Doctors in Arizona

receive and treat patients from other states, refer Arizona

patients for treatment out-of-state, receive substantial sums

of money which flow across state lines for medical services

rendered in Arizona, and prescribe medicines and other

goods and products which are shipped in interstate com-

merce and form an integral part of the interstate

distribution of such prescription drugs, goods and products.

The practice of medicine involves the purchase, use and

sale of goods and products which are manufactured and

sold and flow in a continuous and uninterrupted stream of

interstate commerce.

12. A substantial portion of the prices charged by doctors

to patients are paid through health insurance. The State of

Arizona and many of its citizens purchase health insurance

and the premiums paid for such health insurance total ap-

proximately $350 million annually in the State of Arizona.

The prices doctors charge for their services, goods and

products have a direct and substantial effect upon pay-

ments made to and premiums charged by insurers. Health

insurance involves a continuous and uninterrupted flow of

services, products, contracts and claims in interstate com-

merce and the transfer of substantial sums of money across

state lines.

13. Defendants Maricopa Foundation and Pima Founda-

tion endorse certain health insurance plans (hereinafter

referred to as “Foundation Plans”) which are underwritten

by private insurers in the State of Arizona and elsewhere

and meet certain “minimum stendards” formulated by de-

fendants. Those minimum standards include, among other

things, coverage of a wide range of services, goods and

equipment sold by doctors. Defendants and their co-

conspirators set the prices which the insurers must pay

under Foundation Plans for covered services, goods and

products sold by doctors to Foundation policyholders.

Foundation Plans involve a substantial and uninterrupted

flow of products, services, contracts and claims in interstate

commerce and the transfer of substantial sums of money

across state lines.

VII

VIOLATIONS ALLEGED

14. Beginning at a time unknown to plaintiff but believed

to be on or about December 22, 1969, and continuing there-

after up to and including the filing of this Complaint,

defendants and their co-conspirators have engaged in a con-

tinuing combination and conspiracy in unreasonable

restraint of the aforesaid interstate trade and commerce in

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

Plaintiff is informed and believes that said combination

and conspiracy is continuing and may continue in the fu-

ture unless the relief herein prayed for is granted.

15. The aforesaid combination and conspiracy consists of

a continuing agreement, understanding and concert of ac-

tion among the defendants and their co-conspirators, the

substantial terms of which have been, among others:

(a) to fix, raise, maintain and stabilize prices charged

by doctors;

(b) to establish and maintain uniform and agreed-upon

systems for determining prices charged by doctors;

agreed-upon relative value schedules;

(d) to fix, raise, maintain and stabilize unit conversion

factors to be used in connection with the aforementioned

relative value schedules;

(e) to control and restrain third party review of prices

charged by doctors; and

(f) to reduce and eliminate price competition among

doctors.

16. In formulating and effectuating the aforesaid combi-

nation and conspiracy, defendants and their co-conspirators

did those things which they combined and conspired to do

including, among other things:

(a) consulted with and surveyed doctors and doctors’

associations with respect to current and desired prices for

services, goods and products sold by doctors;

(b) consulted with and surveyed doctors and doctors’

associations with respect to relative value schedules, unit

conversion factors and other fee schedules used to deter-

mine prices for services, goods and products sold by

doctors;

schedules of agreed-upon prices for services, goods and

products sold by doctors;

(d) compiled, revised, maintained and published rela-

tive value schedules;

(e) compiled, revised, maintained and published sched-

ules of unit conversion factors for use with relative value

schedules;

(f) prepared, approved and published changes in rela-

tive value schedules, unit conversion factors and fee

schedules after surveying and consulting with doctors

and doctors’ associations with respect to such changes;

(g) adhered to Foundation relative value schedules,

unit conversion factors and fee schedules;

(h) entered into agreements with health insurers that

the insurers pay for covered services, goods and products

sold to Foundation policyholders by dociors at prices set

by defendants and their co-conspirators;

(i) required as a term of membership in the Maricopa

Foundation or Pima Foundation that Foundation mem-

bers accept payment on assigned claims for services,

goods and products sold to Foundation policyholders in

accordance with Foundation fee schedules;

(j) gave advance notice of planned increases in Foun-

dation fee schedules to health insurers so that the

resulting increases in prices charged by doctors were

passed on to Foundation subscribers through increased

health insurance premiums;

(k) controlled the review and administration of claims

for services, goods and products sold by doctors to Foun-

dation policyholders.

Vill

EFFECTS OF THE CONSPIRACY

17. The aforesaid combination and conspiracy has had

the following effects, among others:

(a) schedules of agreed-upon prices for services, goods

and products sold by doctors have been regularly pub-

lished to the majority of doctors in the State of Arizona;

(b) Foundation fee schedules have set an agreed-upon

ievel for prices charged by doctors;

tors have been fixed, maintained and stabilized at

artificial and non-competitive levels;

(d) prices for services, goods and products sold by doc-

tors have been raised collectively to agreed-upon levels;

(e) uniform systems for setting the prices of services,

goods and products sold by doctors have been estab-

lished, maintained and stabilized;

(f) price competition in the sale of services, goods and

products sold by doctors has been restricted, suppressed

and restrained;

(g) purchasers of the services, goods and products sold

by doctors have been deprived of the benefits of free and

open competition and the right to obtain such services,

goods and products at competitively determined prices;

(h) review by third party payors of the prices charged

for doctors’ services, goods and products has been re-

stricted, suppressed and restrained;

(i) The cost of health insurance has been increased.

COUNT TWO

18. Plaintiff repeats and realleges the allegations con-

tained in Paragraphs 1 through 17 as if again set forth in

full.

19. The aforementioned conduct of the defendants and

co-conspirators violates Arizona Revised Statutes Anno-

tated 4 44-1401, et seq., commonly known as the Uniform

State Antitrust Act.

WHEREFORE, Plaintiff prays:

1. That the Court adjudge and decree that the aforesaid

combination and conspiracy and the acts done in pursuance

thereof were and are an unreasonable restraint of trade and

commerce in violation of Section 1 of the Sherman Act, 15

U.S.C. § 1, and Arizona Revised Statutes Annotated § 44-

1402.

2. That pursuant to Section 16 of the Claytc: Act, 15

U.S.C. § 26, and Arizona Revised Statutes Annotated 4 44-

1408(B) the defendants and their members be permanently

enjoined from continuing the violations of the law alleged

in this Complaint and from entering into any combination,

conspiracy, agreement, understanding or concert of action

having a similar purpose or effect.

3. That pursuant to Section 16 of the Clayton Act, 15

U.S.C. § 26, and Arizona Revised Statutes Annotated 4 44-

1408(B) the Court enter such decree as may be required \o

restore competition in the sale of services, goods and prod-

ucts by doctors.

4. That defendants be required to distribute to each of

their members a copy of the final judgment or decree en-

tered by this Court within 60 days after entry of such

judgment or decree.

5. That defendants’ members be required to surrender to

plaintiff within 120 days after the date of entry of the final

judgment or decree all relative value schedules, schedules of

unit conversion factors, other fee schedules and minimum

standards for health insurance and all copies thereof in

their possession.

6. That plaintiff recover from defendants the costs of this

suit including a reasonable attorney's fee in accordance

with Sections 4 and 16 of the Clayton Act, 15 U.S.C. §§ 15,

26, and Arizona Revised Statutes Annotated § 44-1408(B).

7. That plaintiff have such other, further or different re-

lief as the law may require or the Court may deem just and

proper.

(Signature omitted in printing.)

JURY DEMAND

PLEASE TAKE NOTICE that plaintiff demands a trial

by jury pursuant to Rule 38(b), Federal Rules of Civil Pro-

cedure, of all iseues triable of right by a jury.

(Signature omitted in printing.)

Filed - NOV. 2, 1978

W. J. Furstenau, Clerk

U. S. District Court

For The District of Arizona

(Caption omitted in printing.)

ORDER

Pursuant to stipulation of the parties,

IT IS ORDERED that:

1. On or before November 17, 1978, defendants shall

file and serve motions permitted under Rule 12, Federal

Rules of Civil Procedure, or answers to the complaint

herein. Plaintiff will file and serve its response to all Rule

12 motions filed by defendants on or before November 27,

1978 and defendants will file and serve their reply papers

on or before December 4, 1978. All such motions will be set

for hearing on December 11, 1978, at 10:00 a.m.

2. Defendants shall file and serve their responses to

plaintiff's First Request for Admissions and Interrogatories

on Rule 42C within one week following the meeting of

counsel pursuant to Local Rule 42A. The Court shall then

set a pre-hearing conference pursuant to Local Rule 42D

and a date for hearing plaintiff's motion for preliminary

injunction which will be as soon after the pre-hearing con-

ference as possible and prior to April 30, 1979.

6. For the purpose of maintaining the status quo until

plaintiff's preliminary injunction motion may be heard, un-

til the earlier of May 1, 1979, or final judgment for any

party in this action, or further order of this Court, no de-

fendant, nor any officer, agent, servant, employee or

attorney of any defendant nor any person in active concert

or participation with any defendant who receives actual

notice of this order by personal service or otherwise shall

participate in any survey, agreement, vote or other step to

establish, determine or disseminate any relative value or

conversion factor with respect to medical services, goods or

products other than those relative values and conversion

factors in effect on or before October 18, 1978.

DONE IN OPEN COURT this 2 day of November, 1978.

/s/

Honorable Willie». ~. Copple,

Judge, United States District Court

Filed - NOV. 15, 1978

W. J. Furstenau, Clerk

U. S. District Court

For The District of Arizona

ANSWER OF DEFENDANT PIMA FOUNDATION FOR

MEDICAL CARE

The defendant, Pima Foundation for Medical Care, an

Arizona non-profit corporation, answers the Complaint as

follows:

COUNT ONE

While it admits that the plaintiff claims the jurisdiction

of this Court under the statute recited in Paragraph 1 of

the Complaint, it denies that in fact this Court has jurisdic-

tion over it in this matter.

It denies that it is engaged in interstate commerce, either

within or from the District of Arizona, or that any of its

acts are within the flow of interstate trade and commerce or

have any direct or substantial effect on such trade or com-

merce.

III

It denies the status of the State of Arizona to bring this

action and it denies further that the State or its citizens

purchased “substantial amounts of doctors’ services and

health insurance” which is affected in any way by the activ-

ities of this defendant.

It admits the allegations of Paragraph IV referable to it

except that it specifically denies that it has four classes of

members, affirmatively alleging that it has in fact three

classes of members and that it has no “PSRO members” at

all; and it further denies that over 70% of the doctors prac-

ticing in Pima County are participating or cooperating

members of the Foundation or have anything whatever to

do with the Foundation or its structure.

It denies the allegations of Paragraph V.

It admits that health care is a substantial industry in the

United States and in the State of Arizona, and it has no

information sufficient to enable it :o form any belief as to

the truth of the allegations of Paragraph VI(10), and hence

denies them all; it admits the allegations of the first sen-

tence of Paragraph VI(11); and it has no information

sufficient to enable it to form any belief as to the truth of

the allegations of the remainder of (11) and hence denies

them all.

VII

It denies that health insurance, to the extent that it is in

any way applicable to the activities or structure of this de-

fendant, involves a continuous and uninterrupted flow of

services, products, contracts and claims in interstate com-

merce or the transfer of substantial sums of money across

state lines, and otherwise admits the allegations of Para-

graph VI(12).

Vill

It denies that it and others set the prices which insurers

must pay under Foundation plans for covered services,

goods and products sold by doctors to Foundation policy-

holders; it denies further that its plan or it itself involves a

substantial and uninterrupted flow of products, services,

contracts and claims in interstate commerce and the trans-

fer of substantial sums of money across state lines; and it

admits the remaining allegations of Paragraph VI(13).

It denies every allegation of Paragraph VII in all its

parts, and all of the allegations of Paragraph VIII in all its

parts, and every other allegation of the Complaint, includ-

ing all the allegations of Count Two not specifically

admitted when included in Count One.

AFFIRMATIVE DEFENSES

As a further and alternative defense, this defendant avers

that the Court is without jurisdiction over the subject mat-

ter of the Complaint against this defendant in this case.

WHEREFORE, this defendant prays for judgment in its

favor on the Complaint, for its costs herein incurred, and

for all other appropriate relief.

(Signature omitted in printing)

Filed - NOV. 17, 1978

W. J. Furstenau, Clerk

U. S. District Court

For The District of Arizona

(Caption omitted in printing.)

DEFENDANT MARICOPA FOUNDATION FOR

MEDICAL CARE’S MOTION TO

DISMISS THE COMPLAINT

Defendant Maricopa Foundation for Medical Care,

moves the Court pursuant to Rules 12(b) (1) and (6) of the

Federal Rules of Civil Procedure for an order dismissing

the complaint herein for lack of jurisdiction over the sub-

ject matter and failure to state a claim upon which relief

can be granted. This motion is based upon the complaint

hezein, the attached Memorandum and the affidavit of

Anthony D. Mitten sworn to November 17, 1978.

(Signatures omitted in printing.)

Piled - NOV. 17, 1978

W. J. Furstenau, Clerk

U. 8S. District Court

For The District of Arizona

(Caption omitted in printing.)

MEMORANDUM IN SUPPORT OF

DEFENDANT MARICOPA

FOUNDATION FOR MEDICAL

CARE’S MOTION TO DISMISS

THE COMPLAINT

THE ACTIVITIES OF MARICOPA FOUNDATION

WHICH PLAINTIFF ALLEGES TO BE UNLAWFUL

ARE EXEMPTED FROM THE FEDERAL ANTITRUST

LAWS BY THE McCARRAN-FERGUSON ACT BE-

CAUSE THEY CONSTITUTE THE “BUSINESS OF

INSURANCE” AND ARE REGULATED BY ARIZONA.

Although the ailegations of the complaint are vague and

ambiguous (see Defendant’s Motion for a More Definite

Statement), it is clear from plaintiff's Memorandum in

Support of Application for Order to Show Cause and Mo-

ta for Preliminary Injunction, dated October 25, 1978,

that the activity of Maricopa Foundation for Medical Care

(“Maricopa Foundation”) which plaintiff contends to be

unlawful consists of its endorsement, promotion and admin-

istration of heath insurance plans.

“The framework for the defendants’ unlawful com-

bination lies in agreements between the foundations

and certain health insurers. Under those agreements

the foundations endorse, promote and administer cer-

tain health insurance plans (hereinafter ‘foundation

plans’) which are underwritten by the insurers. In re-

turn, the insurers must provide coverage for the wide

range of doctors’ services set out in the foundations’

minimum standards and agree to pay for covered ser-

vices, goods and products sold by doctors to

foundation policyholders at the prices fixed by the

foundation fee schedule. As a term of membership in

the foundation, doctors agree to accept the prices fixed

by the foundation fee schedule as full payment for as-

signed claims of foundation policyholders. The doctors

submit such assigned claims directly to the founda-

tions. The review and payment of those claims is

performed by foundation members; in the case of spe-

cialists, the review is performed by members of the

same specialty.”

Pages 4-5. (Emphasis added)

As plaintiff states in its complaint, “Defendants Mari-

copa Foundation and Pima Foundation endorse certain

health insurance plans (hereinafter referred to as

‘Foundation Plans’) which are underwritten by private

insurers in the State of Arizona and elsewhere and

meet certain ‘minimum standards’ formulated by de-

fendants. Those minimum standards include, among

other things, coverage of a wide range of services,

goods and equipment sold by doctors. Defendants and

their co-conspirators set the prices which the insurers

must pay under Foundation Plans for covered services,

goods and products sold by doctors to Foundation poli-

cyholders.”

(Paragraph 13). The complaint further alleges that the

Sherman Act Section 1 violation consists of a conspiracy,

pursuant to which Maricopa Foundation

“(h) entered into agreements with health insurers that

the insurers pay for covered services, goods and prod-

ucts sold to Foundation policyholders by doctors at

prices set by defendants and their co-conspirators;

(i) required as a term of membership in the Maricopa

Foundation or Pima Foundation thet Foundation mem-

bers accept payment on assigned claims for services,

goods and products sold to Foundation policyholders in

accordance with Foundation fee schedules;

(j) gave advance notice of planned increases in Founda-

tion fee schedules to health insurers so that the resulting

increases in prices charged by doctors were passed on to

Foundation subscribers through increased health insur-

ance premiums;

(k) controlled the review and administration of claims

for services, goods and products sold by doctors to Foun-

dation policyholders.”

(Complaint, paragraph 16).

The complaint further alleges “The prices doctors charge

for their services, goods and products have a direct and sub-

stantial effect upon payments made to and premiums

charged by insurers” (paragraph 12) and that an effect of the

alleged conspiracy is that “The cost of health insurance has

been increased.” (Complaint, paragraph 17) Maricopa Foun-

dation does not believe that the allegations of the complaint

or charges in the preliminary injunction papers accurately

represent the functions of the Maricopa Foundation, particu-

larly in their unfounded accusations that Maricopa

Foundation has increased the price of medical services. The

facts will prove, to the contrary, that Maricopa Foundation

has been a substantial factor in reducing the cost of medical

services and retarding price increases. Nevertheless, it is re-

spectfully submitted that the allegations of the complaint,

viewed in light of the admissions by plaintiff in its Motion for

Preliminary Injunction, demonstrate that Maricopa Founda-

tion is exempted from the federal antitrust laws by the

McCarran-Ferguson Act.

The McCarran-Ferguson Act, 15 U.S.C. §) 1011-

1015,' | exempts the “business of insurance” from applica-

tion of the Sherman Act to the extent that such business is

regulated by state law. In construing the Act, federal courts

consistently have held that the “business of insurance” is not

limited to activities of insurance companies; the focus of the

exemption is on the nature of the conduct under attack, not

on the nature of the entity engaging in the challenged con-

duct. If challenged activities touch upon the “core of the

‘business of insurance,’ defined by the Supreme Court to

include “the fixing of rates ... the selling and advertising of

policies ... the type of policy which [can] be issued, its relia-

bility, interpretation, and enforcement ...,"’ and if they

are subject to regulation by state law, federal laws which

might otherwise supersede the state regulatory scheme do not

apply. E.g., Lowe v. Aarco-American, Inc., 536 F.2d 1160,

1162 (7th Cir. 1976) (applying the McCarran-Ferguson Act to

exempt an insurance broker and a premium finance company

from the Turth in Lending Act; “the fact that neither appel-

lee is an insurance company does not take the disputed

transaction outside the scope of the ‘business of insurance’ ”’);

General Glass Co., Inc. v. Globe Glass and Trim Co., [1978-1]

' 15 U.S.C. § 1012 provides:

(a) The business of insurance, and every person engaged therein, shall

be subject to the laws of the several States which relate to the regulation or

taxation of such business.

(b) No Act of Congress shall be construed to invalidate, impair, or su-

persede any law enacted by any State for the purpose of regulating the

business of insurance, or which imposes a fee or tax upon such business,

unless such Act specifically relates to the business of insurance: Provided,

That after June 30, 1948, the Act of July 2, 1890, as amended, known as

the Sherman Act, and the Act of October 15, 1914, as amended, known as

the Clayton Act, and the Act of September 26, 1914, known as the Federal

Trade Commission Act, as amended, shall be applicable to the business of

insurance to the extent that such business is not regulated by State law.

SEC v. National Securities, Inc., 393 U.S. 453, 459-60 (1969)

(reversing a decision which applied the McCarran-Ferguson Act to exempt

from the federal securities laws a contemplated merger of insurance compa-

nies because the state regulatory scheme did not constitute regulation of

the business of insurance).

Trade Reg. Rep. (CCH) { 62,231 (N.D. Ill. Sept. 13, 1978)

(granting summary judgment for defendant auto glass re-

placement firms because their agreements with respect to

pricing and billing procedures with automobile insurers con-

stituted the business of insurance; “the claims-settlement

procedures have a direct connection with an insurance com-

pany’s ratemaking structure. Almost axiomatic is the fact

that the cost of repairs, including labor charges ... paid in

settlement of damage claims are an important factor in the

ratemaking structure.” /d. at 75,489).

A. The Foundation is Engaged in the “Business of

Insurance”.

With the exception of one decision, the appeal from which

is now sub judice in the Supreme Court, federal courts which

have considered applicability of the McCarran-Ferguson Act

to agreements among suppliers of health care services and

insurers have held the agreements to constitute the “business

of insurance” because of their direct impact upon the insur-

ance ratemaking process.’

In a case strikingly similar to this, Anderson v. Medical

Service, [1976-1] Trade Reg. Rep. (CCH) 1 60,884 (E.D. Va.

Feb. 10, 1976), aff'd mem., 551 F.2d 304 (4th Cir. 1977), the

court dismissed the Sherman Act complaint filed by a physi-

cian against a non-profit corporation engaged in selling

prepaid medical services because Medical Service's activities

were part of “the business of insurance”’. Like the Maricopa

Foundation’s insurance plans, Medical Service patients who

were treated by participating physicians pursuant to its UCR

plan were assured that their treatment would be fully paid by

their insurance because those physicians had agreed to accept

* Royal Drug Co. v. Group Life & Health Ins. Co., 556 F.2d 1375 (5th

Cir. 1977), cert. granted, 98 Sup. Ct. 1448 (1978) stands virtually alone in

its holding that a prepaid pharmaceutical insurance plan, which involved

an agreement by pharmacies to provide drugs at pre-determined rates, did

not constitute the business of insurance. The matter was argued to the Su-

preme Court on October 11, 1978, but it has not yet rendered its opinion.

[1978] Trade Reg. Rep. (CCH) % 60,021.

the insurer’s payment as payment in full, even though the

physician’s usual and customary fees may have been higher.

(Mitten aff., para. 4) The level of reimbursement under the

UCR plan was ordinarily the physician’s usual and customary

fee charged for the services rendered up to a maximum reim-

bursement level set by Medical Service. The Maricopa

Foundation and Medical Service UCR plans are parallel in

other significant respects: (1) in both patients are in no way

restrained from seeking treatment from non-participating

physicians—they receive exactly the same benefits regardless

of the service provider; in both cases they are, however, liable

for physician fees exceeding the maximum level of benefits if

a non-participating physician charges more than the plan’s

maximum reimbursement level (Mitten aff., para. 4); (2) a

significant percentage of area physicians are enrolled as par-

ticipating members of the corporations;' (3) the contracts

between participating physicians and each corporation are

“nothing more than an agreement on the part of the doctor to

accept as full payment for medical services rendered Medical

Service’s policyholders the charge computed by the UCR

formula.” [1976-1] Trade Reg. Rep. (CCH) 1 60,884 at 68,857;

Mitten aff., para. 3; and (5) physicians charge their patients,

including Foundation or Medical Service plan patients, what-

ever they deem proper.’ /d. at 68,858; Mitten aff., para. 3.

‘ The complaint alleges over 70% of the licensed physicians in Mari-

copa County are enrolled in the Maricopa Foundation as participating

members (para. 8(b)) while 93% of the practicing physicians in the Wash-

ington metropolitan area were enrolled in Medical Service. |1976-1]| Trade

Reg. Rep. (CCH) 9 60,884 at 68,856.

* Moreover, Foundation physicians expressly agree as a condition of

membership that their participation in the plan will not affect the method

or amount they charge their patients for services rendered. Their only

agreement, in connection with compensation, is to accept as payment in full

the level of reimbursement provided under the Foundation plan. {Mitten

aff., para. 3, 4; Ex. A]

Another prepaid health care services insurance program,

strikingly parallel to the Foundation plan, was found ex-

empt from federal antitrust attack in the leading decision

on applicability of the McCarran-Ferguson Act to health

care within the Ninth Circuit. Manasen v. California Dental

Services, 424 F. Supp. 657 (N.D. Cal. 1976).° Accepting

the well-established notions that “the ‘business of insur-

ance’ may embrace arrangements between insurance

companies and nonpolicyholders, including service provi-

ders” and that “a wide variety of activities which have a

substantial effect on ratemaking, including the settlement

of claims and the limitation of costs...,” the court held

that California Dental Service’s (CDS) payment arrange-

ments to the providers of health services constituted the

“business of insurance” within the meaning of the Mc-

Carran-Ferguson Act and granted CDS’ motion for

summary judgment. 424 F. Supp. at 666. In reaching its

decision, the court stated:

“Plaintiffs here contend that it is an antitrust viola-

tion for CDS to pay service providers prevailing rates

for the services rendered to insured patients. It is un-

disputed that the level of dentists’ fees are a major

factor in determining policy premiums. CDS’ payment

* Like CDS, the Foundation offers prepaid health care services un-

der which subscribers pay periodic premiums in exchange for the

agreement of the Foundation membership to provide designated services

at predetermined rates. While CDS assumed direct actuarial risk, inde-

pendent insurance carriers or self-insurers assume that risk under the

Foundation plan. Mitten aff., para. 2. The distinction is immaterial,

however, because in CDS as here, “the plaintiffs’ primary challenge is

directed at the method and manner by which CDS compensates those

dentists who provide the services for which CDS accepts claims and vn-

derwrites risks. 424 F. Supp. at 665. The manner of compensation at

issue in Manasen, like the manner of compensation at issue here, in-

volved the agreement of participating dentists to accept as full

reimbursement payment provided by CDS pursuant to a pre-established

schedule. CDS schedule limited compensation to the ninetieth percentile

of the usual, customary and reasonable fees charged by area dentists for

any particular procedure, unless a peer review group determined that a

higher fee was reasonable under the circumstances. 424 F. Supp. at 661.

arrangements to service providers are critical elements

in CDS’ contractual agreements with its subscribers.

These arrangements are intimately related to the in-

terpretation and implementation of CDS’ policies and

to its reliability as an insurer. Accordingly, the Court

finds that the activities challenged in the instant com-

plaint constitute part of the “business of insurance”

within the meaning of the McCarran Act.” (footnotes

omitted)

424 F. Supp. at 666-67.

Similarly, the level of the Foundation’s reimburseinent to

participating physicians is a major factor in determining

the policy premiums of the group insurance plans it en-

dorses. In establishing premium rates, underwriters use the

Foundation’s reimbursement levels as the basis for their

actuarial calculations. Plaintiff so alleges in the complaint.

Para. 12, 13, 16(j), 17(i). According to Manasen, the close

relationship of the Foundation’s compensation schedule,

together with its claims processing activities, without more,

is sufficient to bring its challenged activities within the

business of insurance.

A series of cases in a related health services area—

hospital care—further compel the conclusion that the very

activities which the State of Arizona alleges to be violative

of the federal antitrust laws clearly constitute the “business

of insurance.” E.y., Travelers Ins. Co. v. Blue Cross, 481

F.2d 80 (3d Cir.), cert. denied, 414 U.S. 1093 (1973)

(antitrust claim alleging that Blue Cross’ standard contract

entered into with more than one hundred hospitals in

Western Pennsylvania, prescribing the terms and amounts

of compensation to be paid the providers for hospital care

rendered to Blue Cross subscribers, dismissed because the

agreements were within the “business of insurance.");

Frankford Hospital v. Blue Cross, 417 F. Supp. 1104 (E.D.

Pa. 1976), aff'd per curiam, 554 F.2d 1253 (3d Cir.), cert.

denied, 434 U.S. 860 (1977); Doctors, Inc. v. Blue Cross, 431

F. Supp. 5 (E.D. Pa. 1975), aff'd per curiam, 557 F.2d 1001

(3d Cir. 1976); Nankin Hospital v. Michigan Hospital Ser-

vice, 361 F. Supp. 1199 (E.D. Mich. 1973); Winters v.

Kansas Hospital Service Ass'n, Inc., [1975] Trade Reg.

Rep. (CCH) {1 60,140 (D. Kan. Dec. 26, 1974).

B. The State of Arizone Regulates Maricopa

Foundation’s Activities.

The conduct which the State of Arizona challenges, in-

cluding entering into agreements with insurers and

engaging in claims processing and review,’ are clearly reg-

ulated by the States’ own comprehensive statutory

insurance scheme. No only are the challenged insurance

agreements (which incorporate the provisions of the Foun-

dation’s minimum standards) subject to regulation by the

Arizona Department of Insurance“ but the activities of the

Foundation itself are directly regulated by that administra-

tive agency. [Mitten aff. paras. 5-6] As an insurance

administrator,’ the Maricopa Foundation may not act

“without a written agreement between [the Foundation]

and an insurer,"’ and the agreement, which is subject to

audit and review by the director of insurance,'' must con-

tain provisions “with respect to the underwriting or other

The State alleges at paragraphs 16(h) and (k) of its complaint that

the Foundation “entered into agreements with health insurers that the

insurers pay for covered services, goods and products sold to Foundation

policyholders by doctors. ...” and “controlled the review and administra-

tion of claims for services, goods and products sold by doctors to

Foundation policyholders.”

* See generally A.R.S. 4 20-1341 to 20-1376 and §4 20-1401 to 20-

1406, pertaining to disability insurance, defined by A.R.S. § 20-253 to

include “expense resulting from sickness, and every insurance appertain-

ing thereto” and A.R.S. §4 20-441, -442 and -446 prohibiting unfair trade

practices in the business of insurance.

* The Foundation was notified by the Director of the Department of

Insurance in January 1978, that it was an “insurance administrator”

within the meaning of A.R.S. 4 20-485 and therefore subject to regulation

by that department. The Foundation has registered pursuant to A.R.S. }

20-485.12. [Mitten aff., paras. 5-6]

A.R.S. § 20-485.01(A).

" A.R.S. § 20-485.03. °

standards pertaining to the business underwritten by such

insurer.”"*

The Insurance Laws of Arizona contain in Title 20,

Chapter 2, Article 6, A.R.S. a number of sections giving the

Department of Insurance power to prevent unfair practices.

A.R.S. \ 20-441 provides:

“Among the purposes of this article is the regulation

of trade practices in the business of insurance in ac-

cordance with the intent of Congress as expressed in

the Act of Congress of March 9, 1945, 59 Stat. 33 [15

U.S.C.A. § 1011 et seq.], by defining, or providing for

the determination of, all such practices in this state

which constitute unfair methods of competition or

unfair or deceptive acts or practices and by prohibiting

the trade practices so defined or determined.”

Even absent the specific provisions of the Insurance

Laws regulating the Maricopa Foundation, it would still be

exempted from the Sherman Act by the McCarran-

Ferguson Act. It is not necessary that the state regulatory

scheme “seek to implement the policies expressed in the

federal antitrust laws,” nor is it necessary that the scheme

be effective. “Indeed, the mere existence of regulatory stat-

utes capable of being enforced is sufficient to invoke the

protection of the McCarran Act.” Manasen v. California

Dental Services, 424 F. Supp. at 667. Accord, Commander

Leasing Co. v. Transamerica Title Ins. Co., 477 F.2d 77, 84

(10th Cir. 1973); Ohio AFL-CIO v. Insurance Rating Board,

451 F.2d 1178, 1184 (6th Cir. 1971), cert. denied, 409 U.S.

917 (1972); California League of Independent Ins. Pro-

ducers v. Aetna Casualty & Surety Co., 175 F. Supp. 857,

860 (N.D. Cal. 1959) ("...a State regulates the business of

insurance ... when a State statute generally proscribes .. .

or permits or authorizes certain conduct on the part of the

insurance companies.”’)

! ALRS. § 20-485.05.

Because the activities of the Foundation, as set forth in

the State of Arizona’s complaint, constitute the “business

of insurance” subject to regulation by the State, the Mc-

Carran-Ferguson Act exempts the Foundation from

application of federal antitrust laws and Count One of the

complaint, therefore, should be dismissed.

IF PLAINTIFF’S FEDERAL ANTITRUST CLAIM IS

DISMISSED, THE STATE ANTITRUST CLAIMS

SHOULD BE DISMISSED AS WELL.

Plaintiff's complaint alleges two causes of action. Count

One alleges violations of Section 1 of the Sherman Act, 15

U.S.C. § 1, with jurisdiction conferred by 28 U.S.C. § 1331

and 1337 and 15 U.S.C. § 26. Count Two alleges violations

of the Uniform State Antitrust Act. A.R.S. §§ 44-1401, et

seq. The sole basis alleged by plaintiff to give this Court

jurisdiction over the state law claim of Count Two is pen-

dent jurisdiction. (Complaint, paragraph 2). If the federal

claims of Count One are dismissed, the basis for pendent

jurisdiction would no longer exist and the state law claim

should also be dismissed for lack of subject matter jurisdic-

tion pursuant to Fed. R. Civ. P. 12(b)(1).

The landmark case on pendent jurisdiction is United

Mine Workers of America v. Gibbs, 383 U.S. 715, 726

(1966). In that decision, Justice Brennan explained the

principles of pendent jurisdiction as follows:

“It has consistently been recognized that pendent

jurisdiction is a doctrine of discretion, not of plaintiff's

right. Its justification lies in considerations of judicial

economy, convenience and fairness to litigants; if these

are not present a federal court should hesitate to exer-

cise jurisdiction over state claims ... Certainly, if the

federal claims are dismissed before trial, even though

not insubstantial in a jurisdictional sense, the state

claims should be dismissed as well.” (Emphasis

added.)’

The situation described by Justice Brennan exists in this

case. If the federal claims are dismissed with respect to

Maricopa Foundation, it would be an abuse of discretion

not to also dismiss the state claims.

Numerous Ninth Circuit decisions have applied the prin-

ciple set forth above to dismiss state law pendent claims

not decided on their merits prior to dismissal of all claims

over which the federal court had statutory jurisdiction.

Hodge v. Mountain States Tei. & Tel. Co., 555 F.2d 254,

261 (9th Cir. 1977), (Affirming the district court’s summary

judgment for defendant on the federal claims; “remand|[ing]

the state law claims to the district court with instructions

tc dismiss for want of federal jurisdiction.”); Toensing ».

Brown, 528 F.2d 69, 72 (9th Cir. 1977), (Affirming the dis-

trict court’s summary judgment for defendant on the

federal claim and the dismissal of the pendent state claim.

“Upon dismissal of the federal claim before trial, a proper

exercise of discretion required dismissal of the pendent

state claim.”); National Ass'n of B.E.T. v. International

All. of T.S.E., 488 F.2d 124 (9th Cir. 1973), (Affirming the

district court’s dismissal of the federal antitrust claim on

the pleadings and the dismissal of the pendent state

claim.); Walling v. Beverly Enterprises, 476 F.2d 393, 398

(9th Cir. 1973), (Reversing and remanding dismissal of a

federal securities claim for lack of subject matter jurisdic-

tion with instruction that “... if the federal claim is

dismissed prior to trial, the state claims should be dis-

missed as well so that federal jurisdiction will not be

abused.”); Wham-O-Mfg. Co. v. Paradise Mfg. Co., 327

F.2d 748, 753 (9th Cir. 1964) (Affirming dismissal of a fed-

eral claim for patent infringement and a state claim for

unfair competition. The district court acting sua sponte had

dismissed the unfair competition claim. Once the federal

claim was dismissed, on summary judgment, the district

court, “in the exercise of a sound discretion, had no choice

but to dismiss the complaint with respect to [the state]

claim.”)

On the basis of the foregoing cases, if the federal claims

of Count One are dismissed or sticken, defendant respect-

fully requests this Court to dismiss without prejudice the

state law claim of Count Two for lack of subject matter ju-

risdiction.

Conclusion

For the foregoing reasons, plaintiff's complaint should be

dismissed in its entirety.

November 17, 1978.

(Signatures omitted in printing.)

(Caption omitted in printing.)

AFFIDAVIT OF

ANTHONY D. MITTEN

STATE OF ARIZONA

8s.

County of Maricopa

ANTHONY D. MITTEN, being duly sworn, under oath

deposes and says:

1. I am the Executive Director of defendant Maricopa

Foundation for Medical Care (“Maricopa Foundation”)

herein. I make this affidavit in support of Maricopa Foun-

dation’s Motion to Dismiss the Complaint.

2. The Maricopa Foundation was established to provide

residents of Maricopa County with a competitive alterna-

tive to utilization of closed panel prepaid health insurance

p!ans. Its activities include establishment of minimum stan-

dards for insurance plans for which Maricopa Foundation

will perform peer review and administrative functions. Mar-

icopa Foundation reviews the medical necessity and

appropriateness of treatment and, for certain insured

groups, also reviews utilization of hospital services. Follow-

ing the medical review by the Maricopa Foundation, it

makes payment on claims for certain insured groups. In

each instance, Maricopa Foundation acts as an agent of an

insurer who underwrites the health insurance plan. When

Maricopa Foundation pays claims, it draws funds from

bank accounts of the insurer with respect to which it has

the power to issue drafts as the insurer's agent.

3. Membership in Maricopa Foundation is open to all

physicians licensed to practice in Arizona without regard to

whether they are members of any medical society. Each

participating member in Maricopa Foundation executes an

application for membership, a true copy of which is at-

tached hereto as Exhibit “A”. That application for

membership specifically states “! understand and agree

that participating membership in the Foundation shall not

affect the method of computation or amount of fees billed

by me with respect to any medical care for any patient.”

Participating members further agree “to be bound during

the period of the membership applied for with respect to

maximum fees charged patients covered by Foundation

sponsored plans by any fee determination by the Founda-

tion consistent with the schedule adopted by the

membership and agree also to be bound with respect to pa-

tients covered by Foundation sponsored plans during the

period of membership applied for by any agreements, con-

tracts, or statements of policy entered into or adopted by

the Foundation concerning the rendering of medical care

and the cost thereof.”

4. The only determinations with respect to fees charged

for medical services which are made by Maricopa Founda-

tion are with respect to maximum fees paid with respect to

patients covered by Foundation endorsed plans to partici-

pating members in Maricopa Foundation. They agree to

accept the Foundation’s determination of maximum fees as

payment in full for services performed by them on patients

covered by Foundation endorsed plans when they bill the

patient more than that amount. If the patient is billed less

than that amount, the physician is paid the amount billed if

the services are determined by Maricopa Foundation to

have been medically appropriate. Maricopa Foundation

does not and never has taken any position with respect to

the amount of fees a participating member or other physi-

cian should bill with respect to any medical care for any

patient. Patients covered by Foundation endorsed plans

receive the same insurance benefits with respect to treat-

ment by physicians who are not participating members as

they would receive if treated by a participating member.

5. In 1977, Arizona enacted Article 9 to Title 20, Chapter

2 of Arizona Revised Statutes, the Title pertaining to regu-

lation of the business of insurance in Arizona. That Article,

which became effective August 27, 1977, provides for regu-

lation by the Department of Insurance of the State of

Arizona of “insurance administrators” as defined in A.R.S.

) 20-485. After enactment of Chapter 9, I consulted with

Jack Trimble, Director of the Arizona Department of Insur-

ance, as to whether Maricopa Foundation was an insurance

administrator as defined by A.R.S. § 20-485. In January

1978, I received a response to my inquiry to Mr. Trimble

from Clarence E. Newman, Jr. auditor in the Department

of Insurance of the State of Arizona, informing me that “It

has been determined that the functions that your organiza-

tion performs are within the definition of an insurance

administrator as defined under § 20-485 of the Insurance

Administrators’ Law” and enclosing forms to be completed

by Maricopa Foundation in order to register under that law.

6. Maricopa Foundation has submitted registration

forms to the Department of Insurance of the State of Ari-

zona in the form required by it and those forms have been

accepted by the State of Arizona Department of Insurance.

As a result, Maricopa Foundation is duly regulated by the

Department of Insurance of the State of Arizona under the

insurance laws of the State of Arizona.

(Signature and notarization

omitted in printing.)

Filed - NOV 20, 1978

W. J. Furstenau, Clerk

U. 8. District Court

For The District of Arizona

‘tion omitted in printing.)

Deposition of MARY GERDENICS

November 14, 1978

Tucson, Arizona

[4]

* * * Would you please state your name and home

‘ess?

Mary Gerdenics, 2001 West Brichta; Tucson, Arizona,

i-c-h-t-a.

-_* * &*

By whom are you employed?

The Greater Southern Arizona PSRO.

What is your position with the Greater Southern Ari-

PSRO?

I'm the administrative assistant.

What are your responsibilities as Administrative As-

nt of the Greater Southern

[5]

ona PSRO?

Okay. I’m the bookkeeper; I take care of all the ac-

ts; I’m responsible for the over-all running of the

e, itself, as far as —

And how long have you held that position.

Since October, 1977.

What position did you hold prior to becoming the

inistrative assistant for the Greater Southern Arizona

A. I was the executive secretary for the Pima Foundation

for Medical Care.

Q. What were you responsibilities as Executive Secretary

for the Pima Foundation for Medical Care?

A. I was the bookkeeper and secretary to the board of

directors.

ae 2 ¢

[20]

Q. Would you briefly describe the method in which the

Pima Foundation performs claims’ payment on Foundation

plans and when I say “Foundation plans,” let us under-

stand that I’m referring to — A. Uh-huh.

Q. — plans that are endorsed by the Pima Foundation.

A. Well, I don’t pay claims myself, so I don’t know how

they do them, but I know they follow the guidelines estab-

lished by the insurance companies involved, so — But, how

they pay claims, I don’t know. I don’t know the actual pro-

cess.

Q. As the bookkeeper and secretary to the board for the

Pima Foundation, was it your understanding that the Foun-

dation paid claims specifically in accordance with the

guidelines of the insurance companies that underwrote

those policies?

A. Yes, they have to follow their guidelines, establised

guidelines.

Q. The Pima Foundation does not assume any actuarial

risk or underwrite any actuarial risk under Foundation

plans; is that correct? A. That's correct.

*) ot

[25]

*_* * ©

Q.... [H]ow would you use the numbers to determine

the allowable price?

A. Well, say an office visit would have a 1.0 units as-

signed; you would multiply your 1.0 units times your

medicine schedule to come up with what you would pay for

that particular procedure?

Q. So, in other words, you would multiply the dollar

amount in the appropriate category times the relative value

accorded a specific procedure? A. Yes, un-huh.

Q. In order to determine a price, then, with the Founda-

tion fee schedule, it is necessary to use a relative value

schedule? A. Yes, uh-huh.

Q. And conversely, the relative value schedule is part of

the fee schedule of the Pima Foundation? A. Yes, uh-huh.

-_* * *

[28]

_* * &*

Q. In Paragraph Three of Exhibit 6, the letter states:

The Foundation plan to be offered meets the minimum

standards of the Pima Foundation for Medical Care for

plans to be presented as under our auspices. A. Um-hum.

Q. Does a plan have to meet all minimum standards of

the Pima Foundation in order to be presented under the

auspices of the Pima Foundation? A. Yes.

Q. Paragraph Four, Number One, states that Pima

Foundation for Medical Care members are to abide by a fee

schedule related to 1964 CRV and there follows a list of

medical categories with a dollar amount next to each cage-

tory. Does this mean that the Pima Foundation members

have agreed to abide by the use of the 1964 California Rela-

tive Value Schedule with those conversion factors? A. Yes.

Q. Are the numbers used to multiply the relative values

in the California Relative Value Schedule commonly re-

ferred to as conversion factors? A. Yes, they are.

Q. So if I use the term “conversion factors” to identify

those dollar amounts, we’ll understand each other?

A. It’s easier to understand, yes.

Q. Correct? A. Yes, uh-huh.

Q. .In Subparagraph Four on Page One of Exhibit 6, the

letter states that: The Foundation agrees to request the

Maricopa Foundation to honor this program according to

our previous agreements with the Maricopa Foundation to

give the program broader state coverage.

[29]

What type of agreements does the Pima Foundation have

with the Maricopa Foundation which would give such a

program broader state coverage?

A. The Pima and Maricopa physicians agree to the same

contract — What I mean is if a member — If someone who

has a Pima Foundation contract would go to Phoenix to a

physician who is a member of the Maricopa Foundation,

then they would — It was if they were going to a Pima

Foundation physician; they would not be charged for the

difference. It is almost as if they, belonging to one organiza-

tion, you belong to the other.

Q. So, it — A. I’m not saying this very well, but that’s

the only way I can —

Q. Would it be correct to say, then, that the members of

the Maricopa Foundation honor the fee schedule agreed to

by the members of the Pima Foundation?

A. Yes, on a given contract.

Q. And conversely, do the members of the Pima Founda-

tion agree to use or to recognize on certain contracts the fee

schedule agreed to by the members of the Maricopa Foun-

dation? A. Yes, uh-huh.

J a oe

[30]

*_s *& *

Q. .... At what time did the Foundation begin to pay

claims?

A. I think it was in January, 1976.

-_* & *

[47]

Q. If you would be kind enough to clarify for me the

manner in which this [California Relative Value Schedule

and the ASA Guide] is used.

At Page Nine, taking a simple value, Procedure 9004

under medicine is labeled as: Follow-up Office Visit, Rou-

tine, and has a unit value of one; is that correct?

A. Yes, uh-huh.

Q. If the conversion factor for medicine is ten, then the

fee charged for a routine follow-up office visit would be

ten? A. Yes, uh-huh.

Q. And if the conversion factor for medicine is 12, then

the fee charged for a routine follow-up office visit is 12? A.

Yes.

Q. If the value of Procedure 9004 labeled: Follow-up Of-

fice Visit, Routine, were increased to 1.5, then the price of

that office visit would be increased by 50 percent; is that

correct? A. Yes, uh-huh.

Q. And if the doctor were a surgeon or anesthetist, would

he still use the conversion

[48]

factor for medicine to compute the price for services listed

in the medicine section of the California Relative Value

Schedule? A. I don’t understand exactly —

Q. Does the choice of conversion factor depend on the

category of the procedure within the relative value sched-

ule, or the specialty of the particular doctor? A. The

procedure.

Q. I see. So, the categorization of the conversion factors

into those five or six categories refers to sections of the rela-

tive value schedule -—— A. Yes.

Q. — rather than to a person’s actual — A. Yes.

Q. — method of practice or category of practice. I see.

Just to clarify again, then, if the unit value of one proce-

dure is increased, the price is increased only for that one

procedure; is that right? A. Yes, if you only increase one.

Q. Okay, but if the conversion factor is increased, it

raises the prices of all the procedures within the category of

that conversion

[49]

factor? A. Yes.

-_* *& *

Filed - NOV 20, 1978

W. J. Furstenau, Clerk

U. S. District Court

For The District of Arizona

(Caption omitted in printing.)

PLAINTIFF’S MOTION FOR PARITAL SUMMARY

JUDGMENT ON THE ISSUE OF LIABILITY AND

NOTICE OF HEARING

Plaintiff STATE OF ARIZONA moves pursuant to Rule

56(a), Federal Rules of Civil Procedure, for entry of an or-

der awarding partial summary judgment in its favor and

against defendants that defendants’ actions are in violation

of section 1 of the Sherman Act, 15 U.S.C. § 1, and the Uni-

form State Antitrust Act, Ariz. Rev. Stat. Ann. § 44-1402.

This motion is based upon the accompanying statement of

facts and memorandum of law and the entire record herein.

PLEASE TAKE NOTICE that this motion will be heard

on December 11, 1978 at 10:00 a.m.

DATED this 20th day of November, 1978.

(Signatures omitted in printing.)

Filed - NOV 20, 1978

W. J. Furstenau, Clerk

U.S. District Court

For The District of Arizona

(Caption omitted in printing.)

MEMORANDUM IN SUPPORT OF PLAINTIFF'S

MOTION FOR PARTIAL SUMMARY JUDGMENT ON

THE ISSUE OF LIABILITY

I. INTRODUCTION

Plaintiff, STATE OF ARIZONA, has brought this action

on its own behalf and as parens patriae on behalf of the

citizens of Arizona for injunctive and declaratory relief from

defendants’ continuing violations of the antitrust laws. The

undisputed facts in this matter establish that defendants’

ongoing activities constitute per se violations of section 1 of

the Sherman Act, 15 U.S.C. § 1, and the Uniform State

Antitrust Act, Ariz. Rev. State. Ann. } 44-1402. Plaintiff

therefore requests that the Court enter partial summary

judgment in its favor and against defendants on the issue of

liability.

There is no dispute that the defendant foundations are

combinations of doctors which formulate, adopt and circu-

late comprehensive schedules of fees for services, goods and

products sold by doctors. More than 1,000 doctors in Mari-

copa County and more than 400 doctors in Pima County

have signed agreements to abide by the foundation fee

schedules. It is also undisputed that during the four year

period prior to the filing of the complaint in this matter,

increases in the foundation fee schedules were periodically

adopted by mail ballot of the foundation membership, and

that such price increases typically followed price surveys

and consultations with defendants’ members and various

doctors’ associations regarding desirable relative value

' 42

schedules and conversion factors. Defendants do not and

cannot dispute that they and their members have used and

continue to use agreed-upon fee schedules to set prices for

services, goods and products sold by doctors in Arizona.

From their inception, the foundations have functioned as

arms of the defendant medical societies. It is not disputed

that the societies created the foundations for the purpose of

promoting the interests of ‘‘fee-for-service medi-

cine,”"* and that the foundations’ pricing agreements have

been formulated and adopted with the knowledge and ap-

proval of the societies. Indeed, the foundations’ By-

laws'* have granted member doctors only the limited right

to vote on uniform, average or median fee schedules, while

vesting the general voting power exclusively in the members

of the societies’ elected boards of directors.

Defendants’ conspiracy has been effectuated through

agreements between the foundations and certain health

insurers which underwrite foundation plans. Those agree-

ments require the insurers to pay doctors for covered

services to foundation policyholders at the prices fixed by

foundation fee schedules and to provide coverage for the

wide range of doctor’s services defined in defendants’ mini-

mum standards for foundation plans. Under those

agreements, defendants’ members may submit claims which

foundation policyholders have assigned to them in advance

directly to the foundations for payment. The review and

'" “Fee-for-service medicine” refers to the sale of doctor's services in

return for fees based upon the services rendered, as opposed to work per-

formed for a salary or for capitation payments.

‘* Since this action was filed, the By-laws of the Pima Foundation for

Medical Care have been amended to sever the relationship between that

foundation and the Pima County Medical Society. Gerdenics Deposition,

pp. 70-72. A stipulated Judgment against the Pima County Medical So-

ciety was filed on November 17, 1978. The Maricopa County Medical

Society remains a defendant herein.

payment of claims on foundation plans is performed by

foundation members. Thus, the foundations have elimi-

nated third party review of doctors’ bills under foundation

plans.

Defendants’ fee schedules come in two parts: the relative

value schedule and the “foundation fee schedule” of unit

conversion factors. A relative value schedule is a compila-

tion of doctor’s services which assigns a relative unit value

to each service listed. A unit conversion factor is a number

or dollar figure used to multiply the unit value for any doc-

tor’s service into a dollar figure payable for that service.

The foundation fee schedule provides unit conversion fac-

tors for six categories of relative values. By multiplying the

unit value for each procedure by the foundation conversion

factor in that category, doctors can determine the price

approved by the foundation membership for each procedure

found in the relative value schedule.

By agreement, defendants use certain relative value

schedules which were originally developed by the California

Medical Association, American Society of Anesthesiologists

and American College of Radiology. Defendanis have main-

tained and updated those relative value schedules by

agreeing upon relative values for new and additional proce-

dures, and by providing instructions for uniform use of

those schedules by their members. At the request of various

doctors’ associations, defendants have adjusted the prices

for some procedures by increasing the unit values for those

procedures. In addition, the Maricopa Foundation has de-

voted considerable effort to the preparation of a special

relative value schedule for Arizona doctors.

In a deposition taken on November 14, 1978, the desig-

nee of the Pima Foundation for Medical Care, Ms. Mary

Gerdenics, explained the way in which agreed-upon relative

value schedules and conversion factors are used by defen-

dants and their members. Deposition of Pima Foundation

for Medical Care by its designee Mary Gerdenics, taken

November 14, 1978, filed November 20, 1978 (hereinafter

“Gerdenics Deposition”) pp. 24-26, 41-49. Referring to the

Pima Foundation’s edition of the California Relative Value

Schedule (Gerdenics Deposition Exhibit 18), the founda-

tion’s representative related the method by which uniform

prices are computed with foundation fee schedules:

A. Well, say an office visit would have a 1.0 units

assigned; you would multiply your 1.0 units times your

medicine schedule to come up with what you would

pay for that particular procedure.

Q. So, in other words, you would multiply the dollar

amount in the appropriate category times the relative

value accorded a specific procedure?

A. Yes, uh-huh.

Q. In order to determine a price, then, with the

Foundation fee schedule, it is necessary to use a rela-

tive value schedule?

A. Yes, uh-huh.

Q. And conversely, the relative value schedule is

part of the fee schedule of the Pima Foundation?

A. Yes, uh-huh.

Gerdenics Deposition, pp. 25-26.

Later in the same deposition, the witness confirmed that

increasing the unit value assigned to a procedure in the re-

lative value schedule would increase the price charged for

that procedure, whereas an increase in the foundation's

conversion factor would raise prices across the board in the

increased category.

Q. If you would be kind enough to clarify for me the

manner in which this is used.

At Page Nine, taking a simple value, Procedure

9004 under medicine is labeled as: Follow-up Office

Visit, Routine, and has a unit value of one; is that cor-

rect?

A. Yes, uh-huh.

Q. If the conversion factor for medicine is ten, then

the fee charged for a routine follow-up visit would be

ten?

A. Yes, uh-huh.

Q. And if the conversion factor for medicine is 12,

then the fee charged for a routine follow-up office visit

is 12?

A. Yes.

Q. If the value of Procedure 9004 labeled: Follow-up

Office Visit, Routine, were increased to 1.5, then the

price of that office visit would be increased by 50 per-

cent; is that correct?

A. Yes, uh-huh.

Just to clarify again, then, if the unit value of one

procedure is increased, the price is increased only for

that one procedure; is that right?

A. Yes, if you only increase one.

Q. Okay, but if the conversion factor is increased, it

raises the prices of all the procedures within the cate-

gory of that conversion factor?

A. Yes.

Thus, the testimony of the foundation’s own representa-

tive establishes that defendants’ use of agreed-upon relative

value schedules and conversion factors results in uniform

pricing and uniform step increases in doctors’ prices. This

type of pricing agreement is, as a matter of law, a per se

violation of section 1 of the Sherman Act and the Uniform

State Antitrust Act.

Il. ARGUMENT

A. Defendants’ Use of Agreed-Upon Relative

Value Schedules and Conversion Factors Con-

stitutes a Per Se Violation of Section 1 of the

Sherman Act.

Under section 1 of the Sherman Act, 15 U.S.C. § 1, any

combination which tampers with price structures is unlaw-

ful on its face. United States v. Socony-Vacuum Oil Co.,

310 U.S. 150, 221, 60 S.Ct. 811, 843 (1940). Because any

combination or agreement which restrains price competi-

tion undermines the strong public policy favoring a

competitive marketplace, the Supreme Court has consis-

tently ruled that any agreement to fix, raise, maintain. or

stabilize prices is per se unlawful, even if the price fixed is

purported to be reasonable.

The power to fix prices whether unreasonably exer-

cised or not involves power to control the market and

to fix arbitrary and unreasonable prices. The reason-

able price fixed today may through economic and

business changes become the unreasonable price of

tomorrow. United States v. Trenton Potteries Co., 273

U.S. 392 397, 47 S.Ct. 377, 379 (1927). See Also United

States v. National Ass'n of Real Estate Bds., 339 U.S.

485, 488-489, 70 S.Ct. 711, 714 (1950). Northern Cali-

fornia Pharmaceutical Ass'n v. United States, 306

F.2d 379, 385 (9th Cir.), cert. denied, 371 U.S. 862

(1962).

The undisputed facts in this case clearly establish that

defendant foundations are combinations which tamper un-

lawfully with price structures. The very forms on which

doctors apply for foundation membership and approve in-

creases in foundation conversion factors are express

agreements to fix prices. The foundation conversion factors

establish an agreed-upon level for doctors’ prices and pro-

vide a key for computing uniform prices for every

procedure listed in the relative value schedules used by de-

fendants. It makes no difference that defendants call this

agreed-upon price level a “maximum” level. The Supreme

Court has clearly established that maximum price agree-

ments are just as per se unlawful as other price agreements,

since the fixing of maximum prices poses the same unrea-

sonable restraint on competition as the fixing of minimum

prices. Because agreements among competitors to fix maxi-

mum prices, “..... no less than those to fix minimum

prices, cripple the freedom of traders and thereby restrain

their ability to sell in accordance with their own judgment

[,]” the Supreme Court has consistently held maximum

price agreements to be per se unlawful under section 1 of

the Sherman Act. Kiefer-Stewart Co. v. Joseph E. Seagram

and Sons, Inc., 340 U.S. 211, 213, 71 S.Ct. 259, 260 (1951).

Accord, Albrecht v. Herold Co., 390 U.S. 145, 88 S.Ct. 869

(1968); United States v. McKesson & Robbins, 351 U.S.

305, 76 S.Ct. 937 (1956).

The Supreme Court’s recent decision in National Society

of Professional Engineers v. United States, US.

___, 98 S.Ct. 1355, 1365-1366 (1978); clarifies the legal

standard applicable to defendants’ conduct. In Professional

Engineers, the Court was presented with a professional so-

ciety’s “ethical rule” against competitive bidding. The

defendant society had argued through protracted litigation

that its ban on competitive bidding was justified because

price competition by engineers could be detrimental to the

public welfare. Characterizing defendants’ arguments as a

fundamental misunderstanding of antitrust analysis, the

Supreme Court ruled that the society’s ban on competitive

bidding was unlawful on its face because, while it was not

price fixing as such, “no elaborate industry analysis [was]

required to demonstrate the anticompetitive character of

such an agreement.” /d., 98 S.Ct. at 1365. Since the ban

“impede[d] the ordinary give and take of the marketplace,’

and substantially deprive[d] customers of the ‘ability to uti-

lize and compare prices in_ selecting engineering

services[,]’” the Court held that the agreement on its face

restrained trade within the meaning of section 1 of the

Sherman Act. Jd., 98 S.Ct. at 1365-1366. Under this legal

standard, the price agreements and price schedules of the

defendant foundations are clearly per se violations of sec-

tion 1 of the Sherman Act.

Indeed, the agreed-upon use of relative value schedules

alone constitutes a per se violation of the Sherman Act

under the Professional Engineers standard. No elaborate

industry analysis is required to demonstrate the anticompe-

titive impact of defendants’ use of relative value schedules

as uniform pricing manuals. The anticompetitive effect of

that practice is amply demonstrated by defendants’ price

surveys and ballots on price increases, for only the collec-

tive use of the relative value schedule makes it possible for

defendants to fix the prices of thousands of doctor's ser-

vices by circulating six numbers on a postcard. Used as a

uniform price key by defendants, relative value schedules

serve only to relieve the individual doctor of the burden of

individual pricing decisions. The use of such pricing man-

uals and formulas has consistently been held to violate the

Sherman Act. E.G., United States v. Container Corpora-

tion of America, 393 U.S. 333, 87 S.Ct 510 (1969); Morton

Salt Co. v. United States, 235 F.2d 573 (10th Cir. 1956);

Food & Grocery Bureau of Southern California v. United

States, 139 F.2d 973 (9th Cir. 1943). In recent years, nu-

merous consent judgments have been entered enjoining

doctors’ associations from using relative value schedules.

E.g., United States v. Illinois Podiatry Society, Inc., 1977-2

CCH Trade Cas. 1 61,767, at 73,170 (N.D. Ill., 12/6/77; Fed-

eral Trade Commission v. Minnesota Medical Ass’n., FTC

File No. 771 0028, 3 CCH Trade Reg. Rep. 121,236, at

21,186 (4/20/77); Federal Trade Commission v. American

College of Radiology, FTC File No. 761 0059, 3 CCH Trade

Reg. Rep. 921,236, at 21,134 (11/17/76); Federal Trade

Commission v. American College of Obstetricians and

Gynecologists, FTC File No. 761 0043, 3 CCH Trade Reg.

Rep. 121,171, at 21,082 (7/17/76); Federal Trade Commis-

sion v. American Academy of Orthopedic Surgeons, FTC

File No. 761 0058, 3 CCH Trade Reg. Rep. 21,171, at

21,082 (7/16/76). Nevertheless, defendants have not only

continued to use agreed-upon relative value schedules, but

have proceeded to update and maintain in Arizona fee

schedules which are subject to consent decrees elsewhere

and to develop a new relative value schedule for Arizona

doctors. This flagrant violation of the antitrust laws in the

face of repeated warnings of illegality cannot be justified or

condoned under the rule of Professional Engineers.)

Furthermore, the price agreements and consultations

regarding desirable relative values and conversion factors

which have typically preceded increases in the foundation

fee schedules also violate the Sherman Act, since they

impede the ordinary give and take of the marketplace and

deprive persons seeking medical care of the benefits of price

competition. United States v. Container Corporation of

America, 393 U.S. 333, 89 S.Ct. 510 (1969); United States

v. Utah Pharmaceutical Ass’n., 201 F. Supp. 29, 34-35 (D.

Utah), aff'd per curiam, 371 U.S. 24, 83 S.Ct. 119 (1962);

Phelps Dodge Refining Corp. v. Federal Trade Commis-

sion, 139 F.2d 393 (2d Cir. 1943). In United States v.

Container Corporation of America, supra, the Supreme

Court held that reciprocal exchanges of price information

violated the Sherman Act even when no agreement had

been made to adhere to any specific price, because each

defendant had a manual with which it could compute its

competitor’s prices. Thus, defendants’ regular price surveys,

consultations and agreements with foundation members

and numerous doctors’ associations regarding their collec-

tive use of agreed-upon relative value schedules and

conversion factors are clearly in violation of the Sherman

Act.

The Supreme Court has made it unmistakably clear that

members of the so-called “learned professions” are subject

to the same antitrust scrutiny as anyone else. National So-

ciety of Professional Engineers v. United States, ———__

US. _, 98 S.Ct. 1355,1367 (1978); Goldfarb v. Vir-

ginia State Bar, 421 U.S. 773, 787-88, 95 S.Ct. 2004, 2013-

14 1975). The rule of law applicable to professional group

activities which impede the setting of price by free market

forces was restated in the clearest possible terms in Profes-

sional Engineers:

Price is the “central nervous system of the economy,”

and an agreement that “interfere[s] with the setting of

price by free market forces” is illegal on its face. 98

S.Ct. at 1365 (Citations omitted).

Defendants’ undisputed use of agreed-upon relative value

schedules and unit conversion factors unquestionably inter-

feres with the setting of price by free market forces. Under

the holding of Professional Engineers, their ongoing con-

spiracy to fix and stabilize the prices charged by doctors in

the State of Arizona is unlawful on its face.

B. Defendants’ Use of Agreed-Upon Relative

Value Schedules and Conversion Factors Con-

stitutes a Per Se Violation of the Uniform

State Antitrust Act.

Arizona Revised Statutes Annotated § 44-1402 prohibits

any “contract, combination or conspiracy between two or

more persons in restraint of, or to monopolize, trade or

commerce,” any part which is within the State of Arizona.

The Arizona Legislature specifically provided in Arizona

Revised Statutes Annotated § 44-1412 that federal case law

interpreting the federal antitrust statutes should be used as

a guide in construing the Uniform State Antitrust Act, so

that a consistent body of case law will be developed under

the Uniform Act. Thus, the standards enunciated by the

Supreme Court in applying the Sherman Act also apply to

defendants’ conduct under the Uniform State Antitrust

Act. Cf., Sherman v. Transamerica Title Ins. Co., 580 P.2d

729 (Ariz. App. 1978). Under those standards, defendants’

actions are per se violations of the Uniform State Antitrust

Act as well as the Sherman Act. Indeed, the strong public

interest favoring a competitive marketplace which has been

enunciated by the federal courts is underscored in the State

of Arizona by the constitutional protection against price-

fixing and other restraints of trade which has been provided

in the Arizona Constitution. Ariz. Const. art. 14 4 15.

C. Even If Defendants’ Conduct Were Subject To

Rule of Reason Analysis, It Would Clearly Be

In Violation of Section 1 of the Sherman Act

and the Uniform State Antitrust Act.

In the Professional Engineers decision the Supreme

Court determined that the defendant society’s arguments to

the effect that competition by professionals was not in the

public interest had been based upon ‘‘a fundamental mis-

understanding of the Rule of Reason.” 98 S.Ct. at 1360.

The Court ruled that arguments about the merits of compe-

tition in a profession, id. at 1367-1368, or the purported

benefits of monopolistic arrangements, id. at 1364, were

simply not cognizable under the Sherman Act. Clarifying

the legal standard to be applied under the Rule of Reason,

the Court said:

[T]he inquiry mandated by the Rule of Reason is

whether the challenged agreement is one that pro-

motes competition or one that suppresses competition.

Id. at 1365.

While this legal standard is more lenient than the per se

rule which applies to price-fixing and other agreements

having clear anticompetitive impact, it would still mandate

a determination that defendants’ use of agreed-upon price

schedules is in violation of section 1 of the Sherman Act

and the Uniform State Antitrust Act.

III. CONCLUSION

The Supreme Court’s ruling in National Society of Pro-

fessional Engineers v. United States is dispositive of this

case. Defendants’ undisputed use of agreed-upon relative

value schedules and conversion factors to set doctors’ prices

is, to a far greater extent than a professional rule against

competitive bidding, an agreement which “ ‘impedes the

ordinary give and take of the marketplace,’ and substan-

tially deprives customers of the ‘ability to utilize and

compare prices in selecting [professional] services.’” 98

S.Ct. at 1365-1366. Under the clear standards enunciated in

Professional Engineers, the horizontal pricing agreements

among doctors which the undisputed facts in this case es-

tablish are on their face restraints of trade within the

meaning of section 1 of the Sherman Act and the Uniform

State Antitrust Act. Although these price-fixing agreements

fall within the per se rule, they would also be deemed un-

lawful under the Rule of Reason standard enunciated by

the Supreme Court, because they have suppressed price

competition by establishing and maintaining a uniform

pricing system for Arizona doctors. Since there is no dis-

pute on any material fact and defendants can raise no

defense for their conduct that is cognizable under the Sher-

man Act, plaintiff is entitled to the entry of partial

summary judgment in its favor and against defendants that

defendants’ actions are in violation of the Sherman Act and

the Uniform State Antitrust Act. International Salt Co. v.

United States, 332 U.S. 392, 68 S.Ct. 12 (1947).

DATED this 20th day of November, 1978.

(Signatures omitted in printing.)

Filed - DEC 7, 1978

W. J. Furstenau, Clerk

U. S. District Court

For The District of Arizona

RESPONSE TO PLAINTIFF’S MOTION FOR PARTIAL

SUMMARY JUDGMENT ON THE ISSUE OF

LIABILITY

The defendant, Pima Foundation for Medical Care,

hereby enters its opposition to the plaintiff's Motion for

Partial Summary Judgment on the issue of liability and

adopts as its memorandum in support thereof its memoran-

dum heretofore filed in opposition to Plaintiff's Motion for

Partial Summary Judgment on the Issue of Subject Matter

Jurisdiction.

The essentials of this defendant's opposition to both

Motions are contained in that memorandum, which is

adopted for this purpose by this reference.

Respectfully submitted,

(Signature omitted in printing.)

Filed - DEC 7, 1978

W. J. Furstenau, Clerk

U. S. District Court

For The District of Arizona

(Caption omitted in printing.) .

OPPOSITION TO PLAINTIFF'S MOTION FOR

PARTIAL SUMMARY JUDGMENT ON THE ISSUE OF

SUBJECT MATTER JURISDICTION

The defendant Pima Foundation for Medical Care re-

sponds to the Attorney General’s Motions for Summary

Judgment as follows:

The Attorney General of the State of Arizona has alleged

that defendant, Pima Foundation for Medical Care has vio-

lated federal antitrust law. The Attorney General does not

allege, nor is there evidence tending to prove, that the Pima

Foundation has imposed mandatory uniform fee schedules

on doctors who practice within Pima County. Hence, this

case does not fall within the rule announced in Goldfarb v.

Virginia State Bar, 421 U.S. 773, 95 S.Ct. 2004 (1975). That

Court observed:

“A purely advisory fee schedule issued to provide

guidelines, or an exchange of price information without

a showing of actual restraint on trade, would present

us with a different question.” (Citations omitted.) 421

USS., at p. 781.

The Sherman Act does not prohibit the gathering of av-

erage cost information within a trade or profession, even

though some uniformity of pricing may result. Cement

Mfars. Protective Association v. United States, 268 U.S.

588, 45 S.Ct. 586 (1924); Maple Flooring Mfg. Association

v. United States, 268 U.S. 563, 45 S.Ct. 586 (1924).

Plaintiff Mr. Goldfarb was able to prove that the Bar

Association's minimum fee schedule was more than an ex-

change of average price information. It was mandatory,

given that any attorney who habitually charged less than

the minimum schedule was presumed to be “guilty of mis-

conduct.” (Id. at p. 778). He also demonstrated actual

“restraint on trade,” in that all of the 37 attorneys that he

contacted in Fairfax County, Virginia, refused to examine

the title for less than the local fee schedule.

In contrast, the Attorney General has not alleged that

the Pima Foundation has imposed mandatory fee schedules

on doctors. Nor has the Attorney General introduced any

evidence that the Foundation has the power to set uniform

fees for all doctors in the County, or that it has attempted

to do so.

Rather, the Attorney General alleges that the Pima

Foundation has fixed uniform fees with respect to three

health insurance policies written by three major insurance

carriers. Thus, the essence of the Complaint is that this

defendant, through the medium of three independent

health insurance carriers, has conspired to fix prices for

covered health services. The heart of the Attorney Gener-

al’s Complaint, then, is that this defendant has conspired to

set the rates for health insurance payments to Pima

County doctors. Since health insurance is substantial busi-

ness in this State and throughout the United States, the

Attorney General asserts that this alleged local price fixing

of health insurance payments ripples into the health indus-

try generally and across state lines.

However, even if the Attorney General could prove the

jurisdictional and substantive claims relevant to federal

antitrust violation, the very nature of the Complaint and

the facts of this case fall within the “business of insurance”

exemption. The controlling statue, known as the McCarran

Act, provides that the Sherman, Clayton and Federal Trade

Commission Acts:

*... shall be applicable to the business of insurance to

the extent that such business is not regulated by State

law.” 15 U.S.C. §1012(b).

There can be no question that the Pima Foundation is

“regulated by State law.” as evidenced by the attached let-

ter from the State of Arizona Department of Insurance.

(See Exhibit “A”) This letter, dated October 30, 1978, is

addressed to the Pima Foundation for Medicare (sic) Care

and states the following:

“It has come to the attention of this Department that

the functions your organization perform are those of

an Insurance Administrator as defined under the Ari-

zona Revised Statute Section 20-485 (et seq). You are

therefore required to comply with this law by obtain-

ing from this Department a Certificate of Registration.

For your convenience we are enclosing the necessary

forms.”

A.R.S. § 20-485 is applicable to the Pima Foundation in

that it processes claims for health insurance, for which it

receives a six per cent management fee. (See the attached

affidavit of Mr. Finley, Exhibit “B.”) The Foundation does

not collect premiums.

Thus, the Pima Foundation falls squarely within the sta-

tutory language as an “Insurance Administrator” in that it

processes claims for payment and sets maximum rates for

various categories of covered health services.

The Attorney General ignores the fact that the Founda-

tion-approved health insurance plans do not require

participation of all doctors, nor does it preclude any doctors

from payment for services rendered to Foundation-

approved policyholders.

Policyholders are not required to see only those doctors

who are members of the Foundation. It may be to the ad-

vantage of the policyholder to see a Foundation doctor, who

has agreed that his charges will not exceed the ceiling rates

established by the Foundation. On the other hand, if the

policy-holder receives medical service from a doctor who is

not a member of the Foundation, the Foundation will pay

the same amount as to a Foundation doctor—but the policy

holder must be responsible for any excess charge assessed

by the non-Foundation doctor. (See Exhibit “B.”)

Thus, the Foundation-approved plans represent the ef-

fort of the private medical community to contro! rising

health costs. It does this by setting maximum rates which

the Foundation will pay to given specialists for given medi-

cal tasks. It in no way interferes with the choice of patients

or doctors.

If a policyholder happens to be traveling out-of-state and

has a need for health care, the Foundation will reimburse

the out-of-state doctor at the same raves as a Foundation

doctor. However, the policyholder is responsible to that

non-Foundation doctor for any part of his charge which

exceeds the Foundation maximum. The number ¢« — uch

out-of-state payments from the Pima Foundatier is mini-

mal. All of the doctors and all of the policyholders in the

three Pima Foundation-sponsored plans are residents of

Pima County. (See Exhibit “B.”) This minimal amount of

out-of-state payments is insufficient to invoke Federal ju-

risdiction. The United States Supreme Court disposed of

the same question in Oregon State Medical Society, supra;

* .. The Government did show that Oregon Physicians

Service made a number of payments to out-of-state

doctors and hospitals, presumably for treatment of

policyholders who happened to remove or temporarily

be away from Oregon when need for service arose.

These were, however, few, sporadic and incidental.”

(Id. at pp. 338-339.)

Thus, the Foundation sponsorship of health plans under-

written by three private carriers represents new

competition in the local health insurance market. As in

Oregon State Medical Society, supra, the Foundation’s

entry into the field of prepaid medical care makes it an-

other one of several “competitors in the field.” (Id., at pp.

334-335.)

It is important to note that Oregon State Medical So-

ciety is not inconsistent with Goldfarb, in that the latter

involved the setting of minimum fees for all attorneys

within the State of Virginia. Furthermore, Goldfarb in-

volved examination of titles of property prior to sale, a

mandatory function with obvious interstate ramifications as

to foreign buyers and lenders.

In contrast, Oregon State Medical Society involved a

group of doctors who associated for the purpose of entering

the prepaid medical field. As such, their prepaid plans

tended to increase competition among existing health insur-

ance policies. In so doing, these prepaid medical plans did

not interfere in the choices made by doctors and patients.

Mr. Goldfarb had no choice but to pay the mandatory

minimum fee if he wanted to buy property, whereas the

policyholders in Oregon State Medical Society and in the

present case have the added choice of another competitor

health plan.

BREADTH OF THE “BUSINESS OF INSURANCE”

EXEMPTION

The “business of insurance” exemption from federal anti-

trust jurisdiction is one of considerable breadth, and is not

affected by whether or not there is a conflict between Fed-

eral and State regulation on material issues. Proctor uv.

State Farm Mutual Auto Ins. Co., 561 F.2d 262 (D.C.,

1977).

The “business of insurance” exemption is effective even

if the State is lax in regulating those engaged in any of the

many facets of insurance. The mere existence of State regu-

latory machinery is all that is required for the McCarran

Act exemption to come into play. Proctor, supra; Ohio

AFL-CIO v. Insurance Rating Board, 451 F.2d 1178 (6th

Cir., 1971), cert. den. 409 U.S. 917. The breadth of the ex-

emption was discussed in Dexter v. Equitable Life

Assurance Society of U.S., 527 F.2d 233 (2d Cir., 1975) in

the following terms:

“The McCarran-Ferguson Act clearly contemplates

that where a state undertakes to regulate the business

of insurance, it has the power to permit practices

which would otherwise violate federal antitrust laws; if

the exemption is only to apply when state law squarely

prohibits all acts which would, absent the exemption,

violate the antitrust laws, the state regulation which

the McCarran-Ferguson Act aims to foster, 15 U.S.C.,

§§ LOLL, 1012(a), would be a nullity.” (Citations omit-

ted.) 527 F.2d, at p. 236.

Prior to 1943, the common law held that interstate insur-

ance transactions were not “interstate commerce.”

However, the United States Supreme court re-read the ex-

isting statutory definition of “in commerce” jurisdiction

and found that interstate insurance transactions were “in

commerce.” United States v. South-Eastern Underwriters

Ass'n., 322 U.S. 533, 64 S.Ct. 1162 (1943).

In response to the holding of South-Eastern, Congress

added a statutory exception to the “in commerce” jurisdic-

tion as regards state-regulated insurance activity. The

McCarran Act, 15 U.S.C., §1011, et seq., reinstated the

common law principle that state regulation of the “business

of insurance” should generally be unhampered by federal

regulation of “interstate commerce.” This statute is in

harmony with the recent holding in National League of

Cities v. Usery, 426 U.S. 833, 96 S. Ct. 2465 (1976), which

narrowed the reach of “in commerce’ jurisdiction where di-

rect state activity was involved. As noted by the Attorney

General in the present case, congressional determination of

an issue (such as the exemption of the “business of insur-

ance” from federal antitrust jurisdiction) “merits great

deference in this forum.” (See the Attorney General’s Mo-

tion for Partial Summary Judgment, p. 3, lines 23-26.)

The present case is similar to Proctor, supra, which was

an antitrust action brought by four automobile repair shops

against five insurance carriers. The complaint alleged that

the five insurance carriers conspired to fix the prices of

claims settlements, and that such price fixing was based

upon standardized labor rates. The plaintiffs also alleged

that the defendants furthered a group boycott favoring cer-

tain auto repair shops while disfavoring plaintiffs’ repair

shops. The favored repair shops complied with the carrier-

imposed formula for computation of claims.

The United States District Court granted summary judg-

ment to the defendants on the ground that the conduct of

defendants fell within the McCarran Act “business of insur-

ance” exemption. The Court of Appeals affirmed, citing the

following language of the District Court with approval:

“[{The] activities complained of in this suit have a vital

impact on rate-making and must, of necessity, be in-

cluded within the term ‘business of insurance.’ ... The

‘business of insurance’ can touch relationships between

insurance companies and non-policyholders such as

automobile repair shops when such relationships are

closely connected with the insurer-insured relation-

ship through the profound effect of the costs of

damage claims in the rate making structure.” Empha-

sis in Court of Appeals’ Opinion, 561, F.2d, at p. 269.)

The plaintiffs argued that the “core” of their case was

the horizontal agreement to pay an insured’s claim on the

basis of the standard formula, based upon standardized

labor rates. The District Court and the Court of Appeals

found, as a matter of law, that this “core” of defendant's

activity fell squarely within the “business of insurance”

exemption. (Id. at p. 267.)

The principal difference between Proctor and the present

case is that the former involved the repair of automobiles

whereas the latter involves the diagnosis and treatment of

human ailments. Both plaintiffs have alleged a horizontal

price-fixing conspiracy, with the standard rate based upon

uniform labor rates. In the present case, the uniform maxi-

mum fee schedule is drawn in part from a_ physician's

Relative Value Schedule. (See Exhibit “B.”)

The relationship of the insurer-repair shop in Proctor is

analgous to the relationship of the Foundation-doctor in

this case. Both relationships are directly connected” ...

through the profound effect of costs of damage claims in

the rate making structure.” (Id., at p. 269)

To similar effect was the facts and holding in Manasen v.

California Dental Services, 424 F. Supp. 657 (1976). In that

case, a nonprofit corporation was in the business of operat-

ing prepaid dental care plans. This corporation actually

underwrote the actuarial risk that the premium payments

would be sufficient to defray the cost of services.

The corporation used the same formulas to calculate

premiums as the health insurance carriers used. The United

States District Court found that this corporation was en-

gaged in the “business of insurance’ and was therefore

exempt from federal antitrust jurisdiction.

The case law is replete with many other examples of dif-

ferent kinds of insurance activity falling within the

McCarran Act exemption, e.g., Prudential Insurance Co. v.

Benjamin, 328 U.S. 408, 415-418, 66 S.Ct. 1142; North Lit-

tle Rock Transp. Co., Inc. v. Casualty Reciprocal

Exchange, 181 F.2d 174 (5th Cir., 1950); Lawyers Title

Company of Missouri v. St. Paul Title Insurance Corpora-

tion, 526 F.2d 795 (8th Cir., 1975).

This is not to say that the “business of insurance” ex-

emption will protect an antitrust violator where the

connection between the violator’s conduct and the “busi-

ness of insurance” is superseded by a dominant federal

policy. See SEC v. National Securities, Inc., 393 U.S. 453,

89 S.Ct. 564 (1969) (an insurance company’s relationship to

its stockholders is governed by SEC regulations, even

though the company is in the “business of insurance’’).

Furthermore, the “business of insurance” exemption will

not apply where the plaintiff can prove “boycott,” “coer-

cion” or “intimidation.” See Frankford Hospital v. Blue

Cross of Greater Philadelphia, 554 F.2d 1253 (3d Cir.,

1977); Travelers Insurance Co. v. Blue Cross, 481 F.2d 80

(3d Cir., 1973); Doctor’s Inc. v. Blue Cross, 557 F.2d 1001

(3d Cir., 1976).

One example of a “boycott” case is Royal Drug Co. v.

Group Life & Health Ins. Co., 556 F.2d 1375 (5th Cir.,

1977), which is distinguishable from the present case. In

that case, the insurer essentially promulgated a list of ‘‘ap-

proved” pharmacists which policyholders were to patronize

for their prescription drug needs. The insurer reimbursed

these “approved” pharmacists at a higher rate than the rate

for “non-approved” pharmacists. This discrimination

tended to operate as a boycott against the “non-approved”

pharmacists, and hence was outside the legitimate ‘“‘busi-

ness of insurance” exemption.

In the present case, the Foundation-approved health in-

surance plans do not have an “approved” list of doctors,

pharmacists or anything else. The Foundation-approved

plans pay the same amounts up to a maximum for compa-

rable service or drugs to any doctor, regardless of whether

or not he is a Foundation member. The same is true of

reimbursement to pharmacists: All are treated equally.

Hence, the facts of this case do not fall within the Royal

Drug Co. rule for “boycott,” “coercion” or “intimidation.”

(See Exhibit “B”)

In summary, the Pima Foundation is engaged in the

“business of insurance” ana is regulated by the State De-

partment of Insurance, by their own admission (Exhibit

“A"). Therefore, the McCarran Act eliminates federal anti-

trust jurisdiction. Proctor, Ohio AFL-CIO, Dexter, Mana-

sen, Oregon State Medical Society, Benjamin, North Little

Rock Transp. Co., Lawyers Title Company of Missouri,

supra.

NO “CONDUCT IN COM MERCE” OR

“AFFECTING COMMERCE”

The Attorney General has gone to great lengths to intro-

duce evidence that the health care industry is sizeable and

that many of the transactions cross state lines. (See the

Statement of Undisputed Facts attached to Plaintiff's Mo-

tion for Partial Summary Judgment.) Defendant Pima

Foundation for Medical Care does not dispute the size and

extent of the national health care industry. However, these

facts are of no legal significance with respect to the issue of

federal subject matter jurisdiction over these defendants.

The Attorney General’s position is in harmony with

United States v. South-Eastern Underwriters Ass'n., 322

U.S. 533, 64 S.Ct. 1162 (1943). As noted previously, that

case changed the common law concept that the “business of

insurance” was peculiarly a state-regulated activity. Howev-

er, shortly after the South-Eastern decision, Corgress

changed the statutory jurisdictional rules with the Mc-

Carran Act and reinstated the “business of insurance”

exemption from federal antitrust jurisdiction. The United

States Supreme Court has had numerous opportunities to

overturn the McCarran Act in the past three decades, but

has not done so. The only possible conclusion is that the

“business of insurance” exemption is still viable.

These defendants have shown that their conduct falls

within the “business of insurance’ exemption as inter-

preted by the Courts. See Proctor, Ohio AFL-CIO, Dexter,

Manasen, Oregon State Medical Society, Benjamin, North

Little Rock Transp. Co., Lawyers Title Company of Mis-

souri, supra. Furthermore, the Attorney General's evidence

contains not even the suggestion that these defendants en-

tered into any “boycott,” coercion” or “intimidation.”

Rather, the evidence shows that the State of Arizona De-

partment of Insurance considers the Foundation an

“Insurance Administrator” under relevant statutes (See

Exhibit “A”).

However, even if the State did not regulate the “business

of insurance,” or even if the conduct complained of was not

within the McCarran Act exemption, the Attorney General

has still failed to show that these defendants are either “in

commerce” or that they have had an “effect on commerce.”

Hospital Building Co. v. Trustees of Rex Hospital, 425 U.S.

738, 96 S.Ct. 1848 (1976); Gulf Oil Corp. v. Copp Paving

Co., 419 U.S. 186, 95 S.Ct. 392 (1974).

Much of the Attorney General’s evidence as to “in com-

merce” or “effect on commerce” relates to the conduct of

individual doctors, hospitals and pharmacists. No one can

deny that these providers of health care service and prod-

ucts do make purchases in interstate commerce. However,

the Attorney General is not seeking injunctive and declara-

tory relief against them in their individual capacities. The

Attorney General has named as defendants the Pima

County Medical Society, the Pima Foundation for Medical

Care, and two counterpart entities in Maricopa County.

The only relevant evidence or discussion has to do with

acts done by the Foundation as an individual entity, not by

members of organizations acting in their individual capaci-

ties. The fact that individual members of an organization

engage “in commerce” does not necessarily mean that the

organization also engages “in commerce.” Page v. Work,

290 F.2d 323, 328 (5th Cir., 1961).

The Attorney General also suggests that federal “pres-

ence” in the health care industry automatically means that

any provider of health care service must also be “in com-

merce.” (See Memorandum of Law In Support of Plaintiff's

Motion for Partial Summary Judgment, pp. 3-4) If this

theory were correct, the “in commerce” clause would not

only be broadly construed, it would be unbounded. There is

federal “presence” in almost every sphere of legal activity,

to greater or lesser extent. However, federal “presence”

does not equate with “in comme. e” jurisdiction.

A similar argument was pressed by the unsuccessful

plaintiff in Copp Paving, supra. Defendants Gulf Oil, Un-

ion Oil and others were heavily engaged in producing liquid

petroleum for the Los Angeles and Orange County highway

construction markets. A substantial portion of their product

was used in the construction of the interstate highway sys-

tem in the Los Angeles area. The Court noted that

Congress had passed the Federal Aid Highway Act, 23

U.S.C., $101, et seq., and specifically stated that interstate

highways were critical to the national economy.

In addition, there was case law holding that the inter-

state highways were instrumentalities of commerce, and

that employees engaged in the “production of goods for

commerce” were within the Fair Labor Standards Act. Al-

state Construction Co. v. Durkin, 345 U.S. 13, 73 S.Ct. 565

(1953). Notwithstanding these statutes and decisions, the

Court found:

“... No intention to apply the full range of antitrust

laws to persons who, as part of their local business,

supply materials used in construction of local segments

of interstate roads.” (419 U.S., at p. 197)

The practice of the healing arts is local in character.

Spears Free Clinic and Hospital for Poor Children v.

Cleere, 197 F.2d 125, 126 (10th Cir., 1952). The fact that

the Foundation approves a minimal amount of payments to

out-of-state doctors, who treat Foundation policyholders

away from Arizona when services are needed, is insufficient

to either be “in commerce” or “affect commerce.” Oregon

State Medical Society, 343 U.S. 326, 338-339, 72 S.Ct. 690

(1952).

or is it sufficient to note that Foundation policyholders

premiums to out-of-state insurance carriers, or that

1 carriers reimburse the Foundation based on 6% of

e premiums. Both Gulf Oil Company and Union Oil

ipany had interstate dealings with their 100% owned

sidiaries who were charged with price-fixing. The Copp

ing Court rejected the theory that interstate companies

ion Oil and Gulf Oil) were automatically “in commerce”

n their 100% owned subsidiaries supplied products for

1 segments of interstate highways. The Court gave the

ywing reason:

The chain of connection has no logical endpoint. The

niverse of arguably included activities would be broad

nd its limits nebulous in the extreme.” (Id., at p. 198)

‘he position taken by the Attorney-General in the pre-

> case presses upon the Court a chain of connection

ch has “no logical endpoint.” The mere “presence” of

»ral statutes in the health industry cannot automatically

fer “in commerce” jurisdiction over local health provi-

3 any more than federal highway statutes or labor

utes convey automatic “in commerce” jurisdiction over

ion-dollar oil companies competing in sizeable local

‘kets. The Court further observed:

The plaintiff must allege and prove that apparently

cal acts in fact have adverse consequences on inter-

tate markets and the interstate flow of goods in order

o invoke federal antitrust prohibitions. See United

‘tates v. Yellow Cab Co.” (Citations omitted) (Id., at

02)

t is undisputed that all 400 doctors in the Foundation

| all 6,000 policyholders are residents of Pima County,

| that the Foundation restricts its operations to Pima

inty in the State of Arizona. (See Exhibit “B.”)

“he fact that some patients come from out-of-state to be

ited by doctors in Arizona is totally irrelevant to the

duct of these defendants. The Foundation has no con-

| over what price Foundation or non-Foundation doctors

charge non-Foundation patients. The contract between the

Foundation and its member doctors is completely silent as

to the member doctor’s dealings with non-Foundation pa-

tients, such as tourists from another state.

This contract does fix a price limit on the doctor’s charge

to Foundation policyholders. (A limitation for covered

charges is common in health insurance policies. Without it,

health insurance carriers would be totally at the mercy of

doctors and patients.) It should be pointed out that the

contract does not require the doctor to charge anything at

all to a Foundation policyholder. If he so desires, the doctor

could treat the patient for nothing, or for less than maxi-

mum rate. The Foundation contract merely sets a

maximum limit on the charge for covered services, based

upon the nature of the service and the doctor's specializa-

tion,

Since the Foundation is located in Pima County, all of

the member doctors are located in Pima County, and all of

the policyholders reside in Pima County, it is wholly a local

matter what prices are charged. Out-of-state patients are

treated according to the doctor’s own pricing policy, what-

ever that may be. The Foundation has no pricing policy for

out-of-state patients or for in-state patients who are not

policyholders in Foundation sponsored plans.

In jurisdictional terms, the relationship between Founda-

tion doctors and policyholders is similar to the relationship

between local taxi drivers and local residents. United

States v. Yellow Cab Co., 332 U.S. 218, 67 S.Ct. 1560

(1946). In that case, Chicago taxi companies held licenses

which specifically restricted their service “between any two

points within the corporate limits of the City.” (332 U.S., at

pp. 230-231) When a local passenger would leave his home,

board a cab, and then travel to a city railway station to

embark on interstate business, the cab ride from the pas-

senger’s home to the terminal was held to be outside of the

stream of interstate commerce, Likewise, when a resident

returned to Chicago by train, boarded a cab from the ter-

minal, and traveled to his home, that ride was also outside

interstate commerce. The Court held that “such transporta-

tion is too unrelated to interstate commerce to constitute a

part thereof within the meaning of the Sherman Act.” (Id.,

at p. 230)

However, if an interstate passenger on a train boarded

the same cab to travel the short distance between one inter-

state terminal to another, that trip was held to be within

the stream of commerce. (Id., at p. 228)

Therefore, even though a Foundation policyholder visited

a Foundation doctor before leaving the state or immedi-

ately upon returning to the state, the doctor-patient

relationship would be totally based within the state.

Since the entire conduct of the Foundation is centered in

its member doctors and its policyholders—all of whom are

residents of Pima County—where is the adverse effect on

interstate commerce that the Attorney General must prove?

Copp Paving, supra. Given that only one percent of the

population of Pima County is covered by a Foundation-

sponsored health plan, any effect would be de minimus.

The maximum rates of health care payment would certainly

not interfere with interstate travel in any reasonable way.

Heart of Atlanta Motel, Inc. v. United States, 379 U.S.

241, 85 S.Ct. 348 (1964).

The Foundation does not, as a corporate entity, purchase

any drugs or medical supplies, or wield any influence on

individual doctors and pharamcists as to their purchases in

interstate commerce. Since the Attorney General has not

named these individual doctors and pharmacists as defen-

dants, the allegation that the Foundation “affects”

commerce through purchase of such gupplies is without

evidentiary foundation.

LOCAL ACTIVITIES WHICH “AFFECT

COMMERCE”

The Attorney General has cited a number of cases where

local activity had an adverse “effect” upon interstate com-

merce. These cases are distinguishable from the present

case.

The Attorney General repeatedly cites Rex Hospital,

supra, for the proposition that local health care activity

may have a substantial effect on interstate commerce. Be-

fore considering the factual differences between Rex

Hospital and the present case, it should be noted that the

lower Court dismissed the original complaint on the plead-

ings. On remand, the United States Supreme Court stated:

“We have held that ‘a complaint should not be dis-

missed for failure to state a claim unless it appears

beyond doubt that the plaintiff can prove no set of

facts in support of his claim which would entitle him

to relief’... And in antitrust cases, where ‘the proof is

largely in the hands of the alleged conspirators’ ...

dismissals prior to giving the plaintiff ample opportun-

ity for discovery should be granted very sparingly ...”

(Citations omitted.) 425 U.S., at pp. 746-747.

Therefore, the Court did not rule on the factual merits of

the case, but held that the complaint was sufficient under

several theories to state a cause of action. (In the present

case, the Attorney General has had ample opportunity for

discovery and has introduced evidence.)

The plaintiff, Hospital Building Company, was a private

company which desired: (1) to relocate Mary Elizabeth

Hospital to a site within Raleigh, N.C., and (2) to expand

its size from 49 to 140 beds. Defendant Rex Hospital, also

located in Raleigh, attempted to block Hospital Building's

application for a state permit to relocate and expand. After

a long delay, the permit was granted, after which Rex Hos-

pital allegedly engaged in frivolous litigation and

maliciously published adverse information about Mary Eliz-

abeth Hospital’s proposed expansion.

Thus, an existing provider of health service in the city,

Rex Hospital, attempted to completely foreclose the efforts

of a competitor from moving into the same geographical

area and from thereafter tripling in size.

If Rex Hospital succeeded in foreclosing this relocation

and expansion, Hospital Building Company would not have

purchased as many medical supplies, borrowed as much

money, or served as many patients—allegedly from out-of-

state.

Since the trial court dismissed the complaint on its

pleadings, Hospital Building Company had no opportunity

to present admissable evidence as to the actual “effect” on

commerce. In weighing the dismissal on the pleadings, the

United States Supreme Court properly assumed that such

“effect” could have been shown by the plaintiff.

Since the present proceeding is one in Summary Judg-

ment, the Court has the benefit of the Attorney General's

evidence as to “adverse effect on interstate commerce.”

There is no showing of interstate lending activity which has

been foreclosed by defendant’s conduct. Nor has the Attor-

ney General shown how the Foundation may have adversely

affected the interstate flow of drugs, medical supplies or

patients.

The Foundation has done nothing to foreclose the health

care industry in Pima County, or any part of it, nor has

there been any evidence that competition has been other

than benefitted by the addition of new prepaid health plans

with unique controls over major expense items.

Rex Hospital did not involve the McCarran Act or the

“business of insurance” exemption, nor did the competing

hospitals even claim the “business of insurance” exemption.

Even if the McCarran Act was applicable, the remand of

Rex Hospital would be fully consistent with its “boycott,”

“coercion” and “intimidation exceptions.” Defendant Rex

Hospital mounted an attempted total boycott of the pro-

posed reloca vn and expansion of Mary Elizabeth Hospital,

and attempted to coerce and intimidate Mary Elizabeth

Hospital, its prospective patients and customers.

The Attorney General has cited other cases where local

activity was held to “affect” interstate commerce. In each

of these decisions, the defendants were guilty of conduct

which could be equated with “boycott,” “coercion” or “in-

timidation.”

For example, Goldfarb involved a total boycott by the

Virginia State Bar against any attorney who would charge a

title examination fee lower than the Bar-approved mini-

mum: that attorney, would be presumed to be “guilty of

misconduct.” The minimum fee schedule also acted to

coerce property buyers, since it was virtually impossible to

buy property without the title examination, and only Vir-

ginia lawyers had legal authority to do the work. Goldfarb

did net address the McCarran Act or the “business of in-

surance” exemption.

The same is true of United States v. Employing Plaster-

ers Assoc., 347 U.S. 186, 74 S.Ct. 452 (1953). Chicago

plastering contractors and labor unions, who controlled

60% of the plastering market in the area, combined to pre-

vent out-of-state contractors from doing business i» the

Chicago area. The Foundation has not acted to prevent any

health provider or insurer from entering the competing in

the local market.

Mandeville Island Farms v. American Crystal Sugar

Company, 334 U.S. 219, 68 S.Ct. 996 (1948) involved a con-

spiracy by local sugar refiners against local sugar beet

growers. The refiners were the only market for the buyers,

thus, the refiners were able to intimidate and coerce the

growers to accept the refiners’ pricing formula.

The same pattern emerged in other cases cited by the

Attorney General, e.g., DeVoto v. Pacific Fidelity Life In-

surance Co., 516 F.2d (9th Cir., 1975) (a Transamerica loan

company and a Transamerica insurance company elimi-

nated a competitor insurance company from a sizeable

portion of the California mortgage market); Gough v. Ross-

moor, 487 F.2d 373 (9th Cir., 1973) (a Rossmoor land

developer and a Rossmoor retailer of carpets and drapes

combined to exclude a private retailer of furniture, carpets

and drapes from a Rossmoor residential development); Las

Vegas Merchant Plumbers Ass’n. v. United States, 210

F.2d 732 (9th Cir., 1954) (a plumbing association estab-

lished a committee to allocate bids; wholesalers and

laborers who did not comply were boycotted by the remain-

der of the association); Boddicker v. Arizona State Dental

Association, 549 F.2d 626 (9th Cir., 1977) (the state and

local dental associations coerced its member dentists to also

be members of the American Dental Association, even

though a dentist in Arizona could practice his profession

without joining any of them).

The Foundation has done none of the things which would

place them in this line of cases. The Foundation treats

Foundation and non-Foundation doctors alike. All pharma-

cists and hospitals are treated alike.

CONCLUSION

The Sherman Act is “aimed at substance rather than

form.” United States v. Yellow Cab Co., 332 U.S., at p. 227.

Mere exchange of average price information does not run

afoul of antitrust prohibitions, even if some uniformity of

pricing results. Cement Mfgrs., Maple Flooring Mfgrs.,

supra. The fact that Foundation-sponsored health policies

contain maximum prices may appear to have the “form” of

a conspiracy in restraint of trade does not mean that such a

conspiracy exists in “substance.”

The State of Arizona, through its Department of Insur-

ance, has admitted that the Foundation is an “Insurance

Administrator” under Arizona law. (Exhibit “A”) There-

fore, even if the Attorney General could prove the merits of

its case, the McCarran Act “business of insurance” exemp-

tion would eliminate federal jurisdiction. 15 U.S.C., §

1012(b); Oregon State Medical Society, Proctor, Page, Ohio

AFL-CIO, Dexter, Usery, Manasen, Benjamin, North Lit-

tle Rock Transp. Co., Lawyers Title Company of Missouri,

supra.

Even if the “business of insurance” ememption was in-

applicable to this case, the Attorney General has failed to

submit evidence that this defendant was “in commerce” or

“affected commerce.” Oregon State Medical Society, Yel-

low Cab Co., Copp Paving Co., supra. The 400 doctors who

are members of the Foundation serve approximately 6,000

residents of Pima County, or little more than one percent of

the County’s population.

Communication of average price information across state

lines is insufficient to create federal jurisdiction. Cement

Mfgrs., Maple Flooring Mfurs., supra. The transfer of

funds across state lines, even between a parent corporation

and its wholly-owned subsidiary, is insufficient to confer

federal jurisdiction. See Copp Paving, supra.

There being no material issues as to the facts upon which

federal jurisdiction are based, the Motions of the Attorney

General should be denied, and the Complaint dismissed

against this defendant, as prayed in its Answer here.

(Signatures omitted in printing.)

EXHIBIT “A” OMITTED IN PRINTING

(Caption omitted in printing.)

AFFIDAVIT

STATE OF ARIZONA a

County of Pima

THOMAS P. FINLEY, being first duly sworn, deposes

and says:

1. I am the Executive Director of the Pima Foundation

for Medical Care, a position which I have occupied since

February, 1978. I reside at 9035 Bears Path Road in Tuc-

son, Arizona.

2. I have personal knowledge of the day-to-day opera-

tions of the Pima Foundation for Medical Care

(“Foundation”), including its dealings with the Pima

County Medical Society (‘Medical Society”), the State of

Arizona Department of Insurance and various outside par-

ties such as insurance brokers and carriers involved in

Foundation sponsored health plans.

3. The Foundation was formed in 1971 by the Medical

Society. Its primary purpose was to offer a competitive

health plan to help control the rapid increase in the cost of

health care within Pima County. In 1978, the Foundation

became independent of the Medical Socieiy, which no

longer has the right of approval over the selection of Direc-

tors for the Foundation.

4. Of approximately 1300 doctors in Pima County, some

400 doctors are members of the Foundation. Several Foun-

dation-sponsored plans provide prepaid health insurance

coverage to 6,000 men, women and children in Pima Coun-

ty, or little more than 1% of the total population (500,000)

of the County. All of the member doctors and all of the pol-

icyholders are residents of Pima County. The 6,000

EXHIBIT “B”

policyholders, if evenly dispersed among all 1,300 doctors,

would amount to 4 or 5 patients per doctor. Spread among

the 400 Foundation doctors, these 6,000 policyholders

amount to roughly 15 patients per doctor.

5. The Medical Society has nothing whatever to do with

Foundation-sponsored claim processing or with the setting

of any premium rates or claim payment rates. Nor does the

Medical Society have any authority over its 1,300 doctors

with respect to what prices they charge in their individual

practices, nor has it attempted to wield such authority.

6. Neither the Foundation nor the Medical Society have

any formal connection with counterpart organizations in

Maricopa County. The prepaid health plans sponsored by

the Foundation is independent of any other organization.

Any contact with other organizations has been casual and

in a discussion of common concerns, but no conspiracy to

fix prices has or will be entered into.

7. Most or all of the 400 members of the Foundation are

also members of the Medical Society. However, neither the

Foundation nor the Medical Society attempt to control the

individual decisions of each doctor as to affiliation in either

organization or as to policies adopted by either organiza-

tion. An individual doctor may bécome affiliated with the

Foundation, may decline to affiliate, or may change a pre-

vious decision. Membership in each organization is a matter

of personal choice, and neither organization applies any

direct or indirect pressure on the individual doctor.

8. Approximately 900 doctors in Pima County have not

joined the Foundation. Since February, 1978, I have person-

ally been told by a number of these non-participating

doctors that they will not join because they feel the rates

established by the Foundation are too low, unreasonable

and unfair.

9. In view of its stated goal to help control the rising cost

of health care, the Foundation and its sponsored plans have

implemented the following control procedures:

(a) Since a large part of health cost dollars are consumed

by long and sometimes unnecessary hospital confinements,

the Foundation has adopted a formal program to review

every instance of a policyholder being sent to the hospital.

The Foundation employs a trained nurse who visits every

policyholder while in the hospital, and certifies that there

was medical justification for the admission and for the pro-

jected length of stay. To the best of my knowledge and be-

lief, no other health plan in Pima County provides such

comprehensive scrutiny of this major factor in cost of medi-

cal care.

(b) The Foundation acts as the claims agent for the pri-

vate insurance carriers who actually underwrite the risks.

Each claim is carefully reviewed to assure that the reim-

bursement for doctor’s fees, medicine and hospital services

do not exceed the maximum rates established by the Foun-

dation.

10. The Foundation does not discriminate among doc-

tors, pharmacists, hospitals or other suppliers of health care

services and products. A policy holder may select a Founda-

tion doctor or a non-Foundation doctor. The only possible

difference is that the non-Foundation doctor has not con-

tractually agreed to charge no moie than the ceiling rate for

his services. Thus, if a policyholder receives medical care

from a non-Foundation doctor, he will be personally liable

for any excess in charge by that doctor over the Founda-

tion’s maximum rate.

11. The Foundation does not discriminate between in-

state doctors or out-of-state doctors. If a policyholder hap-

pens to be outside Arizona when the need for health care

arises, the Foundation will process the claim for covered

health items the same as for any other non-Foundation

doctor who is located within Arizona. However, the fact

remains that the 6,000 policyholders receive covered medi-

cal services from out-of-state doctors only a_ negligible

number of times each year. The policyholder remains liable

to that doctor for any charge that is in excess of the Foun-

dation maximums.

12. The Foundation does not discriminate in any way

against any hospital, pharmacist or other supplier of cover-

edf health services. The choice is wholly left up to the

patient-policyholder. The Foundation’s goal is simply to see

that certain portions of covered expenses are insured, no

matter which provider of health care (doctor, hospital,

pharmacist) the policyholder selects.

13. According to my best information and belief, the

presence of the Foundation’s prepaid health plans covering

approximately one percent of the population of Pima

County tends to increase competition among health care

providers and insurers. The controls which the Foundation

exercises over the necessity of each hospital stay, together

with rigid review of billings against Foundation maximum

rates, tends to reduce the cost of health care for the 6,000

policyholders.

14. Three private carriers underwrite the various Foun-

dation-sponsored plans, i.e., Arizona Blue Cross-Blue

Shield, Pacific Mutual Life Insurance Company, and Con-

necticut General Life Insurance Company. Each of the

Foundation’s plans are rated retrospectively. In other

words, the savings achieved by the Foundation’s hospital

review procedure, preliminary scrutiny and review for com-

pliance with rate maximums—these savings are passed

along to the policyholder in the subsequent year, once the

carrier's overhead expenses are deducted.

15. The Foundation is a nonprofit corporation. It does

not collect premiums or actually underwrite the risks, but it

does act as the claims agent for the three private insurance

carriers who underwrite the risks. These carriers, which are

regulated by the State of Arizona, reimburse the Founda-

tion for its cost-control services and claims payment. The

reimbursement is calculated at 6% of monthly premiums

received by the carrier. The Foundation has no control over

premiums charged by the carriers, other than the effective

cost-savings measures that are reflected in lower premiums

as the carriers retrospectively rate each plan’s experience

with loss.

16. The Foundation does exercise direct control over the

establishment of maximum payment rates for medical ser-

vices. However, these rates are a ceiling, not a floor, for

Foundation members. Each doctor who is a member of the

Foundation expressly agrees that covered expenses will be

reimbursed at no more than the maximum rate established

by the Foundation.

17. The Foundation rates are based upon the nature of

the medical service rendered and the particular specializa-

tion of the doctor performing the service. The rates are set,

in part, based upon a Relative Value Schedule and a Unit

Conversion Factor.

18. The Foundation’s Board of Directors weighs the var-

ious factors from industry sources and from their own

experience in recommending a rate schedule. After its ini-

tial determination, the Board recommends the overall rate

schedule to the Foundation’s membership. Th» recommen-

dation becomes effective after a majority of the 400

members approve it. Such payment schedules are reviewed

every year or 80.

19. The Foundation originally designed its health insur-

ance plan, then contacted an insurance broker to find

carriers who would provide the desired coverage. A unique

feature in the contracts with the carriers is that the Foun-

dation will perform cost-control review of hospitalization

and review all charges against the ceiling rates.

20. Neither the Foundation or the Medical Society pur-

chase any drugs or any medical products, but a minimal

amount of office supplies are purchased each year. Doctors,

in their individual capacities, do purchase drugs or medical

products, or prescribe the same for their patients. The

Foundation has no control or concern over which particular

drugs or products are thus favored by individual doctors,

nor does the Foundation exercise or attempt to exercise

such control with respect to individual pharmacists or hos-

pitals. Thus, the price of drugs and medical supplies in

Pima County and elsewhere is totally unrelated to the oper-

ation of the Foundation.

21. Based upon my personal knowledge, the Pima Foun-

dation for Medical Care is concerned with the rising cost of

medical care in Pima County. Inasmuch as these costs can-

not be contrviled in various circumstances without some

kind of uniform cost ceilings, the Foundation has sponsored

several prepaid health insurance plans to implement such

maximum rates, and to eliminate unnecessary hospital

stays by tight scrutiny from within the medical profession

itself.

(Signature and notarization

omitted in printing.)

Filed - DEC 11, 1978

W. J. Furstenau, Clerk

U. S. District Court

For The District of Arizona

(Caption omitted in printing.)

RESPONSE OF DEFENDANT MARICOPA COUNTY

MEDICAL SOCIETY TO PLAINTIFF’S MOTION FOR

PARTIAL SUMMARY JUDGMENT ON THE ISSUE OF

LIABILITY

Defendant Maricopa County Medical Society hereby

opposes the plaintiff's Motion for Partial Summary Judg-

ment on the Issue of Liability filed herein upon the grounds

and for the reasons set forth in the Memorandum in Re-

sponse to that Motion filed by Defendant Maricopa

Foundation for Medical Care.

Respectfully submitted this 11th day of December, 1978.

(Signature omitted in printing.)

Filed - DEC 11, 1978

W. J. Furstenau, Clerk

U. S. District Court

For The District of Arizona

(Caption omitted in printing.)

DEFENDANT MARICOPA COUNTY MEDICAL

SOCIETY’S RESPONSE TO PLAINTIFF'S

STATEMENT OF UNDISPUTED MATERIAL FACTS

ON ITS MOTION FOR PARTIAL SUMMARY

JUDGMENT ON THE ISSUE OF LIABILITY

Most of the factual allegations contained in Plaintiff's

Statement of Facts are directed to either the Maricopa or

Pima Foundations for Medical Care. Defendant Maricopa

County Medical Society is without sufficient knowledge to

form a belief as to the truthfulness of the allegations con-

tained in those statements of facts, and is therefore unable

to controvert them.

1. Defendant Maricopa County Medical Society denies

that it published a Foundation fee schedule (see General

Objection No. 1 and Answer to Nos. 59 and 60 of Defendant

Maricopa County Medical Society's Responses to Plaintiff's

First Request for Admissions and Interrogatories).

2. Defendant Maricopa County Medical Society is unable

to discern the meaning or relevance of Plaintiff's Statement

No. 38, and therefore denies the same.

(Signature omitted in printing.)

Filed - DEC 12, 1978

W. J. Furstenau, Clerk

U. S. District Court

For The District of Arizona

(Caption omitted in printing.)

DEFENDANT MARICOPA FOUNDATION FOR

MEDICAL CARE’S STATEMENT OF MATERIAL

FACTS AS TO WHICH THERE IS A GENUINE ISSUE

PRECLUDING PARTIAL SUMMARY JUDGMENT IN

FAVOR OF THE PALINTIFF ON THE ISSUE OF

SUBJECT MATTER JURISDICTION

Defendant Maricopa Foundation for Medical Care

(“Maricopa Foundation”) submits, pursuant to Local Rule

11(h), this statement of material facts which preclude par-

tial summary judgment in favor of the plaintiff on the issue

of subject matter jurisdiction.

A. Maricopa Foundation disputes plaintiff's contention

that the following paragraphs of “Statement of Undisputed

Facts Supporting Plaintiff's Motion for Partial Summary

Judgment on the Issue of Subject Matter Jurisdiction” are

not disputed:

1. With respect to Plaintiff's Statement 1, doctors in

Maricopa County have not agreed to be bound by a fee

schedule adopted by members of Maricopa Foundation.

The only determinations with respect to fees charged for

medical services which are made by Maricopa Foundation

are with respect to maximum fees paid with respect to pa-

tients covered by Maricopa Foundation endorsed plans to

member doctors of Maricopa Foundation. They have agreed

to accept Maricopa Foundation’s determination of maxi-

mum fees as payment in full for services performed by

them on patients covered by Foundation endorsed plans

when they billed the patient more than that amount. If the

patient is billed less than that amount, the physician is

paid the amount billed if the services are determined by

Maricopa Foundation to have been medically appropriate.

Maricopa Foundation does not and never has taken any

position with respect to the amount of fees a physician

should bill any patient. (See, eg. Mitten § Aff.,

November 17, 1978, paras. 3, 4.)

2. Maricopa Foundation has no information sufficient to

admit or deny Plaintiff's Statement 2.

3. With respect to Plaintiff's Statement 3, Maricopa

Foundation has entered into agreements with insurers Pa-

cific Mutual Life Insurance Company, Washington National

Life Insurance Company, Connecticut General Life Insur-

ance Company, Metropolitan Life Insurance Company,

Northwestern National Life Insurance Company, Cal West-

ern Insurance Company, and Occidental Life Insurance

Company, all of which transact business in Arizona wherein

insurers agreed to reimburse doctors for services rendered

to patients insured under Maricopa Foundation-endorsed

health insurance plans in accordance with the their usual

and customary fees charged for such services but not to

exceed the maximum reimbursable level of compensation

set forth in the Maricopa Foundation’s minimum standards

for Foundation-endorsed group insurance programs, except

at the insurer's discretion. Maricopa Foundation has no

information sufficient to admit or deny Plaintiff's state-

ment with respect to Pima Foundation or other defendants.

(See, e.g., Response 12 of Defendant Maricopa Foundation

for Medical Care’s Responses to Plaintiff's First Request

for Admissions and Interrogatories.)

4. Maricopa Foundation for Medical Care has no infor-

mation sufficient to admit or deny Plaintiff's Statement 4.

5. Maricopa Foundation for Medical Care has no infor-

mation sufficient to admit or deny Plaintiff's Statement 5.

6. Maricopa Foundation has no information sufficient to

admit or deny Plaintiff's Statement 6.

7. Maricopa Foundation denies that the payment of

premiums, claims and service fees on Maricopa Foundation

endorsed insurance plans has involved a continuous stream

of fee schedules, claims and continuous transfers of sub-

stantial sums of money across state lines and states it has

no information sufficient to admit or deny the remainder of

Plaintiff's Statement 7.

8. Maricopa Foundation denies that underwriting and

operation of Maricopa Foundation endorsed insurance

plans have involved a continuous stream of fee schedules,

agreements, policies, claims and other materials and ser-

vices across state lines and states it has no information

sufficient to admit or deny the remainder of Plaintiff's

Statement 8.

9. With respect to Plaintiff's Statement 9, if a patient

insured under a Maricopa Foundation endorsed plan seeks

treatment from a doctor outside the state of Arizona, the

Foundation will pay the claim in the same manner as any

claim for services performed by a doctor. Claims paid on

Maricopa Foundation endorsed health insurance plans to

out-of-state doctors are very few in number. Maricopa

Foundation has no information sufficient to admit or deny

Plaintiff's statement with respect to Pima Foundation.

(See, Mitten Aff., December 11, 1978, para. 7.)

10. With respect to Plaintiff's Statement 10, the relative

value schedules prepared and used by Maricopa Founda-

tion are based in part upon the 1964 edition of the Relative

Value Schedule adopted by the California Medical Associa-

tion, in part upon the Relative Value Schedules adopted by

the American Society of Anesthesiologist, and in part upon

the Relative Value Schedules adopted by the American Col-

lege of Radiology. Maricopa Foundation has no information

sufficient to admit or deny Plaintiff's statement with re-

spect to Pima Foundation, Pima Society, or Maricopa

Society. (See, Responses 19, 21, and 23 of Defendant Mari-

copa Foundation for Medical Care’s Responses to Plaintiff's

First Request for Admissions and Interrogatories.)

11. With respect to Plaintiff's Statement 11, Maricopa

Foundation has requested various professional organiza-

tions whose members are doctors to advise Maricopa

Foundation only in connection with Maricopa Foundation’s

determination of maximum reimbursable levels of compen-

sation to doctors providing medical services to patients

insured under Maricopa Foundation endorsed health insur-

ance plans to be proposed to Maricopa Foundation’s

participating and cooperating members for adoption. Mari-

copa Foundation has no information sufficient to admit or

deny Plaintiff's statement with respect to Pima Founda-

tion, Pima Society, or Maricopa Society. (See, Responses 44

through 53 of Defendant Maricopa Foundation for Medical

Care’s Responses to Plaintiff's First Request for Admis-

sions and Interrogatories.)

12. With respect to Plaintiff's Statement 12, Maricopa

Foundation denies it obtained fee schedules and materials

related to fee schedules through interstate association with

other foundations for medical care. Maricopa Foundation

has no information sufficient to admit or deny Plaintiff's

statement with respect to Pima Foundaon, Pima Society, or

Maricopa Society. (See, Mitten Aff., December 11, 1978,

para. 4.)

13 With respect to Plaintiff's Statement 13, officers and

employees of Maricopa Foundation have traveled to other

states for meetings with representatives of other founda-

tions for medical care for two purposes:

1. To study the claims processing operations used by

other medica! foundation; and,

2. To promote the foundation concept of health insur-

ance.

No officer or employee of Maricopa Foundatien has met

with the representative of another medical foundation to

discuss or to take any action with respect to fees charged

for medical services by doctors in Arizona. (See, Mitten

Aff., December 11, 1978, para. 4.)

14. With respect to Plaintiff's Statement 14, Maricopa

Foundation has received only one grant from the federal

government. The amount of the grant was less than

$100,000.00 and its purpose was to study the desirability

and feasibility of Maricopa Foundation forming a Health

Maintenance Organization. That study was not related to

the functions performed by Maricopa Foundation as a med-

ical foundation and no changes in the operations of

Maricopa Foundation took place as a result of that study.

Maricopa Foundation has no information sufficient to ad-

mit or deny Plaintiff's statement with respect to Pima

Foundation. (See, Mitten Aff., December 11, 1978, para. 5.)

17. Maricopa Foundation has no information sufficient

to admit or deny Plaintiff's Statement 17 with respect to

the amounts of prescription drugs, equipment, goods and

products which are manufactured and distributed in other

states and shipped into Arizona.

18. Maricopa Foundation has no information sufficient

to admit or deny Plaintiff's Statement 18 with respect to

the amount of money paid annually for services, goods and

products sold by doctors within the state of Arizona.

19. Maricopa Foundation has no information sufficient

to admit or deny Plaintiff's Statement 19 with respect to

the portion of the prices charged by the doctors in the State

of Arizona which are paid through private health insurance.

20. Maricopa Foundation has no information sufficient

to admit or deny Plaintiff's Statement 20

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