Opposition Brief — Kartell v. Blue Shield of Massachusetts, Inc.
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Nos. 84-1353, 84-1354. | M™ ON" Fp
In the MAR 26 1985
Supreme Court of the United Statese: + ss.
CLERK
OCTOBER TERM, 1984.
No. 84-1353.
JAMES P. KARTELL, M.D., ET AL.,
PETITIONERS,
Vv
BLUE SHIELD OF MASSACHUSETTS, INC.
RESPONDENT.
No. 84-1354.
GRANT V. RODKEY, M.D., ET AL.,
PETITIONERS,
Vv
BLUE SHIELD OF MASSACHUSETTS, INC.,
RESPONDENT.
Respondent’s Brief in Opposition to
Petitions for Certiorari.
DANIEL O. MAHONEY,
Counsel of Record,
PALMER & DODGE,
One Beacon Sireet,
Boston, Massachusetts 02108.
(617) 227-4400
REGINALD H. Howe,
Suite 2200,
One Beacon Street,
Boston, Massachusetts 02108.
(617) 227-4400
Dated: March 25, 1985
~ BEST AVAILABLE COPY
Questions Presented.
Both petitions for certiorari fundamentally ask this Court to
consider doing what the court of appeals refused to do: “create
new potentially far-reaching law” on whether and under what
circumstances contracts which simply set the price of the trans-
action at hand may violate § 1 of the Sherman Act. Kartell v.
Blue Shield of Massachusetts, Inc., 749 F.2d 922, 928 (CA1
1984) (“Kartell VI’) (PA14).'
Blue Shield of Massachusetts, Inc. (Blue Shield) was estab-
lished under a special act for the purpose of “furnishing medical
services at low cost to members of the public who become
subscribers . . . .” Mass. St. 1941, c. 306, preamble. The
contracts between Blue Shield and its participating physicians, .
and between Blue Shield and its subscribers, require Blue
Shield participating physicians in most instances to accept Blue
Shield payments as payment-in-full for covered services ren-
dered to Blue Shield subscribers, and prohibit participating
physicians from making additional charges to subscribers, a
practice known as “balance billing.”
This case presented three basic issues regarding the prohib-
ition on balance billing: (1) whether it is a “contract . . . in
restraint of trade” in violation of § 1 of the Sherman Act, 15
U.S.C. § 1; (2) whether it is immune from antitrust attack
under the state action doctrine of Parker v. Brown, 317 U.S.
341 (1943), and its progeny; and (3) whether it is exempt from
the antitrust laws under the McCarran-Ferguson Act, 15 U.S.C.
§§ 1011-1015.
In a unanimous opinion by Breyer, J., the Court of Appeals
for the First Circuit, bypassing the immunity and exemption
issues, proceeded directly to the antitrust merits. Kartell VI,
749 F.2d at 924 (PAS). It held that “Blue Shield in essence
‘See infra, p. 4, fn. 3, for explanation of citation forms used in this brief.
‘buys’ medical services for the account of [its subscribers ]”
(id. at 925 (PA7)), that “the lawfulness of the [ban on balance
billing] stems from the fact that it is an essential part of the
price bargain etween buyer [Blue Shield] and seller [par-
ticipating physician]” (id. at 928 (PA14)), and that whether
the “price bargain is, in fact, reasonable is, legally speaking,
beside the point, even in the case of a monopolist [assuming
that the price is not predatory].” /d. Accordingly, relying on
a long line of analogous cases and considerable scholarly au-
thority (see infra, pp. 10-13), the court of appeals “appl[ied]
mainstream antitrust doctrine” (id. at 930 (PA18)) and held
that the ban on balance billing was not a “contract in restraint
of trade” within the meaning of § 1 of the Sherman Act regard-
less of Blue Shield’s alleged market power.
Table of Contents.
Opinions below
Pertinent statutes
Statement of the case
I. Proceedings below
Il. Relevant facts
Summary of argument
Argument 10
I. The decision of the Court of Appeals is in accord-
ance with similar decisions of this Court, four other
courts of appeals, and the weight of scholarly com-
ment 10
Il. Since the ban on balance billing is now a state
Statutory prohibition, further review by this Court
OoADRwWwWwn —
is unwarranted 17
Conclusion 19
Appendix follows page 19
Tabie of Authorities Cited.
CASES.
Arizona v. Maricopa County Medical Society, 457 U.S.
332 (1982) 14, 15
Blue Cross & Blue Shield v. Michigan Association of
Psychotherapy Clinics, 1980-2 Trade Cases (CCH)
{ 63,351 (E.D. Mich. 1980) lin, 12
Cook v. Hudson, 429 U.S. 165 (1976) 18
Dandridge v. Williams, 397 U.S. 471 (1970) Sn
il TABLE OF AUTHORITIES CITED.
Davidowitz v. San Diego County Dental Society, 1983-
| Trade Cases (CCH) 4 65,231 (S.D. Cal. 1983) 12
Feldman v. Health Care Service Corp. 562 F.Supp. 941
(N.D. Ill. 1982) 12, 17
Grant V. Rodkey, et al. v. Blue Shield of Massachu-
setts, Inc., et al., United States District Court for the
District of Massachusetts, No. 82-317-C 3n
Group Life & Health Insurance Co. v. Royal Drug Co.,
440 U.S. 205 (1979) 11, 13, 1Sn
Hoover v. Ronwin, 467 U.S. , 104 S.Ct. 1989, 80
L.Ed.2d 590 (1984) 18
Jefferson Parish Hospital District No. 2 v. Hyde, 466
U.S. , 104 S.Ct. 1551, 80 L.Ed.2d 2 (1984) 16
Kartell v. Blue Shield of Massachusetts, Inc. , 592 F.2d
1191 (CAI 1979) (Kartell I) 4
Kartell v. Blue Shield of Massachusetts, Inc., 384
Mass. 409, 425 N.E.2d 313 (1981) (Kartell ID 1,2,4,5,6
Kartell v. Blue Shield of Massachusetts, Inc., 542 F.
Supp. 782 (D. Mass. 1982) (Kartell III) 2, 4, 5, 14n
Kartell v. Blue Shield of Massachusetts, Inc. , 687 F.2d
543 (CAI 1982) (Kartell IV) 4,5
Kartell v. Blue Shield of Massachusetts, Inc., 582 F.
Supp. 734 (D. Mass. 1984) (Kartell V) = 4, 5, 7, 9, 14n
Kartell v. Blue Shield of Massachusetts, Inc. , 749 F.2d
922 (CAI 1984) (Kartell VI) 4, 5, 7, 9, 12, 13 et seq.
Medical Arts Pharmacy of Stamford, Inc. v. Blue Cross
& Blue Shield of Connecticut, Inc., 675 F.2d 502
(CA2 1982) (per curiam) (affirming 518 F.Supp.
1100 (D. Conn. 1981) 11, 12, 13
Michigan State Podiatry Association v. Blue Cross and
Blue Shield of Michigan, 1982-2 Trade Cases (CCH)
§{ 64,801 (E.D. Mich. 1982) 12
Mulhearn v. Rose-Neath Funeral Home, Inc., 512 F.
Supp. 747 (W.D. La. 1981) 10
TABLE OF AUTHORITIES CITED. ili
Nelson v. Blue Shield of Massachusetts, Inc., 377
Mass. 746, 387 N.E.2d 589 (1979)
Parker v. Brown, 317 U.S. 341 (1943)
Pennsylvania Dental Association v. Medical Service
Association of Pennsylvania, 745 F.2d 248 (CA3
1984), pet. for cert. filed, 53 U.S.L.W. 3619 (No.
84-1296, February 13, 1985) i}
Proctor v. State Farm Mutual Insurance Co., 675 F.2d
308 (CADC 1982) cert. denied, 459 U.S. 839 (1982) 10
Quality Auto Body v. Allstate Insurance Co. , 660 F.2d
1195 (CA7 1981), cert. denied, 455 U.S. 1020(1982) 10, 12
Royal Drug Co. v. Group Life & Health Insurance Co.,
737 F.2d 1433 (CAS 1984), cert. denied, 105 S.Ct.
912 (1985) |
Sausalito Pharmacy, Inc. v. Blue Shield of California,
677 F.2d 47 (CA9 1982) (per curiam) (affirming 544
F.Supp. 230 (N.D. Cal. 1981)), cert. denied, 459
U.S. 1016 (1982) 11, 12, 13
Sitkin Smelting and Refining Co. v. FMC Corp., 575
F.2d 440 (CA3 1978), cert. denied, 439 U.S. 866
~om
(1978) 10
Triangle Improvement Council v. Ritchie, 402 U.S.
497 (1971) 18
United States v. New York Telephone Co., 434 U.S.
159 (1977) Sn
United States v. Trenton Potteries Co., 273 U.S. 392
(1927) 13, 14
STATUTES.
Federal:
15 U.S.C. § 1 3, 4, 5, 10, 13, 17
IS U.S.C. § 2 3
iv TABLE OF AUTHORITIES CITED.
15 U.S.C. §§ 1011-1015 4,5
42 U.S.C. § 1395) et seq. &
Supreme Court Rule 17.1 13
State:
Massachusetts General Laws
c. 93A 8
c. 176B 2, 6
c. 176B, § 7 2
c. 176B, § 12 8
Mass. St. 1941, c. 306, preamble 6
Mass. St. 1984, c. 192, § 1 2, 17, 18n
MISCELLANEOUS.
P. Areeda, Antitrust Analysis, pp. 530-531 (1981) 13
Nos. 84-1353, 84-1354.
In the
Supreme Court of the United States.
OCTOBER TERM, 1984.
No. 84-1353.
JAMES P. KARTELL, M.D., eT at.,
PETITIONERS,
Vv.
BLUE SHIELD OF MASSACHUSETIS, INC.
RESPONDENT.
No. 84-1354.
GRANT V. RODKEY, M.D., eT at..
PETITIONERS,
Vv.
BLUE SHIELD OF MASSACHUSETTS, INC..
RESPONDENT.
Respondent's Brief in Opposition to
Petitions for Certiorari.
Opinions Below.
Both petitions for certiorari fail to append all pertinent opin-
ions below as required by Rule 21(k)(ii), particularly: Kartell
v. Blue Shield of Massachusetts, Inc., 384 Mass. 409, 425
2
N.E.2d 313 (1981) (“Kartell IT”) (answering certified questions
of state law); and Kartell v. Blue Shield of Massachusetts,
Inc., 542 F.Supp. 782 (D. Mass. 1982) (“Kertell IIT”) (granting
in part defendants’ motion for summary judgment). These
opinions are set forth in the appendix to this brief.
Pertinent Statutes.
In addition to the statutes cited by petitioners, this case
involves the state enabling legislation for Blue Shield, Mass.
Gen. Laws, c. 176B, as amended, the pertinent parts of which
are set forth in the appendix to this brief. Of particular impor-
tance in connection with the petitions for certiorari is the recent
amendment to Mass. Gen. Laws, c. 176B, § 7 (Mass. St.
1984, c. 192, § 1, effective July 12, 1984), making the Blue
Shield ban on balance billing an express state statutory prohib-
ition. This amendment was passed in response to the decision
of the district court in this case and prior to the decision of
the court of appeals for which certiorari is sought. See infra,
pp. 17-18. The amendment provides in relevant part:
No participating physician or other participati id
of health services shall charge to or collect from a sub-
scriber or covered dependent any amount in excess of the
amount of compensation determined and allowed by [Blue
Shield) pursuant to the applicable method of compensation
approved by the commissioner [of insurance], except [in
certain limited circumstances not here material].
3
Statement of the Case.
i. Proceepincs BeLow.
This action was originally brought by four Massachusetts
physicians, two of whom were Blue Shield participating physi-
cians and two of whom were not, for injunctive relief from
alleged violations of §§ | and 2 of the Sherman Act by Blue
Shield and by Blue Cross of Massachusetts, Inc. (“Blue
Cross”). Subsequently the Massachusetts Medical Society (the
“Medical Society”), which has sponsored and financed this
and related cases from the outset, and two additional Mas-
sachusetts physicians were allowed to intervene as parties
plaintiff, and the Massachusetts Commissioner of Insurance
(the “Commissioner”) was allowed to intervene as a party
defendant.
On the merits, plaintiffs and intervenor-plaintiffs (the
petitioners before this Court) principally challenged two prac-
tices of Blue Shield and one of Blue Cross: (1) the refusal of
Blue Shield to provide benefits for services rendered by non-
participating physicians except in an emergency or outside
Massachusetts; (2) the refusal of Blue Cross to provide benefits
for physicians’ services except those rendered by salaried staff
of institutional providers such as hospitals; and (3) the require-
ment that Blue Shield participating physicians in most instances
accept the Blue Shield payments as payment-in-full for services
rendered to Blue Shield subscribers and not “balance bill”
the first two practices constituted a concerted refusal to deal and
A related cane, Grant V. - Rodkey, ad. v. Blue Shield of Massachusetts,
inc... et al... United States District Court for the District of Massachusetts, No
82-317-C, raising a claim for treble damages on account of the ban on balance
billing and other alleged wrongs. remains pending.
4
an attempt to monopolize the market for prepaid health care
by Blue Shield and Blue Cross, and that the third constituted
illegal price-fixing by Blue Shield or was otherwise an unlawful
contract in restraint of trade under § | of the Sherman Act.
Blue Shield and Blue Cross denied that these practices violated
the federal antitrust laws, and further contended that all three
were immune under the state action doctrine of Parker v. Brown,
317 U.S. 341, 350-352 (1943), and its progeny, and exempt
under the McCarran-Ferguson Act, 15 U.S.C. §§ 1011-1015.
This case has produced six reported opinions, including
three by the Court of Appeals for the First Circuit, two by the
District Court for the District of Massachusetts, and one by
the Supreme Judicial Court of Massachusetts answering rele-
vant questions of state law certified by the district court. These
opinions, all of which bear the caption Kartell v. Blue Shield
of Massachusetts, Inc., are in chronological order: Kartell /,
592 F.2d 1191 (CAI 1979) (vacating and remanding judgment
of dismissal on state action grounds); Kartell I], 384 Mass.
409, 425 N.E.2d 313 (1981) (RA1a-19a) (answering certified
questions); Kartell II], 542 F.Supp. 782 (D. Mass. 1982)
(RA20a-35a) (partial summary judgment for defendants); Kar-
tell IV, 687 F.2d 543 (CA1 1982) (dismissing appeal from
order denying intervenor-plaintiffs permission to raise new
claims); Kartell V, 582 F.Supp. 734 (D. Mass. 1984) (PA28-
68) (judgment enjoining Blue Shield from enforcing the ban
on balance billing); and Kartell VI, 749 F.2d 922 (CAI 1984)
(PA1-25) (reversing judgment enjoining the ban on balance
billing; affirming remainder of judgment in favor of defend-
ants).* The procedural history of this case and related cases is
* Citations in this brief to Kartell Ii and Kartell III are to the official reports
and the corresponding pages in the appendix to this brief, cited “RA” followed
by the page number. Citations in this brief to Kartell V and Kartell VI are to
the official reports and the corresponding pages in the appendix to the petition
in No. 84-1353, cited “PA” followed by the page number. Citations to Kartell
I and Kartell 1V are to the official reports only, neither opinion having been
included in the appendix to either petition.
2
set out in detail in Kartell IV, 687 F.2d at 545-548, and Kartell
V, 582 F.Supp. at 735-737 (PA29-32).
Following the decision of the Supreme Judicial Court in
Kartell I], the district court on cross-motions for summary
judgment held that Blue Shield’s refusal to provide benefits
for non-emergency services rendered by non-participating
physicians in Massachusetts, and Blue Cross’s refusal to pro-
vide benefits for physicians’ services generally, are immune
from antitrust challenge under the state action doctrine. Kartell
II, 542 F.Supp. at 788-792 (RA26a-30a). However, the dis-
trict court held that the ban on balance billing was neither
immune under the state action doctrine (id.) nor exempt under
the McCarran-Ferguson Act. Jd. at 792-794 (RA30a-32a). It
further held that the ban on balance billing was not a per se
violation of § 1 of the Sherman Act (id. at 794-796 (RA32a-
34a), but that it should be tested under the rule of reason. /d.
at 796 (RA34a). After trial without jury, the district court ruled
that the ban on balance billing was an unrevsonable restraint
of trade under § 1 of the Sherman Act and e..joined its further
use by Blue Shield. Kartell V, 582 F.Supp. at 755 (PA67).
In all other respects the case was dismissed. /d. at 755 (PA67,
72).
On appeal, the court of appeals (Campbell, Breyer and
Cowen, JJ.), in a unanimous opinion by Breyer, J., reversed
the district court’s ruling that the ban on balance billing was
unlawful, vacated the injunction enjoining its further use, and
affirmed the district court’s judgment dismissing the case in
all other respects. Kartell VJ, 749 F.2d at 934 (PA25).*
“The court of appeals did not reach the issues of state action immunity or
McCarran-Ferguson Act exemption for the ban on balance billing. However,
these issues were fully tried and briefed at every level below. Accordingly,
should this Court decide to review the judgment of the court of appeals, the
judgment could be sustained on either of these grounds even though that court
did not reach them. United States v. New York Telephone Co., 434 U.S. 159,
166, n. 8(1977). Dandridge v. Williams, 397 U.S. 471, 475-476, n. 6 (1970).
6
II. RELEVANT FACTS.
The history, development and current operation of the Blue
Shield system are described generally in Kartell I], 384 Mass.
at 414-418, 420-421, 423-425 (RA6a-10a, 12a-13a, 15a-17a).
Blue Shield is the only medical service corporation organized
under Mass. Gen. Laws c. 176B, and operates a non-profit
medical service plan pursuant to that chapter. It is subject to
comprehensive administrative regulation by the Commis-
sioner, who must approve, inter alia, its subscriber contracts,
subscriber rates, contracts with participating physicians and
other providers and methods of compensating participating
physicians and other providers. /d. at 422 (RA14a) (citing
Nelson v. Blue Shield of Massachusetts, Inc., 377 Mass. 746,
750, 387 N.E.2d 589, 592 (1979)).
Restrictions on balance billing have been an integral and
important part of the Blue Shield system since its establishment
in 1942. See Kartel’ II, 384 Mass. at 415-418 (RA7a-10a).
Without such restrictions or their functional equivalent, Blue
Shield would be unable to carry out its statutory purpose of
“furnishing medical services at low cost to members of the
public who become subscribers . . . .” Mass. St. 1941, c. 306,
preamble. These restrictions enable Blue Shield to provide
“service” benefits for covered medical services. In essence,
service benefits are full benefits except for such limited deduc-
tibles or co-payments as may be specified in the subscriber
contract.
To both carry out its statutory purpose and meet the demand
of consumers and employers for full benefits for a broad range
of medical services, Blue Shield contracts with physicians and
other providers to pay them for covered services rendered to
Blue Shield subscribers and covered dependents (collectively
“members”). Under these contracts, participating providers
agree to accept Blue Shield payments as payment-in-full and
7
not to try to collect additional payments directly from Blue
Shield members.* This prohibition of additional charges is the
“ban on balance billing” to which the petitioners object.
What the petitioners want is the right to collect an additional
$100 million annually from Blue Shield members. They de-
mand this right notwithstanding that imperfections in the physi-
cians’ services market already allow them monopolistic power
over their fees (see infra, p. 11), notwithstanding increases in
their fees and incomes far exceeding those of comparable oc-
cupational groups (see Exs. 2309-2310; Tr. 1035-1036), and
notwithstanding a relative oversupply of physicians in Mas-
sachusetts. See Kartell VI, 749 F.2d at 927 (PA10-1 1). All
that Blue Shield has done is to set its own buying prices for
the services that it purchases on behalf of its members. It is
conceded that Blue Shield has not entered into any form of
horizontal agreement on price or otherwise. Kartell VI, 749
F.2d at 932 (PA21).
Since 1968, with the express approval of the Commissioner,
Blue Shield payments to physicians have generally been deter-
mined by a formula or methodology known as the “usual and
customary charge” system. Kartell V, 582 F.Supp. 740-741
(PA37-39). Briefly stated, paying usual and customary charges
means paying a participating physician his or her usual charge
for a service, except as that charge exceeds the customary
charge for the service by physicians of similar training and
experience in the same area.° The method was adapted from
‘Similarly, health maintenance organizations, independent practice associa-
tions and preferred provider organizations enter into agreements with physicians
requiring them to accept payments from the plan as payment-in-full and to
refrain from billing covered individuals for any difference between the physi-
cian’s charge and the plan's aliowance or payment. Kartell V/, 749 F.2d at
928-929 (PA14).
*The allowable charge for a service is the lesser of the physician's submitted
charge, his or her usual charge for the service (the “level 1” charge) or the
8
and is similar to the prevailing charge method used under
Medicare — Part B, which had been introduced in 1966. 42
U.S.C. § 1395j et seq.
In 1977, the Commissioner approved modifications to the
usual and customary charge system which allowed Blue Shield
to set maximum allowable percentage increases for both usual
and customary charges, and limited the allowable percentage
increase for customary charges to a percentage no greater than
the percentage increase in the Consumer Price Index for Urban
Wage Earners and Clerical Workers, Boston, All Items, less
the medical care component thereof.
As to participating physicians and other participating provid-
ers, the ban on balance billing has been regularly and consis-
tently enforced by a special administrative board established
under Mass. Gen. Laws c. 176B, § 12, consisting of the
Commissioner, the Attorney General and the Chairman of the
Board of Registration in Medicine, or their designees (Exs.
815-854). It has also been enforced by the Attorney General
under Mass. Gen. Laws c. 93A, which prohibits unfair and
deceptive trade practices (Ex. 1167). In 1976 and 1977, the
Commissioner twice refused to approve any relaxation of the
ban on balance billing (Exs. 638-639, 648-649). In 1984, less
than four months after the district court decision purporting to
invalidate it, the ban on balance billing was made an express
state statutory prohibition by act of the Massachusetts Legisla-
ture. See infra, pp. 17-18.
applicable customary charge (the “level 2” charge). A physician's usual or
level 1 charge was originally defined as the median of his or her reported
charges submitied to Blue Shield during the applicable charge-reporting period.
The customary or leve* 2 charge was originally defined as the 90th percentile
of the usual charges for the service by established physicians within the same
specialty and geographic area during the applicable charge-reporting period.
Today, both usual and customary charges are subject to further limitations as
described below.
9
Notwithstanding that over one-half of all Massachusetts re-
sidents are Blue Shield members, Blue Shield payments subject
to the ban on balance billing account for only about 14 percent
of total physicians’ revenues in Massachusetts. Kartell V/, 749
F.2d at 924 (PA4). For services subject to the ban, the aggre-
gate difference between submitted charges by participating
physicians and Blue Shield payments to them was $69 million
in 1979, $73 million in 1980, $81 million in 1981, $94 million
in 1982, and was projected to be $103 million in 1983. Kartell
V, 582 F.Supp. at 741 (PA39). Expressed as a percentage of
submitted charges, these differences rose from 18.4 percent
in 1976 to 30.7 percent in 1981, and have remained near the
30 percent figure since 1981. /d. If the ban on balance billing
were eliminated, Blue Shield’s subscribers would become li-
able for these amounts, either directly through additional
charges by participating physicians or indirectly through the
higher subscriber rates which Blue Shield would have to charge
in order to pay full submitted charges to participating physi-
cians.
Summary of Argument.
Certiorari should not be granted for two basic reasons: (1)
the decision of the court of appeals in this case represents a
well-reasoned application of “mainstream antitrust doctrine”
fully supported by prior decisions of this Court, the decisions
of four other courts of appeals and several district courts in
similar cases, and the weight of scholarly authority (pp. 10-17);
and (2) the ban on balance billing, having been enacted as a
State statutory prohibition following the decision of the district
court in this case, is now immune from antitrust scrutiny, thus
depriving this case of any significance for the future (pp. 17-
18).
10
Argument.
I. THE DECISION OF THE CouRT OF APPEALS Is IN AC-
CORDANCE WITH SIMILAR DECISIONS OF THIS CouRT, FOUR
OTHER COURTS OF APPEALS, AND THE WEIGHT OF SCHOL-
ARLY COMMENT.
Section | of the Sherman Act states that “[e]very contract,
combination in the form of trust or otherwise, or conspiracy,
in restraint of trade or commerce among the several States, or
with foreign nations, is declared to be illegal.” 15 U.S.C. § 1.
Simple contracts for the purchase and sale of goods or services,
however, have never been considered “contract[s] . . . in re-
straint of trade” within the meaning of § 1 because they do
no more than set the price and other terms of the transaction
at hand. As the Seventh Circuit stated in Quality Auto Body
v. Allstate Insurance Co., 660 F.2d 1195, 1203 (CA7 1981),
cert. denied, 455 U.S. 1020, 1023 (1982):
A contract of this nature between a buyer (the insurance
company) and a seller (the body shop) generally does not,
without more, appear to violate the antitrust laws at all.
Only if such an agreement contains restrictions on the
party’s activities other than those involved in the im-
mediate purchase and sale does the possibility of a Sher-
man Act vi lation arise. [Emphasis by the court. ]
Accord, Proctor v. State Farm Mutual Insurance Co., 675
F.2d 308 (CADC 1982) cert. denied, 459 U.S. 839 (1982).
See Sitkin Smelting and Refining Co. v. FMC Corp., 575 F.2d
440, 446 (CA3 1978), cert. denied, 439 U.S. 866 (1978);
Mulhearn v. Rose-Neath Funeral Home, Inc., 512 F.Supp.
747, 753-754 (W.D. La. 1981) (funeral service insurance pol-
11
icy setting the amount to be paid for the service is not an
antitrust violation because “to agree upon a price with a cus-
tomer in the absence of other circumstance is not within the
legal prohibition”).
In Group Life & Health Insurance Co. v. Royal Drug Co.,
440 U.S. 205, 214 (1979), this Court described contracts pro-
viding for direct payments by Blue Shield of Texas to par-
ticipating pharmacies for drugs provided to subscribers as “‘ar-
rangements for the purchase of goods and services by Blue
Shield.” Because of the purchaser-seller relationship between
Blue Shield plans and their participating providers, the courts
of appeals in four circuits in addition to the First Circuit have
held that a ban on balance billing does not violate the antitrust
laws. Pennsylvania Dental Association v. Medical Service As-
sociation of Pennsylvania, 745 F.2d 248, 256-257, 259 (CA3
1984), pet. for cert. filed, 53 U.S.L.W. 3619 (No. 84-1296,
February 13, 1985). Royal Drug Co. v. Group Life & Health
Insurance Co., 737 F.2d 1433, 1437-1438 (CAS 1984), cert.
denied, 105 S.Ct. 912 (1985). Sausalito Pharmacy, Inc. v.
Blue Shield of California, 677 F.2d 47 (CA9 1982) (per
curiam) (affirming 544 F.Supp. 230 (N.D. Cal. 1981)), cert.
denied, 459 U.S. 1016 (1982).’ Medical Arts Pharmacy of
Stamford, Inc. v. Blue Cross & Blue Shield of Connecticut,
Inc., 675 F.2d 502 (CA2 1982) (per curiam) (affirming 518
"In Sausalito, the plaintiff pharmacies alleged that § | of the Sherman Act
was violated by provisions in Blue Shield’s contracts prohibiting participating
pharmacies from charging Blue Shield subscribers more than a specified amount
— the so-called “deductible” — for covered drugs. The district court concluded
that “contracts between purchasers and sellers do not impermissibly restrain
trade unless there is some effect on price formation other than the terms of
the contract itself.” Sausalito, supra, 544 F.Supp. at 237 (citing Blue Cross
& Blue Shield v. Michigan Association of Psychotherapy Clinics, infra). Be-
cause there was no such effect on price formation, the court granted Blue
Shield’s motion for summary judgment. The Ninth Circuit affirmed on the
basis of the district court's opinion. Sausalito, supra, 577 F.2d at 48.
12
F.Supp. 1100 (D. Conn. 1981)).* Several district courts have
held similarly on motions to dismiss or for summary judgment.
Davidowitz v. San Diego County Dental Society, 1983-1 Trade
Cases (CCH) § 65,231 (S.D. Cal. 1983). Michigan State
Podiatry Association v. Blue Cross and Blue Shield of Michi-
gan, 1982-2 Trade Cases (CCH) { 64,801 (E.D. Mich. 1982).
Feldman v. Health Care Service Corp., 562 F.Supp. 941
(N.D. Ill. 1982). Blue Cross & Blue Shield of Michigan v.
Michigan Association of Psychotherapy Clinics, 1980-2 Trade
Cases (CCH) § 63,351 (E.D. Mich. 1980).
There are no cases to the contrary. Indeed, as one court
noted:
[E]ach federal court which has examined the question in
the context of the antitrust laws has decided that an insurer
paying out pursuant to its policy of insurance is actually
a purchaser of goods or services, and that the :nsured is
merely the recipient of the goods or services pursuant to
the policy.
Feidman v. Health Care Service Corp. supra, 562 F.Supp. at
947 (citing Sausalito, supra, Medical Arts, supra, Quality
Auto Body, supra, Proctor, supra, and Michigan Association
of Psychotherapy Clinics, supra). Furthermore, as the court
of appeals in this case observed, “scholarly commentators be-
lieve that these cases were correctly decided.” Kartell VI, 749
*In Medical Arts, Blue Cross Blue Shield provided for a “maximum billable
amount” method of reimbursement under which it determined the maximum
amount it would pay participating pharmacies for any drug. The court consid-
ered whether the provider agreement affected the prices for prescription drugs
sold to non-Blue Cross Blue Shield customers, prices for non-drug items, or
prices charged by non-participating pharmacies. Since there were no effects
on parties or items apart from the contract terms themselves, the Second Circuit
upheld summary judgment for Blue Cross Blue Shield. Medical Arts, supra,
675 F.2d at 506-507.
13
~-
F.2d at 926 (PA9) (citing P. Areeda, Antitrust Analysis, pp.
530-531 (1981) (“[I]t is difficult to see what could make [such
an] arrangement anticompetitive.”)). Accordingly, there is no
basis for granting certiorari. See Rule 17.1. Far from being
in conflict, the courts of appeals in five circuits, taking their
lead from this Court’s decision in Group Life & Heaith Insur-
ance Co. v. Royal Drug, supra, 440 U.S. at 214, are in
agreement that a Blue Shield plan should, for purposes of
applying the antitrust laws, be characterized or treated as a
purchaser vis-a-vis its participating providers.
Strictly speaking, as the petitioners correctly point out, the
courts in both Sausalito and Medical Arts held that the provider
agreements at issue did not violate § | of the Sherman Act
because they were not unreasonable restraints of trade, not
because they were not restraints of trade at all. In this connec-
tion, the courts recognized that the agreements were not hori-
zontal price-fixing, resale price maintenance or any other trad-
itional type of per se violation. Sausalito, supra, 544 F.Supp.
at 234. Medical Arts, supra, 675 F.2d at 505-506, and 518
F.Supp. at 1106-1107. Nevertheless, they then went on to
analyze whether the agreements were unreasonable vertical
restraints of trade notwithstanding that they merely set the
price for the transactions at issue. In the present case, the court
of appeals recognized that this sort of additional analysis was
unnecessary because § | of the Sherman Act is not concerned
with the reasonableness of a price agreed to by a purchaser
and a seller unless that price is predatory or below incremental
cost. Kartell V1, 749 F.2d at 927-928 (PA12-13). Otherwise,
every purchase and sale contract could be challenged as an
unreasonable restraint of trade, and the courts could become
involved in determining the reasonableness of the agreed price
for almost any transaction affecting interstate commerce. See
United States v. Trenton Potteries Co., 273 U.S. 392, 398
(1927) (“[W]e should hesitate to adopt a construction making
14
the difference between legal and illegal conduct in the field
of business relations depend upon so uncertain a test as whether
prices are reasonable . . .”).
In an effort to distinguish this case, petitioners emphasize
Blue Shield’s alleged market power as a buyer in the physi-
cians’ services market. But, as the court of appeals pointed
out, absent predatory or below cost pricing, “even a monopolist
is free to exploit whatever market power it may possess when
that exploitation takes the form of charging uncompetitive
prices.” Kartell Vi, 749 F.2d at 927 (PA12), and cases and
authorities cited. Since there was no evidence of predatory
pricing by Blue Shield (id. at 928 (PA13)), the court of appeals
held that the ban on balance billing was lawful even assuming,
which it did not decide, “that Blue Shield possesses significant
market power . . . . [and] uses that power to obtain ‘lower
than competitive’ prices.” /d. at 927 (PA12).°
The petitioner's reliance on Arizona v. Maricopa County
Medical Society, 457 U.S. 332 (1982), is misplaced. In
Maricopa, the Court invalidated a horizontal agreement among
competing physicians on their maximum charges to a prepaid
*The court of appeals expressly recognized that “Blue Shield disputes the
existence of significant ‘market power” (id. at 926 (PA10)), noting that 99
per cent of Massachusetts physicians mighi participate whether Blue Shield
had ten thousand or several million subscribers, that the supply of physicians
in Massachusetts had “ ‘increased steadily during the past decade,’” and that
the issue of market power was “hotly debated by the expert economists who
testified at trial.” /d. at 926-927 (PAI0-11).
In this connection, the district court's finding that Massachusetts physicians
are required to participate with Blue Shield as “a matter of economic necessity”
(Kartell V, 582 F.Supp. at 748 (PAS4)) confuses the effects of the ban on
balance billing with the effects of Blue Shield's refusal to provide benefits for
non-emergency services rendered in Massachusetts by non-participating physi-
cians, which is immune from antitrust scrutiny under the state action doctrine.
Kartell i], 542 F.Supp. at 788-792 (RA26a-30a). Any loss of revenue to the
petitioners that results from non-participation is an economic consequence of
this refusal, not the ban on balance billing.
15
health care plan organized and controlled by them. Recognizing
the difference between the horizontal restraint at issue in
Maricopa and the vertical relationship here , the court of appeals
correctly held that “Maricopa is simply not on point.” Kartell
VI, 748 F.2d at 930 (PAI8).
In fact, Maricopa strongly indicates that a ban on balance
billing implemented by an insurer is lawful and pro-competi-
tive."° The Court noted (457 U.S. at 352):
It is true that a binding assurance of complete insurance
coverage — as well as most of the respondents’ potential
for lower insurance premiums — can be obtained only if
the insurer and the doctor agree in advance on the
maximum fee that the doctor will accept as full payment
for a particular service. [Footnote omitted. ]
The Court then stressed that insurers could achieve the same
result without horizontal agreements among providers (id. at
353):
[1]nsurers are capable not only of fixing maximum reim-
bursable prices but also of obtaining binding agreements
with providers guaranteeing the insured full reimburse-
ment of a participating provider's fee. In light of these
examples, it is not surprising that nothing in the record
even arguably supports the conclusion that this type of
insurance program could not function if the fee schedules
were set in a different way [than by horizontal agreement
among providers]. [Emphasis supplied. }
" The Solicitor General's amicus curiae brief in Group Life & Health Insur-
ance Co. v. Royal Drug Co., 440 U.S. 205 (1970), made the same point:
provider agreements are legal, absent evidence of a horizontal conspiracy. See
Maricopa, supra, 457 U.S. at 353, n. 26.
16
The Court's recent decision in Jefferson Parish Hospital
District No. 2 v. Hyde, 466 U.S. . 104 S.Ct. 1551, 80
L.Ed.2d 2 (1984), confirms that the antitrust laws do not
condemn agreements between insurers and providers setting
the price of services rendered to insureds. In Hyde, the Court
held that the per se rule against tying arrangements did not
apply to an exclusive contract between a hospital and a group
of anesthesiologists. The Court noted that the “prevalence of
third-party payment for health care costs reduces price compet-
ition, and a lack of adequate information renders consumers
unable to evaluate the quality of the medical care provided by
competing hospitals.” /d., 80 L.Ed.2d at 22.'' In this setting,
the Court observed: “Insurance companies are the principal
source of price restraint in the hospital industry; they place
some limitations on the ability of hospitals to exploit their
market power.” /d., 80 L.Ed.2d at 23, n. 47.
Finally, the petitioners erroneously suggest that the court of
appeals decided “ ‘to tolerate manifestly anticompetitive con-
duct’ in violation of accepted antitrust principles because of
the lower prices and savings to consumers generated by the
Blue Shield system. Petition in No. 1353, p. 16. In fact, the
“In the present case, the economic experts agreed with this point. The
petitioners’ own expert testified (Tr. 744-745, 763-768, 771):
We take the view that medical care is provided monopolistically. The
monopoly does not arise from the usual [cause] of a small number of
scores of physicians. The monopoly problem arses because of the ex-
tremely poor and costly information available to medical consumers.
Since consumers are not well aware of price, attractiveness and quality
for the many alternative sources of medical care, each provider has
something of a ‘captive market.’ If he were to raise his price somewhat,
some but not all of his customers would desert him. On the other hand,
if he were to lower his price, he would gain some customers but not the
large number required to induce competitive behavior.
17
court of appeals noted “three considerations [which] convince
us to apply mainstream antitrust doctrine” and which “militate
strongly here against any effort by an antitrust court to supervise
the Blue Shield/physician price bargain.” Kartell V/, 749 F.2d
at 930 (PAI8). These considerations were: (1) that the prices
at issue were low prices rather than high ones; (2) that the
area of medical costs is one of “great complexity where more
than solely economic values are at stake” (id. at 931 (PA19));
and (3) that the Blue Shield system, including payments to
participating physicians, is “supervised by state regulators.”
id. However, the court of appeals emphasized (id.): “These
general considerations do not dictate our result... . They
do, however, counsel us against departing from present law
or extending it to authorize increased judicial supervision of
the buyer/seller price bargain.” [Emphasis supplied.} Even the
petitioners concede that “this Court has not specifically applied
the rule of reason to the price terms of a purchase con-
tract. . .” Petition in No. 1353, p. 11. It is they, not the
court of appeals, who would depart from present law and
““blaze new trails.” Kartell V/, 749 F.2d at 931 (PAI9)
(quoting Feldman v. Health Care Service Corp., supra, 562
F.Supp. at 946).
Il. Since THE BAN ON BALANCE BILLING Is Now a STate
STATUTORY PROHIBITION, FuRTHER Review py Tuts
Court Is UNWARRANTED.
Within four months after the decision of the district court
holding that the ban on balance billing violated § | of the
Sherman Act, the Massachusetts Legislature enacted by unani-
mous vote a new statute making the ban a state statutory
prohibition. Mass. St. 1984, c. 192, § 1 (see supra, p. 2).
Passed with an emergency preamble, the new statute became
18
effective on the date of enactment, July 12, 1984. Whatever
the status of ban on balance billing under the state action
doctrine prior to that date (see supra, p. 5, n. 4), after that
date it became immune from antitrust scrutiny under Hoover
v. Ronwin, 467 U.S. ; , 104 S.Ct. 1989, , 80
L.Ed.2d 590, 599 (1984) (conduct of state legislature ipso
facto immune from antitrust challenge). Accordingly, the in-
junction granted by the district court could not be reinstated
even if the court of appeals were wrong on the antitrust merits,
which it was not."
This Court should not grant certiorari to review a question
which has been essentially resolved by a subsequent statute
(Cook v. Hudson, 429 U.S. 165, 165-166 (1976)), or which,
to the extent that it has significance for the future, arises under
a new statute. Triangle Improvement Council v. Ritchie, 402
U.S. 497, 498-501 (1971) (opinion of Mr. Justice Harlan).
law, Mass. St. 1984, ch. 192, § 1, renders the case moot by immunizing Blue
Shield’s ‘balance billing ban’ from the reach of the antitrust laws.” Kartell VI,
749 F.2d at 924 (PAS). However, recognizing, inter alia, that “the new statute
may not immunize the defendants from treble-damage liability for past con-
duct,” the court of appeals considered it “simpler and more appropriate to
proceed directly to the antitrust merits.” /d. The reference to “treble-damage
liability” was a reference to the pending action for damages by substantially
ihe same plaintiffs in the district court. See supra, p. 3, n. 2. The court of
appeals apparently thought that if it did not decide the antitrust merits in this
case, involving only an injunction as to future use of the ban, it might weil
have to decide them later in the related case involving damages for use of the
ban prior to the adoption of the new statute. In practical terms, therefore, all
that is at issue if this Court grants certiorari is the extent of the preclusive
effect of the court of appeals judgment in this case on the pending damage action.
EO _
19
Conclusion.
For the foregoing reasons, the petitions for certiorari should
be denied.
Respectfully submitted,
DANIEL O. MAHONEY,
Counsel of Record,
PALMER & DODGE,
(ne Beacon Street,
Boston, Massachusetts 02108.
(617) 227-4400
REGINALD H. HOWE,
Suite 2200,
One Beacon Street,
Boston, Massachusetts 02108.
(617) 227-4400
Dated: March 25, 1985
Appendix.
Table of Contents.
Opinion below (Kartell II) la
Opinion below (Kartell III) 20a
Massachusetts General Laws
c. 176B, § 7 36a
Acts of 1984
c. 192 38a
384 Mass. 409 ” 409
Kartell v. Blue Shield of Massachusetts, Inc.
James P. Karrett & others! vs. BLUE SHIELD OF
MassacuHusetts, Inc. & others.?
Suffolk. May 7, 1981. — August 20, 1981.
Present: Hennessey, C.J., om | Asrams, & Noxan, JJ.
Medical Service Corporation. Administrative Law, Primary jurisdiction.
Insurance, Commissioner of Insurance.
In considering questions certified by a judge of the United States District
Court for the District of Massachusetts in an action by certain physi-
cians against Blue Shield of Massachusetts, Inc., and Blue Cross of
Massachusetts, Inc., this court declined to invoke the doctrine of
primary jurisdiction to refer the questions to the Commissioner of In-
surance for his determination where the certified questions involved
matters of law and the application of principles of statutory construc-
tion and presented no unresolved factual issues. [412-414]
There is nothing in the broadly stated purpose of G. L. c. 176B or in the
comprehensive regulatory power of the Commissioner of Insurance
under c. 176B from which may be inferred a State policy requiring, or
authorizing the Commissioner to require, that physicians who have
signed agreements for services to subscribers of Blue Shield of
Massachusetts, Inc., accept the fee paid by Blue Shield as payment in
full for covered services. [414-423]
General Laws c. 176B, § 7, precludes payments by Blue Shield of Mas-
sachusetts, Inc., to physicians who have not signed Participating
Agreements with Blue Shield for services rendered to subscribers ex-
cept in cases of emergency or when services are rendered outside the
State. [423-425]
Blue Cross of Massachusetts, Inc., is not empowered under G. L. c. 176A
to make payments to subscribers or physicians for physicians’ services
[426-427], although it is permitted by c. 32A, § 4, to contract with the
Group Insurance Commission to make payments for such services
tendered to State employees [427].
‘Kartell is joined by three other Massachusetts physicians as parties
plaintiff.
? The second named defendant is Blue Cross of Massachusetts, Inc. The
Commissioner of Insurance has intervened as a party defendant.
«
410 384 Mass. 409
Kartell v. Blue Shield of Massachusetts, Inc.
QUESTIONS OF LAW certified to the Supreme Judicial
Court by the United States District Court for the District of
Massachusetts.
James van R. Springer of the District of Columbia
(Stanley V. Ragalevsky with him) for the plaintiffs.
Daniel O. Mahoney (Reginald H. Howe with him) for
Blue Shield of Massachusetts & another.
Paul W. Johnson, Assistant Attorney General, for Com-
missioner of Insurance, intervener.
Noxan, J. On January 16, 1981, a judge of the United
States District Court for the District of Massachusetts cer-
tified to this court two questions relating to a private anti-
trust action now pending in the Federal court. The ques-
tions are as follows:
“1. Is Blue Shield of Massachusetts, Inc. compelled by
M.G.L. c. 176B, § 7 or any other Massachusetts statute or
required by any clearly articulated and affirmatively ex-
pressed State policy (a) to limit fees of participating physi-
cians as described in the annexed Stipulation and (b) to
refuse to make payment for non-emergency services provid-
ed in Massachusetts by physicians who decline to accept the
terms imposed by Blue Shield :n their participation agree-
ment, including such limitation of fees?
“2. Is Blue Cross of Massachusetts, Inc. permitted
generally under the Massachusetts statutes to make pay-
ments to subscribers or physicians for medical services pro-
vided by physicians to Blue Cross-Blue Shie!d subscribers, as
it does under its contract insuring employees of the Com-
monwealth?” For the reasons which follow, we answer
question l(a) and 2 in the negative. We answer ques-
tion 1(b) in the affirmative.
I. Background.
The plaintiffs, four Massachusetts physicians, seek in-
junctive relief under § 16 of the Clayton Act, 15 U.S.C.
§ 26 (1976), against certain practices of the defendants,
Blue Shield of Massachusetts, Inc. (Blue Shield), and Blue
Cross of Massachusetts, Inc. (Blue Cross), which are alleged
to operate in restraint of trade in violation of §§ 1 and 2 of
384 Mass. 409 3a 411
Kartell v. Blue Shield of Massachusetts, Inc.
the Sherman Act, 15 U.S.C. §§ 1 and 2 (1976). Specifi-
cally, the plaintiffs allege that a) by refusing to reimburse
physicians who have not signed Participating Physician's
Agreements with Blue Shield for services to subscribers, ex-
cept in emergencies or for services rendered outside
Massachiusetts, and b) by requiring that participating physi-
cians accept Blue Shield’s reimbursement as payment in full
in most cases, Blue Shield is engaged in unlawful price set-
ting. The plaintiffs further allege that Blue Cross has con-
spired with Blue Shield in refusing to provide benefits for
physicians’ services other than those rendered by the
salaried staff of institutional providers such as hospitals and
those rendered under Blue Cross’s contract covering State
employees, thereby perpetuating Blue Shield’s alleged
dominance in the market for physicians’ services.
The defendants raised the defense that the challenged
practices are immune from Federal antitrust attack under
the “state action” exemption recognized in Parker v. Brown,
317 U.S. 341 (1943), and most recently articulated in
California Retail Liquor Dealers Ass'n v. Midcal
Aluminum, Inc., 445 U.S. 97 (1980). This contention was
supported by the Commissioner of Insurance (Commis-
sioner) and initially accepted by the trial judge, who in
August, 1978, ordered the complaint dismissed. On appeal,
however, the United States Court of Appeals for the First
Circuit reversed, holding that the questions of statutory
construction raised by the State action defense should ini-
tially be determined by the State courts. Kartell v. Blue
Shield of Mass., Inc., 592 F.2d 1191 (Ist Cir. 1979). The
Court of Appeals accordingly directed the District Court to
abstain pending our decision in Nelson v. Blue Shield of
Mass., Inc., 377 Mass. 746 (1979), and, if sufficient
guidance was not provided by that decision, to consider cer-
tifying questions to this court. Kartell v. Blue Shield of
Mass., Inc., supra at 1195. After determining that the
Nelson decision did not speak to the central statutory issues
raised by the instant case, the trial judge proceeded with
this certification. The materials before us include the briefs
412 4a 384 Mass. 409
Kartell vo. Blue Shield of Massachusetts, Inc.
of the parties, including the Commissioner, a stipulation of
facts accompanied by a documentary appendix, and certain
materials developed during the discovery phase of the
Federal litigation.
Il. Primary Jurisdiction.
As a threshold matter, the defendants invoke the doctrine
of primary jurisdiction, and urge that we refer both cer-
tified questions to the Commissioner of Insurence for his
formal consideration. We decline to do so.
The doctrine of primary jurisdiction permits a court to
refrain from exercising its jurisdiction until an administra-
tive agency has determined some question or some aspect of
a question arising in the proceeding before that court. 3
K.C. Davis, Administrative Law § 19.01, at 3 (1958). See
Murphy v. Administrator of the Div. ef Personnel Adminis-
tration, 377 Mass. 217, 220-222 (1979). A court will apply
the doctrine to promote uniformity of regulation and to take
advantage of an agency’s special expertise. Mashpee Tribe
v. New Seabury Corp., 592 F.2d 575, 580 (Ist Cir. 1979).
See Nader v. Allegheny Airlines, Inc., 426 U.S. 290,
303-304 (1976). in antitrust cases, the doctrine of primary
jurisdiction may provide a means of accommodating Feder-
al antitrust policy to an agency's regulatory policy. 3 K.C.
Davis, Administrative Law § 19.05, at 26 (1958). See Ricci
v. Chicago Mercantile Exchange, 409 U.S. 289 (1973);
Jaffe, Primary Jurisdiction, 77 Harv. L. Rev. 1037, 1069-
1070 (1964). Its use in a given case, however, rests in the
sound discretion of the trial judge. Lehman Bros. v.
Schein, 416 U.S. 386, 391 (1974).
In the instant case, the judge who certified questions of
law to this court has already considered the applicability of
the doctrine of primary jurisdiction. He rejected the de-
fendants’ comparison of the allegations in this case with
those in Nelson v. Blue Shield of Mass., Inc., supra, where
we applied the doctrine to dismiss a complaint alleging that
certain of Blue Shield’s practices, regulated by the Commis-
sioner, violated State law provisions which are enforced in
the first instance by the Commissioner. The judge con-
Sa
384 Mass. 409 413
Kartell o. Blue Shield of Massachusetts, Inc.
cluded that in the instant case “[t}he threshold question . . .
is purely one of state statutory construction; no fact-finding,
administrative proceedings are necessary or even relevant.”
Because we agree with the statement, we need not reach the
question whether, under our Uniform Certification of
Questions of Law rule, S.J.C. Rule 1:03, as appearing in 382
Mass. 700 (1981), we possess the power to refer certified
questions to an agency for its consideration, especially when
the Federal trial court has already refused to do so. See
SDK Medical Computer Servs. Corp. v. Professional
Operating Management Group, Inc., 371 Mass. 117,
126-127 (1976), which held that, although it is possible that
certain charges as to unfair competitive practices by Blue
Shield should be initially referred to the Commissioner of
Insurance for correction under his administrative authority,
the matter is one for consideration by the trial court. But
see Kartell v. Blue Shield of Mass., Inc., 592 F.2d 1191,
1196 (Ist Cir. 1979) (Coffin, C.J., dubitante) (“[I}f, in the
process of considering the questions certified the
Massachusetts court finds the record to be inadequate, I
would see no reason why it could not require the record to
be supplemented as might be necessary”).
We find the first rationale supporting primary jurisdic-
tion — the promotion of uniformity and consistency in the
regulation of business entrusted to a particular agency — to
be unimportant here. The danger of inconsistency present
where, for example, various Federal courts construe the
provisions of Federal regulatory statutes, is absent in our
construction of State law as it applies to a State agency.*
See Comment, Confusion of Exhaustion of Administrative
*In this regard, we note that courts disagree on the question whether
referral from a Federal court to a State agency under the primary jurisdic-
tion doctrine is ever appropriate in State action analysis. Contrast Litton
Sys., Inc. v. Southwestern Bell Tel. Co., 539 F.2d 418, 421 (5th Cir.
1976), with Industrial Communications Sys., Inc. v. Pacific Tel. & Tel.
Co., 505 F.2d 152 (9th Cir. 1974). See Note, Parker v. Brown Revisited:
The State Action Doctrine Under Goldfarb, Cantor, and Bates, 77
Colum. L. Rev. 898, 925-928 (1977).
414 = 384 Mass. 409
Kartell v. Blue Shield of Massachusetts, Inc.
Remedies and Primary Jurisdiction Doctrines, 7 Suffolk
U.L.Rev. 124, 138-139 (1972).
As to the second rationale supporting the use of primary
jurisdiction — reliance on an agency's special expertise,
especially with respect to issues involving technical ques-
tions of fact — we perceive no lack in the voluminous record
before us which could be remedied by any kind ot adminis-
trative proceeding. The certified questions before us in-
volve questions of law and the application of principles of
statutory construction. We agree with the District Court
that, in this regard, Nelson v. Blue Shield of Mass., Inc.,
supra, is distinguishable. That case involved, among other
questions, consideration of the frequency with which Blue
Shield’s board had been convened, the adequacy of its staff,
its technical competence, and the efficiency of its pro-
cedures. Id. at 753. Such factual questions underlay what
amounted to “an attack on the entire system by which Blue
Shield compensates participating physicians.” Jd. The cer-
tified questions before us, while potentially having a broad
impact on the Blue Cross-Blue Shield insurance system, pre-
sent no such unresolved issues of fact, nor do they involve
any claimed violation of the statutes administered by the
Commissioner. Accordingly, we see no need to refer to the
Commissioner any aspect of the questions certified.
Ill. Restriction on “Balance Billing.”
The parties have stipulated that, at present, approx-
imately 96 per cent of all Blue Shield subscribers are covered
by “service benefit” contracts, under which a participating
physician is required to accept the fee paid by Blue Shield as
payment in full for covered services. Thus, only about 4 per
cent of subscribers may be billed directly by participating
physicians for amounts in addition to Blue Shield’s ap-
proved rate, or “balance billed”, as the plaintiffs term it.
The defendants, conceding that no provision of G. L.
c. 176B specifically orders this restriction, argue that the stat-
utory purpose of providing low cost medical care, coupled
with the Commissioner’s regulatory actions in furtherance of
that purpose, are together sufficient to insulate the restriction
384 Mass. 409 ta 415
Kartell v. Blue Shield of Massachusetts, Inc.
trom Federal antitrust attack. We disagree. Assuming, as
we must, that the challenged practice operates to restrain
competition in contravention of Federal antitrust law, we
find in G. L. c. 176B no affirmative policy requiring, or
authorizing the Commissioner to require, such a restraint.
We therefore answer question l(a) in the negative.
The restriction on balance billing is a product of two fea-
tures of the Blue Shield system. Under the Participating
Physician's Agreement presently in use, participating physi-
cians are contractually obligated to accept Blue Shield’s fees
as payment in full for services rendered to members who are
covered by service benefit, as opposed to indemnity benefit,
contracts. Historically, as is explained in greater detail
later in this opinion, service benefits were available only to
subscribers who came within approved income limits.
With the advent in 1968 of the “usual and customary
charge” method of compensation, however, service benefits
were for the first time provided to many subscribers without
regard to their income. This development is the focal point
of the State action controversy, and we explore it in some
detail below.
Blue Shield was incorporated on May 6, 1942, under the
name Massachusetts Medical Service. It was the first and
remains the only medical service corporation organized un-
der G. L. c. 176B. On September 18, 1942, the Commis-
sioner gave his approval to the first subscription contract,
Participating Physician's Agreement, schedule of rates to be
charged subscribers, and schedule of fees to be paid par-
ticipating physicians. The Participating Physician’s Agree-
ment, which remains unchanged to the present day, pro-
vides that “(t]he Participating Physician agrees to accept as
full compensation for all . . . services such payments as are
received from the Corporation . . . except in the case of
those persons who are entitled only to Limited Indemnifica-
tion, in which case the physician may make his customary
charge to the patient for his services, crediting against such
charge the amount set forth for such services in the fee
schedule in effect at the time the services are rendered.”
416 = 384 Mass. 409
Kartell « Blue Shield of Massachusetts. Inc
The origina! subscription certificate established two
classes of subscribers, “limited” and “unlimited”. An
unlimited subscriber was one whose annual income was less
than a certain amount on file with the Commissioner, a
limited subscriber was one whose income exceeded that
amount. Income limits were reviewed periodically, and
revised to reflect general increases in wages. In 1951, Blue
Shield implemented a second plan, known as Plan “B”, to
supplement the original plan, which was known as Plan
“A”. Under Plan “B”, a single income limit of $5,000 was
set for the subscriber and covered dependents; Plan “A” re-
tained separate limits of $2,000 for an individual, $2,500 for
families of two, and $3,000 for families of three or more.
Plan “B” imposed higher subscription rates and paid higher
fees for doctors; essentially, it provided the option of more
comprehensive coverage, particularly for higher income
subscribers, but did not otherwise depart from the basic
precedent of Plan “A”.
In 1956, Blue Shield and Blue Cross jointly initiated the
Master Medical Certificate, providing comprehensive cover-
age of hospital and medical costs under a single plan. As with
Plan “B”, however, there was no departure from the income
limit method of determining a subscriber's entitlement to ser-
vice benefits.
By the late 1960's, there was pervasive dissatisfaction
among participating phsvicians with Blue Shield’s fees, and
particularly with fees received under service benefit con-
tracts. See, e.g., Proceedings of the Massachusetts Medical
Society, May 16, 1967. In response to the complaints of
participating physicians, Blue Shield in late 1967 or early
1968 filed with the Commissioner a proposed revision of the
Master Medical Certificate accompanied by a proposed
“Amended Schedule of Benefits — Blue Shield Portion of
the Blue Cross — Blue Shield Master Medical Certificate”
(1968 Amended Schedule of Benefits). This filing intro-
duced the usual and customary charge method of compen-
sation. Blue Shield proposed to substitute for fixed fee
schedules a system under which participating physicians
384 Mass. 409 4i7
would receive 95 per cent of the lesser of their usual charge,
or the customary charge, for a particular service. The usual
charge is calculated by determining the median of all fees
charged by a particular physician for a specific service dur-
ing each six-month reporting period. Similarly, the custom-
ary charge is established as the mean of all fees reported for
a particular service by pliysicians of like experience and
training during each reporting period.
The advantage to participating physicians in this method
of calculating fees lay in the promise of higher fees im-
mediately for many services and relatively automatic future
adjustments for inflation. Its benefit to consumers was
that, for the first time, participating physicians would be
bound to accept Blue Shield’s fees as payment in full for
covered services regardless of a subscriber's income. When
the method was first proposed in 1968, it was to be im-
plemented only for group accounts under the Master
Medical Certificate and for Blue Shield’s coverage of the
Federal Employees program.‘ At present, however, it is
applied to all Blue Shield accounts except the few remaining
Plan “B” subscribers.
The revisions to the Master Medical Certificate and the
1968 Amended Schedule of Benefits were approved by the
Commissioner effective February 1, 1968. From 1970 until
1975, Blue Shield updated usual and customary charges as it
deemed appropriate without objection from the Commis-
sioner. In 1976, Blue Shield deferred any update due
primarily to a decrease in its reserves from $26 million to $1
million during the eighteen months preceding April 30,
1976. On March 1, 1977, the financial condition of the cor-
poration having improved, Blue Shield filed an amended
schedule of benefits. On April 15, 1977, the amended sched-
ule of benefits was approved by the Commissioner subject to
the condition that for the 1977 update, “the usual fees and
the normal customary fees shall not exceed increases of 107 %
‘The parties offer no estimate of the percentage increase in service
benefits at the time this method was instituted.
418 10a 384 Mass. 409
Kartell v. Blue Shield of Massachusetts, Inc.
and 104% respectively, of those fees iraplemented in July
1975.” In 1978, the Commissioner took the position that
any update of usual and customary charges was subject to
his prior written approval. A revision to the amended
schedule of benefits was filed in 1978 and received prelimi-
nary approval, but, following a change in administrations,
that approval was rescinded. Accordingly, the 1977
schedule of benefits has remained effective to the present.
The defendants argue that in exercising his power of ap-
proval over methods of compensation to achieve the
statutory purpose of providing low cost medical care to the
public, the Commissioner exerts sufficient control over Blue
Shield that the present methods of compensation, and the
concomitant limitations on physicians’ fees, must be con-
sidered to be compelled by a “clearly articulated and af-
firmatively expressed state policy.” There is no simple
definition of the degree of State compulsion which will suf-
fice to constitute State action for antitrust purposes. Several
of the United States Supreme Court’s decisions in which
such a policy was found dealt with State schemes with an
avowed purpose to restrain competition. See, e.g., Califor-
nia Retail Liquor Dealers Ass'n v. Midcal Aluminum, Inc.,
445 U.S. 97 (1980); Bates v. State Bar, 433 U.S. 350 (1977);
Parker v. Brown, 317 U.S. 341 (1943). In this case, how-
ever, we are asked to infer such a policy from the broadly
stated purpose of G. L. c. 176B and the comprehensive
regulatory power of the Commissioner under the statute.
The Supreme Court dealt with an analogous, although
not identical, contention in Cantor v. Detroit Edison Co.,
428 U.S. 579 (1976). There, a retail pharmacist engaged in
marketing light bulbs brought suit to enjoin an electric utili-
5’ The 1977 amended schedule of benefits was later challenged in a pro-
ceeding instituted by several physicians and the Massachusetts Medical
Society. The suit was ultimately dismissed on the ground that the plain-
tiffs had failed to exhaust their administrative remedies. See Nelson v.
Blue Shield of Mass., Inc., 377 Mass. 746 (1979).
lla
384 Mass. 409 419
Kartell ». Blue Shield of Massachusetts, Inc.
ty company from distributing to its customers, with no
separate charge, approximately fifty per cent of the most
commonly used light bulbs. The cost to the utility of main-
taining this program was approved by the State public utili-
ty commission as one aspect of the tariffs filed by the utility.
The Court formulated the issue tendered in terms of
whether “the Parker rationale immunizes private action
which has been approved by a State and which must be con-
tinued while the state approval remains effective.” Id. at
581. Reversing the United States Court of Appeals for the
Sixth Circuit, the Court held that the State’s regulatory ap-
proval was insufficient to invoke the Parker immunity. In its
analysis of the case, the Court offered two possible ra-
tionales for holding private conduct immune from Federal
antitrust attack. First, it noted the potential injustice of
holding a private actor liable for simply “[obeying] the com-
mand of his state sovereign”; second, the Court suggested
that “if the State is already regulating an area of the
economy, it is arguable that Congress did not intend to
superimpose the antitrust laws as an additional, and
perhaps conflicting, regulatory mechanism.” Id. at 592.
The Court then noted that where the option to initiate
the challenged program lay primarily in the private actor's
hands, there was no inherent injustice in requiring that the
utility conform its conduct to Federal law. Id. at 594. Sec-
ond, and perhaps of more significance to the instant case,
the Court found “no logical inconsistency between requir-
ing [the utility] to meet [State] regulatory criteria in so far as
it is exercising its natural monopoly powers and also to com-
ply with antitrust standards to the extent that it engages in
business activity in competitive areas of the economy.” Id.
at 596. Thus, where the State’s regulatory interest could
not be considered to extend to the market in light bulbs, the
possibility of Federal and State policy conflict was absent.
Id. at 584-585, 596; see Bates v. State Bar, supra at
361; Lafayette v. Louisiana Power & Light Co., 435 U.S.
389, 419 (1978) (emphasizing the importance of a clearly
and affirmatively expressed State policy “requiring the anti-
420 12a 384 Mass. 409
Kartell v. Blue Shield of Massachusetts, Inc,
competitive restraint as part of a comprehensive regulatory
system”).
In deciding whether Blue Shield’s current methods of
compensation are compelled by State policy, we understand
that we are to look to at least the foilowing factors: any in-
dication that in enacting G. L. c. 176B the Legislature
sought to restrain competition in the market for physicians’
services; the nature of and extent of the Commissioner's
regulatory powers; and the degree to which any State in-
terests involved could be accommodated by a method of
compensation with a lesser effect on competition. See, e.g.,
Sound, Inc. v. American Tel. & Tel. Co., 631 F.2d 1324,
1334 (8th Cir. 1980); George R. Whitten, Jr., Inc. v. Pad-
dock Pool Builders, Inc., 424 F.2d 25, 30 (1st Cir. 1970).
We conclude that, under this analysis, Blue Shield’s current
method of compensation is not required by any express State
policy.
First, to the extent that the Legislature, in enacting G. L.
c. 176B, was concerned at all with the market in physicians’
services, that concern appears to have been limited to pro-
viding a means whereby persons of average and low income
could obtain otherwise unaffordable medical care. The
clearest indication of this limited purpose is the fact that for
the first twenty-six years of its operation, Blue Shield
limited service benefits, with the Commissioner’s approval,
to subscribers who met certain income requirements. It is
apparent that neither Blue Shield nor the Commissioner
during this period believed that G. L. c. 176B required the
extension of service benefits beyond this population.
This limited view of the purpose of G. L. c. 176B is sup-
ported by other materials which, while they do not con-
stitute formal legislative history, nevertheless shed light on
the contemporary understanding of the Blue Shield pro-
gram. We have previously relied on such materials in
determining legislative intent. See Pereira v. New England
LNG Co., 364 Mass. 109, 115 (1973).
The draft legislation which was enacted as G. L. c. 176B
was introduced by the Massachusetts Medical Society. After
l3a
384 Mass. 409 421
Kartell v. Blue Shield of Massachusetts, Inc.
its introduction, the Medical Society observed in its official
journal that the legislation was “submitted as evidence of a
sincere effort on the part of the Massachusetts Medical
Society to meet the present-day problems of low-income
groups in regard to paying for medical care.” Medical Serv-
ice Corporations, 224 New England J. Med., No. 3, 124
(1941). In 1962, the Legislature empanelled a “Special
Commission to Investigate and Study the Laws relative to
Non-Profit Hospital and Medical Service Corporations, and
the Rising Cost of Hospital and Medical Care and Hospital
Accommodations” (Special Commission); the Special Com-
mission’s Final Report was filed in 1964. See 1964 Senate
Doc. No. 958. The Special Commission specifically noted
that both service and indemnity benefits were contemplated
under G. L. c. 176B, and linked the provision of service
benefits to Blue Shield’s corporate purpose. “Simply stated,
the fundamental purpose of . . . Blue Shield is to make
available at the lowest possible premium cost, to the
average and below average income citizen ... a plan
whereby the medical and surgical needs of himself and his
family would be paid for in full at the time of such need.”
Id. at 142. See also id. at 182 (recommending that “the
service-benefit features of Blue Shield contracts be retained
in order to retain its purpose of serving the average and
below average income subscribers”). While the Special
Commission’s report cannot be taken as an indication of
original legislative intent, it does reflect the contemporary
understanding of the underlying purposes of Blue Shield.
The conclusion is inescapable that no one familiar with the
legislative scheme, either at its inception or immediately
prior to the adoption of the present method of compensa-
tion, believed that it required the near universal provision
of service benefits which is now subject to challenge.
The second dimension to the defendants’ State action
argument is that G. L. c. 176B gives the Commissioner per-
vasive regulatory powers over Blue Shield, and that since
1968 he has exercised those powers to compel the extension
of service benefits at their present level. Our review of the
499 I4a 384 Mass. 409
Kartell v. Blue Shield of Massachusetts, Inc.
Commissioner’s powers convinces us that his approval of the
usual and customary method of compensation does not con-
stitute State action for the purposes of antitrust immunity.
In Nelson v. Blue Shield of Mass., Inc., 377 Mass. 746, 750
(1979), we held that “G. L. c. 176B establishes a compre-
hensive scheme for the public supervision of medical service
corporations.” In support of this conclusion, we noted the
Commissioner’s power of approval over Blue Shield’s ar-
ticles of organization (§ 2), by-laws (§ 3), “the form of its
agreements with participating providers and its methods of
compensating them (§ 4),” as well as the certificates issued
to, and the rates charged, subscribers (§§ 4, 6). Id.
By G. L. c. 176B, § 4, the Commissioner is specifically re-
quired to approve in writing Blue Shield’s “methods of com-
pensating” providers. This language was inserted by St. 1968,
c. 432, § 9; prior to this amendment, § 4 required the Com-
missioner to approve Blue Shield’s “rates” of compensation.
Under the prior law, we noted that because physician fee
schedules are the primary determinants of the rates charged to
Blue Shield’s subscribers, the express standards governing the
Commissioner's approval of rates to subscribers “are implicitly
the standards to be applied by the Commissioner . . . in deter-
mining, the rates at which the physicians are to be compensat-
ed... . It follows that the Commissioner may disapprove the
fee scnedule only if the fees are inadequate, excessive or un-
fairly discriminatory.” Massachusetts Medical Serv. v. Com-
missioner of Ins., 344 Mass. 335, 338-339 (1962). There is no
reason to think that the substitution, in 1968, of the word
“methods” for the word “rates” implied any change in the
Commissioner’s role under § 4. Thus, following our analysis
in Massachusetts Medical Serv. v. Commissioner of Ins., supra
at 339, we think that the present § 4 does not give the Com-
missioner power to establish Blue Shield’s methods of compen-
sation, but only to disapprove them if they are outside the
“range of reasonableness.” Cf. Hathaway v. Commissioner of
Ins., 379 Mass. 551, 554 (1980). (St. 1968, c. 432, § 9, in-
dicates no intention to have physicians’ fees fixed by the
Commissioner. )
384 Mass. 409 ise 423
Kartell ». Blue Shield of Massachusetts, Inc.
The above analysis leads us to the conclusion that
although the usual and customary charge method of com-
pensation may represent a reasonable accommodation of
the various interests involved in establishing Blue Shield’s
rates of reimbursement to participating physicians, it is only
one among a range of methods that the Commissioner
would be required to approve. At least to the extent that it
goes beyond the statutory policy of providing service
benefits to low income subscribers, it cannot be said to be
required by the State. Cf. Cantor v. Detroit Edison Co.,
supra, at 584-585.
IV. Limitation on Payments to Nonparticipating Physi-
cians.
By contrast to question l(a), question 1(b) involves a
relatively straightforward process of statutory construction.
We agree with the defendants that G. L. c. 176B, § 7,
precludes payments by Blue Shield to nonparticipating
physicians for services rendered to subscribers except in
cases of emergency or for services rendered outside the |
State.
General Laws. c. 176B, § 7, as appearing in St. 1978,
c. 574, § 3, provides in relevant part that “[a] subscriber or
a covered dependent, subject to the by-laws, rules and
regulations of a medical service corporation and the terms
and provisions of his subscription certificate, shall be enti-
tled to the benefits of this chapter upon receiving medical
. . service from any participating physician . . . or, in the
discretion of the corporation, upon receiving medical . . .
service from any non-participating physician ... in an
emergency or when outside the commonwealth” (emphasis
added). A nonprofit medical service plan is defined by
G. L. c. 176B, § 1, as “a plan operated by a medical service
corporation . . . whereby the cost of medical . . . service
. . . furnished to subscribers and covered dependents is paid
by the corporation . . . to participating physicians . . . and
to such other physicians as are provided for herein. . . .”
Finally, a participating physician is defined as “a registered
physician . . . who agrees in writing with a medical service
424 = 384 Mass. 409
Kartell ». Blue Shield of Massachusetts, Inc.
corporation to perform medical service for subscribers and
covered dependents and to abide by the by-laws, rules and
regulations of such corporation.” G. L. c. 176B, § 1. These
sections, read together, indicate a clear legislative purpose
to limit the advantages of reimbursement by Blue Shield —
principally the guarantee of prompt payment at a fixed rate
— to those physicians who choose to participate in the pro-
gram. The plaintiffs, however, suggest that § 7 merely
limits the benefits to which subscribers are entitled, but in
no way compels Blue Shield to refuse reimbursement to
nonparticipating physicians for nonemergency services
rendered in the State.
To the extent that the language of § 7 is ambiguous, the
ambiguity is resolved by reference to the structure and
history of the Blue Shield program as a whole. The critical
language of § 7 was included in the initial bill submitted by
the Medical Society to authorize the formation of nonprofit
medical service corporations, as well as in the successor bill
which was ultimately enacted as G. L. c. 176B. See 1941
House Doc. No. 1477, § 7; 1941 House Doc. No. 2301, § 7.
The participating physician concept was integral to the
original vision of the manner in which medical service plans
would operate. Because medical service corporations were
to be formed and operated by the medical profession itself,
rather than by commercial insurance companies, the
drafters of the enabling legislation were faced with the
problem of either accumulating the financial reserves re-
quired to g“*xantee the soundness of the program, or find-
ing some acceptable substitute. This problem was ad-
dressed by means of the “unit system,” under which par-
ticipating physicians themselves acted as underwriters of
risk.
The system was presented to the Commissioner of In-
surance, in a statement from the Medical Society, as a
substitute for the reserve requirements of traditional in-
surance plans. The Medical Society's statement to the
Commissioner argued that the unit system “constitutes an
actuarial substitute for the necessary large financial reserves
384 Mass. 409 ive 425
Kartell ©. Blue Shield of Massachusetts, Inc.
of profit-making commercial corporations .... This is
necessary in commercial corporations because [financial
demands] are directly related to contractually binding, in-
flexible indemnity schedules. Thus there is substituted in
Massachusetts Medical Service, Inc. for such large financial
reserves, @ guaranteed medical-service reserve to the
subscribers during the terms of the contract, by par-
ticipating physicians who accept an unguaranteed and fluc-
tuating schedule of indemnification, the current monetary
equivalent of which at any time is determined by an
equitable proration of available earned income among the
participating physicians” (emphasis added).
The original Participating Physician’s Agreement, ap-
proved by the Commissioner of Insurance on September 18,
1942, contained the following clause: “Unit System: In the
event that the amount available in any accounting period
for distribution to Participating Physicians . . . shall be in-
sufficient to pay all Participating Physicians in full, then the
amount which the Board of Directors decides is available
for distribution shall be paid to all Participating Physicians
on a pro rata basis.” This agreement remains in use at pres-
ent.
Obviously, the potential benefits to physicians stemming
from participation in the plan were accompanied by an ele-
ment of risk. Had physicians been free to obtain payment
for services to subscribers without incurring the risk of
reduced payment under the unit system, there would have
been little incentive to participate. Against this back-
ground, we think it clear that the Legislature intended by
G. L. c. 176B, § 7, to limit Blue Shield’s system of reim-
bursement to participating physicians, except in those cir-
cumstances in which such services could not reasonably be
obtained.
V. Blue Cross’s Authority to Contract for Payment for
Physicians’ Services.
To respond to question No. 2 it will be helpful to recast
the question into two questions: (a) Is Blue Cross em-
powered under G. L. c. 176A to cover physicians’ services
426 ite 384 Mass. 409
Kartell v. Blue Shield of Massachusetts, Inc.
under the caption “c.her health services” as that phrase is
used in G. L. c. 176A, § 1? (b) By what authority is Blue
Cross authorized to contract directly with the Com-
monwealth to cover services of physicians?
The first question (a) must be answered “no”. Blue Cross
was permitted to provide benefits only for hospital services
until 1953. In that year the Legislature amended G. L.
c. 176A, § 1, to permit a hospital service corporation to pro-
vide “reimbursement for other health services.” St. 1953,
c. 287, § 1. These “other health services” have included
such nonhospital providers as visiting nurse associations,
mental health clinics and home health agencies. Authoriza-
tion for these contracts is found in the fourth paragraph of
G. L. c. 176A, § 5.
It has been stipulated that Blue Cross has never provided
benefits for physicians’ services except (1) covered services
rendered by salaried staff physicians of hospitals and certain
other institutional providers with which it has contracts;
and (2) nonemergency, in State service rendered by par-
ticipating and nonparticipating Blue Shield physicians
under the State employees’ contract.
The Master Medical Certificate issued to subscribers pro-
vides that “(b]enefits contained herein for all services and
supplies other than those furnished by a physician, dentist,
podiatrist, or psychologist shall be provided by Blue Cross,”
and that “[b]Jenefits contained herein for services of a physi-
cian. dentist, podiatrist, or psychologist shall be provided
by Blue Shield.”
It is highly unlikely that the Legislature would authorize
Blue Cross and Blue Shield to sail on a collision course of
competition for subscribers for coverage of physicians’ serv-
ices when Blue Cross’s principal course is directed toward
hospital services and Blue Shield’s towards physicians’ serv-
ices. Equally improbable is a legislative intent to permit
Blue Cross to provide the benefits of a full range of physi-
cians’ services on a nonparticipating basis and thereby es-
cape the network of regulation found in G. L. c. 176B. In
384 Mass. 409 an 427
Kartell v. Blue Shield of Massachusetts, Inc.
short, Blue Cross is not empowered to cover physicians’
services except in those instances already noted.
The answer to the second question (b) can be found in
G. L. c. 32A, § 4. Blue Cross is authorized to contract
with State employees because the Legislature vested it with
such authority. Under this statute,* the Group Insurance
Commission is authorized to enter into an agreement for in-
surance coverage for State employees with Blue Cross “in
the same manner as any other insurance company.”
The authority for contracts with State employees reposes
in G. L. ec. 32A in the first instance, and not in G. L.
c. 176A. The express reference to G. L. c. 176A in G. L.
c. 32A, § 4, encourages us to rule that such provision is
special and thus, absent a contrary legislative intent, it must
prevail over conflicting provisions, if any, in G. L. c. 176A
and c. 176B. See Boston Teachers Local 66 v. School
Comm. of Boston, 370 Mass. 455, 472 (1976). Accordingly,
we respond to this question by recognizing that payments to
physicians for medical services under the contract between
Blue Cross and the Group Insurance Commission are
authorized by the express language of G. L. c. 32A, § 4,
and, as such, this coverage does not derogate from the exclu-
siveness of Blue Shield’s coverage for physicians’ services to
subscribers who are not under the contract insuring State
employees.
In conclusion, we answer question l(a), “No”, 1(b),
“Yes”, 2. “No”.
*The relevant paragraph of G. L. c. 32A, § 4, as amended through
St. 1979, c. 268, § 2, is as follows: “For the purposes of this chapter, any
savings bank authorized to engage in the insurance business in accordance
«Va
782
James P. KARTELL, Plaintiff,
Vv
BLUE SHIELD OF MASSACHUSETTS,
Defendant.
Grant RODKEY, Plaintiff,
v
BLUE CROSS OF MASSACHUSETTS,
Defendant.
Civ. A. Nos. 78-0594-C, 82-0317-C.
United States District Court,
D. Massachusetts.
June 30, 1982.
As Amended July 7, 1982.
Various parties moved for summary
judgment in suit claiming that agreements
between medical insurance plan and partici-
pating physicians violated antitrust law.
The District Court, Caffrey, Chief Judge,
held that state action doctrine barred cer-
tain claims but neither state action doctrine
nor McCarran-Ferguson Act barred other
claims.
Order accordingly.
1. Physicians and Surgeons 21
No state law or policy requires either
Commissioner of Insurance or medical in-
surance plan to prohibit physician from bill-
ing patient for fees not paid by medical
insurance. M.G.L.A. c. 176B, §§ 3, 4, 7.
2. Monopolies 18
Medical insurance plan's practice of
prohibiting physicians from balance billing
insured was not shielded from scrutiny un-
der federal antitrust laws under state ac-
tion doctrine. Clayton Act, § 16, 15 US.
C.A. § 26; Sherman Anti-Trust Act, §§ 1,
2, 15 U.S.C.A. §§ 1, 2; M.G.L.A. c. 176B,
§§ 3, 4, 7.
3. Monopolies 18
Medical insurance plan's practice of re-
stricting to participating physicians remu-
neration for services rendered to subscrib-
542 FEDERAL SUPPLEMENT
ers was clearly articulated and affirmative-
ly expressed as state policy, and satisfied
first part of state action test. Ciayton Act,
§ 16, 15 U.S.C.A. § 26; Sherman Anti-
Trust Act, §§ 1, 2, 15 US.C.A. §§ 1, 2;
M.G.L.A. c. 176B, §§ 3, 4, 7.
4. Monopolies 18
Where medical insurance plan's prac-
tice generally excluding nonparticipating
physicians from remuneration was com-
pelled by statute, it a fortiori passed second
part of state action test and was immune
from federal antitrust scrutiny under state
action doctrine. Clayton Act, § 16, 15 U.S.
C.A. § 26: Sherman Anti-Trust Act, §§ 1,
2, 15 U.S.C.A. §§ 1, 2; M.G.L.A. c. 176B,
§§ 3, 4, 7.
5. Monopolies 18
In view of explicit language of state
statute excluding nonparticipating physi-
cians from remuneration under medical in-
surance plan, court, in determining whether
such practice was protected from antitrust
scrutiny under state action doctrine, need
not consider test relating to whether chal-
lenged restraint is necessary to ©uccessful
operation of legislative scheme that state
sovereign established. Clayton Act, § 16,
15 U.S.C.A. § 26; Sherman Anti-Trust Act,
§§ 1, 2, 15 U.S.C.A. §§ 1, 2; M.G.LA. «
176B, §§ 3, 4, 7.
6. Monopolies 18
Hospital insurance plan's forbearance
from generally providing benefits for physi-
cian's services was immune under state ac-
tion doctrine from antitrust challenge.
Clayton Act, § 16, 15 U.S.C.A. § 26; Sher-
man Anti-Trust Act, §§ 1, 2, 15 U.S.C.A.
§§ 1, 2; MG.LA. c 176A, § 1 et seq.
7. Monopolies C= 28(7.1)
To establish that agreements between
medical insurance plan and its participating
physicians were within protection of McCar-
ran-Ferguson Act, plan had burden of
showing that agreements were the business
of insurance, the agreements must be regu-
lated by state law, and that any agreement
to boycott, coerce or intimidate, or act of
boycott, coercion, or intimidation was out-
side Act's exemptive powers and subject to
2la
KARTELL v. BLUE SHIELD OF MASSACHUSETTS
783
Cite as 542 F Supp. 782 (( 982)
antitrust laws. McCarran-Ferguson Act,
§§ 1-5, 2b), 15 USCA. §§ 1011-1015,
1012(b).
8. Monopolies 18
Where participating physicians in medi-
cal insurance plan agreed to be compensat-
ed for their services rendered to subscribers
on pro rata basis if insurer was unable at
any time to compensate participating physi-
cians in full because of depletion of funds,
there was some amount of risk placed on
participating physicians for purpose of de-
termining application of McCarran-Fergu-
son Act. McCarran-Ferguson Act, §§ 1-5,
2b), 15 U.S.C.A. §§ 1011-1015, 1012().
9. Monopolics 18
Fact that agreements between partici-
pating physicians and medical insurance
plan required participating physicians to
carry some risk was not sufficient to estab-
lish that agreements were business of insur-
ance. McCarran-Ferguson Act, §§ 1-5,
2b), 15 U.S.C.A. §§ 1011-1015, 1012(b).
10. Monopolies 18
Even though agreements between par-
ticipating physicians and medica! insurance
plan required physicians to assume some
risk by agreeing to be compensated on pro
rata basis if plan was unable to compensate
in full because of depletion of funds, agree-
ments did not constitute “business of insur-
ance” so as to be exempt from antitrust
regulation under McCarran-Ferguson Act.
McCarran-Ferguson Act, §§ 1-5, 2b), 15
U.S.C.A. §§ 1011-1015, 1012(b).
11. Monopolies 18
Agreement whereby participating phy-
sicians in medical insurance plan were
barred from balance billing subscribers did
not rise to level of per se violation of Sher-
man Act. Sherman Anti-Trust Act, § 1, 15
US.C.A. § 1.
12. Monopolies ¢ 12(17)
Per se prohibition of Sherman Act pro-
vision making unlawful any contract, com-
bination, or conspiracy in restraint of trade
or commerce applies as much to profession-
al services as it does to commodities. Sher-
man Anti-Trust Act, § 1, 15 U.S.C.A. § 1.
13. Monopolies 18
Agreements between medical insurance
plan and participating physicians should be
examined under traditional rules of reason
standard to determine whether they violate
Sherman Act provision making unlawful
contracts, combinations, or conspiracies in
restraint of trade or commerce. Sherman
Anti-Trust Act, § 1, 15 U.S.C.A. > 1.
14. Federai Civil Procedure 2546
Sufficient facts had not yet been devel-
oped to allow court to make proper determi-
nation, under rule of reason standard, of
whether agreements between medical insur-
ance plan and participating physicians vio-
lated Sherman Act prohibition of agree-
ments in restraint of trade or commerce
and motions for summary judgment wil! be
denied and further discovery directed.
Sherman Anti-Trust Act, § 1, 15 U.S.C.A.
§ 1.
Stanley V. Ragalevsky, Warner & Stack-
pole, Boston, Mass., David I. Shapiro, Dick-
stein, Shapiro & Morin, Washington, D. C.,
for plaintiffs.
Thayer Fremont-Smith, Choate, Hall &
Stewart, Boston, Mass., for intervenor-plain-
tiffs.
Reginald H. Howe, Daniel Mahoney,
Palmer & Dodge, Boston, Mass., for Blue
Cross and Blue Shield of Mass.
OPINION
CAFFREY, Chief Judge.
This is a private civil antitrust action
which was originally filed in March of 1978
by four Massachusetts physicians who re-
quest injunctive relief under § 16 of the
Clayton Act, 15 U.S.C. § 26, for alleged
violations of §§ 1 and 2 of the Sherman
Act, 15 U.S.C. §§ 1 and 2, by Blue Shield of
Massachusetts, Inc. (Blue Shield) and Blue
Cross of Massachusetts, Inc. (Blue Cross).
The Massachusetts Commissioner of Insur-
ance (the Commissioner) intervened as a
party defendant, and by order of this Court
entered on January 29, 1982, the Massachu-
734
setts Medical Society (the Society), Grant V.
Rodkey and Henry Brown were permitted
to intervene “as parties plaintiff in the ex-
et laint.”
In accordance with the suggestion of the
Court of Appeals for this Circuit (Kartell v.
Blue Shield of Massachusetts, 592 F.2d
1191, 1195 (ist Cir. 1979)), in January 1981
the Honorable Walter Jay Skinner of this
Court certified certain questions of state
law to the Supreme Judicial! Court of Mas-
sachusetts on a record consisting principally
of a Stipulation of Facts and related Exhib-
its. At that time, Judge Skinner, to whom
this case was then assigned, stated that
upon his receiving answers to the certified
questions, the defendants’ pending motion
to dismiss would then be treated as a mo-
tion for summary judgment to be heard and
determined on the same record as the certi-
fied questions. In an opinion filed on Au-
gust 20, 188i, the Supreme Judicial Court
answered the certified questions, Kartel! v.
Blue Shield of Massachusetts, Inc,
Mass. ——, Mass.Adv.Sh. (1981) 1980, 425
N.E.2d 213, thus rendering the defendants’
motion mpe for hearing and decision as a
notion for summary judgment. Plaintiffs
Kartell, Wilson and Howe filed a motion for
partial summary jedgment on March 8,
1982. On April 8, 1982, this Court heard
ora! arguments on both summary judgment
motions.
After considering these arguments, as
well as the briefs submitted by ail parties, I
rule that plaintiffs’ complaint against Blue
Cross ard Blue Shield is barred in part by
the state action doctrine of Parker v.
Brown, 317 U.S. 341, 63 S.Ct. 307, 87 L.Bd.
315 (i943). To the extent that plaintiffs’
complaint challenges Blue Shield's “ban on
balance-billing,” discussed infra, the com-
piaint is not bcrred by either the state
action doctrine or the McCarran-Ferguson
Act, 15 U.S.C. §§ 1011 et seq, which ex-
empts from the federal antitrust laws “the
business of insurance . regulated by
State law.” Jd. § 1012%b). I further rule
that the “per se” standard of antitrust anal-
ysis should not be applied to the so-<alled
ban on balance-billing, and that the tradi-
tional “rule of reason” standard should be
employed.
——
342 FEDERAL SUPPLEMENT
As a result of these rulings, it follows
that defendants’ motion for summary judg-
ment should be granted in part and demied
in part, arid the plaintiffs’ complaint should
be dismissed in part with prejudice with
respect to all defendants, in accordance
with the rulings below. It also follows that
plaintiffs’ motion for partial summary
judgment should be denied.
I. The Facts
Although this case has been pending for
more than four years, and has been as-
signed to five different judges of the
Court—four of whom have recused them-
selves—the maternal facts have not changed
since the filing of the complaint or its
transfer to the undersigned on March 8,
1982.
Blue Shield and Blue Cross, respectively,
are nonprofit, tax-exempt medical service
and hospital service corporations, organized
to provide “for the preservation of the pub-
lic health by furnishing medical services at
low cost to members of the public who have
become subscribers.” 1941 Mass.Acts c¢.
306, preamble. Mass.G.L. c. 176B (Blue
Shield); c. 176A (Blue Cross). They are the
only corporations of their kind created un-
der their respective enabling statutes.
Blue Shield directly compensates in
scheduled amounts those physicians who
“participate” in its medical services pian for
services rendered to about 96% of Blue
Shield’s premium-paying subscribers. Par-
ticipating physicians, in turn, agree to ac-
cept Blue Shield’s payments in full satisfac-
tion for their services, and not to “balance-
bill,” Le, not to seek to recover from Blue
Shield subscribers whom they treat any
amount in excess of that which Blue Shield
has agreed to pay the physician for the
service. Except in a few cases not of con-
cern here, Blue Shield does noi directly
remunerate subsenbers in any manner, and
does not remunerate non-participating Phy-
sicians for services rendered to subscmbers,
unless such services are rendered in am
emergency, or outside the Commonwealth.
KARTELL v. BLUE SHIELD OF MASSACHUSETTS
785
Cite as 342 F Supp. 782 (1982)
Blue Cross, on the other hand, is authoriz-
ed by statute to provide coverage to its
subseribers for hospital care and related
procedures. Blue Cross does not remuner-
ate any physician for services rendered to
Blue Cross subscribers except those physi-
cians who are salaried members of the
staffs of institutions, like hospitals, which
have entered into agreements with Blue
Cross, and those physicians who treat Mas-
sachusetts state employees who are sub-
scribers of a Blue Cross pian available only
to employees of the Commonwealth.
As permitted by Mass.G.L. c. 176B, § 3,
Blue Shield has joined with Blve Cross for
the joint administration of their affairs uod
the issuance of joint subscriber contracts
for both medical and hospital services. At
this time, defendants’ subscribers constitute
about 60% of the population of Massachu-
setts, and about 99% of the Common-
wealth's physicians are participating physi-
cians in Blue Shield’s medical service pian.
The doctors who are the individual plain-
tiffs here are all licensed to practice medi-
cine in Massachusetts. All but two are
participants in Blue Shield's medical service
plan, and al! claim to have been materially
harmed by certain practices of Blue Cross
and Blue Shield.
Specifically, plaintiffs claim that Blue
Shield is engaged in iilega!l price fixing 1)
by generally refusing to reimburse physi-
cians who have not signed participating
Physicians’ Agreements with Blue Shield
for services rendered to Blue Shield sub-
seribers, and 2) by requiring that participat-
ing physicians (a) accept Blue Shield's reim-
bursement as payment in full in most cases,
and (b) refrain from billing Blue Shield
subscribers for any amount in excess of the
amount which Blue Shield has agreed to
pay participating physicians. Plaintiffs
claim that were it not for Blue Shield's
so-called ban on balance-billing, participat-
ing physicians would be able in many cases
to charge and receive higher fees for their
1. “in a dual svstem of government in which,
under the Constitution, the states are sover-
e1gn. save on!y as Congress may constitutional.
ty subtract from thew authority. an unew-
services to subscribers. They also claim
that Blue Shield’s refusal in most cases to
compensate cither subsenbers or non-partic-
ipating physicians for services rendered by
non-participating physicians wrongfully de-
prives those physicians of potential patients
who, but for Blue Shicld's policy of exclud-
ing non-participating physicians, would
turn to non-participating physicians for
treatment.
Plaintiffs further allege that Blue Cross
has agreed with Blue Shield to refuse to
provide benefits to Blue Cross subscribers
for services rendered by physicians other
than those rendered by the salaried staff of
institutional providers, such as hospitals,
and those rendered under Blue Cross’ con-
tract covering Massachusetts State employ-
ees. Plaintiffs claim that this agreement
has had the effect of perpetuating Blue
Shield's alleged dominance in the market of
providing insurance against the costs of
physicians’ services.
Plaintiffs further allege that Blue Shield
directs its subscribers not to use non-particr-
pating physicians, and directs participating
physicians not to refer patients to non-par-
Uicipating physicians. Blue Cross, according
to plaintiffs, directs its participating hospi-
tals not to employ physicians who do not
participate in the Blue Shield pian.
Il. The State Action Exemption
Judge Skinner initially dismissed the
complaint in April 1978 on the ground that
the challenged practices are immune from
federal antitrust attack under the “state
action” exemption recognized in Parker v.
Brown, 317 U.S. 341, 63 S.Ct. 307, 87 L.Ed.
315 (1943).' Recognizing that application of
the state action doctrine to the facts of this
case called for the “[rjesolution of com-
plex questions of state law,” the United
States Court of Appeals for the First Cir-
cuit reversed the ruling dismissing the com-
plaint and instructed Judge Skinner vo seek
state court guidance in determining the an-
pressed purpose to nullify a state's control over
us officers and agents 1s not hghtly to be attmb-
uted to Congress.” Parker v Brown. 317 US
341, 351, 63 S.Ci. 307, 313, 87 LLEd 315 (1943)
24a
542 FEDERAL SUPPLEMENT
786
swers to these questions, first, by awaiting
a forthcoming decision in a related case
then pending before the Massachusetts Su-
preme Judicial Court,? and second, if that
decision did not present sufficient guidance,
to consider “certifying” the relevant ques-
tions of state law to the Supreme Judicial
Court for that court’s consideration. As
noted above, questions of state law were
eventually certified by Judge Skinner to
the Commonwealth’s highest court, and
were answered by that court in an opinion
announced on August 20, 1981. The an-
swers to these questions now enable this
Court to determine whether the challenged
practices of Blue Shield and Blue Cross
constitute “state action,” and thus are im-
mune from attack under the federal anti-
trust laws.
As all parties have noted in their argu-
ments, the state action defense originally
announced in Parker has been reviewed and
restated in two recent decisions of the Su-
preme Court: Community Communications
Company Inc. v. City of Boulder, Colo., —
US. —, , 102 S.Ct. 835, 839, 70
L.Ed.2d 810 (1982), and California Associa-
tion v. Midcal Aluminum, Inc., 445 U.S. 97,
100 S.Ct. 937, 63 L.Ed.2d 233 (1980). The
standard articulated in Midcal, which was
expressly reaffirmed in Community Com-
munications, is as follows:
First, the challenged restraint must be
‘one clearly articulated and affirmatively
expressed as state policy;’ second, the
policy must be ‘actively supervised by the
State itself.’
445 U.S. at 105, 100 S.Ct. at 943 (citations
omitted). As noted above, plaintiffs have
identified several practices which they
claim amount to illegal restraints. The an-
swer of the Supreme Judicial Court to the
certified questions clearly disclose whether
three of the challenged restraints are
2. In this case, Nelson v. Blue Shield of Massa-
chusetts, 377 Mass. 746, 387 N.E.2d 589 (1976),
the Supreme Judicial Court dismissed the com-
plaint on the grounds that plaintutfs there had
tailed to exhaust their administrative remedies.
3. This agreement, which remains unchanged to
this date, provides in relevant part that:
“clearly articulated and affirmatively ex-
pressed as state policy,” and thus meet the
first part of the state action test.
II(A). Question 1(a): The Ban on Balance-
Billing
The first question certified to and an-
swered by the Supreme Judicial Court asks:
1. Is Blue Shield of Massachusetts, Inc.
compelled by M.G.L. c. 176B, § 7 or any
other Massachusetts statute or required
by a clearly articulated and affirmatively
expressed State policy (a) to limit fees of
participating physicians as described in
the Annexed Stipulation [i.e., by requir-
ing the participating physician to accept
the fee paid by Blue Shield as payment in
full for covered services rendered to Blue
Shield subscribers] .. .?
The Supreme Judicial Court ruled that
“we find in G.L. c. 176B no affirmative
policy requiring, or authorizing the Com-
missioner to require, such a restraint. We
therefore answer question l(a) in the nega-
tive.” Kartell, supra, —— Mass. at —,
Mass.Adv.Sh. (1981) at 1986, 425 N.E.2d
313.
The court’s exhaustive rationale for its
answer to question l(a) includes a concise
history cf the fee-limitation practice, Id. at
—-, Mass.Adv.Sh. (1981) at 1986-94, 425
N.E.2d 313, which was culled from the same
Stipulation of Facts and Exhibits now be-
fore this court, and which merits para-
phrase here.
Blue Shield was incorporated as the first
and only medical service corporation organ-
ized under G.L. c. 176B on May 6, 1942, On
September 18, 1942, the Commissioner, pur-
suant to his powers under c. 176B, gave his
approval to the first subscription contract,
the first Participating Physician’s Agree-
ment,® the first schedule of rates to be
“(t]he Participating Physician agrees to ac-
cept as full compensation for al! ... services
such payments as are received from the Cor-
poration ... except in the case of those per-
sons who are entitled only to Limited Indem-
nification, in which case the physician may
make his customary charge to the patient for
his services, crediting against such charge
the amount set forth fcr such services in the
25a
KARTELL v. BLUE SHIELD OF MASSACHUSETTS
787
Cite as 542 F.Supp. 782 (1982)
charged subscribers, and the first schedule
of fees to be paid participating physicians.
The original subscription certificate created
two classes of subscribers, “unlimited”
(those whose personal or family income was
below a certain figure, who received under
the plan “unlimited” coverage from physi-
cians in return for their premium pay-
ments), and “limited” (those whose income
was above a certain figure who could be
“balanced-billed” by participating physi-
cians for charges in excess of that amount
which Blue Shield had agreed to pay partic-
ipating physicians). In 1951, the “unlimit-
ed” class of subscribers was divided into
two sub-classes. The sub-class whose mem-
bership had higher incomes than those of
the lower sub-class also were charged high-
er premiums; participating physicians re-
ceived higher payments from Blue Shield
for services rendered to subscribers in the
higher income group. This subdivision of
the “unlimited” group did not affect partic-
ipating physicians’ ability to balance-bill
limited subscribers.
In 1956, Blue Cross and Blue Shield ini-
tiated the Master Medical Certificate, which
provides comprehensive coverage of hospi-
tal and medical costs under a single plan,
but which did not depart from the income-
limit method of determining a subscriber's
entitlement to service benefits.
In late 1967, Blue Shield submitted to the
Commissioner a proposed “Amended Sched-
ule of Benefits—Blue Shield Portion of
Blue Cross—Blue Shield Master Medical
Certificate,” which introduced the “usual
and customary charge” method of compen-
sation. According to the Supreme Judicial
Court,
Blue Shield [by this plan] proposed to
substitute for fixed fee schedules a sys-
tem under which participating physicians
would receive 95 percent [5 percent would
be subtracted by Blue Shield to cover
administrative costs] of the lesser of their
usual charge, or the customary charge,
for a particular service. The usual
charge is calculated by determining the
median of all fees charged by a particular
fee schedule in effect at the time the services °
physician for a specific service during
each six month reporting period. Simi-
larly, the customary charge is established
as the mean of all fees reported for a
particular service by physicians of like
experience and training during each re-
porting period.
Id. at ——, Mass.Adv.Sh. (1981) at 1987-88,
425 N.E.2d 313. While participating physi-
cians under the usual and customary meth-
od of compensation are required to accept
Blue Shield’s fees as payment in full for
covered services regardless of a subscriber’s
income, the advantage to participating phy-
sicians of this system (at least in the late
1960s, when lagging Blue Shield fee adjust-
ments were reducing physicians’ real com-
pensation because of inflation) was the
“promise of higher fees immediately for
many services and relatively automatic fu-
ture adjustments for inflation.” Id. at —,
Mass.Adv.Sh. (1981) at 1988, 425 N.E.2d
313.
The Commissioner approved the revision
of the Master Medical Certificate effective
February 1, 1968, and through 1975 Blue
Shield “updated usual and customary
charges as it deemed appropriate without
objection from the Commissioner.” Id. In
1976, no updating was proposed by Blue
Shield due to the fact that its reserves had
decreased from $26 million to $1 million
during the eighteen months preceding May
of 1976. Blue Shield proposed an update of
the charges in 1977, which was approved by
the Commissioner subject to the qualifica-
tion that increases in the usual and custom-
ary fees not exceed 7 and 4 percent, respec-
tively. In 1978, the Commissioner took the
position that updates in the usual and cus-
tomary fees must receive his prior written
approval, which was withheld for the 1978
proposed increases. Thus, the 1977 fee
schedules have remained in effect to this
date.
In answering question l(a), the Supreme
Judicial Court focused on two elements.
The court first examined the language and
statutory history of Mass.G.L. c. 176B, and
are rendered.”
788
arrived at the “inescapable” conclusion that
“no one familiar with the _ legislative
scheme, either at its inception or immedi-
ately prior to the adoption of the present
method of compensation, believed that it
required the near universal provision of ser-
vice benefits [i.e the ban on balance-bill-
ing] which is now subject to challenge.”
The Supreme Judicial Court thus ruled that
Blue Shield’s near-universal ban on bal-
anced-billing was nowhere “compelled” by
the statute in question.
The Supreme Judicial Court sirnilarly
found that because § 4 of c. 176B gives the
Commissioner the power only to disapprove
of Blue Shield’s methods of compensation if
they are outside the range of reasonable-
ness, but not to establish those methods, the
Commissioner’s “approval in 1967 of the
usual and customary method of compensa-
tion does not constitute State action for the
purposes of anti-trust immunity.” Id. at
, Mass.Adv.Sh. (1981) at 1993, 425
N.E.2d 313.
Defendants here do not challenge the Su-
preme Judicial Court’s negative answer to
question 1(a) as that question was put to
the court. They rather contend that the
Supreme Judicial Court’s rationale requires
a finding by this Court that a method of
compensation which prohibits participating
physicians from balance-billing low- and
middle-income subscribers (who the Su-
preme Judicial Court has ruled were intend-
ed by the legislature to be the beneficiaries
of c. 176B) is compelled by the statute or by
state policy as articulated and implemented
by the Commissioner. The defendants’
reading of the Supreme Judicial Court’s
rationale, if accepted, would insulate from
antitrust challenge the usual and customary
method of compensation as it pertains to
low- and middle-income subscribers, leaving
for antitrust scrutiny only that part of the
method which applies to upper-income sub-
seribers.
[1,2] I decline to adopt the defendants’
contention. While it is beyond doubt that
Mass.G.L. ec. 176B is primarily intended to
insure that affordable health insurance will
be available to low- and middle- income
542 FEDERAL SUPPLEMENT
residents of the Commonwealth, I find no
state law or policy which requires either the
Commissioner or Blue Shield to prohibit
balance-billing for any income-class of sub-
scribers. I adopt the rationale of the Su-
preme Judicial Court, and rule that no
‘clearly articulated and affirmatively ex-
pressed ... state policy,’” Midcal, supra,
445 U.S. at 105, 100 S.Ct. at 943, compeils
the use by Blue Shield of the usual and
customary charge method of comtpensation
to participating physicians. As a result, I
rule that this practice cannot be shielded
from scrutiny under the federal antitrust
laws under the state action doctrine of Par-
ker and Midcal.
II(B). Question 2a): The “lock-out” of
non-participating Physicians
The second question certified to the Su-
preme Judicial Court asks:
1. Is Blue Shield of Massachusetts, Inc.,
compelled by M.G.L. c. 176B, § 7 or any
other Massachusetts statute or required
by any clearly articulated and affirma-
tively expressed State policy ... (b) to
refuse to make payment for non-emer-
gency services provided in Massachusetts
by physicians who decline to accept the
terms. imposed by Blue Shield in their
participation agreement, including limita-
tion of such fees?
Finding that “[b]y contrast to question l(a),
question 1(b) involves a relatively straight-
forward process of statutory construction,”
—— Mass. ——-, (1981) Mass.Adv.Sh. at 1994,
425 N.E.2d 313, the Supreme Judicial Court
ruled “that G.L. c. 176B, § 7, precludes
payments by Blue Shield to non-participat-
ing physicians for services rendered to sub-
scribers except in cases of emergency or for
services rendered outside the State.” Id.
The Supreme Judicial Court explained its
ruling in the following passage:
General Laws, c. 176B, § 7, as appearing
in St. 1978, c. 574, § 3 provides in rele-
vant part that “/a] subscriber or a cover-
cd dependent, subject to the by-laws,
rules and regulations of a medical service
corporation and the terms and provisions
of his subscription certificate, shall be
27a
KARTELL v. BLUE SHIELD OF MASSACHUSETTS 7&9
Cite as 542 F.Supp. 782 (1982)
entitled to the benefits of this chapter
upon receiving medical ... service from
any participating physician ... or, in the
discretion of the corporation, upon receiv-
ing medical ... service from any non-
participating physician ... in an emer-
gency or when outside the Common-
wealth” (emphasis added). A nonprofit
medical service plan is defined by G.L. c.
176B, § 1, as “a plan operated by a medi-
cal service corporation ... whereby the
cost of medical ... service ... furnished
to subscribers and covered dependents is
paid by the corporation . . . to participat-
ing physicians ... and to such other phy-
sicians as are provided for herein ...”
Finally, a participating physician is
defined as “a registered physician
who agrees in writing with a medical
service corporation to perform medical
service for subscribers and covered de-
pendents and to abide by the by-laws,
rules and regulations of such corpora-
tion.” G.L. c. 176B, § 1. These sections,
read iogether, indicate a clear legislative
purpose to limit the advantages of reim-
bursement by Blue Shield—principaliy
the guarantee of prompt payment at a
fixed rate—to those physicians who
choose to participate in the program.
The Supreme Judicial Court analyzed and
rejected the plaintiffs’ argument that § 7
of c. 176B merely limits the benefits to
which subscribers are entitled, but in no
way compels Blue Shield to refuse reim-
bursement to non-participating physicians
for non-emergency services rendered in the
Commonwealth.‘ In rejecting this argu-
ment, the Court discussed the origins of
Blue Shield, highlighting matters of signifi-
cance to this and later parts of this opinion.
The Supreme Judicial Court said:
To the extent that the language of § 7 is
ambiguous, the ambiguity is resolved by
reference to the structure and history of
4. After having argued to the Supreme Judicial
Court that c. 176B, § 7, prohibits the payment
ot benefits to subscribers, and not to non-par-
ucipating physicians, plaintiffs argue before
this court that c. 176B, § 7, prohibits the pay-
ment of benefits to non-participating physi-
cians, but does not prohibit the payment of
benefits to subscribers for services rendered by
the Blue Shield program as a whole. The
critical language of § 7 was included in
the initial bill submitted by the Medical
Society to authorize the formation of
nonprofit medical service corporation, as
well as in the successor bill which was
ultimately enacted as G.L. c. 176B. The
participating physician concept was inte-
gral to the original vision of the manner
in which medical service plans would op-
erate. Because medica! service corpora-
tions were to be formed and operated by
the medical profession itself, rather than
by commercial insurance companies, the
drafters of the enabling legislation were
faced with the problem of either accumu-
lating the financial reserves required to
guarantee the soundness of the program,
or finding some acceptable substitute.
This problem was addressed by means of
the “unit system”, under which partici-
pating physicians themselves acted as un-
derwriters of risk.
The system was presented to the Commis-
sion of Insurance, in a statement from
the Medical Society, as a substitute for
the reserve requirements of traditional
insurance plans. The Medical Society's
statement to the Commissioner argued
that the unit system “constitutes an actu-
arial substitute for the necessary large
financial reserves of profit-making com-
mercial corporations This is neces-
sary in commercial corporations because
[financial demands] are directly reiated to
contractually binding, inflexible indemni-
ty schedules. Thus there is substituted in
Massachusetts Medical Service, Inc. [now
known as Blue Shield of Massachusetts,
Inc.} for such large financial reserves, a
guaranteed medical-service reserve to the
subscribers during the terms of the con-
tract, by participating physicians who ac-
cept an unguaranteed and fluctuating
non-participating physicians. I rule that such
an attempted end around reverse of the Su-
preme Judicial Court's clearly-reasoned answer
to the question put to it by this Court should be
stopped with no gain, for the Supreme Judicial
Court's rationale, which is quoted in the body
of this opinion, disposes of both of plaintiffs’
argument on this issue.
26a
790
schedule of indemnification, the current
monetary equivalent of which at any
time is determined by an equitable prora-
tion of available earned income among
the participating physicians” (emphasis
added).
The original Participating Physician's
Agreement, approved by the Commission-
er of Insurance on September 18, 1942,
contained the following clause: “Unit
System: In the event that the amount
available in any accounting period for
distribution to Participating Physicians
. Shall be insufficient to pay all Partic-
ipating Physicians in full, then the
amount which the Board of Directors de-
cides is available for distribution shall be
paid to all Participating Physicians on a
pro rata basis.” This agreement remains
in use at present.
Obviously, the potential benefits to physi-
cians stemming from participation in the
plan were accompanied by an element of
risk. Had physicians been free to obtain
payment for services to subscribers with-
out incurring the risk of reduced payment
under the unit system, there would have
been little incentive to participate.
Id. at ——, Mass.Adv.Sh. (1981) at 1995-96,
425 N.E.2d 313. The Supreme Judicial
Court concluded its analysis of question 1(b)
by stating that “{a]gainst this background,
we think it clear that the Legislature in-
tended by G.L. c. 176B, § 7, to limit Blue
Shield’s system of reimbursement to partici-
pating physicians, except in these circum-
stances in which such services could not
reasonably be obtained.” Id. at ——, Mass.
Adv.Sh. (1981) at 1996, 425 N.E.2d 313.
{3] In light of this controlling interpre-
tation of state law made by the highest
court of the Commonwealth, I rule that
Blue Shield’s practice of restricting to par-
ticipating physicians remuneration for serv-
ices rendered to subscribers is “ ‘clearly ar-
ticulated and affirmatively expressed as
state policy,” Midcal, supra, at 105, 100
S.Ct. at 943, and therefore satisfies the first
part of the state action test. °
The intervenor plaintiffs claim that Blue
Shield’s general practice of not remunerat-
542 FEDERAL SUPPLEMENT
ing non-participating physicians cannot pass
the second part of the state action test,
which requires that the challenged restraint
“be ‘actively supervised’ by the State it-
self.” Id. They claim that their argument
is supported by the fact that Blue Shield
subscriber contracts provide that remunera-
tion will be provided to non-participating
physicians in the event of emergency, or for
services rendered outside of Massachusetts,
and then only when the services of a partic-
ipating physician are not reasonably availa-
ble, and at the discretion of Blue Shield.
There is, however, nothing in plaintiffs’
complaint which shows that they are chal-
lenging under the antitrust laws the proce-
dure by which Blue Shield determines
whether services rendered to a subscriber
by a non-participant were rendered in an
emergency situation or out-of-state, or
whether the services of a participating phy-
sician was not reasonably available. Plain-
tiffs instead are challenging the larger Blue
Shield practice of normally remunerating
only participating physicians.
{4,5] I rule that since the challenged
Blue Shield practice of generally excluding
non-participating physicians from remuner-
ation is compelled by c. 176B, § 7, it a
fortiori passes the second part of the state
action test, and is as a result immune from
federal antitrust scrutiny under the state
action doctrine of Parker, supra, and its
progeny. Plaintiffs argue that in Corey v.
Look, 641 F.2d 32 (1st Cir. 1981) the United
States Court of Appeals for the First Cir-
cuit recently articulated a third rung of the
state action test which requires that “the
[entity] ... claiming [state action] exemp-
tion illustrate the requisite state legislative
intent by demonstrating by convincing rea-
soning that the challenged restraint is nec-
essary to the successful operation of the
legislative scheme that the state sovereign
has established.” The court in Corey ruled
that this showing must be made only in
cases where “explicit” statutory language
was “absent.” Id. Given the clear lan-
guage of c. 176, § 7, and the state court’s
finding that “question 1(b) involves a rela-
tively straightforward process of statutory
29a
KARTELL v. BLUE SHIELD OF MASSACHUSETTS 791
Cite as $42 F.Supp. 782 (1982)
construction,” I rule that the test articulat-
ed in Corey need not be considered herein.
Insofar as plaintiffs’ complaint challenges
this Blue Cross practice, the complaint
should be dismissed.
1l(C). Question 2: Blue Shield Forebear-
ance From Generally Providing
Benefits for Physician's Services
The third question certified to the Su-
preme Judicial Court asks:
2. Is Blue Cross of Massachusetts, Inc.
permitted generally under the Massachu-
setts statutes to make payments to sub-
scribers or physicians for medical services
provided by physicians to Blue Cross-Blue
Shield subscribers, as it does under its
contract insuring employees of the Com-
monwealth?
One of plaintiffs’ theories in this law suit
is that Blue Cross has failed to generally
provide coverage for its subscribers for
services rendered by physicians, other than
those services rendered by the salaried staff
of institutional providers such as hospitals.
Plaintiffs suggest that this failure suggests
the existence of an illegal conspiracy be-
tween Blue Cross and Blue Shield which
allows Blue Shield to dominate the market
of health insurance for treatment by physi-
cians. That Blue Cross could offer such
coverage under its enabling laws, according
to plaintiffs, is demonstrated by the fact
that such coverage is provided for those
Blue Cross subscribers who are employees
of the Commonwealth.
{6} In ruling that the laws of Massachu-
setts do not generally permit such coverage,
the Supreme Judicial Court articulated the
following rationale, which I adopt:
To respond to Question No. 2 it will be
helpful to recast the question into two
questions: (a) Is Blue Cross empowered
under G.L. c. 176A to cover physicians’
services under the caption “other health
services” as that phrase is used in G.L. c.
176A, § 7? (b) By what authority is Blue
Cross authorized to contract directly with
the Commonwealth to cover services of
physicians?
The first question (a must be answered
“no.” Blue Cross was permitted to pro-
vide benefits only for hospital services
until 1953. In that vear the Legislature
amended G.H. c. 176A, § 1, to permit a
hospital service corporation to provide
“reimbursement for other health serv-
ices.” St. 1953, c. 287, § 1. These “other
health services” have included such non-
hospital providers as visiting nurse associ-
ations, mental health clinics and home
health agencies. Authorization for these
contracts is found in the fourth para-
graph of G.L. c. 176A, § 5.
It has been stipulated that Blue Cross has
never provided benefits for physicians’
services except (1) covered services ren-
dered by salaried staff physicians of hos-
pitals and certain other institutional pro-
vides with which it has contracts; and (2)
nonemergency, in-State service rendered
by participating and non-participating
Blue Shield physicians under the State
employees’ contract.
The Master Medical Certificate issued to
subscribers provides that “{bJjenefits con-
tained herein for all services and supplies
other than those furnished by a physician,
dentist, podiatrist, or psychologist shall be
provided by Blue Cross,” and that
“{bjenefits contained herein for services
of a physician, dentist, podiatrist, or psy-
chologist shall be provided by Bluc
Shield.”
It is highly unlikely that the Legislature
would authorize Blue Cross and Blue
Shield to sail on a collision course of
competition for subscribers for coverage
of physicians’ services when Blue Cross’s
principal course is directed towards hospi-
tal services and Blue Shield’s towards
physicians’ services. Equally improbable
is a legislative intent to permit Blue
Cross to provide the benefits of a fulli
range of physicians’ services on a non-
participating basis and therevy cscupe the
network of regulation found in G.L. c.
176B. In short, Blue Cross is not empow-
ered to cover physicians’ services except
in those instances already noted.
The answer to the second question ()) can
be found in G.L. c. 32A, § 4. Blue Cross
JVa
542 FEDERAL SUPPLEMENT
792
is authorized to contract with State em-
ployees because the Legislature vested it
with such authority. Under this statute,
the Group insurance Commission is au-
thorized to enter into an agreement for
insurance coverage for State employees
with Blue Cross “in the same manner as
any other insurance company.”
The authority for contracts with State
employees reposes in G.L. c. 32A in the
first instance, and not in G.L. c. 176A.
The express reference of G.L. c. 176A in
G.L. c. 32A, § 4 encourage us to rule that
such provision is special and thus, absent
a contrary legislative intent, it must pre-
vail over conflicting provisions, if any, in
G.L. c. 176A and c. 176B. ... According-
ly, we respond to this question by recog-
nizing that payments to physicians for
medical services under the contract be-
tween Blue Cross and the Group Insur-
ance Commission are authorized by the
express language of G.L. c. 32A, § 4, and,
as such, this coverage does not derogate
from the exclusiveness of Blue Shield’s
coverage for physicians’ services to sub-
scribers who are not under the contract
insuring State employees.
Id. at ——-———, Mass.Adv.Sh. (1981) at
1996-1998, 425 N.E.2d 313. Since general
forebearance from the insurance market
covering physician’s services is clearly re-
quired of Blue Cross by state statutes as
described above by the Supreme Judicial
Court, I rule that this practice satisfies both
prongs of the Midca/ test, and thus is im-
mune under the state action doctrine from
antitrust challenge.® Thus plaintiffs’ com-
plaint should be dismissed insofar as it chal-
lenges Blue Cross’ forebearance from this
market.
IIT.
Since this Court has ruled that the agree-
ment of Blue Shield and participating phy-
sicians to use the usual and customary
method of physician compensation is not
immune from antitrust scrutiny under the
state action doctrine, we now turn to de-
fendants’ claim that this agreement is ex-
The McCarran-Ferguson Act
3. See discussion of Corey v. Look, supra.
empt from the antitrust laws under the
McCarran-Ferguson Act, 15 U.S.C.
§$§ 1011-1015.
[7] To establish that the agreements be-
tween Blue Shield and its participating phy-
sicians are within the protection of the Act,
Blue Shield has the burden of meeting
three separate tests. First, the agreements
must be shown to be the “business of insur-
ance,” 15 U.S.C. § 1012(b), as that statutory
term has been interpreted by case law since
the passage of the Act 40 years ago.
Second, the agreements must be “regulated
by State law” as required by § 2b) of the
Act. Id. Third, “any agreement to boy-
cott, coerce, or intimidate, or act of boycott,
coercion, or intimidation” is outside the
Act’s exemptive powers, and remains sub-
ject to the antitrust laws. The undisputed
facts at this point must show an absence of
any such agreement or action before the
defendants may be awarded summary judg-
ment on this issue.
Plaintiffs claim that a recent Supreme
Court case, Group Life and Health Insur-
ance Company v. Royal Drug Company, 440
U.S. 205, 99 S.Ct. 1067, 59 L.Ed.2d 261
(1979), clearly establishes that the agree-
ments in question here are not the “busi-
ness of insurance” as required by the Act.
The Supreme Court in that case was con-
fronted with a scheme whereby Blue Shield
of Texas offered insurance policies which
entitled the policyholder to obtain prescrip-
tion drugs from both participating and non-
participating pharmacies. If a prescription
were obtained under this plan from a par-
ticipating pharmacy, the insured paid $2 to
the pharmacy for the prescription; the
pharmacy's wholesale cost was paid to the
participating pharmacy directly by Blue
Cross. Thus the highest price a participat-
ing pharmacy could obtain on prescription
sold to a Blue Shield policyholder was its
wholesale cost plus $2. If the prescription
were obtained from a_ non-participating
pharmacy, the insured paid the entire price
charged by the pharmacy to the pharmacy,
and was reimbursed by Blue Shield for 75%
of the difference between the actual price
3la
KARTELL v. BLUE SHIELD OF MASSACHUSETTS
793
Cite as 542 F.Supp. 782 (1982)
and $2. Thus non-participating pharmacies
were not limited in the amount that they
could charge Blue Shield subscribers.
Suit was brought against Blue Shield by
a group of pharmacy owners who alleged
that the agreements entered into by Bluc
Shield and the participating pharmacies
amounted to the type of price fixing
banned by § 1 of the Sherman Act. The
United States District Court for the West-
ern District of Texas granted summary
judgment to Blue Shield on the grounds
that the agreements met ali three tests of
the McCarran-Ferguson Act. Upholding
the reversal of the trial court by the United
States Court of Appeals for the Fifth Cir-
cuit, the Supreme Court ruled that the
agreements in fact did not amount to the
“business of insurance,” and thus were not
within the protection of the Act. Jd. at
211-15, 99 S.Ct. at 1073-1075.
In so holding, the Court articulated what
amounts to a two part test that procure-
ment agreements similar to the one exam-
ined in Royal Drug must meet in order to
be considered the “business of insurance.”
First, the agreement must be concerned in
part with the “spreading and underwriting
of a policyholder’s risk.” Id. at 211, 99 S.C.
at 1073 (emphasis added). Second, since the
“business of insurance” is “commonly un-
derstood” to focus on “ ‘the relationship be-
tween the insurance company and the poli-
eyholder’”, Id. at 215-16, 99 S.Ct. at 1075,
quoting SEC v. National Securities, Inc.,
393 U.S. 453, 460, 89 S.Ct. 564, 568, 21
L.Ed.2d 668 (1969), the agreements must
themselves focus at least in part on the
relationship between the insured and the
insurer, and not merely on contractual ar-
rangements for the procurement of goods
and services.
The Court ruled that the agreement be-
tween Blue Shield of Texas and participat-
ing pharmacies could not pass either test.
and thus were not part of the “business of
insurance.” The agreements, the Court
said, “serve only to minimize the costs Blue
Shield incurs in fulfilling its underwriting
obligations” to its policvholders. Jd. at 213,
99 S.Ct. at 1074. As long as Blue Shield is
able to keep its contractual obligation to its
policyholders that they will not have to pay
more than $2 per prescription to participat-
ing pharmacies, “policyholders are basicali.
unconcerned with the arrangements mad«:
between Blue Shield and participating
pharmacies.” Jd. at 214, 99 S.Ct. at 1074.
The court continued:
By agreeing with pharmacies on the max-
imum price it will pay for drugs, Bluc
Shield effectively reduces the total
amount it must pay to its policyholders.
The Agreements thus enable Blue Shield
to minimize costs and maximize profits.
Such cost-saving arrangements may well
be sound business practice, and may well
insure ultimately to the benefit of policy-
holders in the form of lower premiums,
but they are not the business of insur-
ance.
Id.
[8] The agreements between Blue
Shield and participating physicians cha!-
lenged here by plaintiffs are in substance
the same as those agreements which were
ruled to be outside the realm of the “busi-
ness of insurance” in Royal Drug, with one
exception—a difference which Blue Shield
argues brings these agreements within the
Royal Drug definition of the “business of
insurance.” As wa. described in detail by
the Supreme Judicial Court of Massachu-
setts in excerpts from its Kartell decision
reproduced above, the “unit system,” by
which participating physicians agree to be
compensated for their services rendered to
Blue Shield subscribers on a pro rata basis
if Blue Shield is unable at any time to
compensate participating physicians in full
because of a depiction of Blue Shield funds,
has been an inteyr:.! part of the agreement
between Blue Shield and participating pny-
sicians since the creation of Blue Shield 40
years ayo. Biue Shield argues that
“({ujnlike the pharmacy agreements at issue
in Roya! Drug, Biue Shield’s agreements
with its participating physicians [by inciu-
sion of the unit system) place underwritinc
risk on the physicians.” Plaintiffs counter
that the “unit system” is a “relic” of the
early years of Biue Shield, and make much
794
of the fact that Blue Shield has never in its
history had to resort to pro rata compensa-
tion because of a depletion of its funds. I
concur with Blue Shield and the Supreme
Judicial Court that the unit system remains
an integral part of the larger Blue Shield
plan, and continues to place some amount
of risk on participating physicians. That
this risk is perhaps a significant risk is
underscored by the fact that, as noted
above, Blue Shield in 1976 made the deci-
sion not to upscale its usual and customary
fee schedule in 1976 due to the fact that its
funds available for physician compensation
had dramatically dropped from $26 million
to 31 million in an 18-month period.
[9,10] I further rule that the fact that
the “unit system” forces participating phy-
sicians to carry some risk is not enough by
and of itself to satisfy the first test of
Royal Drug. The risk accepted by the par-
ticipating physicians is the risk that at any
time Blue Shield may not have sufficient
reserves to satisfy participating physicians’
claims for remuneration. This is a risk
which, absent the participating physicians’
agreement to carry it, would be carried by
Blue Shield, not by the subscribers. By
agreeing to carry the risks inherent in the
“unit system,” participating physicians no
doubt enable Blue Shield to cut the costs of
maintaining the higher reserves that pri-
vate insurance companies not able to em-
ploy the unit system must maintain. As is
noted above, this is the result the Supreme
Judicial Court found was intended by the
state legislature in including the unit sys-
tem in c. 176B. And it is also true that
these lower costs may result in lower sub-
scriber premiums. But the Supreme Court
has ruled in Royal Drug that the fact that
an agreement between an insurance compa-
ny and a third party may result in lower
premiums to policyholders is not enough to
qualify that agreement as the “business of
insurance.” As the court stated, “The
{[McCarran-Ferguson Act] exemption is for
the ‘business of insurance,’ not the ‘business
of insurers.’ Id. at 211, 99 S.Ct. at 1073.
I therefore rule that the agreements here in
question between Blue Shield and partici-
pating physicians do not qualify as the
542 FEDERAL SUPPLEMENT
“business of insurance,” and thus are not
exempt from the federal antitrust laws un-
der the McCarran-Ferguson Act.
IV. Plaintiffs’ Motion for Partial Summa-
ry Judgment
Plaintiffs claim that the general ban on
balance-billing contained in Blue Shield’s
agreements with its participating physi-
cians constitutes a violation of § 1 of the
Sherman Act, and have moved for partial
summary judgment on this issue pursuant
to Fed.R.Civ.P. 56. The question of wheth-
er agreements such as the one examined
here are violations of § 1 is currently being
litigated in at least two other federal courts
(see discussion below), and the Supreme
Court recently stated that it has not yet
been presented with this exact question,
and thus has not yet expressed an opinion
on whether these agreements are in viola-
tion of the Sherman Act. Arizona v. Man-
copa County Medical Society, ——- U.S.
—~-, 102 S.Ct. 2466, 73 L.Ed.2d 48 (1982),
Opinion of the Court, n.26.
{11} After considering all of the parties’
oral arguments and briefs on this issue, |
rule that this agreement does not rise to the
level of a per se violation of the Sherman
Act, and that the facts have not been suffi-
ciently developed at this point in time to
allow a proper determination to be made as
whether the agreement violates the “rule of
reason” standard which more commonly is
used to determine violations of § 1. Conse-
quently, plaintiffs motion for partial sum-
mary judgment should be denied.
[12] The words of § 1 of the Sherman
Act make unlawful “{e]very contract, com-
bination ..., or conspiracy, in restraint of
trade or commerce among the several
States.” 15 U.S.C. § 1. Plaintiffs’ primary
theory of Blue Shield’s § 1 liability is that
the ban on balance-billing is per se violative
of § 1. Antitrust case law has determined
that restrictive agreements which are
“manifestly anticompetitive” are violative
per se of § 1. See, e.g., Continental T.V.
Inc. v. GTE Sylvania, Inc., 433 U.S. 36,
33a
KARTELL v. BLUE SHIELD OF MASSACHUSETTS
795
Cite as $42 F.Supp. 782 (1982)
49-50, 97 S.Ct. 2549, 2557, 53 L.Ed.2d 568
(1977); Northern Pacific Railway Co. v.
United States, 356 U.S. 1, 5, 78 S.Ct. 514,
518, 2 L.Ed.2d 545 (1958). Plaintiffs here
claim that the agreements between Blue
Shield and its participating physicians are
similar to agreements which have been
struck down by the Supreme Court as
“manifestly anticompetitive” despite the
fact that the agreements set maximum as
opposed to minimum prices at which the
goods in question may be sold to third par-
ties. Albrecht v. Herald Co., 390 U.S. 145,
88 S.Ct. 869, 19 L.Ed.2d 998 (1968) (publish-
er's establishment of maximum resale price
of newspapers sold by carriers held per se
violative of § 1); Kiefer-Stewart Co. v. Jo-
seph E. Seagram & Sons, Inc., 340 U.S. 211,
71 S.Ct. 259, 95 L.Ed. 219 (1951) (distiller’s
agreement on maximum resale price of li-
quor sold by distillers held per se violative
of § 1). Plaintiffs correctly point out that
the per se prohibition of § 1 applies as
much to professional services such as medi-
cal treatment as it does to the “commodi-
ties” involved in the cases cited above.
Goldfarb v. Virginia State Bar, 421 U.S.
773, 786-788, 95 S.Ct. 2004, 2013, 44 L.Ed.2d
572 (1975).
Blue Shield, on the other hand, argues
that the per se standard should not be ap-
plied to its agreements with participating
physicians, and relies for support on recent
cases from the United States Court of Ap-
peals for the Second Circuit and the United
States District Court for the Northern Dis-
trict of California. In Medical Arts Phar-
macy v. Blue Cross & Blue Shield of Con-
necticut, 675 F.2d 502 (2d Cir. 1982), the
Court of Appeals for the Second Circuit
upheld a decision of the United States Dis-
trict Court for the District of Connecticut
by ruling that agreements between Blue
Cross and participating pharmacies in which
the maximum prices that the pharmacies
could charge Blue Cross subscribers was set
were not per se violative of § 1. The
agreements in this case were almost dupli-
cates of the agreements examined by the
Supreme Court in the Royal Drug case,
discussed above, in that Blue Cross sub-
scribers who patronized “participating”
pharmacies (i.c., those who had entered into
agreement with Blue Cross) were required
at most to pay the pharmacy a small “«de-
ductible” amount, and the pharmacy was
reimbursed by Blue Cross at the rate estab-
lished in the agreement; subscribers who
patronized non-participating pharmacies
paid the pharmacies the over-the-counter
prices for prescriptions, and were reim-
bursed by Blue Cross at the rate established
in the subscriber agreement with Blue
Cross.
In finding that the agreements were not
per se violative of § 1, the district court
distinguished the case before it from cases
in which agreements fixing maximum
prices had been struck down as unlawful.
The court found that Blue Cross was in fact
a bulk purchase of drugs for its subscribers;
thus the agreements between Blue Cross
and the participating pharmacies did not
restrain the pharmacies from setting their
own price for their goods and services to
third parties. Medical Arts Pharmacy v.
Blue Cross & Blue Shield of Connecticut,
518 F.Supp. 1100, 1107 (D.Ct.1981). See
Sitkin Smelting & Refining Co., Inc. v.
FMC Corp., 575 F.2d 440, 446 (3d Cir.), cert.
denied, 439 U.S. 866, 99 S.Ct. 191, 58
L.Ed.2d 176 (1978) (the per se rule applies
to “an agreement to fix the price to be
charged in transactions with third parties,
not between the contrasting parties them-
selves”). On appeal, the plaintiff argued
that only the Blue Cross subscriber could be
viewed as the purchaser of prescriptions
from participating pharmacies. In ruling
that the district court properly refused to
apply the per se standard, the Court of
Appeals for the Second Circuit stated that
even if Blue Cross cannot be characteriz-
ed as the purchaser for the purpose of
antitrust analysis, we consider the phar-
macy agreements to be sufficiently dif-
ferent from the maximum price-fixing
agreements struck down in Albrecht and
Kiefer-Stewart to preclude application of
the per se rule. ... Whether Blue Cross
is characterized as a purchaser or as an
indemnitor or third party payor, it is the
ultimate payor, and therefore its pre-
796
scription drug plan differs significantly
from the vertical arrangements to re-
strict prices that [have been] invalidated.
675 F.2d at 505-6. After noting that the
“pharmacy agreements are novel restraints,
with potential procompetitive effects,” and
citing several cases and law review articles
for the proposition that the per se rule
should not be lightly applied to business
relationships with a potential for enhancing
competition, the court ruled that the dis-
trict court properly determined that the
agreements must be analyzed under the
lower “rule of reason” standard. Id. at 505.
{13] I find the reasoning of the Second
Circuit in this case to be cogent and per-
suasive. The restrictive agreements here
challenged by the plaintiffs do not differ in
substance from the agreements scrutinized
in Medicai Arts Pharmacy* That the enti-
ties entering into the agreements are here
doctors, as opposed to pharmacists, and that
the subject matter of the agreements here
involves the rendering of medical services,
as opposed to the sale of prescription drugs,
are distinctions without differences for pur-
poses of determining under the antitrust
laws whether Blue Shield is the “ultimate
payor” of the services whose price has been
fixed, and thus has the ability to restrict
the price that can be received for those
services. I therefore rule that the agree-
ments here challenged by the plaintiffs
should be examined under the traditional
rule of reason standard to determine
whether they are in violation of § 1 of the
Sherman Act. Accord: Sausalito Pharma-
cy, Inc. v. Blue Shield of California, 1980-81
CCH Trade Cases 77, 722 (N.D.Cal.1980)
(“Sausalito ["), and 1981-2 CCH Trade
Cases 75, 604 (N.D.Cal.1981) (“Sausalito
IT”).
6. Plaintiffs claim that Medical Arts can be dis-
tinguished from the case before the Court be-
cause [1] the Blue Cross scheme in Medial
Arts (unhke the Blue Shield scheme here) al-
lowed subscribers to be at least partially remu-
nerated tor subscnptions obtained from non-
purticipating pharmacists; and [2] that the dis-
trict court judge specifically fund in Medical
Arts that Blue Cross occupied only about 9"
ot the relevant market, as opposed to Blue
Shield’s occupation ot 60%, or more of the rela-
tive market here. I first note that this finding
542 FEDERAL SUPPLEMENT
{14] Both plaintiffs and Blue Shield ar-
gue in their respective memoranda in sup-
port of their summary judgment motions
that they should prevail under the rule of
reason analysis. This standard “requires
the factfinder to determine whether, under
all of the circumstances of the case, includ-
ing the facts peculiar to the business and
the history of, reasons for, and market im-
pact of the restraint, the restrictive practice
imposes an unreasonable restraint on com-
petition.” Medical Arts, supra, at 504. In
light of the very limited discovery that has
taken place in this case despite its four-year
life-span, I rule that sufficient facts have
not yet been developed to allow a proper
determination under the rule of reason
standard. Therefore, both plaintiffs’ and
Blue Shield’s motions for summary judg-
ment on this issue shovld be denied and an
order will enter directing the parties to
conduct discovery on this issue. The dis-
covery must be completed by November 1,
1982.
V. Conclus.on
As stated above, two of defendants’ prac-
tices here challenged under the Clayton and
Sherman Acts are immune from federal
antitrust scrutiny. These practices are
Blue Shield's refusal, with limited excep-
tions, Lo compensate non-participating phy-
sicians for medical services rendered to its
subscribers, and Blue Cross’ forebearance
generally for the medical service insurance
market inhabited by Blue Shield. Blue
Shield's practice of requiring its participat-
ing physicians not to charge Blue Shield
subscribers any amount over and above that
which Blue Shield has previously agreed to
by the court was made during its “rule of
reason” analysis and was not mentioned by the
court during its exarmunation of the per se ap-
proach. 518 F.Supp. at 1108, n9& In any
event, neither of these considerations are rele-
vant to the inquiry of whether the per se stan-
dard should be applied; both, of course, may
be highly relevant (as they were in Medical
Arts at both the tnal and appellate stages) to
the determination of whether the restnctive
agreements violate the “rule of reason.”
35a
MASHPEE TRIBE v. WATT
Cite as 342 F.Supp. 797 (1982)
pay them on behalf of its subscribers is not
exempt from antitrust challenge under ei-
ther the state action doctrine or the McCar-
ran-Ferguson Act. This Court, however,
will at the appropriate time apply to this
practice the “rule of reason,” as opposed to
the per se standard of antitrust analysis.
Order accordingly.
a
Massachusetts General Laws
Chapter 176B, § 7
§ 7. Agreement Between Corporation and Participating
Physician or Chiropractor; Influencing Cheice of Physi-
cian; Termination; Discrimination Against Chiropractors
Prohibited.
Every registered physician and every registered chiropractor
shall have the right, on complying with such rules and regula-
tions as the corporation may make, to enter into a written
agreement with a medical service corporation, doing business
in the city or town where the said physician or chiropractor
resides or has his usual place of business, to perform medical
or chiropractic services. This chapter shall not change the
normal relations between physician or chiropractor and patient.
No restriction shall be placed by any such corporation upon
its participating physicians or participating chiropractors as to
methods of diagnosis or treatment. No officer, agent, or em-
ployee of a medical service corporation shall influence or at-
tempt to influence a subscriber or a covered dependent in his
choice of a participating physician or participating chiroprac-
tor. A subscriber or a covered dependent, subject to the by-
laws, rules and regulations of a medical service corporation
and the terms and provisions of his subscription certificate,
shall be entitled to the benefits of this chapter upon receiving
medical or chiropractic service from any participating physi-
cian or participating chiropractor or, in the discretion of the
corporation, upon receiving medical or chiropractic service
from any non-participating physician or chiropractor in an
emergency or when outside the commonwealth. A corporation
may terminate its agreement with any participating physician
or participating chiropractor or any other participating provider
of health services licensed under the laws of the commonwealth
37a
at any time (a) for failure to comply with the reasonable rules
tion such rules and regulations as may be adopted governing
the keeping of accounts, records and statistics, the making of
reports and proof of services rendered, or (b) for presenting
any fraudulent, unreasonable, or improper claim for payment,
or compensation.
Nothing in section four or in this section shall be construed
to prohibit any medical service corporation from entering into
written agreements with its subscribers and with participating
chiropractors to furnish chiropractic services to subscribers
and covered dependents o: from including chiropractic services
in its nonprofit medical service plan, nor shall any medical
service corporation discriminate in any way against partici-
pating chiropractors in the furnishing of chiropractic service
to its subscribers and covered dependents. (Amended in 1978,
$74, § 3, approved July 22, 1978, effective 90 days therefter;
1981, 623, § 2, approved December 11, 1981, effective 90
days thereafter.)
38a
THE COMMONWEALTH OF MASSACHUSETTS
ADVANCE COPY 1984 ACTS AND RESOLVES
MICHAEL JOSEPH CONNOLLY, SECRETARY OF STATE
Chap. 192. AN ACT RELATIVE TO MEDICAL SERV-
ICE CORPORATIONS.
Whereas, The deferred operation of this act would tend to
defeat its purpose, which is to immediately insure the continued
delivery of health services in the commonwealth, therefore it
is hereby declared to be an emergency law, necessary for the
immediate preservation of the public convenience.
Be it enacted, etc., as follows:
SECTION 1. Section 7 of chapter 176B of the General
Laws, as most recently amended by section 2 of chapter 623
of the acts of 1981, is hereby further amended by inserting
after the first sentence the following sentence: — No partici-
pating physician or participating provider of health services
shall charge to or collect from a subscriber or covered depend-
ent any amount in excess of the amount of compensation de-
termined and allowed by a medical service corporation pursuant
to the applicable method of compensation approved by the
commissioner, except when such subscriber or covered depen-
dent (a) is eligible for benefits under a subscription certificate
containing a provision permitting such charge or collection
when the subscriber or covered dependent (i) is entitled to
receive reimbursement or compensation from a third party for
the cost of the same or similar services or (ii) receives money
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or its equivalent as a result of a claim against a third party for
loss or damages for personal injuries, and only in the cir-
cumstances and to the extent so permitted, or (b) is eligible
for benefits under a subscription certificate which provides for
compensation to a participating physician or other participating
provider of health services under a nonprofit medical service
plan previously approved by the commissioner, the so-called
“Plan B”, and has an annual income in excess of seven thousand
five hundred dollars, or (c) is eligible for benefits under a
subscription certificate under a group medical service agree-
ment containing a provision describing the specific cir-
cumstances under which and the extent to which additional
amounts may be charged or collected; provided, however, that
such provision has first been approved in writing by the com-
missioner and has been requested by the employer, employers
or other representatives of the group to which it applies, and
only in the circumstances and to the extent so described.
SECTION 2. A special commission to consist of six members
of the Senate, eleven members of the House of Representatives,
the Secretary of Consumer Affairs and Business Regulations
or his designee, the President of the Massachusetts Medical
Society or his designee, and four persons to be appointed by
the Governor, one of whom shall be a representative of Blue
Shield of Massachusetts, one of whom shall be a representative
of Blue Cross of Massachusetts, one of whom shall be a rep-
resentative of the Life Insurance Association of Massachusetts,
one of whom shall be a representative of organized labor. The
special commission is hereby established to make an investiga-
tion and study of the laws relating to nonprofit hospital services
corporations and nonprofit medical services corporations, as
established pursuant to chapters one hundred and seventy-six
A and one hundred and seventy-six B of the General Laws.
Said commission shall, in the course of its investigation and
40a
study, consider, among other questions it deems relevant, the
tax, reimbursement and regulatory status of said corporations
in Massachusetts, their standing in relationship to other health
care insurers and nonprofit medical services corporations
within and without the Commonwealth, to government pro-
grams of health insurance, and to competing and alternate forms
of health care financing. Particular attention shall be paid to
the corporations’ rights to contract with professional an other
noninstitutional providers of health care services, the system
of payments made by said corporation, including the impact
of the prohibition on the practice of balance billing, so-called,
the financial and accounting procedures of said corporations
and their impact on the quality and cost of health care services.
Said commission may expend for expenses and for legal,
actuarial, research, clerical and other assistance such sums as
may be appropriated, therefor, not to exceed two hundred
thousand dollars annually; provided, however, that all costs
of adminisiration and operation of said commission shall be
borne by nonprofit hospital service corporations established
pursuant to chapter one hundred seventy-six A of the General
Laws, nonprofit medical service corporations established pur-
suant to chapter one hundred and seventy-six B of the General
Laws, the Massachusetts Medical Society, and the Life I. a-
ance Association of Massachusetts. The secretary of the office
of consumer affairs and business regulations shall apportion
the estimated costs of said commission on said organizations
on a fair and reasonable basis. Said estimated costs shall be
paid to said secretary within thirty days after notice from said
secretary of such estimated costs. Said secretary shall sub-
sequently apportion actual costs among all said organizations
and shall make assessment adjustments for the same for any
variation between estimated and actual costs on a fair and
reasonable basis. Such estimated and actual costs shall include
an amount equal to the cost of fringe benefits as established by
4la
the commissioner of administration pursuant to section six B
of chapter twenty-nine of the General Laws.
Said commission shall meet at least quarterly, may report
from time to time to the general court, and shall file the results
of its investigation and study, and its recommendation, if any,
together with drafts of legislation necessary to carry its recom-
mendations into effect with the clerk of the house of representa-
tives in its first annual report no later than July first, nineteen
hundred and eighty-five, and shall file its final report on or
before December thirty-first, nineteen hundred and eighty-five.
Approved July 12, 1984.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.