Amicus Curiae Brief — Ocean State Physicians Health Plan, Inc. v. c

| Supreme Court, US.

FILED

FEB 28 1990

No. 89-1044 JOSEPH F. SPANIOL, JR,

GLEE <

IN THE

Supreme Court of the United States

OCTOBER TERM, 1989

OCEAN STATE PHYSICIANS HEALTH PLAN, INC., et al., |

Petitioners,

BLUE CROSS AND BLUE SHIELD OF RHODE ISLAND,

Respondent.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the First Circuit

BRIEF OF AMERICAN MANAGED CARE

AND REVIEW ASSOCIATION AS AMICUS CURIAE

SUPPORTING PETITIONERS

MICHAEL T. PLATT *

BERMAN, AISENBERG & PLATT

1730 Rhode Island Avenue, N.W.

+ 809

Washington, D.C. 20036

(202) 293-1464

* Counsel of Record

WILSON - Eres PRINTING Co., INC. - 789-0096 - WASHINGTON. D.C. 20001

TABLE OF CONTENTS

INTEREST OF THE AMICUS CURIAE ......................

PU MEMEMREe Re CO PIU MIN DE onccnsccrcesnciinsncennenvcnrensscevens S

I

I. This Case Offers This Court an Ideal Opportu-

II.

ITI.

IV.

nity to Clarify How the More Consumer-Ori-

ented, Less Protectionist Approach to Antitrust

Law That It Has Taken Since the 1970s Applies

to the Appraisal of Conduct of a Monopolist

Under Section 2 of the Sherman Act and, Spe-

cifically, to Clear Up the Confusion Prevailing

in the Lower Courts on the Important Subject

eg | ee

The Rule of Per Se Legality Fashioned by the

Court of Appeals for Any Practice Having a

Colorable Business Justification Is an Unprece-

dented and Unjustified Overreaction to the Con-

cern That Antitrust Suits Under Section 2 Will

Deter Aggressive Competition by Large Firms..

The Court of Appeals Egregiously Misconstrued

Blue Cross’ Prudent Buyer Plan in Viewing It,

as a Matter of Law, as a Cost-Recucing Measure

That “Tends to Further Competition on the

ead BE Re el en A Ree Ss 28 a Aen a ee

Monopoli:tic Practices by Insurers of the Par-

ticular Kind Involved in This Case Threaten

Competition Not Only in the Market for Private

Health Care Financing but, Even More Impor-

tantly, in the Market for Physicians’ Services....

The Practices Immunized by the Court of Ap-

peals in Applying the McCarran-Ferguson Act

Are Potentially Destructive of Important Com-

petition in Provider Markets as Well as in “‘the

Business of Insurance.”’ A Different Reading of

the Act Would Provide Needed Protection

ee es I oor he

III sinceiitilas coercecaresesberp sonnet ivasissiasnonans saicosiaies

13

15

18

20

ii

TABLE OF AUTHORITIES

CASES Page

A.A. Poultry Farms, Inc. v. Rose Acre Farms,

Inc., 881 F.2d 1396 (7th Cir. 1989), petition for

cert. filed, No. 89-1075 (Dec. 29, 1989) -.............. 9

American Medical Ass’n v. FTC, 455 U.S. 676

CRI actin cnuccennccisciencte ae eee 20

Arizona v. Maricopa County Medical Soc’y, 457

U.S. 332 (1982) ....... TT Roe LOD eS 20

Aspen Skiing Co. v. Aspen Highlands Skiing

Corp., 42 US. Ge Cae eee 6, 7,12

Ball Memorial Hosp., Inc. v. Mutual Hosp. Ins.,

Inc., 784 F.2d 1825 (7th Cir. 1986) ....10, 13, 14, 15, 16

Barry Wright Corp. v. ITT Grinnell Corp., 724

P36. S87 (let Cle. Ieee 7,9, 10, 11

Berkey Photo, Inc. v. Eastman Kodak Co., 603

F.2d 263 (2d Cir. 1979), cert. denied, 444 U.S.

10038 (IRC8) ncnbea eee 6, 12

Broadcast Music, Inc. v. CBS, 441 U.S. 1 (1979)... 5, 10

Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429

US. OTE CIO Ve ences, -ciscmapancoamnianes Ea a ass 6

California Retail Liquor Dealers Ass’n v. Midcal

- Aluminum, Inc., 445 U.S. 97 (1980) _........---..... 19

Cargill, Inc. v. Monfort of Colo., Inc., 479 U.S. 104

CHG asarisccccececncicchecesnsatecs mie eee 9,10

Continental T.V., Inc. v. GTE Sylvania Inc., 433

CB. DB CAGED inwsctkeccae eee 5

FTC v. Indiana Fed’n of Dentists, 476 U.S. 447

COD asc oc vcesccssnccnenesca cope eee 20

Group Life & Health Ins. Co. v. Royal Drug Co.,

440 U.S. 205 (1979) ........ sassnisighec om aaaaeaaaaaee 20

Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466

UB. REE CGD vo vvoeeeetecte eee 20

Kartell v. Blue Shield of Mass., 749 F.2d 922 (1st

Cir. 1984), cert. denied, 471 U.S. 1029 (1985) .... 10, 11,

13, 14, 15, 16, 20

Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,

476.U3. 874: (G88) ....... eee 9,10, 11,17

Monsanto Co. v. Spray-Rite Service Corp., 465

UB. FOR (Ae) xen PP BRR ET rtd 9,11

iil

TABLE OF AUTHORITIES—Continued

Page

National Gerimedical Hosp. & Gerontology Center

v. Blue Cross of Kansas City, 452 U.S. 378

eo, feces ws 20

Northwest Wholesale Stationers, Inc. v. Pacific

Stationery & Printing Co., 472 U.S. 284 (1985).. 5,10

Patrick v. Burget, 486 U.S. 94 (1988) .......0..... 19, 20

Royal Drug Co. v. Group Life & Health Ins. Co.,

737 F.2d 1433 (5th Cir. 1984), cert. denied, 469

SR ES 10

Telex Corp. v. IBM Corp., 510 F.2d 894 (10th

Cir.), cert. dismissed, 423 U.S. 802 (1975)... 6,12

Transamerica Computer Co. v. IBM Corp., 698

F.2d 1377 (9th Cir.), cert. denied, 464 U.S. 955

I a 10

Travelers Ins. Co. v. Blue Cross of Western Pa.,

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

Dee ee a ccswertnnoanbl 14, 16

Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119

aa gen selene dc atin vsniechsostnnienenutdeaenan 20

United States v. General Dynamics Corp., 415 U.S.

eee Saere? .......-... ie en EDR AOR ETH RR hese 5

United States v. Griffith, 334 U.S. 100 (1948)... 6

STATUTES |

McCarran-Ferguson Act:

8 SF ee 4, 18,19

Sherman Act:

EIS a eee Ta NAR a BE 5, 10

: ss a. sss waasinse dede'ns ESRD eRe passim

MISCELLANEOUS

3 P. Areeda & D. Turner, Antitrust Law (1978)... 11

Areeda & Turner, Predatory Pricing and Related

Practices Under the Sherman Act, 88 Harv. L.

a csn cv esenncnuavionsarenncmusnre 9

R. Bork, The Antitrust Paradox (1978) ............ 6, 7,17

iv

TABLE OF AUTHORITIES—Continued

Bureau of Competition, FTC, Staff Report on

Medical Participation in Control of Blue Shield

and Certain Other Open-Panel Medical Pre-

IE Fe CE TOD ait cetestcetctmeceteerecen

Challenges to the Chicago School Approach, 58

BE Ba II eitisecittchcacetentanaccentocsnanscs

Changes in Medicine Bring Pain to Healing Pro-

fession, New York Times, Feb. 18, 1990, at Al..

Havighurst, The Questionable Cost-Containment

Record of Commercial Health Insurers, in

Health Care in America (H. Frech ed. 1988)...

Hovenkamp, Antitrust Policy After Chicago, 84

| ae eee

Interstudy, The Interstudy Edge ( Summer 1988) .

Kaplow, Extension of Monopoly Power Through

Leverage, 85 Colum. L. Rev. 515 (1985) _..........

Krattenmaker & Salop, Analyzing Anticompetitive

Exclusion, 56 Antitrust L.J. 71 (1987) .............

Krattenmaker & Salop, Anticompetitive Exclu-

sion: Raising Rivals’ Costs to Achieve Power

over Price, 96 Yale L.J. 209 (1986) ........0000.000.....

Many in Medicine Are Calling Rules a Profes-

sional Malaise, New York Times, Feb. 19, 1990,

| GRIER RAT ar nA We tes eaters an Re a ONE Oe

National Commission for the Review of Antitrust

Laws and Procedures, Report of the President

and the Attorney General (Jan. 22, 1979) .......

Posner, The Next Step in the Antitrust Treatment

of Restricted Distribution: Per Se Legality, 48

U. Chi. L. Rev. 6 (1981)

Page

16

7,14

10

BRIEF OF AMERICAN MANAGED CARE

AND REVIEW ASSOCIATION AS AMICUS CURIAE

SUPPORTING PETITIONERS

INTEREST OF THE AMICUS CURIAE

The American Managed Care and Review Association

(“AMCRA”’) respectfully submits this brief amicus

curiae in support of the pending petition for a writ of

certiorari in this case in order that this Court may con-

sider precisely how the decision below undercuts the

utility of Section 2 of the Sherman Act, 15 U.S.C. § 2,

as a protection for competition, not only in markets for

health care-financing, but also in markets for health

care services, particularly physician services.

1. AMCRA is a national trade association comprising

over 500 health maintenance organizations (“HMOs”),

preferred-provider organizations (“PPOs”), and other

nontraditional mechanisms for financing and delivering

medical care. Many AMCRA members are HMOs of the

individual practice association (“IPA”) variety, which

depend for their competitive attractiveness on being able

to offer access to a substantial number of community

physicians, just as Blue Cross and Blue Shield plans

typically do. The petitioner, Ocean State Physicians

Health Plan, Ine. (‘Ocean State’), is an IPA-type HMO

and a member of AMCRA. Unlike Blue Cross and Blue

Shield, IPA plans such as petitioner’s place physicians at

risk through the implementation of “physicians with-

holds” and other financial incentives.

2. HMOs have grown rapidly. “In 1970 there were

37 HMOs enrolling 3 million people. This January, there

were 607 serving 32.5 million... .” Many in Medicine

Are Calling Rules a Professional Malaise, New York

Times, Feb. 19, 1990, at Al, A13.1 AMCRA and its

members are concerned that the decision of the court of

appeals in this case, if allowed to stand, would legalize

a variety of practices on the part of dominant health

1]PA-type HMOs have been growing rapidly (J.A. 34).

2

insurers that will slow or even reverse the growth of

competitive medical plans. In particular, a dominant in-

surer’s practice of penalizing physicians for participat-

ing in an IPA-type HMO, in the way that Blue Cross

and Blue Shield of Rhode Island (‘‘Blue Cross’) did in

this case, can injure competition by eliminating the value

of financial incentives, clearly threatening the existence

of [PA-type HMOs.*

3. Because the parties litigated this case, and the

lower courts decided it, with predominant regard to the

effects of the challenged practices in the market for

private health insurance and health care financing, the

record, briefs, opinions, and the pending petition to this

Court do not fully illuminate the significance of the case

for the vigor of competition in another, even more im-

portant market—namely, the market for physician serv-

ices. AMCRA is concerned that the court of appeals

failed to appreciate how the respondent monopolist, in

seeking to perpetuate and enhance its own market power,

intentionally suppressed competition in this market. Be-

cause many AMCRA members were organized by physi-

cians for the specific purpose of competing for patients

in markets dominated by traditional health insurers like

Blue Cross, AMCRA is in a good position to call the

Court’s attention to the destructive strategies employed

by such insurers.

SUMMARY OF ARGUMENT

In holding that Blue Cross’ Prudent Buyer program

could not; as a matter of law, be deemed an exclusion-

ary practice, the court of appeals invalidated the jury’s

contrary assessment of an admitted monopolist’s conduct

and rendered irrelevant all of the record evidence es-

tablishing (1) Blue Cross’ predatory intent—specifi-

2 While many HMOs are now quite large, none has a dominant

market position in any market. The largest HMO is the Kaiser

Foundation Health Plan. The largest IPA-type HMO is owned by

U.S. Healthcare. Interstudy, The Interstudy Edge 28 (Summer

1988).

3

cally, its primary interest in raising the costs of its

competitor, Ocean State; (2) the actual exclusionary

nature of Blue Cross’ practice—despite its ostensible

business purpose; and (8) the actual, direct effects of

the practice on Ocean State’s competitiveness, on the

price of health insurance, and on consumer welfare. The

court’s ruling amounted to the creation of an unprece-

dented rule of per se legality for any exclusionary prac-

tice for which a defendant monopolist offers a colorable

business rationale. This holding is directly at odds with

accepted understanding of Section 2 of the Sherman Act.

The court of appeals apparently adopted its rule of

per se legality in an attempt to accommodate the signi-

ficant shift that has occurred in antitrust economic

thinking in the last two decades. This new thinking,

which this Court has ratified to some extent, has gen-

erally featured greater skepticism toward private treble-

damage suits, greater receptivity to efficiency-based de-

fenses, and special vigilance to prevent competitors from

using Section 2 to deter hard competition by large

firms. Despite the virtues of this new economic thinking,

however, the conduct of the monopolist challenged in

this case should not have been given the extraordinary

protection implicit in a rule of per se legality, a standard

which this Court has never endorsed.

The court of appeals made fundamental errors of

factual and economic analysis in interpreting the Pru-

dent Buyer program as a normal business’ attempt to

lower its input costs. However, a comparison with the

business practices of other health insurers, which are

well documented in other cases, shows that Blue Cross

did not in fact seek to buy physicians’ services at the

most favorable (or even at competitive) prices. In deal-

ing with Ocean State physicians, its primary object was

to induce them to accept the higher price, not the lower

one. By paying physicians generously and not using its

potential buying power aggressively against them (until

some of them stepped out of line by marketing through

Ocean State), it hoped to remain their sole marketing

a

agent, with all the monopoly power attendant on that

position. The lower court’s failure to recognize the na-

ture of Blue Cross’ monopoly and the consequences of its

conduct demonstrates the danger of a legal rule under

which any appearance of a business justification fore-

closes further inquiry into the purpose and effect of a

monopolist’s behavior.

The other Blue Cross practices challenged by Ocean

State—those that the court of anpeals deemed immunized

by the McCarran-Ferguson Act, 15 U.S.C. $$ 1011 et seq.,

—are likewise easily employed by dominant health in-

surers to maintain market control by excluding HMOs

and other competitive medical plans. AMCRA therefore

urges this Court to rule that the McCarran exemption,

which was enacted well before the implied exemption for

“State acticn” became crystallized, embodies the same re-

quirement of “active state supervision” of exempt private

conduct that the Court now imposes as a prerequisite for

state-action immunity.

Ocean State’s petition should be granted not only be-

cause this case raises serious issues of antitrust doctrine

but also because the challenged practices have grave im-

plications for the state of competition in the enormous

health care industry which currently represents approxi-

mately 11° of this country’s Gross National Product.

Changes in Medicine Bring Pain to Healing Profes-

sion, New York Times, Feb. 18, 1990, at Al. In par-

ticular, the development of competitive health plans, par-

ticularly HMOs of the IPA variety, is jeopardized by

the practices of which Ocean State complains. Non-

traditional mechanisms for financing and delivering

health care are essential vehicles for introducing effective

price (as well as quality) competition into local markets

for providers’ services, where such competition has long

been lacking because of the traditional practices of con-

ventional health insurers. This case presents a classic

instance of a nonprofit health insurer that, in pursuing

its own monopolistic objectives, has suppressed competi-

tion in the market for physician services.

5

ARGUMENT

I. This Case Offers This Court an Ideal Opportunity to

Clarify How the More Consumer-Oriented, Less Pro-

tectionist Approach to Antitrust Law That It Has

Taken Since the 1970s Applies to the Appraisal of

Conduct of a Monopolist Under Section 2 of the Sher-

man Act and, Specifically, to Clear Up the Confusion

Prevailing in the Lower Courts on the Important Sub-

ject of “Non-Price Predation”

Since the mid-1970s, this Court has significantly re-

fined its analysis in antitrust cases to take a more prag-

matic approach in the search for adverse effects on com-

petition. For example, in United States v. General Dy-

namics Corp., 415 U.S. 486 (1974), the Court moved

away from evaluating horizontal mergers almost exclu-

sively on the basis of market shares, inviting a more

searching analysis that focuses on the actual competi-

tive consequences. Similarly, in Continental T.V., Inc. v.

GTE Sylvania Inc., 433 U.S. 36 (1977), the Court over-_

ruled its previous per se approach to non-price vertical

restraints, recognizing that restrictions on the number

and competitive independence of a manufacturer’s dis-

tributors car sometimes strengthen competition between

manufacturers, benefitting consumers. More recently, in

appraising competitor collaboration under Section 1 of

the Sherman Act, 15 U.S.C. $1, the Court has demon-

strated a new willingness to recognize that such collabora-

tion may often promote efficiency more than it harms com-

petition, thereby increasing consumer welfare. £.9.,

Northwest Wholesale Stationers, Inc. v. Pacific Station-

ery & Printing Co., 472 U.S. 284 (1985); Broadcast

Music, Inc. v. CBS, 441 U.S. 1 (1979).

Despite the strides that this Court has made in help-

ing lower courts assess business combinations and con-

certed action for consistency with the statutory mandate

to preserve competition in the interest of consumers,

it has yet to provide comparable guidance for appraising

the conduct of dominant firms under Section 2 of the

Sherman Act. Indeed, it has decided only one case under

6

Section 2 in the last 16 years, Aspen Skiing Co. v. Aspen

Highlands Skiing Corp., 472 U.S. 585 (1985). Because

of its unusual facts that case did not effectively clarify

the significance for Section 2 analysis of the new anti-

trust thinking, under which, conduct, that is truly effi-

ciency-enhancing, may be valued for its own sake even

if a competitor’s survival may be jeopardized.

In the absence of clear guidance from this Court, some

lower courts, taking their cue from this Court’s generally

greater skepticism toward private antitrust actions, have

allowed large, even dominant, firms somewhat greater

leeway to respond to competition than older Supreme

Court precedents seemed to contemplate.’ Although many

of these lower court rulings appear to give correct effect

to the Court’s view that antitrust law is intended to pro-

tect “competition, not competitors,” * the Ocean State de-

cision in the court of appeals demonstrates that there is

a danger that the pendulum may swing too far, depriv-

ing Section 2 of its vitality as a defense against prac-

tices that on close inspection can be shown to be preda-

tory or exclusionary.’

3 See, e.g., R. Bork, The Antitrust Parador 126-60, 299-209, 244-

46 (1978); compare United States v. Griffith, 334 U.S. 100, 107

(1948) (dictum implying that doing business as a monopolist or

using monopoly to gain a competitive advantage is unlawful with-

out regard to how power was obtained) with Telex Corp. v. IBM

Corp., 510 F.2d 894, 926 (10th Cir.), cert. dismissed, 423 U.S. 802

(1975) (putative monopolist allowed to use “ordinary marketing

methods available to all in the market”) and Berkey Photo, Inc. v.

Eastman Kodak Co., 603 F.2d 263, 276 (2d Cir. 1979), cert. denied,

444 U.S. 1093 (1980) (monopolist entitled to enjoy, in competitive

markets, benefits flowing from vertical integration with its mo-

nopoly ).

* Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 488

(1977).

* Indeed, the so-called “Chicago School” of economic analysis, in

reacting against the era when some procompetitive conduct may

have been penalized too quickly, may have encouraged the courts to

go to the opposite extreme of tolerating—even legalizing per se-—-

conduct that in some circumstances can create or perpetuate a

7

The extensive literature on predatory pricing has

helped the lower courts to develop the law in that area

with considerable sophistication.* More recently, how-

ever, scholars have begun to refine the notion of strategic

behavior by a monopolist, particularly the phenomenon

increasingly known as “non-price predation.” ’

Unfortunately, case law in the lower courts has not

revealed a sophisticated grasp of the issues involved in

non-price predation. See Krattenmaker & Salop, Anal-

yzing Anticompetitive Exclusion, 56 Antitrust L.J. 71,

89-90 (1987) (noting that “substantial disarray” in laws

governing exclusionary conduct reflects conflict between

prevailing doctrine and “pleas for laissez-faire” rules of

per se legality). Unlike predatory pricing, non-price

predation can take many forms and easily eludes efforts

to develop objective, cost-based tests. The instant case

provides an opportunity for this Court to supply up-to-

date economically based principles for applying Section 2

to non-price predation.

monopoly unjustified by efficiency and harmful to consumers’ inter-

ests. See Challenyes to the Chicago School Approach, 58 Antitrust

L.J. 627 (1989). Recent scholarship develops just this thesis in a

variety of areas of antitrust law but most particularly in the area of

exclusionary conduct. E.g., Hovenkamp, Antitrust Policy After Chi-

cago, 84 Mich. L. Rev. 215, 255-83 (1985) (discussing “strategic

behavior,” including “raising rivals’ costs”); Kaplow, Extension of

Monopoly Power Through “everage, 85 Colum. L. Rev. 515 (1985).

6 See, e.g., Barry Wright Corp. v. ITT Grinnell Corp., 724 F.2d

227 (1st Cir. 1983), and cases and articles cited therein.

7 The leading article developing this new theme is Krattenmaker

& Salop, Anticompetitive Exclusion: Raising Rivals’ Costs to

Achieve Power over Price, 96 Yale L.J. 209 (1986). This Court

has so far provided only limited guidance on this important sub-

ject. In Aspen Skiing, the Court defined the issue as whether the

monopolist had tried to exclude a rival “ ‘on some basis other than

efficiency.’ 472 U.S. at 605, quoting R. Bork, supra, at 138. But,

because the defendants offered no business justification whatsoever,

the Court gave no guidance to the lower court on how efficiency

claims were to be weighed against evidence of exclusionary pur-

pose and effect. The instant case presents just this issue.

8

Il. The Rule of Per Se Legality Fashioned by the Court

of Appeals for Any Practice Having a Colorable Busi-

ness Justification Is an Unprecedented and Unjustified

Overreaction to the Concern That Antitrust Suits Un-

der Section 2 Will Deter Aggressive Competition by

Large Firms

Despite the jury’s apparent conclusion that Blue Cross’

Prudent Buyer program constituted exclusionary conduct,

the court of appeals held,-as a matter of law, that it

could not be so categorized. The court reasoned that “in-

sisting on a supplier’s lowest price . . . tends to further

competition on the merits and, as a matter of law, is not

exclusionary.” Pet. App. 19a.

There is no basis in the precedents of this Court or

elsewhere, however, for holding that any conduct that

facially “tends to further competition on the merits” is

lawful per se—thus rendering nugatory all other evi-

dence. If the court of appeals is to be believed, summary

judgment for-a—monopolist would be appropriate even

though the plaintiff could demonstrate that a seemingly

innocuous practice did not in fact “further competition

on the merits” but instead gratuitously raised rivals’ costs

and increased the monopolist’s market power. Surely this

is not the law.

Some have argued that certain vertical restraints of

trade should be declared lawful per se." Such arguments

are also based on the now-familiar fear that the threat

of nonmeritorious antitrust suits will inhibit desirable

competitive behavior—specifically, a manufacturer’s ef-

forts to market its products efficiently, or in combination

with desired services, in competition with other sellers.

However, this Court has protected against the stifling of

efficient marketing strategies, not by ruling that certain

practices are per se leval, but by raising plaintiffs’ bur-

den of proving that there was an actual vertical agree

*E.a., Posner, The Next Step in the Antitrust Treatment of

Restricted Distribution: Per Se Legality, 48 U. Chi. L. Rev. 6

(1981).

9

ment to fix resale prices. Thus, the Court held in Mon-

santo Co. v. Spray-Rite Service Corp., 465 U.S. 752, 763-

64 (1984), that, in order to prevent “highly ambiguous

evidence” from being misconstrued by the finder of fact,

the plaintiff must tender evidence that “tends to exclude

the possibility that the manufacturer and nonterminated

distributors were acting independently.” In Matsushita

Electric Industrial Co. v. Zenith Radio Corp., 475 U.S.

574, 588 (1986), the same evidentiary requirement was

imposed in granting summary judzment against plain-

tiffs alleging an improbable horizontal conspiracy to prac-

tice predatory pricing.

Admittedly, there is some lower court authority for a

special rule of per se legality under Section 2 for certain

prices that plaintiffs might allege to be predatory. Thus,

certain prominent scholars have argued that, whatever the

evidence of intent and effect on competition, a claim of

predatory pricing should not be submitted to the jury if

the putative predator did not set prices that were “below

some appropriate measure of cost.” Matsushita, 475 U.S.

at 584-85 nn.8. 9, citing Areeda & Turner, Predatory

Pricing and Related Practices Under the Sherman Act,

88 Harv. L. Rev. 697 (1975). Indeed, the leading judicial

authority for the per se legality of prices above both “in-

cremental cost” and “average total cost” is Judge Breyer’s

opinion for the First Cireuit in Barry Wright Corp. v.

ITT Grinnell Corp., 724 F.2d 227, 233-35 (1st Cir. 1983).

See also A.A. Poultry Farms, Inc. v. Rose Acre Farms,

Inc., 881 F.2d 1396 ‘7th Cir. 1989), petition for cert.

filed, No. 89-1075 ( Dec. 29, 1989).

The arguable justification for conclusively presuming

legality in certain predatory pricing cases is that, despite

the rarity of true predatory pricing, Matsushita, 475

U.S. at 588, there is still a great temptation for com-

petitors facing stiff price competition from efficient large

firms to file antitrust suits portraying themselves as vic-

tims of such price predation. Cargili, Inc. v. Monfort of

Colo., Inc., 479 U.S. 104, 121 n.17 (1986). Without a

basis for dismissing these cases at an early stage, there

10

is always a risk that juries will find violations based on

equivocal evidence of intent. Barry Wright, 724 F.2d at

232, 235. Even so, however, the proposal to adopt such

a rule of per se legality has engendered great contro-

versy,” and some lower courts have refused to embrace

the idea.” This Court has never specifically addressed

the issue. Cargill, 479 U.S. at 117 n.12.

In any event, assuming, arguendo, that there are con-

siderations that might warrant a rule of per se legality

in certain predatory pricing cases, no similar considera-

tions are present in the circumstances of this case.”

The physician petitioners are not complaining about being

forced to accept low prices or to compete for patients on

the basis of price. On the contrary, their complaint is

that Blue Cross penalized them for competing—by mar-

keting their services at a discount outside the Blue Cross

system. By the same token, Ocean State itself was not an

9 See, e.g., National Commission for the Review of Antitrust

Laws and Procedures, Report of the President and the Attorney

General 149-51 (Jan. 22, 1979).

10 See, e.g., Transamerica Computer Co. v. IBM Corp., 698 F.2d

1377, 1386-88 (9th Cir.), cert. denied, 464 U.S. 955 (1983) (reject-

ing per se legality of prices above average total costs), and cases

there cited. Nor has this Court itself ever indicated that a rule of

per se legality is a proper response to the danger that price com-

petition might be inhibited. See Matsushita, 475 U.S. at 585 n.9.

Indeed, its hesitancy in applying and extending rules of per se

illegality in recent cases under Section 1 suggests that per se rules

of all kinds are to be approached with great caution. See, ¢.g.,

Northwest Wholesale Stationers; Broadcast Music, 441 U.S. at 19-24.

11 Although health care providers have brought many antitrust

suits to contest hard bargaining by large purchasers, the courts

have consistently rejected them. E.g., Ball Memorial Hosp., Inc.

v. Mutual Hosp. Ins., Inc., 784 F.2d 1325 (7th Cir. 1986); Kartell

v, Blue Shield of Mass., 749 F.2d 922 (1st Cir. 1984), cert. denied,

471 U.S. 1029 (1985); Royal Drug Co. v. Group Life & Health Ins.

Co., 737 F.2d 1433 (5th Cir. 1984), cert. denied, 469 U.S. 1160

(1985). Such suits have therefore become less common, demonstrat-

ing that large buyers do not need any special protection against

erroneous outcomes or the high cost of litigation challenging their

aggressive purchasing.

11

inefficient competitor seeking the court’s protection

against hard competition by an efficient rival. Indeed,

it was Ocean State which initiated the discounts that Blue

Cross now wants to eliminate through the exercise of its

market power. Clearly, the Blue Cross plan in this case

is decidely not one of those health insurers that pursues

aggressive cost containment in the interest of consumers.’

Following its approach in Monsanto and Matsushita,

this Court might rule in this case that the lower courts

should protect conduct that is potentially beneficial to con-

sumers, not by adopting rules of per se legality, but by

requiring plaintiffs to produce evidence that “tends to

exclude the possibility” that the practices challenged were

procompetitive, efficiency-enhancing, or otherwise non-

predatory business behavior consistent with ‘competition

on the merits.”’’* Such a ruling would discourage anti-

trust suits by competitors merely seeking protection

against hard competition, thus preserving the vigorous

competition that modern antitrust law seeks to foster on

consumers’ behalf. But unlike the court of appeals’ hold-

ing in this case, it would not leave Section 2 of the Sher-

man Act a dead letter against any exclusionary conduct

that facially resembles ordinary business activity."

12 It is ironic that the same court of appeals that handed down

the leading cases (1) defending large firms against competitors’

misplaced charges of predatory pricing (Barry Wright) and (2)

protecting large health insurers against physicians’ misplaced

charges of monopsonistic purchasing (Kartell) should have failed

so conspicuously in applying those cases’ underlying principles in

this case. It should be noted that Judge Breyer, the former law

professor who authored the opinions in both Barry Wright and

Kartell, was not on the panel in Ocean State.

13 The following widely cited definition of exclusionary conduct

suggests such a heavy burden of proof: “behavior that not only

(1) tends to impair the opportunities of rivals, but also (2) either

does not further competition on the merits or does so in an un-

necessarily restrictive way.” 3 P. Areeda & D. Turner, Antitrust

Law © 626b at 78 (1978).

14 Because the petitioners in this case offered a great deal of evi-

dence showing the anticompetitive purpose and effect of Blue Cross’

12

The errors of the court of appeals in this case are per-

haps understandable in light of some of the leading court

of appeals decisions under Section 2 in recent years.

These decisions have heavily emphasized the importance

of allowing even undoubted monopolists to follow normal

business practices.'° Although it is certainly important

to avoid judicial “handicapping” in an artificial effort to

equalize the competitive race, a defendant monopolist

should not be entitled to win merely by demonstrating

that its action had a “rational basis.” The rule-of-reason

test of Aspen Skiing surely requires stricter scrutiny than

that—i.e., more than a search for some rationale for the

challenged conduct that is both facially plausible and per-

missible.'” Yet, without clearer guidance from this Court,

lower courts may simply accept, as the court of appeals

did in this case, any facially plausible explanation for

a monopolist’s strategic maneuvers, even though those

practices could be seen under “close scrutiny” to have

been intended to raise rivals’ costs and to perpetuate the

monopolist’s freedom to charge supracompetitive prices."

Again, the correct way to ensure that competition is not

jeopardized unnecessarily, either by inhibiting antitrust

rules or by monopolistic practices, is to make plaintiffs

demonstrate affirmatively—as Ocean State did—that com-

petition and consumer welfare were harmed, not helped,

by the practices in question.

Prudent Buyer program, they were entitled to the benefit of the

jury’s verdict.

15 B.g., Telex and Berkey Photo, described supra note 3.

16 See supra note 7.

17 The defendant in Aspen Skiing lost because it “did not per-

suade the jury that its conduct was justified by any normal business

purpose.” 472 U.S. at 608. In this case, Blue Cross similarly failed

to convince the jury, yet won because the court of appeals was

unwilling to let the jury decide the issue. Actually, however, the

skiing monopolist’s object of preventing a free-riding competitor

from sharing the rewards from its lawful monopoly (which, after

all, attracted skiers to Aspen) was a more “norma! business pur-

pose” than Blue Cross’ object of inducing physicians to deal ex-

clusively with it and to boycott Ocean State.

13

III. The Court of Appeals Egregiously Misconstrued Blue

Cross’ Prudent Buyer Plan in Viewing It, as a Matter

of Law, as a Cost-Reducing Measure That “Tends to

Further Competition on the Merits”

In characterizing the Prudent Buyer plan as nothing

more than “insisting on a supplier’s lowest price,” the

court of appeals chose to see Blue Cross’ effort only as

a cost-reduction strategy. The court of appeals was wrong

on three counts—first, in believing that Blue Cross was

truly and primarily interested in reducing its costs; sec-

ond, in believing that Blue Cross’ method was calculated

to “get the lowest possible price” or “the best deal pos-

sible’ (Pet. App. 19a-23a); and third, in believing that

allowing the practice would “bring low price benefits to

the consumer” (id. at 21a). Far from justifying the

court’s view of the case, the evidence in the record easily

supports the jury’s apparent conclusion that the program

was part of a scheme to pay physicians, not less, but

more—as long as they did not sell their services at a dis-

count to Ocean State. This strategy was specifically in-

tended to perpetuate Blue Cross’ position as the physi-

cians’ exclusive marketing agent, to raise Ocean State’s

costs, and to enhance Blue Cross’ power over price. The

record shows that consumers paid higher prices, not lower,

as a consequence of Ocean State’s reduced ability to check

Blue Cross’ premium increases."

That Blue Cross was not interested in getting ‘‘the best

deal possible” from physicians is easily demonstrated by

comparing what it did with the actions of comparable

insurers in the Kartell and Ball Memorial cases, supra

note 11. In those cases, the courts ‘in opinions by Judges

Breyer and Easterbrook, respectively) upheld health in-

surers’ aggressive cost reduction efforts against antitrust

challenges lodged by the affected providers. Those in-

surers, in demanding that providers accept the plan’s

allowances as payment in full (Kartell) or that they offer

their best price in competitive bidding (Ball Memorial),

18 J.A. 1110-13, 1847-49, 2183-84.

14

were plainly engaged in efforts to “get the best deal pos-

sible” for their subscribers. Despite the view of the court

of appeals that the result in Ocean State was “‘compelled”’

by its earlier holding in Kartell, the Rhode Island plan

followed a policy fundamentally different from the ag-

gressive cost containment seen in both Kartell and Ball

Memorial.

Thus, Blue Cross allowed “balance billing” by non-

participating physicians and sought lower fees only from

those physicians that persisted in dealing with Ocean

State—hardly the way to “get the best deal possible’ from

physicians. Thus, instead of concluding that Blue Cross

was seeking only to pay lower prices, the court

should have said that Blue Cross was offering to pay

more to each physician who eschewed marketing at a

discount through other outlets.'? Despite its euphemistic

name, the Prudent Buyer program was not calculated

to obtain low physician fees in general, but only to penal-

19 Tronically, the first case to approve efforts by a Blue Cross or

Blue Shield plan to ‘‘get the best deal possible’’—indeed, the case

from which the Kartell and Ocean State courts quoted that phrase—

also misconstrued the plan’s actions and excused what was in fact

a monopolistic rather than simply a cost-containment strategy.

Travelers Ins. Co. v. Blue Cross of Western Pa., 481 F.2d 80, 84

(3d Cir.), cert. denied, 414 U.S. 1093 (1973). The discounts from

regular hospital charges enjoyed by the Blue Cross plan in that

case were not the result of hard bargaining with competing hos-

pitals. Instead, “the hospitals negotiated jointly’’ with Blue Cross

(id.)—that is, as a cartel. By accepting from the hospital associa-

tion a smaller discount than it could have gotten by forcing the

hospitals to compete, the insurer monopolist kept the cartel intact

as an obstacle to its would-be competitors, raising their costs. See

Krattenmaker & Salop, supra, 96 Yale L.J. at 238-40 ( maintenance of

supplier cartel as an exclusionary practice). Although paying hos-

pitals more than if it had used its purchasing power to destroy

their cartel, Blue Cross enjoyed a greater net cost advantage over

its competitors than it would have had if hospitals competed for

the business of all payers. For a fuller explanation of this monopo-

list’s unrecognized strategy, see Havighurst, The Questionable Cost-

Containment Record of Commercial Health Insurers, in Health

Care in America 221, 250-53 (H. Frech ed. 1988).

15

ize Ocean State doctors.*” Indeed, the record shows rather

strikingly that Blue Cross’ mind was more on raising

Ocean State’s costs than on lowering its own.*'

A possible interpretation of Blue Cross’ action, seem-

ingly adopted by the court of appeals, is that it was sim-

ply targeting those doctors who had already signified

their willingness to accept lower fees—in other words,

that it was merely defending itself against price dis-

crimination being practiced against it by its suppliers.

But the notion that a buyer with an 80% market share

was a victim of price discrimination is patently absurd.

Far from demonstrating that Blue Cross was seeking to

“set the best deal possible,” this circumstance reveals that

Blue Cross had assiduously refrained from exercising its

buying power against physicians and that it was Ocean

State that finally brought competition to the market for

physician services in Rhode Island. Of course, if Blue

Cross had used its buying power to the fullest in the con-

sumer’s interest instead of using it selectively to obtain

an unnatural market advantage, there would have been

no basis for Ocean State to complain. But it is Blue

Cross that is price-discriminating—in what it pays phy-

sicians—obviously hoping by such discrimination to dis-

courage doctors from embarking on the competitive path

of discounting their services and selling through alterna-

tive outlets.

IV. Monopolistic Practices by Insurers of the Particular

Kind Involved in This Case Threaten Competition Not

Only in the Market for Private Health Care Financing

but, Even More Importantly, in the Market for Physi-

cians’ Services

Nonprofit health insurance offered under the Blue

Cross and Blue Shield trademarks has a long and vener-

ated history in the United States. As the market for

20“Prudent purchasing” is a term of art in the health care in-

dustry signifying aggressive purchasing of precisely the kinds found

in Kartell and Ball Memorial.

21 J.A. 336-39, 850-55, 1208-09, 1220-22, 1227-31; P.E. 45, 294,

344,

16

health insurance has evolved in different places, however,

two essential types of “Blue” plans have emerged—one

selling services on behalf of providers and the other pur-

chasing services on behalf of its subscribers. Although

nearly all Biue plans began life as monopolistic joint sell-

ing agencies controlled by the providers whose services

they sold,** provider control gradually eroded. Some plans

evolved into ordinary insurers, purchasing services as

consumers’ agents. But others, particularly those with

very large market shares, found that their corporate in-

terests were still served best by remaining the ally of pro-

viders rather than by becoming aggressive purchasers of

their services. The respondent in this action is a prime

example of a plan whose monopoly made this a feasible

strategy—as was the Blue Cross plan in the 1973

Travelers case, discussed supra note 19. The plans in

Kartell and Ball Memorial are examples of plans with

a different orientation. See Pet. 19 (on Indiana Blue

Cross’ switch to the consumer’s side).

In expressly characterizing the Rhode Island plan as

one that “purchases health services . . . on behalf of its

subseribers,”’ Pet. App. 2a, the Ocean State court sig-

nified its failure to focus on the crucial distinction be-

tween that plan and the plans in Ball Memorial and

Kartell. In that distinction lies one of the keys to this

ease. The Blue Cross monopolist, hoping to enjoy the

benefits of its dominant market position, undertook to

induce exclusive dealing by strategic pricing, charging

more to employers who offered the Ocean State option

and paying less to physicians who marketed through an

alternative plan. These strategies were aimed at stamp-

ing out alternative health plans and raising the costs of

any that survived. Under the Blue Cross monopoly, there

would be virtually no opportunity for a physician to en-

gage in price competition—that is, to increase patient

volume by lowering price. Thus, Blue Cross suppressed

22 See Bureau of Competition, FTC, Staff Report on Medical Par-

ticipation in Control of Blue Shield and Certain Other Open-Panel

Medical Prepayment Plans (Apr. 1979) (unpublished).

17

the competition from which consumers had the most to

gain (and Blue Cross had the most to lose).

The ultimate reason why the court of appeals could see

little potential harm to consumers in what Blue Cross did

to Ocean State is that it overlooked entirely the possibility

that a dominant nonprofit health insurer might have

monopolistic reasons of its own for not seeking to “get

the best deal possible” ** and for instead allying itself

explicitly or implicitly with providers and suppressing

competition among them.”* In fact, however, a nonprofit,

regulated health insurer has little reason not to overpay

providers if it ean thereby prevent the emergence of

alternative outlets through which they can sell their serv-

23 The practice of paying physicians supracompetitive fees in

order to raise rivals’ costs could easily qualify for condemnation

as a predatory practice under the rationale routinely used in con-

demning predatory pricing. Significant current outlays aimed, not

at increased efficiency, but only at gaining or keeping a monopoly

are appropriate targets for policing under Section 2. See R. Bork,

supra, at 137-48.

*4The theory that Blue Cross sought to monopolize by specifi-

cally refraining from efforts to ‘‘get the best deal possible’—from

everyone, that is, except Ocean State physicians—must be examined

to see whether it makes “economic sense.” Matsushita, 475 U.S. at

598 (approving grant of sumary judgment against plaintiffs on the

ground that complaint, which contemplated a decades-long, im-

probable conspiracy to practice predatory pricing, “‘simply | made]

no economic sense’’). After all, it might be argued, a rational Blue

Cross monopolist would not choose to incur unnecessarily high costs

in the short run if it could not realistically hope to recover them in

the long run—either because the firm is subject to price regulation

or because its nonprofit character precludes anyone’s direct enjoy-

ment of future monopoly profits. But a business strategy of serv-

ing provider rather than consumer interests would appeal to a non-

profit, regulated insurer precisely because it is regulated and has

no significant interest in profits as such. Such a firm can enjoy

the nonpecuniary benefits that flow from monopolizing the market-

ing of physician services—e.g., large size and cash flow, with the

attendant prestige, perquisites, and job security for corporate

managers—while regulation, which regards the costs incurred for

physician services simply as an expense to be passed on to con-

sumers, allows the physicians to enjoy the monetary rewards.

18

ices. Only if this Court corrects the errors made by the

court of appeals in this case can Section 2 be used to pre-

vent similar abuses in other health care markets.

V. The Practices Immunized by the Court of Appeals in

Applying the McCarran-Ferguson Act Are Potentially

Destructive of Important Competition in Provider

Markets as Well as in “the Business of Insurance.”

A Different Reading of the Act Would Provide Needed

Protection Against Such Abuses

Although this Court reasonably might elect in this

case to review only those issues related to Blue Cross’

Prudent Buyer program, the issues raised under the

McCarran-Ferguson Act are of equal practical signifi-

cance. Indeed, actions of the kind treated by the court

of appeals as immune from antitrust attack under the

McCarran Act also have the potential for destroying

the market opportunities of HMOs and other innovative

health plans and for foreclosing competition among pro-

viders. If dominant health insurers are able to practice

differential pricing, ostensibly to offset the effects of

adverse selection, without meaningful regulatory over-

sight, emerging HMOs and other competitive medical

plans will be easy targets for predatory pricing. More-

over, regulated nonprofit insurers like Blue Cross have

less of a disincentive to engage in predatory pricing

than other would-be monopolists because they have re-

serves that can be used to defray current losses and

that can be replaced through higher rates once the threat

is past. In addition, they operate over geographic areas

larger than most HMOs, yet can target their price cuts

and sail their “fighting ship” HMOs wherever competi-

tion threatens to get a foothold. They may also be able

to reduce their payments to providers (an apparently

procompetitive move) as a way of financing a predatory

campaign, a practice that many providers may approve

as a way of staving off competition that they too wish to

avoid. Even if regulators are alert, they may be hard-

pressed to prevent pricing strategies that are exclusion-

ary in fact. If the regulators fail, as in this case, even

19

to consider the specific practices that carry the risk of

abuse, antitrust immunity is an invitation to suppress

the most promising forms of price competition in the

health care industry.

Certainly the insurance regulatory scheme in this case

left Blue Cross the opportunity to engage in predation

with impunity. As petitioners argue, this Court should

consider the significance of the fact that the state’s over-

sight in this case was clearly insufficient to constitute

“active state supervision” under the two-part test for

“state-action” immunity laid down in California Retail

Liquor Dealers Association v. Midcal Aluminum, Inc.,

445 U.S. 97 (1980). See also Patrick v. Burget, 486

U.S. 94 (1988).

There is some authority for the view that the McCarran

exemption, being explicit, is broader than the comity-

inspired implied exemption for state action. However,

the McCarran Act was passed well before the courts,

construing the Sherman Act not to preempt the states

as economic policy makers, finally defined what a state

must do before federal antitrust policy will give way.

This Court should take this occasion to consider the

argument that the McCarran Act, in requiring state

regulation as a condition of exemption, was simply a pre-

cursor of the state-action doctrine and did not provide

any more sweeping immunity than that which this

Court subsequently inferred from the Sherman Act itself.

It seems unlikely, for example, that Congress, in the

same statute that expressly barred state insurance regu-

lators from authorizing predatory “boycott[s], coercion

or intimidation,” intended to free private insurers to set

possibly predatory prices without actual state supe.

vision. As petitioners observe, this case provides an

ideal vehicle for addressing this extremely important

issue. As petitioners also argue, even if the McCarran

defense is valid for two of the three tactics Blue Cross

employed against Ocean State, this Court should still

indicate that evidence concerning the nature and mono-

20

polistic tendency of those actions is relevant in interpret-

ing the nonexempt conduct.

CONCLUSION

The court of appeais rested its decision in this case

in part on its “reluctan[ce] to interfere in the domain of

medical costs, ‘an area of great complexity.’”’ Pet. App.

2la, quoting Kartell v. Blue Shield of Mass., 749 F.2d

922, 931 (1st Cir. 1984), cert. denied, 471 U.S. 1029

(1985). AMCRA respectfully submits that the health

care industry is a crucially important sector of the econ-

omy in which to ensure that competition is operating and

that its “complexity” provides no justification for adopt-

ing legal rules that obscure market reality. Fortunately,

this Court has itself not been reluctant to address difficult

antitrust issues arising in the health care and health in-

surance industries in recent years.* Unfortunately, the

Court must visit the field once again.

Respectfully submitted,

MICHAEL T. PLATT *

BERMAN, AISENBERG & PLATT

1730 Rhode Island Avenue, N.W.

+ 809

Washington, D.C. 20036

(202) 293-1404

* Counsel of Record

2 Group Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205

(1979); National Gerimedical Hosp. & Gerontology Center v. Blue

Cross of Kansas City, 452 U.S. 278 (1981); American Medical Ass'n

vr. FTC, 455 U.S. 676 (1982) (per curiam) (affirmed by an equally

divided court); Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119

(1982); Arizona v. Maricopa County Medical Soe'y, 457 US. 222

(1982); Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 1551

(1984); Patrick v. Burget; FTC v. Indiana Fed'n of Dentists, 476

U.S. 477 (1986).

F ie