# Appendix — Blue Cross & Blue Shield of Kansas, Inc. v. Reazin

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 1990
- **Citation:** 497 U.S. 1005

## Text

Riz. Suprema Court, U.S.
iy FILED

49-1839—-

No. |

t CLERK si
i o_o eee ———_——
IN THE

Supreme Court of the United States

OCTOBER TERM, 1989

BLUE CROSS AND BLUE SHIELD OF
KANSAS, INC.

Petitioner,
VS.

WALTER L. REAZIN, M.D., et al.

Respondents.

APPENDIX VOLUME II
TO PETITION FOR WRIT OF CERTIORARI TO
THE UNITED STATES COURT OF APPEALS
FOR THE TENTH CIRCUIT

Gary D. McCallister Daniel R. Shulman*

Anne L. Baker GRAY, PLANT, MOOTY,
DAVIS, WRIGHT, UNREIN, MOOTY & BENNETT, PA
HUMMER & McCALLISTER 3400 City Center
3715 SW 29th Street 33 South Sixth Street
Topeka, Kansas 66604 Minneapolis, MN 55402
(913) 273-4220 (612) 343-2800

Joseph M. Alioto *Counsel of Record
ALIOTO & ALIOTO
23rd Floor

650 California Street

San Francisco, California 94108

(415) 434-2100 May, 1990
Counsel for Petitioners

TABLE OF CONTENTS
FOR APPENDIX

Appendix Volume I
[bound following the
Petition for Writ of Certiorari]

Statutory Provisions Involved ...............00 ia

Opinion of the United States Court of
Appeals for the Tenth Circuit
fg Be Oe. A) ee no Ib

Appendix Volume II

Memorandum and Order of United States
District Court for the District of

Kansas, filed May 22, 1987

GUE RO UE IRM E oor acon pdicssianioseretenseecrene Ic

Appendix Volume III

Memorandum and Order of United States
District Court for the District of

Kansas, filed May 22, 1987

(Post Trial Motions) (continued) ...........00.. 251c

Memorandum and Order of United States
District Court for the District of

Kansas, filed May 23, 1986

(Motion for Summary Judgment) «0.0.0.0... Id

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App. Ic

APPENDIX C

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS

Case No. 85-6027-K

WALTER L. REAZIN, M.D.; HCA HEALTH
SERVICES OF KANSAS, INC., d/b/a

Wesley Medical Center; HEALTH CARE
PLUS, INC.; and NEW CENTURY LIFE
INSURANCE CO.,

Plaintiffs,

BLUE CROSS AND BLUE SHIELD OF
KANSAS, INC.,

Defendant and
Counterclaim Plaintiff,

HMO KANSAS, INC.,

Additional Counterclaim
Plaintiff,

VS.
HOSPITAL CORPORATION OF AMERICA,

Additional Counterclaim
Defendant.

App. 2c

MEMORANDUM AND ORDER

[Filed 22, 1987]

On August 30, 1985, defendant Blue Cross and
Blue Shield of Kansas, Inc. announced its intention
to terminate its contracting provider agreement with
Wesley Medical Center, effective January 1, 1986.
Plaintiffs brought this action seeking damages and
other relief under the federal antitrust laws,’ and the
laws of the State of Kansas. Blue Cross and Blue
Shield answered and, with its subsidiary HMO
Kansas, Inc., filed a counterclaim challenging certain
business conduct and activities of the plaintiffs and
Hospital Corporation of America. The court granted
plaintiffs’ motion for separate trials of their
complaint and the counterclaim. Following a lengthy
trial of plaintiffs’ claims during the summer of 1986,
and a significant period of deliberation, the jury
returned a verdict in Wesley's favor finding Blue
Cross and Blue Shield liable for anticompetitive
conspiratorial restraint of trade violating Section 1| of
the Sherman Act, monopolization of the relevant
market violating Section 2 of the Act, and tortious
interference with Wesley's present and prospective
business relations violating Kansas law.

The months following the verdict were consumed
with a host of motions. First, Blue Cross and Blue
Shield moves under Fed.R.Civ.P. 12(b) to set aside
the verdict and dismiss the case for lack of

App. 3c

jurisdiction. Second, defendant alternatively moves
for judgment notwithstanding the verdict or a new
trial, under Fed.R.Civ.P. 50(b) and 59 respectively.
Third, plaintiffs move for injunctive relief against
Blue Cross and Blue Shield under Section 16 of the
Clayton Act, 15 U.S.C. §26. Fourth, plaintiffs move
for an award of costs and attorneys’ fees against
defendant pursuant to Section 4 of the Clayton Act,
IS US.C. 815. Finally, plaintiffs and Hospital
Corporation of America move for summary judgment
on the counterclaim, under Fed.R.Civ.P. 56. On
January 16, 1987, the court heard oral argument on
these motions. This memorandum and order will
address each.

Before analyzing these issues, however, some
discussion of the parties and the history of their
disputes is necessary. Perhaps more so than any
federal antitrust litigation to date, this case results
from the unprecedented economic pressures and
turmoil within the health care services and financing
industries from the beginning of this decade.
Although the suit focuses on participants and events
in Sedgwick County, Kansas, it embraces difficult
heaith care issues facing many areas throughout the
country. All the principal players are present:
hospitals and physicians as health care providers,
struggling to cut costs while maintaining quality of
care, adequate capital and a sufficient patient base;
emerging alternative delivery systems, such as health
maintenance organizations and preferred provider
organizations, radically altering traditional notions

App. 4c

about delivering and financing health care by merging
those components into unified systems; a_ large
nonprofit health care indemnity insurance plan,
seeking both the lowest price for the benefit of its
subscribers, and to maintain or increase its position
in an ever changing market; and a large publicly
held, for profit company owning and managing
hospitals throughout the country, searching for the
best ways to deliver low cost, quality health care to
its patients, while maintaining or increasing its
market position. Each of these players competes for
the loyalty, and thus the dollars, of public consumers
of health insurance products and health care services.
All the players vigorously assert they have acted
throughout in the best interests of those consumers.

This case is the consequence of the parties’
perceptions and misperceptions of the public interest.
The consuming public is the quintessential beneficiary
of the federal antitrust laws. In its interests this case
proceeded; through its interests are judged the
legality of the parties’ actions, and reactions, in the
marketplace.

Wesley Medical Center ("Wesley") is a 760-bed
tertiary care hospital located in Wichita, Kansas.
Wesley provides sophisticated health care services to
residents of Wichita, Sedgwick County, the State of
Kansas, and out-of-state patients. (Dkt. 76, Pretrial
Conf. Order, p. 4, Stip. d; hereafter "Stip. —_—".) ‘It
is a major teaching hospital, operating a number of
graduate medical education residency programs in
affiliation with the Wichita branch of the University

App. Sc

of Kansas School of Medicine. Wesley additionally
provides clinical services; medical research; and
outreach care programs fer Kansans. Six hundred
and forty physicians are currently staff members at
the hospital. Within the City of Wichita, Wesley
competes against St. Francis Regional Medical
Center, St. Joseph’s Medical Center, and Riverside
Hospital. A. B. Jack Davis, Chairman and Chief
Executive officer of Wesley, views the hospital's
primary strength as the ability to provide quality care
at reasonable cost. Wesley garners approximately
10% of all patient admissions throughout the State of
Kansas. (Dkt. 212, Tran. of Jury Trial, Vol. 1,° pp.
13-19.)

Blue Cross and Blue Shield of Kansas, Inc.
("BCBSK") was formed in 1983 by combining Blue
Cross of Kansas, Inc. and Blue Shield of Kansas, Inc.
pursuant to special enabling legislation.

(Stip. m.) BCBSK is engaged in the business of
providing private health care financing to businesses
and individuals in Kansas, including Sedgwick County
and the City of Wichita. (Stip. h.) Under its
enabling legislation BCBSK is required to pursue
health care cost containment as the primary goal in
conducting its business. (Stip. 0.) G. Wayne
Johnston, the company’s president, defines its
business as making available to Kansans "a
mechanism whereby we can provide good quality
health care at very reasonable prices, as reasonable
as we can possibly make it." (Tran. 3, p. 479; Tran.
4, p. 536.) BCBSK offered three principal health

App. 6c

care financing products in 1985: — conventional
indemnity health insurance; a preferred provider
organization called "Choice Care"; and a_ health
maintenance organization through the company’s
wholly-owned subsidiary, HMO Kansas, _ Inc.
("HMOK"). (Tran. 3, p. 481.) BCBSK is the largest
private health care financing organization in Kansas,
and its service area includes the entire state except
for Johnson and Wyandotte Counties in the
northeast. In 1985, all hospitals and approximately
90% of all physicians in this service area were under
contract with BCBSK as providers of medical services
to the company’s subscribers. (Stip. j.) No other
health insurance company has contracts with all of
the hospitals in BCBSK’s service area. (Tran. 3, p.
499.) BCBSK is also the federal Medicare
intermediary in Kansas, administering the Medicare
program throughout the company’s service area: as
well, it is one of the larger third-party administrators
of self-insured programs !n the state. (Tran. 3, pp.
495, 499; Tran. 4, p. 519.)

Conventional or "all provider" indemnity
insurance, the mainstay of BCBSK’s business and
historical success in Kansas, is a third-party insurance
contract paying, based on certain benefit levels, a
predetermined portion of the actual charges for
health care services the subscriber may receive from
any hospital or any doctor of his choice. (Tran. 1, p.
24; Tran. 3, p. 487.) Hospitals and doctors, as
contracting providers, are reimbursed by _ the
insurance carrier for health care services rendered its

App. 7c

subscribers on an "as needed" basis. There is no
incentive to economize, using the most cost
effective methods of practicing medicine, and
conventional indemnity arrangements are perceived
as contributing to the overuse and spiraling costs of
medical services. Alternative delivery systems, such
as health maintenance organizations ("HMOs") and
preferred provider organizations ("PPOs"), emerged
as a consequence of this and other trends in the
health industries:

"In recent years increased emphas[is] has been
placed on alternatives to conventional insurance
with respect to both financing and delivery. The
primary reason for this is a_ belief that
conventional insurance is neither an efficient
nor an effective method to finance and deliver
health care. The recent recession caused
business and government to focus more attention
than ever on the necessity to control and reduce
the cost of medical care. The result of this
increased interest has been restructuring of the
delivery system to include widespread availability
of HMOs and PPOs. Containment efforts have
also. been incorporated in the traditional
programs.”

(Tran. 4, p. 593, quoting Pltfs.” Ex. 64, p. 4). In
contrast to. conventional indemnity arrangements,
alternative delivery systems operate on selected
contracting under which the subscriber is limited

App. 8c

in his choices of medical care providers. (Tran. 3, p.
487.) By relinquishing his freedom of choice, an
HMO or PPO subscriber pays less for his health
care coverage; traditicnal indemnity insurance, with
higher premiums, is more expensive. (Tran. 3, p.
49().)

Health Care Plus ("HCP") was created and
developed in Wichita by Garland H. Bugg. (Tran.
17, pp. 2928-30.) HCP is a health maintenance
organization engaged in the business of providing
private health care financing to businesses and
individuals in Kansas and elsewhere, including
businesses and individuals in Sedgwick County and
the City of Wichita. (Stip. e.) HCP contracts with
doctors and hospitals to provide medical care to its
members. HCP received federal qualification on July
1, 1981, at which time it operated only in Sedgwick
County. Federal qualification designated the
company had developed adequate quality assurance
mechanisms, financial stability, and medical provider
contracts. With this qualification HCP also received
a federal loan to fund its expansion. (Tran. 17, pp.
2930-32.) The growth and success of alternative
delivery systems such as HCP occur at the expense of
traditional indemnity insurance arrangements (Tran.
4, p. 565), because of the historical predominance of
the conventional plans.

HCP was a very early, if not the first, health
maintenance organization to operate in Kansas.
BCBSK did not enter the market for alternative
delivery systems until three years later when its

i

App. 9c

health maintenance organization, HMO _ Kansas,
received federal qualification. (Tran. 4, p. 532.)
HMOK competes with HCP in private health care
financing in Kansas and Sedgwick County, (Stip. k.)
As a health care financing option, HMOK also
competes with BCBSK’s conventional indemnity
product. (Tran. 4, p. 518.)

Hospital Corporation of America ("HCA"),
through its subsidiary corporations, is engaged in the
business of providing health care services, private
health care financing and hospital management
services. (Stip. g.) From its Nashville, Tennessee
headquarters, HCA owns or manages approximately
480 hospitals located in the United States and
abroad. (Tran. 19, p. 3151.) The company’s defined
purpose is "to attain international leadership in the
health care field." (Tran. 19, p. 3154, quoting Pltfs.’
Ex. 292, p. 4.) Measured in number of hospitals,
HCA is the largest for profit hospital company in this
country. (Tran. 21, p. 3320.) Dr. Thomas Frist, one
of the founders of HCA and its current chairman
and chief executive officer, acknowledges the
company's hospital base may give it a "tremendous
advantage" in other health care business
opportunities. (Tran. 21, p. 3311.) But he also
states HCA represents less than 3% of the hospital
business sector in this country, and almost half the
company’s total corporate revenue comes from third-
party insurance carriers comprised largely of the
various Blue Cross plans across the United States.
(Tran. 19, p. 3187.)

App. 10c

New Century Life Insurance Company ("New
Century") is a California corporation with principal
executive offices in Nashville, Tennesee. New
Century is engaged, inter alia, in the business of
providing private health care financing to businesses
and individuals. On June 16, 1983, the company
received a certificate of authority to do business in
Kansas. (Stip. f.)

Dr. Walter Reazin is a medical doctor and a
partner in the Hillside Medical Office, a group
practice in Wichita. Dr. Reazin is a medical staff
member at Wesley; during much of the time period
related to this suit he was also Chairman of the
Wesley Board of Trustees. (Stip. c; Tran. 16, pp.
2664-65, 2669.) Dr. Reazin is a long-standing
subscriber to BCBSK’s indemnity insurance coverage;
he is as well a contracting physician provider for
BCBSK. (Tran. 16, pp. 2671, 2673.)

The court fully explored the recent economic
upheaval in the health care service and insurance
industries in its earlier memorandum and order on
defendant's motion for summary judgment. Keazin
v. Blue Cross & Blue Shield of Kansas, Inc., 635
F.Supp. 1287, 1297-1300 (D. Kan. 1986) ("Reazin I").
I will not repeat that background material here other
than to note particular items underlying the parties’
conduct.

Prior to its merger with Blue Shield, Blue Cross
utilized retrospective reimbursement contracts with
Kansas hospitals to provide medical services to Blue

App. lIlc

Cross subscribers, which services were covered by the
subscribers’ Blue Cross indemnity insurance policies.
Under these contracts Blue Cross directly reimbursed
the hospitals on the basis of 104% of allowable costs.
(Stip. p.) In other words, for the greater part of
Blue Cross’ 40-year history the company simply paid
hospitals and doctors their full charges for providing
health service to Blue Cross’ subscribers. (Tran. 4,
p. 536.) Under such systems, hospitals had no
incentive to keep prices down for the benefit of the
consumer (Tran. 21, p. 3347); Blue Cross’
retrospective reimbursement program simply did not
contain costs (Tran. 4, pp. 536-37). In the mid-1970s,
Blue Cross implemented a prospective rate review
system for hospital reimbursement, and encouraged
all Kansas hospitals to continue as_ participating
providers under the new contract. (Stip. p.) Under
the prospective rate contracts Blue Cross retained
the right to approve hospital budgets and rate
structures, and agreed to pay unlimited hospital
charges based on approved rate structures. (Tran. 4,
p. 537.) The program generated extreme variations
in hospital charges for equivalent medical procedures
and, similar to the earlier retrospective
reimbursement system, failed to contain costs or
utilization. (Tran. 4, pp. 537-39.) By the early 1980s
utilization of hospital services in this state was the
second highest in the entire country; Kansans were
using approximately 1,000 days of hospital care for
every 1,000 people. (/d.)

App. 12c

These and other trends in the health industries
provided the catalyst for rapid development of
alternative delivery systems, "brokered" arrangements
for purchasing and providing health services. These
arrangements are fueled both by demand (from
consumers of health services and insurance) and
supply (of increasing numbers of health care
providers). Garland Bugg’s development of Health
Care Plus in Wichita and Sedgwick County was no
different; he and HCP capitalized on opportunities
arising from the inefficiencies of prevailing market
conditions:

[It] seemed that insurance companies would not
listen to physicians about where care could be
cost effectively delivered. [The insurance
companies] insisted on having care delivered on
an in-patient basis . . . rather than in the
doctor’s office. One example of that, a surgeon
who [| talked to just to see if he would be
interested in having a health plan in Wichita. .
. said that there was one procedure, which is a
proctosigmoidoscopy. For instance, Blue Shield
would pay thirty-five dollars to do_ that
procedure in his office. If he did the same thing
in the hospital, they would pay him a larger
amount, if I remember it was fifty-five dollars,
plus they would pay for a procedure room of a
hundred and twenty dollars. [There] really was
no cost effectiveness in our [then] current
system. In my opinion, that’s how we got so

App. 13c

many hospital beds today. More care really
should be delivered out-patient, and the HMO
concept sponsored that... .

[Employers] were saying that their health care
costs were just going out of the sky. If I recall
at the time .. . about twenty-eight percent was
the average increase for a premium, and in cases
where maybe a son of someone in the company
would have a motorcycle accident, they might
have a two or three or four hundred percent
increase in their premiums from one year to the
next... ..
(Tran. 17, pp. 2929-30).

With HCP’s federal qualification in early 1981
the company received the power to mandate
employers, requiring the employers to make
available an HMO program as an_ individual
alternative for their employees. (Tran. 4, pp. 531-32.)
HCP used the federal mandate capability extensively
and successfully. By the end of 1983 HCP had
acquired approximately 13,000 members (subscribers)
in Sedgwick County. (Tran. 17, p. 2932.) HCP is an
‘individual practice association", or "gatekeeper",
model HMO in which members must select a primary
care physician from those under contract with HCP.
A member’s monthly premiums pay for all needed
medical care so long as it is obtained from the

App. 14c

chosen primary care physician, or a specialist or
hospital authorized by that physician as needed.
(Tran. 17, pp. 2938-39.)

Each physician contracting with HCP is paid a
capitation fee, a specified auiount for each member
choosing that physician as his or her primary care
provider. HCP does not separately contract with
specialists; rather, each primary care physician
determines in his own discretion whether to refer an
HCP patient elsewhere for needed medical attention,
upon which HCP pays the specialist’s fees. HCP sets
aside a portion of the capitation fund (the
"withhold"), and a hospital fund, to cover specialist
and hospital costs for services rendered HCP
patients. Funds not used at the end of a year are
returned to the contracting physicians, each of whom
receives a prorata share of the refund based on the
number of HCP patients treated.

Although not contracting with specialists, HCP
does contract with hospitals. HCP has capitation
agreements with Wesley and St. Francis Hospitals.
Under these contracts the hospitals are paid a
certain monthly figure per member. These amounts
are paid whether or not the members receive care at
the hospitals, but if the members do seek services
there the hospitals must provide care and are paid
no more than the monthly capitation. HCP has fee-
for-service contracts with St. Joseph and Riverside,
under which those hospitals are not paid capitation
but are simply reimbursed for any services which may
be provided HCP members. Reazin /, 635 F.Supp. at

App. 15c

1300.

Based on HCP’s success in Sedgwick County, in
1983 company officials sought to expand into
Lawrence, Salina, Hutchinson, Topeka and other
Kansas cities. The officials explored the conversion
of HCP from a nonprofit to a for profit company,
and eventually issued a private stock placement to
generate the roughly $2 miilion needed for expansion.
(Tran. 17, pp. 2933-35.) Under securities regulations
governing such limited offerings, HCP was confined
to no more than 35 sophisticated investors. HCP
offered the stock to wealthy individuals inside, or
closely affiliated with, the company. (/d., p. 2936.)
The stock was a_ "very risky" investment. (/d., p.
2937.) It was offered to a number of Wichita
physicians, some of whom were under contract with
HCP as primary care providers, and others who were
not contracting providers. (/d., pp. 2937-40.) Among
the contracting physician offerees, certain individuals
and groups accepted the invitation and bought the
stock, while others did not; all of the noncontracting
physicians who were offered stock invested in HCP.
(Id., p. 2941.)

The development and growth of alternative
delivery systems were not the only results of the
crisis in the health insurance and service industries.
BCBSK faced criticism and demands for change from
the Commissioner of Insurance of the State of
Kansas, the Kansas Legislature, and BCBSK’s own
subscribers, all alarmed over increasing utilization

App. 16c

and spiraling costs. From 1975 through 1982, in-
patient utilization in Kansas was up to 38% higher
than the national average. For the four year period
from 1980 through 1983, BCBSK’s premium rate
increases to subscribers were 17%, 23%, 33% and
22% respectively, an overall rate increase of 95%.
(Tran. 4, pp. 538-40, 543; Pltfs.’ Ex. 191.)

On January 1, 1984, BCBSK responded to these
problems by implementing a new contract, the
“Contracting Provider Agreement (Hospital) of the
Competitive Allowance Program (‘CAP’)", and
encouraged all hospitals, including Wesley, to enter
into the new agreement. (Stip. p; Tran. 4, p. 539.)
CAP was aé_ "severe change" to BCBSK’s
reimbursement system under the previous cost-plus
arrangements. (Tran. 4, pp. 544-45.) The CAP
program established the maximum amount BCBSK
would reimburse a medical provider for services
within particular diagnostic related group. (Tran. 4,
pp. 546-47.) Providers contracting with BCBSK
under the CAP program commit themselves to a
maximum allowable payment ("MAP") for each
service provided to the subscribers. The MAPs are
based on uniform diagnostic-related groupings
(DRGs) of medical services; thus, only a limited
amount of money is paid to a provider for medical
services which might be rendered. The MAP clause
is one of the cost containment provisions of BCBSK’s
contracting provider agreements. The clause protects
BCBSK’s subscribers by assuring predictability of
their health care expenses; the "hold harmless"

App. 17c

provision ensures subscribers will not receive bills
for covered medical services in excess of the contract
amount BCBSK pays a participating provider. (Stip.
o; Tran. 3, pp. 483-84; Tran. 4, pp. 546-47.) The
CAP program was BCBSK’s effort to develop a more
cost effective reimbursement program; contracting
hospitals agreed to the MAPs, the hold harmless
provision, utilization review by BCBSK, and other
programs designed to control health care costs.
(Tran. 4, pp. 547-48.) CAP contracting provider
agreements also contain a_ significant competitive
advantage for BCBSK in the form of a "most favored
nations" clause under which participating providers
agree to "fully and promptly inform" BCBSK about,
and make available to it, any rates lower than the
MAPs the hospital might agree to charge competing
insurance carriers. (Tran. 4, p. 596.) At least "one
of the reasons" BCBSK uses the most favored nations
clause is to forestall other insurance companies from!
receiving any better prices from a hospital, which
would enable competitors to offer lower rates to
subscribers for medical insurance; that “would be a
disadvantage to our subscribers." (Tran. 4, pp.
596-98.) In 1984, all 104 Kansas hospitals in
BCBSK’s service area were contracting providers
under the CAP program, including Wesley. (Tran. 4,
pp. 558-59.) BCBSK’s president is unaware of any
other health insurance company in this area that has
the advantage of a most favored nations clause in its
provider contracts, with the exception of Delta
Dental Insurance Company. (Tran. 4, p. 598.)

App. 18c

Slowly, BCBSK_ finally developed its own
alternative delivery system for health care financing.
(Tran. 4, p. 574.) HMO Kansas received state
certification in February, 1984, and did not receive
federal qualification until July, 1984, over three years
after Health Care Plus. (Tran. 6, pp. 1036-37; Tran.
12, p. 2027; Knack Depo., p. 110.) Although HMOK
was licensed to operate throughout the State of
Kansas, BCBSK recognized HCP’s earlier arrival and
presence in Wichita placed HMOK at a considerable
disadvantage here. (Tran. 4, pp. 533-34, 575; Tran.
6, p. 1038.)

From the outset, HMOK experienced difficulty
penetrating the Wichita market. (Tran. 6, pp.
1079-80; Def’s. Ex. 546.) HCP’s early presence in
this market allowed it to capture a_ significant
membership base and develop a comprehensive
physician provider list. (/d.) HMOK attempted to
enter Wichita with the same HMO model as HCP
(an IPA or gatekeeper model), offering substantially
similar benefits. (Tran. 12, pp. 2027-28.) Employers
are not required to offer more than one federally
qualified HMO option to employees; only an HMO
different in structure and benefit design than existing
HMOs can mandate employers to offer its products
as a second option to employees. (Tran. 4, p. 532;
Tran. 12, pp. 2022-23.) Even after receiving federal
qualification HMOK was therefore unable to
mandate employers to offer HMOK to. their
employees along with HCP.

App. 19c

In addition to problems in attracting sufficient
membership, HMOK experienced difficulties in
securing an adequate physician provider base.
Certain groups declined to do business with HMOK
from the outset. Another disadvantage HMOK faced
was the higher capitation paid to physicians by HCP.
(Tran. 8, p. 1348.) HMOK offered two different risk
packages to physician providers: full risk and partial
risk contracts. (Tran. 16, pp. 2702-03; Tran. 29, p.
4762-63.) | However, HMOK required physicians
already under contract with HCP to accept HMOK’s
full risk contract in order to participate. (Tran. 29,
pp. 4762-63.) Certain doctors objected to this
requirement and declined to participate in the
HMOK program. (Tran. 29, p. 4763.) Nevertheless,
a number of primary care physicians and specialists
in Wichita entered contracts with HMOK in late
1983 and early 1984. (Tran. 6, pp. 1037-38; Knack
Depo., pp. 115-16.) Included in this number were
the Hillside Medical Office and the Wichita Clinic,
both of wnom were already under contract with
HCP when they entered separate contracts with
HMOK in late 1983. (Tran. 16, pp. 2688, 2706; Tran.
26, pp. 4144-45.) Physicians in both practices
subsequently purchased stock in HCP during early
1984.

HMOK'’s problems in attracting an adequate
membership base — proved insurmountable. When
federally qualified in July of 1984, HMOK had
enrolled 1800 members. By the end of that year,
HMOK’s Wichita enrollment totalled only 2000

App. 20c

members, while HCP had approximately 35,000.
(Tran. 12, pp. 2027; Tran. 17, p. 3025; Pltfs.’ Ex. 65,
p. 9.) The Hillside Medical office terminated its
contract with HMOK on July 11, 1984. (Tran. 6, pp.
1065-66; Tran. 25, p. 4051.) The Wichita Clinic
terminated its contract with HMOK on July 19, 1984.
(Tran. 17, p. 2993; Tran. 25, p. 4051; Def’s. Exs. 455,
456.)

In early September, 1984, the HMOK Board of
Directors voted to discontinue HMOK’s activities in
Sedgwick County (Def’s. Ex. 553), and the Wichita
area primary care physicians were notified of this
decision on March 27, 1985 (Pltfs. Ex. 49).
However, HMOK continued its business pursuits in
other parts of Kansas, and is a strong competitor
against HCP in areas where the two companies
entered those markets at similar times.

In 1984 Wesley was the largest, strongest and
most competitive low cost, nonprofit tertiary care
hospital in this area. Concerned about Wesley's
future, in the fall of 1984 the hospital’s
administrators began a feasibility study of the sale
of its assets to a well-financed, investor-owned, for
profit corporation. The factors motivating this
decision included the market trends and economic
forces previously discussed. Reactions to high
utilization and rising costs of medical care were
severely impacting the health care sectors; by that
time Kansas in-patient utilization had decreased more
than 50%. (O’Brien Depo., p. 153.) In addition to
reduced utilization, Wesley faced increasing

App. 2lc

regulatory controls and restricted revenue from third-
party payors, increasing competitive forces, and
increasing capital requirements. Sale of the
hospital’s assets to a profit corporation was perceived
as Offering the following advantages: unlimited
access to capital; system efficiencies (purchasing,
marketing, accounting, etc.); reduced economic risk;
improved market position; preservation of quality;
and an expanded, enhanced health care mission.
(Stewart Depo., pp. 104-05; Defs. Ex. 31.) Wesley
administrators approached HCA, "the best in the
field," because the company possessed the quality
care and administrative efficiencies Wesley sought.
(Tran. 1, pp. 36-37.) At that time HCA was
interested in adding tertiary care hospitals to its
operations because of government deregulation
programs and the emerging diagnostic-related group
payment systems. Attempting to relate the growing
cost effectiveness of the marketplace to quality health
care, HCA was seeking "centers of excellence" around
the country through which the company could
develop a provider network to meet these needs.
(Tran. 19, p. 3168.)

Negotiations between Wesley and HCA
continued throughout the fall, and in November,
1984, they agreed to the sale of Wesley's assets for
$265 million. (Tran. 1, p. 36; Tran. 19, p. 3174.) Dr.
Thomas Frist, HCA’s Chairman of the Board, lists
the following as the factors supporting the company’s
decision: Wesley's past, present and projected future
financial performance; the _ hospital’s national

App. 22c

reputation as a teaching school; the quality medical
staff; the characteristics of the marketplace in which
Wesley is located; HCA’s ability to enter the midwest
where it did not have a strong presence; and the
strategic importance of Wesley, as a "center of
excellence," to HCA’s overall goals. (Tran. 19, pp.
3172-73.) On July 11, 1985, HCA, through its wholly-
owned subsidiary HCA Health Services of Kansas,
Inc., consummated the sale and acquired Wesley.
(Stip. v.) Of considerable importance to Wesley's
decision to sell was its understanding of HCA’s
operational philosophy of decentralized control and
local autonomy for its hospitals. (Tran. 1, pp. 37-38.)
Day to day operation of the hospital remains the
responsibility of A. B. Davis, the chief executive
officer, and control of the Medical Center remains
the province of the Wesley Board of Trustees, the
same local group of volunteers who likewise made
hospital policies prior to the sale. HCA preserved
existing Wesley management personnel following the
sale because of HCA’s confidence in Wesley’s sound,
proven management team. (Tran. 19, p. 3176.)
Wesley's duties to HCA are primarily financial:
providing financial information to the company and
its shareholders, and participating in budget approval
processes. (Tran. 1, pp. 38-39.)

At that point HCA was facing criticism for its
reluctance to enter the health care financing industry,
particularly with HMOs. (Tran. 19, p. 3178.)
Initially, in order to provide life and other insurance
products primarily for its own employees, on April

App. 23c

25, 1985, HCA _ purchased New Century Life
Insurance Company, an inactive shell company with
licenses to operate in over 30 states. (Tran. 19, pp.
3181-82; Stip. u.) HCA purchased the company
because of its multi-state licenses; New Century gave
HCA access to life insurance products in those states.
(Tran. 19, p. 3182.)

During this time period Health Care Plus began
exploring the possibility of expanding its HMO
operations beyond Kansas, to a _ national scale.
(Tran. 17, p. 2963.) Recognizing the additional
capital needed to finance this expansion, HCP
officials explored various Opportunities with
investment bankers, venture capitalists, and other
institutional investors. (/d., pp. 2963-64.) Upon
learning of HCP’s plans, Wesley’s Davis indicated
HCA might be interested because that Company was
in the process of purchasing some HMOs and third-
party administrators in other parts of the country.
(/d., p. 2965.) In the spring of 1985 HCP began
discussing its plans with HCA, initially focusing on
the possibility of HCA making a limited investment
in HCP. (/d., pp. 2966-67.) HCA lacked the
expertise needed to successfully create and market
its HMOs, and recognized it would take years to
adequately develop the necessary internal manage-
ment systems and guidance. (Tran. 19, p. 3180.)
When HCA committed itself to the purchase of
Wesley in late 1984, the company was. not planning
to purchase an HMO in Wichita. (Tran. 19, p.

App. 24c

3181.) With this new opportunity, however, HCA
ultimately pursued HCP as a potential acquisition
because HCP offered the most advanced, sophisti-
cated management tools of any HMO under consid-
eration. (/d., p. 3180.) For their part, HCP officials
eventually discarded the idea of a limited investment,
to avoid "creeping acquisition" as capital needs grew
and the risk of ultimately realizing less than the full
value of the company. (Tran. 17, p. 2967.) The sale
of HCP to HCA was publicly announced in May,
1985; on August 14, 1985, HCA, through its wholly-
owned subsidiary Health Care Plus of America, Inc.,
consummated the acquisition of HCP for
approximately $41 million. (Tran. 17, p. 2970; Tran.
19, p. 3269; Stip. w.) The purchase price was the
equivalent of $18.00 per share of HCP’s outstanding
stock. Corporate personne! and area physicians who
previously bought that stock, at prices ranging from
$.25 to $1.00 per share, made substantial profits from
the sale to HCA.

Following the acquisition, Garland Bugg was
appointed President and Chief Executive officer of
HCP of America, Inc., with responsibility for overall
management and development of HCP plans in the
states assigned to that unit. (Tran. 17, p. 2971.)
Much like the post-acquisition management of
Wesley, HCP management remained decentralized
and autonomous; its interaction with HCA was
primarily financial. (Tran. 17, p. 2971.) HCP
continues to contract with Wesley, St. Francis and St.
Joseph Hospitals in Wichita to provide medical care

App. 25c

to its members. (Tran. 1, p. 96; Tran. 17, p. 2970.)

Wesley, a contracting provider with BCBSK from
the 1940s and a charter member of the original Blue
Cross program formulated under the Kansas
enabling statute, has participated in BCBSK’s CAP
program since its implementation in 1984. (Stip. q.)
Five days after the effective date of Wesley’s sale to
HCA, BCBSK sent Wesley a revised CAP contract
reflecting the hospital's name change. (Tran. 1, pp.
34, 36; Pltfs.’ Exs. 6, 7.) Approximately two weeks
later, on July 29, 1985, BCBSK sent Wesley the
"Hospital Policies and Procedures and MAPs"
(maximum allowable payments) materials for calendar
year 1986. (Tran. 1, pp. 34-36; Pltfs.’ Exs. 74, 75.)
The materials reflected a 4% increase in the 1986
MAPs over the 1985 levels. (Tran. 1, p. 36.) The
cover letter from BCBSK to Wesley stated in part:

No action is required, at this time, if your
hospital desires to continue contracting with
Blue Cross and Blue Shield of Kansas during
calendar year 1986. We hope that you will find
the 1986 Policies and Procedures and MAPs
acceptable in order that we may continue our
contractual relationship in 1986.
(Tran. 1, p. 35, quoting Pltfs.’ Ex. 74.)

After abandoning HMOK in the Wichita area
in early 1985, BCBSK attempted to re-enter the
market with a preferred provider organization known
as "Choice Care". (Tran. 4, p. 631.) BCBSK

App. 26c

originally structured Choice Care to include no more
than 35% of the most cost effective area physicians
as participating providers, with BCBSK exercising a
stringent utilization review program and a significant
capitation withhold for those physicians. (Tran. 2,
pp. 248-49.) On this basis competitive bids were
then solicited from all Wichita hospitals. (Tran. 4,
p. 631.) BCBSK also represented that during the
first year of choice Care operation, from 40% to 60%
of its current CAP subscribers would likely switch to
Choice Care. (Tran. 2, pp. 249-50.) In May, 1985,
Wesley, which seeks to participate in programs of all
third-party payors likely to generate patient business,
bid significant discounts from its regular charges,
relying on BCBSK’s announced structure of Choice
Care. (Tran. 2, pp. 246-47; Tran. 16, p. 2821.)
BCBSK received bids from all four Wichita hospitals,
and chose Wesley and St. Francis as the successful
bidders on Choice Care. (Tran. 4, p. 631; Tran. 7,
pp. 1165-1169.) The Choice Care physician withhold
provision proved too much, however, and BCBSK
was unsuccessful in securing the participation of the
necessary physicians. (Tran. 2, p. 250-51.) BCBSK
then altered the Choice Care utilization review and
physician payment mechanisms. (Tran. 7, pp.
1185-86.) Although the modified Choice Care
program would have appealed to more physicians
and subscribers, it exposed the bidding hospitals to
greater financial risk for the same reasons. The bids
were calculated on assumptions of a certain patient
load; BCBSK’s subsequent alterations meant the

App. 27c

lower rates would be extended to more patients than
the hospitals originally anticipated. (Tran. 16, p.
2822.)

Officials from Wesley and BCBSK_ met
throughout June and July of 1985, attempting to
resolve these problems. (Tran. 2, p. 251.) On July
24, John Knack, Vice President of Marketing for
BCBSK, and Marlon Dauner, BCBSK Senior Vice
President for External Affairs, met with Edmund
Berry, Wesley's Senior Vice President and Chief
Finance Officer, to discuss the Choice Care program.
(Tran. 7, p. 1186; Tran. 16, p. 2818.) Knack and
Dauner anticipated they could obtain Wesley’s
commitment to the Choice Care contract; they
attempted to respond to Wesley’s concerns about the
contract and persuade Berry to act. (Tran. 7, p.
1190.) However, Berry lacked the authority to act
alone on Wesley's behalf; he was authorized only to
continue negotiations and attempt to resolve the
financial discrepancies of the Choice Care contract.
(Tran. 2, p. 253; Tran. 17, p. 2844.) The other
Wesley officials responsible for the Choice Care
contract, Robert O’Brien, Senior Vice President, and
Donald Stewart, President and Chief Operating
Officer, were not present at the July 24 meeting.
(Tran. 2, pp. 251-53; Tran. 7, p. 1186.) Berry
indicated he was facing problems with the HCA
office in Dallas regarding the existing terms of the
Choice Care contract as written, and asked how
Wesley could rebid the program. The BCBSK
representatives replied they would not reopen the

App. 28c

program for new bids. At that point, Berry allegedh
responded Wesley desired to participate as a Choice
Care hospital because "it was HCA’s intention to pul
one of the other large hospitals in Wichita out of
business and then work with the other.” (Tran. 7,
pp. 1190, 1193-94.) Berry acknowledges there was
detailed discussion about other Wichita hospitals and
possible adverse consequences of their present bids
on Choice Care, but denies making any such
statement about HCA’s intent to put another
hospital out of business, either at the July 24 meeting
or at any other time. (Tran. 17, pp. 2852-53.) After
further discussion, Berry concluded the July 24
meeting stating he needed to do more work on the
Choice Care contract and would later contact
BCBSK. (Tran. 7, p. 1203.)

Throughout early 1985 BCBSK_ was also
attempting to reestablish HMO, Kansas in the
Wichita area. (Tran. 7, pp. 1153-56.) Uniike the
abandoned HMOK program, the "new" HMOK was
designed as a staff model HMO, rather than an IPA
or gatekeeper model; through the staff model,
BCBSK sought to establish its own medical practice
in the Wichita community, rather than contract with
individual physicians. (/d., pp. 1155-56.) St. Joseph's
Medical Center, and later St. Francis Regional
Medical Center, both expressed enthusiasm for
opportunities presented by the new HMOK.
Officials from those hospitals and BCBSK
periodically met during the late spring and summer
of 1985 to discuss possible HMOK alternatives:

App. 29c

selling financial interests in HMOK; forming another
HMO; or developing a hospital-based HMO for the
Wichita area. (/d., pp. 1156-59, 1213-15.)

On July 24, Knack and Dauner went from the
Wesley meeting to another scheduled meeting with
St. Joseph and St. Francis representatives regarding
HMOK. Dauner told the hospital officials about the
earlier meeting with Berry, expressing "alarm" over
Berry's purported statement. (Tran. 7, pp. 1206-07.)
However, there was no discussion at that time about
the possibility of BCBSK terminating Wesley as a
contracting provider. (/d., p. 1207.)

The Steering Committee of the BCBSK Board
of Directors met on July 30, 1985. (Pltfs.’ Ex. 167.)
The steering committee is composed of Johnston,
Dauner, Knack, and other senior management
officials; they are not members of the board of
directors, but are responsible for the decision-making
process generating recommended policies which are
then offered to the full board or its executive
committee for approval and adoption. (Tran. 2, pp.
215-16; Tran. 4, p. 644.) Berry’s alleged remarks at
the July 24 meeting with Dauner and Knack were
not mentioned at the July 30 steering committee
meeting, and there was no discussion of the possible
termination of Wesley. (Tran. 4, pp. 643, 652; Pltfs.’
Ex. 167.) On July 31, Wesley received the proposed
Choice Care contract from BCBSK. (Tran. 17, p.
2845.)

On August 1, 1985, an article entitled "Hospital
Corp. to Market Group Health Insurance" appeared

App. 30c

on page 19 of the Wall Street Journal. In i
entirety, the article stated:

NASHVILLE, Tenn.--Hospital Corp. c¢
America said it will begin selling group healt
insurance and a_= preferred provide
hospitalization plan in three cities this month

Hospital Corp., a for-profit operator o
hospitals and health-maintenance organizations
said it will offer the group health insurance
through New Century Life Insurance Co., whict
it acquired earlier this year from E. F. Huttor
Group, Inc. New Century has insurance licenses
in 35 states.

The move is part of an industrywide trend
to mesh health insurers with health-care
providers. "Within the next six years, we expect
to see two or three dominant fully integrated
health-care companies," said Thomas F. Frist, Jr..
chief executive and president. Hospital Corp
also eventually will offer life insurance, Mr. Frist
said.

People covered by Hospital Corp. health
insurance wouldn't be required to use Hospita
Corp. facilities. But under the preferrec
provider plan also unveiled yesterday, Hospita
Corp. will give financial incentives in the
employees of eligible companies who us¢
facilities designated by the chain.

Hospital Corp. will begin marketing bot!
plans in Nashville and Chattanooga, Tenn., anc

App. 3lc

Charleston, S.C. It plans to offer them to 15 to
20 additional cities within 18 months, a
spokesman said.

Hospital Corp. is initially targeting the
group health-care programs at companies with
ive to 250 employees, but eventually will seek

larger employers, a company spokesman said.
(Def’s. Ex. 278.)

In the preliminary meetings between BCBSK,
St. Joseph and St. Francis concerning HMOK, the
hospitals indicated they desired majority ownership
of the HMO. BCBSK’s Johnston, however, refused
this idea. (Tran. 6, p. 962.) On August 4, 1985,
administrative officials from both hospitals met in
Wichita with Marlon Dauner, John Knack, and
William Pitsenberger, BCBSK’s general counsel, and
presented the three men with a personal opportunity
to leave their employment with BCBSK and join the
hospitals in the creation, management and marketing
of a new HMO which would be owned by the
hospitals. (Tran. 6, pp. 959-964.) This HMO would
have competed with all of the BCBSK_ health
insurance products (CAP, HMOK and Choice Care),
as well as HCP. (/d., p. 961.) Dauner, Knack and
Pitsenberger indicated their interest in such a
program, but required a firm commitment from the
hospitals that same day. That commitment was not
forthcoming, and the idea was dropped. (/d., pp.
965-66.) Wayne Johnston was not aware of this

App. 32c

meeting when it occurred. (/d., p. 960.)

Immediately following that meeting, Daun
Knack and Pitsenberger developed an alternati
program to be owned and operated by BCBSK b
which would be structured on a hospital-based HM
in conjunction with St. Joseph and St. Franc
Hospitals. What emerged was a new HMOK produ
known as the "Kansas Health Plan", a corporatic
owned by St. Francis and St. Joseph Hospitals an
under contract with HMO, Kansas. (Tran. 6, py
966-67.)

The next day, August 5, 1985, John Knac
returned to Wichita to speak with St. Francis an
St. Joseph representatives about the Kansas Healt
Plan concept. (Tran. 6, pp. 967-68.) The BCBS!
steering committee met in Topeka at the same time
during which there was general discussion about th
Wichita health care environment but nothin
specificaily related to Wesley, HCP or HCA. (Tra
4. pp. 645-46; Tran. 6, pp. 968-69.) The headnot
on the minutes of the August 5 steering committe
meeting states:

PLEASE NOTE: On Monday, August 1.
Steering Committee will have its usual meetir
at 8:30 a.m. for which there will be an agend
The meeting will be adjourned for lunch an
meet again immediately thereafter, probably fc
the rest of the afternoon. The afternoon portic
of the meeting will cover environmental chang:
occurring since the planning session and ho

were 6 3° ao oe

vw

App. 33c

these affect the direction of the Plan and plans
for 1986.
(Pitfs.’ Ex. 168, p. 1.)

The next BCBSK steering committee meeting
occurred as scheduled on August 12, 1985. (Tran. 4,
p. 647; Tran. 6, p. 969.) The relevant portion of the
minutes of that meeting states simply: "The
remainder of the afternoon was spent discussing
various environmental changes in the health care
scene." (Pltfs.. Ex. 169, p. 4.) What actually
occurred that afternoon was anything but a casual
discussion. Marlon Dauner went to that meeting
prepared to recommend that the BCBSK Board of
Directors terminate Wesley as a contracting provider
under the CAP program. (Tran. 6, p. 970.) The
proposal was made and that afternoon the steering
committee decided to recommend "to the Executive
Committee of our Board of Directors to cease
contracting with Wesley." (Tran. 4, p. 647.) The
steering committee also decided on August 12 to
abandon the Choice Care PPO program in Wichita.
(Tran. 4, p. 647; Tran. 6, pp. 969-70, 977.) The last
decision made by the steering committee on August
12 is critical: the committee members, BCBSK’s
senior management staff, also decided to seek to
negotiate reduced MAPs with the other Wichita
hospitals in order to acquire a price competitive CAP
insurance product without Wesley’s participation as
a contracting provider. (Tran. 6, pp. 969-70, 977-78.)

App. 34c

On August 13, 1985, the day after the steering
committee meeting, BCBSK’s Dauner and Knack met
with representatives of St. Joseph and St. Francis
Hospitals. Dauner and Knack opened that meeting
by announcing that BCBSK_ was considering
terminating Wesley's contracting provider agreement
and, because that would result in a different CAP
product, BCBSK wanted the hospitals to accept at
least a 20% reduction in the MAPs. (Tran. 6, pp.
980-81; but see Pltfs. Ex. 4 (BCBSK initially sought
25% _ discount).) The hospital representatives
indicated at this meeting they were receptive to
discounting the MAPs contingent upon Wesley’s
termination by BCBSK. (Tran. 15, pp. 2600-03.)
After further discussion, Knack was asked to appear
before the St. Francis executive committee the
following day to discuss the proposed Wesley
termination and MAPs reduction. (Tran. 15, p. 2498.)

On August 14, Knack made the requested
presentation to the St. Francis executive committee.
The minutes of the August 14 meeting read in
pertinent part as follows:

Bruce Carmichaei [St. Francis’ Vice
President of Planning] gave a brief update of
the recent transactions between St. Joseph, Blue
Cross & St. Francis. After a brief discussion,
John Knack, Blue Cross, Marketing, was asked
to join the group. He explained the CAP
Program which would be a program signing
contracts only with St. Joseph and St. Francis.

App. 35c

The discussion of a discount was held. Steve
Harris (St. Francis’ Chief Financial Officer] was
asked to work out what would be a percentage
that SFRMC could live with. [Mr. Knack stated
that an] answer would be necessary by August
16th so that Blue Cross could cancel the Wesley
contract, giving 120 day notice... .

(Pitts. Ex. 3; Tran. 12,.p. 2103.) BCBSK’s
contracting provider agreement with Wesley required
120 days’ notice for termination without cause.
BCBSK was accordingly required to give Wesley
notice of termination no later than September |,
1985, for an effective date of January 1, 1986.
Within a week after the August 14 meeting,
Carmichael called Knack and told Knack that St.
Francis did not want to give discounts on all MAP
payments but would give discounts on any new
business resulting from Wesley’s termination. (Tran.
ll, p. 1883.) Knack informed Carmichael that
Carmichael’s suggested modification of — the
arrangement was unacceptable to BCBSK. (/d., pp.
1884-85.) On August 21, Knack again met with
representatives of St. Francis and St. Joseph and
further discussions ensued concerning the Wesley
termination/MAPs discount. (/d., p. 1889.) At the
August 21 meeting, Knack indicated that Blue Cross
would be making a similar proposal to Riverside
Hospital. (/d.) At this same meeting BCBSK
offered the hospitals another suggested modification:

App. 36c

instead of terminating Wesley and obtaining reduc
MAPs from the "Saints", BCBSK offered to mar!
a PPO product featuring only St. Francis and
Joseph as preferred providers. (Tran. 11, |
1889-90.) St. Francis. and St. Joseph hospital offici:
responded they wanted no part of the suggest
alternative because they preferred BCBSK’s origir
proposal involving Wesley's termination as
contracting provider under the CAP program. (/«
pp. 1890-91.)

Two days later, on August 23, a meeting w:
held between representatives of St. Francis and §
Joseph Hospitals. At that meeting, St. Franc
agreement to accept a 20% MAPs reduction m;
have been communicated to St. Joseph. (Tran. 1
pp. 2295-96.) That very day Wayne Johnston sent o
a letter calling a special August 29 meeting of tl
BCBSK board of directors executive committee:

This will serve as a reminder following n
telephone call to each of you that we _ ha’
called a special meeting of the Executi'
Committee for Thursday, August 29, .. .

We have a critical decision to make regardit
contracting with hospitals. We _ found

necessary to call a special meeting of ti
Executive Committee to consider this critic
issue before the scheduled September meetin
We have discussed this with your Chairma
Pete Haas, and he agrees such a meeting shou

App. 37c

be called.

I'm enclosing a few articles that I hope will
indicate to you some of the new competitive
pressures we feel developing. If you have the
opportunity to review this material, I think it will
become evident that many new competitors are
coming on the scene and we will see shortly
health care cost price wars. This material will
give you a better understanding of some of the

recommendations we will be making on August
29
a7.

(Pitfs.. Ex. 171.) Accompanying the letter were
reports and articles detailing the plans and
operations of the following health care and health
insurance corporations: HCA; American Medical
International; National Medical Enterprises; Humana;
U.S. Health Care Systems; Prudential; and Cigna.
(/d.)

At the August 29 executive committee meeting,
Wayne Johnston presented the staff's proposal to
terminate Wesley as a contracting provider. His
presentation began with a review of the health care
environment and BCBSK’s responses to those
changes. The minutes reflect the following:

What is happening is a total revolution is
occurring in health care. The public is seeing
rapid growth of for-profit hospital chains such as
the Hospital Corporation of America (HCA),

App. 38c

Humana and others. Not only is the rapi
growth occurring but these for-profit hospita
chains are developing very strong strategie:
toward what they call "vertical integration"
These chains will not only supply health care
they will also provide insurance coverage anc
are in the process of buying PPO’s, HMO’s and
developing third party administrators and doing
it successfully.

The problems faced by Blue Cross and Blue
Shield are not confined to these for-profit
institutions. There are 450 to 500 major
hospitals around the country that belong to the
Voluntary Hospital Association. This
Association will be entering into the same kinds
of activities as the for-profit chains, but will be
doing so through the commercial insurance
company -Aetna, another of Blue Cross and
Blue Shield’s competitors.

Physicians are equally responsive to the new
competitive environment and are forming PPO’s
and HMO’s. They feel strongly they must
maintain control over programs being developed
locally and nationally.

All kinds of joint ventures are being proposed
among commercial insurance companies,
BlueCross and Blue Shield Plans, etc. said
Johnston. There are probably many more on

App. 39c

the drawing board today that staff isn’t even
aware of.

(Pitfs.’ Ex. 10, p. 3.)

Johnston commented that the foregoing was a
modest effort to describe the health care
revolution. What will be the result of this
revolution? There will be a wide choice of
health care coverage for every individual in
every business and the public-will be confused
about what to buy. In the short run, there will
be a proliferation of alternatives which the
consumer likes. Staff's assessment is that in the
long run, many of those schemes will fail.

Johnston feels that health care price wars are
coming and asked the question, "How do we
react to ‘hat?" Some feel that health care costs
will not skyrocket again, but staff feels this
thinking is erroneous.

Johnston concluded by saying, with the review
of the last three years ... where Blue Cross and
Blue Shield of Kansas stands today ... and
staffs perception of the future, the major
question staff wants the Executive Committee to
consider today is -- "Does Blue Cross and Blue
Shield of Kansas wish to continue to do business
with entities that openly desire to compete with

App. 40c

the organization and enroll Biue Cross and Bi)
Shield subscribers in their programs? We thi
not. We believe now is the time to bite t
bullet and work with providers who want
work with us to best serve our subscribers."

Johnston continued, saying, "HCA (Hospit
Corporation of America) has a_ careful
structured and thought through strategy

dominate health care and health insurance |
Wichita and surrounding areas. They have tl
experts and dollars to do it with. This has bee
demonstrated by aggressive actions taken

Wichita with the purchase of a prestigio
hospital (Wesley Medical Center), the purcha:
of Health Care Plus (HCP) - a competiti
HMO - purchase of an insurance company ar
the purchase of a third party to administer se!
insured groups. While staff isn’t aware of tl
future plans of HCA, it is apparent they hav
abundant capital to use in Wichita and perha
other areas. With the present structure of Bh
Cross and Blue Shield, the Plan doesn’t have tl
capital to vertically integrate into the health ca
market as do the for-profit hospital chains.

Staffs recommendation to the Executi'
Committee is that Blue Cross and Blue Shie
staff immediately inform the — Hospit
Corporation of America (HCA) that Blue Cro
and Blue Shield will cease contracting wi

App. 4lc

Wesley Medical Center effective January 1, 1986
with our CAP program. .

Staff feels the Plan can retain favorable CAP
programs with the remaining hospitals in Wichita
that will continue to be beneficial to Blue Cross
and Blue Shield subscribers. Also, they believe
a sufficient number of physicians will be
interested to make the program successful.
Johnston said, "This was a hard recommendation
for staff to make, but we sincerely believe if we
don't enter quickly into contracts with other
hospitals not competing with us, they will make
other arrangements and Blue Cross and Blue
Shield will be left with no hospitals to have
effective contracts with for our subscribers.["]
(Pitfs.” Ex. 10, pp. 3-6.)

One executive committee member inquired about
the effect of such a decision on BCBSK subscribers
who were accustomed to a close relationship between
BCBSK and Wesley. In his response, Johnston
noted:

[S]taff is not talking about Wesley Medical
Center . . . they are talking about HCA and
must talk about this issue from that perspective.

Wesley supm =»! Blue Cross and Blue
Shield through some tough years. It appears
that HCA, Humana and other organizations have
made strategic decisions that they are going to

App. 42c

be the best in the health imsurance field <
plan to dominate it.
(Pitfs.. Ex. 10, p. 7.) The minutes of this meet
also contain the following points which bear note

Johnston noted that when staff developed C,
it was felt it would be a program that wot
long accrue to the benefit of Kansans, but tl
hasn’t turned out to be true and the Plan has
structure itself realistically. Staff doesn’t see
the long run continuing as the organization
today since everyone will be working to fo!
joint ventures or aligning to become mo
competitive. "If you do not make arrangemer
today, all the arrangements will be made and \
will be without effective contracts for o
subscribers," noted Johnston. Staff feels there
an opportunity with the remaining hospitals
Wichita, but if Blue Cross and Blue Shield wa
until a year from now that opportunity will n
be avaiiable.

Staff pointed out that HCA would not know a
more about Blue Cross and Blue Shiel
business if they were contracting than if th
were not. The critical issue is a matter

alignment to solidify Blue Cross and BI
Shield’s place in the market to retain its sha
of the market. The options will go very quick

(Id., p. 9.)

1d

~~.

App. 43c

Prior to the August 29 meeting, Johnston had
approved staff's presentation of reduced MAPs to St.
Joseph and St. Francis Hospitals in Wichita, and was
aware that Dauner, Knack and Pitsenberger had
already discussed with those hospitals the proposed
Wesley termination and new MAPs. (Tran. 4, pp.
505-06; Tran. 5, pp. 674-76.) In fact, Johnston at
that time believed the Saints would be willing, if
Wesley were terminated,to consider lower MAPs
because instead of BCBSK subscribers choosing
among all three major Wichita hospitals (Wesley and
the Saints), there would be an opportunity for St.
Joseph and St. Francis to acquire more patients and
thus a greater market share; Jonnston also
understood St. Francis’ reaction to this concept to be
"generally speaking favorable." (Tran. 5, pp. 676-79.)
This information, however, was never presented to
the executive committee on August 29. In fact, one
of the members posed the question: "If the staff
recommendation is the organization not go with
Wesley, what does staff suggest be done as far as the
other Wichita hospitals are concerned?" Johnston
responded:

If action is taken not to renew the CAP
contract with Wesley, staff would contact the
other Wichita hospitals and modify the Blue
Cross and Blue Shield contracts that are
currently in effect (as of September 1, 1985)
with these other hospitals.

App. 44c

(Pitfs.’ Ex. 10, p. 11; emphasis added.) Implici
not express, in Johnston's answer was his assuré
to the executive committee that BCBSK’s cont
with the Saints on the issue of reduced MAPs we
take place "in the future” if the committee votec
terminate Wesley's contract, when in fact numer
substantial and fruitful discussions between BCE
senior staff and the other hospitals had b
continuing for weeks before the August 29 meet!
(Tran. 4, pp. 506-08.)

Johnston also said to the executive commit
on August 29:

The provider community has initiated the n
environment we find ourselves in. Blue Cr
and Blue Shield did not initiate it. The provic
community is going into the insurance busin
and will control both the supply and dema
We have seen this coming for a long time.
date, we cannot think of another alternative.
is Our assessment that time is of the essenc

[T]he real issue is not HCA... it is |
Wesley .. . but who do we align with while
still can and get a product with a pr
subscribers can afford.

(Pltfs.. Ex. 10, p. 11.) Robert O’Brien, Wesle
representative on the executive committ
commented on Wesley's need to remain competit
as a health care provider:

App. 45c

I have a lot of friends in this room and I hope
to keep those friends. [ have a lot to share
having over 13 years with Blue Cross. I can
probably show slides of the process [Wesley]
went through in making the decision we did. |
resent being singled out as a provider for that.
I think providers reacted to a changing situation
we found ourselves in because of governmental
or third party payers. We were destined to say
we were going to survive. One other resentment
I have is that no one has contacted us to
discuss this. I have no personal hurt and want
you to understand that. In my _ personal
judgment, singling out one institution, whether
it is mine or someone else’s is foreboding. |
think it will send signals to providers that will
not be accepted. That will be the real problem
for the organization. I’m of the opinion that the
line will be drawn with this decision . . . not for
Wesley, but for the providers of the state of
Kansas. There are a lot of others more
formidable to Blue Cross and Blue Shield than
HCA and Wesley. The decision this Board has
to reach is whether to contract or not. We may
some day see Blue Cross and Blue Shield buying
a hospital. The name of the game is
competition and we are going to be competitors.

(/d., p. 12.) Following further discussion, the
executive committee voted, seven to three, with
O’Brien abstaining, to terminate BCBSK’s CAP

App. 46c

contract with HCA and Wesley effective Januan
1986. (/d., p. 15.)

The decision was not unexpected by the BCB
staff; a prepared press release announcing Wesl«
termination was immediately distributed to
committee members on August 29 for their revi
(Pitts.” Ex. 10, p. 12.) Wesley’s O’Brien request
that the board delay any news releases or public
about the decision to enable him to return
Wichita, meet with the Wesley management staff, a
inform them of the decision. (Tran. 2, p. 279.) T
board agreed (Tran. 2, p. 280), and because t
committee members had other suggestions for t
wording of the news release, requested that BCBS
staff not release news of the decision until the n
morning. (Pltfs., Ex. 10, p. 14.) The requests
O’Brien and the executive committee were ignor
On the morning of August 29, even before t
executive committee began its meeting, John Kne
had driven from Topeka to Wichita for a prearrang
meeting with the public relations staffs of St. Fran
and St. Joseph Hospitals. (Tran. 15, p. 2604.) Knz
told those peopie he "needed some media contacts
order to deal with the questions that might aris
(/d., p. 2605.) Knack was later informed abx
O'Brien’s request for some time prior to any put
announcement of BCBSK’s decision, but Kné
recommended, and Dauner agreed, Knack shot
issue the press release on the afternoon of the 29
(/d., p. 2606.) He was interviewed on film by lo

App. 47c

television reporters, both at BCBSK’s Wichita
building and at a parking lot across the street from
Wesley; the announcement of Wesley's termination
and Knack’s interviews were carried on the evening
news. (Tran. 2, p. 280; Tran. 15, p. 2606.) A letter
notifying Wesley of its termination was prepared and
sent by BCBSK the same day. (Pltfs.. Ex. 11.) The
BCBSK news release, sent to al! Kansas newspapers
and television stations, stated in part:

Beginning January 1, 1986, payment for all
covered services at Wesley Medical Center will
be essentially the same amount paid to a
Contracting Hospital. However, payment will be
sent directly to the subscriber and cannot be
assigned. Also, any balance above the Blue
Cross and Blue Shield allowance will be the sub-
scriber’s responsibility.

"In the last few months," said [Wayne]
Johnston "HCA has clearly announced _ its
intention to enter into all lines of insurance and
become a direct competitor of [BCBSK]. Their
recent purchase of Health Care Plus is clear
evidence of this.

"We still have contracts with St. Francis, St.
Joseph and Riverside Hospitals in Wichita.
Therefore, our subscribers will be able to
continue receiving care from a_ contracting
hospital. We also teel we will be able to better

App. 48c

negotiate better programs for our subscribers <
the other hospitals which should provide
positive impact on our subscriber's cost of healt
care."

(Pitfs.’ Ex. 12.)

Wesley officials, shocked and angry over thi
announcement and the way it was handled b
BCBSK, responded with their own media campaigi
to assure physicians, employers, and the community
at large that notwithstanding the termination
beginning January 1, 1986, BCBSK policyholder:
were still welcome at Wesley; Wesley would bil
BCBSK for any charges incurred; BCBSK’s paymen
to the subscriber could be assigned or endorsed tc
Wesley; and other than standard deductibles or co
payments, the subscribers would not be _helc
personally responsible for any excess charges. (Pltfs.
Exs. 14, 15, 19, 20, 226, 227.) BCBSK then informec
its subscribers: “If Wesley's charges are more thar
{BCBSK] allowances to other hospitals for the same
services, the subscriber will be responsible for the
difference." (Pltfs.. Exs. 16; 18, p. 2.) BCBSk
further directed its staff that payment for coverec
services received by subscribers at Wesley was to be
sent directiy to the subscriber "and cannot be
assigned to the hospital." (Stip. y; Pltfs.’ Ex. 17.)

During September, 1985, Wesley and HCA
officials communicated with BCBSK - senio:
management a number of times, attempting t
persuade them to reverse their decision. In %

App. 49c

meeting on September 5, and during telephone
conversations September 9, Wayne Johnston said he
might be willing to reconsider if he received
assurances HCA "would not be competing with us in
that environment," or that HCA would agree not to
market its new products in competition with BCBSK
(Stips. z, aa; Tran. 4, p. 68.) Johnston also indicated
BCBSK had been meeting with the Saints
"developing .. . some basis of understanding,” and “in
a few years, one of the two, either St. Francis or St.
Joseph might not be around and at that time
perhaps we could get back together.” (Tran. 1, pp.
65-66; Tran. 4, pp. 682-85.) During a September 10
telephone conversation between Johnston and David
Williamson, HCA Vice Chairman, the following
points were made:

Mr. Johnston: ". . . [Well have to. align
ourselves with hospitals that are not directly
competing with us. We feel we have to align
with these hospitals to get a very favorable
contract.

Mr. Williamson: " Would it be your position that
any hospital that has a PPO will be excluded
from participating in Blue Cross?"

Mr. Johnston: "Not necessarily.”

App. 50c

Mr. Williamson: "Then it’s the degree of
competition?"

Mr. Johnston: "| think so."

Mr. Wiliamson: "My main objective is to try to
determine if we can have some type of truce in
this. If we went further, we'd have no choice
but to pull out all the stops and fight this. And
we don't want to do that.

I'd like to be partners with you rather than
adversaries, because both Blue Cross and Wesley
would be hurt. I think it is a lose/lose deal for
all parties. Would you reconsider?"

Mr. Johnston: "Given what I know today, |

don't think so. I don’t hear you say that you

are not going to compete with Blue Cross . .
(Stip. bb; Pltfs.” Ex. 22; Tran. 4, pp. 687-89; Tran.
11, pp. 1796, 1799.)

Immediately following the executive committee's
approval of Wesley’s termination on August 29,
BCBSK_ staff moved rapidly to implement the
reduced MAPs with the remaining Peer Group V
hospitals. The very next day, August 30, the BCBSK
internal affairs staff met; its discussion included the

App. 5lc

following:

Discounts on St. Joseph and St. Frances {sic}
Pitsenberger check to make sure we have fully
executed contract.

Need to present to Executive Committee on
September 19.

Brungardt to have meeting to finalize.
Adapt policy to change MAPs.
Find out if Riverside [Hospital] is part of that.

(Pltfs. Ex. 182, p. 2; Tran. 4, pp. 680-82.) Brungardt
is BCBSK’s Vice President of the Electronic Data
Processing Department. (Tran. 4, p. 682.)

Wesley officials requested, and were reluctantly
granted, permission to appear before the BCBSK
executive committee at its September 19 meeting.
Following Davis’ remarks urging the committee to
reconsider its approval of the termination, Johnston
sald:

I'm convinced more than ever that our decision
was a proper one. I’m convinced that HCA will
be vertically integrated and believe this was
demonstrated by the fact they [sic] have already
purchased an HMO and their strategy is to
compete with [BCBSK].

(Pitts.” Ex. 24, p. 11.) After Davis departed from the

App. 52c

meeting, the committee approved the reduced MAPs
for the remaining Wichita Peer Group V hospitals,
subject to the Hospital Advisory Committee’s review
and advice. (/d., p. 22-23; Tran. 4, pp. 691-92.) The
committee then voted to reaffirm its approval of
Wesley’s termination as a contracting provider
effective January 1, 1986. (Pltfs.” Ex. 24, p. 24.)
Johnston, again, did not inform the executive
committee on September 19 that BCBSK staff had
previously been meeting with St. Joseph and St.
Francis officials regarding the reduced MAPs. (Tran.
5, p. 718.)

On September 25, 1985, Donald A. Wilson,
President of the Kansas Hospital Association, sent a
letter to Wayne Johnston requesting information
about, and clarification of, the decision to terminate
Wesley, and the following points in specific:

1) the decision that was made by Blue Cross;
2) the rationale supporting the decision; and

3) Blue Cross policy emerging from this decision
and its implications on future Blue Cross
relationships for hospitals as they also attempt to
respond to this competitive environment that we all
face.

(Stip. ff; Pltfs.” Ex. 468-B; Tran. 5, pp. 850, 857-58.)

In a memorandum to all Kansas hospitals dated
October 4, 1985, Johnston responded in part:

App. 53c

We believe a vigorous, multi-hospital
environment is essential to the people of Wichita
in order to preserve competitive hospital pricing
and competitive health insurance rates.

With the size and resources of HCA and with
the actions they have already taken in Wichita
and with the plans they have announced, we
could only come to the conclusion that our role
with the Wesley Medical Center has drastically
changed. We no longer fit into their long range
plans. Thus, our decision to cease contracting
with HCA and the Wesley medical Center.

Regarding our future relationship with Kansas
hospitals, | would emphasize that we wish to
continue our long and satisfactory relationship
with each hospital. We do believe that to
properly serve our subscribers, we must make
available highly desirable health benefit products
at reasonable and competitive prices. We
cannot stand idly by and watch insurance-
hospital corporations, such as HCA, monopolize
the delivery and financing of care by seeking to
enroll Blue Cross and Blue Shield subscribers in
their insurance programs. Vertical integration is
a Strategy some hospitals may feel to be in their
best interest. However, if hospitals decide to
compete with Blue Cross and Blue Shield in the
manner that HCA is competing, Blue Cross and

App. 54c

Blue Shield must make a business decision about
its future relationship with these entities.
Hospitals that wish to continue their current
relationship with Blue Cross and Blue Shield,
that abide by the terms of our hospital
agreement, that do not seek to enroll subscribers
in other programs, and that wish to cooperate
with Blue Cross and Blue Shield as a major
marketing arm of the hospital, will experience
no change in the contractual relationship that

has historically served Kansans well.
(Pltfs.’ Ex. 468-C, p. 2.)

BCBSK’s approval and implementation of the
reduced Peer Group V MAPs did not follow
standard operating procedure. The company reviews
and revises MAPs annually, and presents proposed
revisions to the cost containment committee, the
hospital advisory committee, and ultimately, the
executive committee. (Tran. 4, p. 691.) Proposed
MAPs are not discussed with hospitals individually;
after approval by BCBSK they are sent out on a peer
group basis, to be accepted or rejected by the
hospitals. (Tran. 5, pp. 716-17.) BCBSK undertook
this process for the 1986 MAPs in late spring and
early summer, 1985; in July it sent out the 1986 CAP
materials reflecting a 4% increase in the 1986 MAPs.
(Pitfs.. Exs. 74, 75; Tran. 6, pp. 949-52.) This
process, however, was disregarded for the later
reduction of 1986 MAPs for Peer Group V. (Tran.
4, p. 691.) Even the executive committee’s

App. 55c

September 19 request that the reduced MAPs next
be presented to the hospital advisory committee, for
review and report back to the executive committee,
was ignored. (Tran. 4, pp. 692-93.) Without
consulting the hospital advisory committee, BCBSK
sent revised 1986 CAP materials, with a 20%
reduction in MAPs, to St. Francis, St. Joseph and
Riverside Hospitals on October 9, 1985. (Pltfs.’ Ex.
33; Tran. 6, p. 953.) The hospital advisory committee
met on October 22 and voted overwhelmingly "to
strongly recommend to the Executive Committee that
the revised MAPs for the Wichita peer group be
rejected." (Pltfs.” Ex. 32, p. 4; Tran. 4, p. 695.) That
response was reported to the executive committee on
November 7, but no further action was taken. (Pltfs.’
Ex. 163, pp. 9-10.) St. Francis, St. Joseph and
Riverside Hospitals did not affirmatively reject the
reduced MAPs, and thereby committed themselves to
the new contracts on November 10, 30 days after
they received these materials from BCBSK. (Tran.
12, pp. 1970-71.) The reduction affects only Wichita
hospitals in Peer Group V; MAPs for other peer
groups in Kansas remain unchanged. (Stip. ee.)
On November 12, 1985, plaintiffs filed a 17-
count complaint against BCBSK. (Dkt. 1.) The
thrust of the complaint was that defendant, in
conjunction with St. Francis and St. Joseph Hospitals,
had terminated Wesley as a contracting provider and
drastically reduced the MAPs for the remaining Peer
Group V_ hospitals, the effects of which were to
restrain trade in the Kansas health care service and

App. 56c

insurance industries, and to preserve, create or
attempt to create defendant's monopoly of the
Kansas health care insurance market, to the
detriment of Kansas health care consumers generally
and plaintiffs in particular. Counts I-III alleged
restraint of trade violations of Section 1 of the
Sherman Antitrust Act, 15 U.S.C. §1. Counts IV-VI
alleged monopolization, attempt to monopolize, and
conspiracy to monopolize, violating Section 2 of the
Sherman Act, 15 U.S.C. §2. Counts VII-XVII
contained pendent state law claims, including
allegations of state and common law violations,
violations of Kansas public policy and defendant’s
enabling act, claims of breach of contract, and
tortious interference with plaintiffs’ present and
future business relations with third parties. Plaintiffs
requested injunctive relief under Section 16 of the
Clayton Act, 15 U.S.C. §26; actual damages under
Section 4 of the Clayton Act, 15 U.S.C. $15, and
Kansas law; punitive damages for their state law tort
claims; certain declaratory relief; and costs and
attorneys’ fees under federal law.

Three days later, on November 15, plaintiffs
filed a motion seeking a preliminary injunction
suspending defendant’s termination of Wesley’s
contracting provider agreement on January 1, 1986,
to preserve the status quo and protect plaintiffs from
irreparable injury pending disposition of their
complaint on its merits. (Dkt. 5-6.) This and other
matters were argued to the court on November 21,
1985. Upon learning Wesley’s CAP contract with

App. 57c

BCBSK clearly permitted termination after 120 days’
notice, the court closely questioned plaintiffs’ counsel
about the propriety of the requested injunction.
(Dkt. 274; Tran. of In-Chambers Proceeding Nov. 21,
1985, pp. 3-6.) Defense counsel insisted the
termination, unequivocably permitted by the terms of
the contract, did not violate any laws, antitrust or
otherwise. (Tran. Nov. 21, 1985, pp. 7-8.) The
discussion then focused on the possibility of the
parties voluntarily maintaining the status quo pending
resolution of plaintiffs’ claims. Defense counsel
responded they had already discussed that approach
with BCBSK officials, who were willing to hold
Wesley’s termination in abeyance so long as the case
could be tried and resolved as quickly as possible.
(Tran. Nov. 21, 1985, pp. 9-11.) The parties
ultimately agreed to this, negating any need for a
ruling on the preliminary injunction.’ (/d., pp. 9-13.)
Counsel also agreed to draft and distribute mutually
approved communications to BCBSK subscribers and
the entire Wichita community announcing Wesley
would continue as a CAP contracting provider under
the newly-reduced Peer Group V MAPs, pending
hearing and disposition of plaintiffs’ claims. (/d., pp.
12-14, 22-26.) The court and counsel then scheduled
a pretrial conference on February 28, 1986, and trial
for March 25. At that point in the discussion the
court was, frankly, surprised to learn both sides
insisted on a jury trial. (/d., pp. 17-18, 21, 23.)
Counsel for both sides agreed to arrange an

App. 58c

acceptable discovery schedule. (/d., p. 20.) Toward
the end of the proceeding defense counsel requested
that, unless plaintiffs’ counsel would agree, the court
order Hospital Corporation of America to respond to
discovery in addition to the named plaintiffs. (/d., p.
30.) Plaintiffs’ attorneys agreed to the request,
however, and no ruling was needed. (/d.) The
meeting concluded with no indication whatsoever
BCBSK would be filing a counterclaim against
plaintiffs and HCA. The court order reciting the
parties’ agreement and the procedural timetable was
filed the next day. (Dkt. 9.)

On December 12, 1985, BCBSK moved the court
to add HMO, Kansas, Inc. as an _ additional
counterclaim plaintiff, and HCA as an additional
counterclaim defendant. (Dkt. 13.) A copy of
defendant’s proposed answer and counterclaim was
appended to the motion. In its answer BCBSK
denied its conduct violated any federal or state laws
as claimed by plaintiffs. Among its other defenses
were the following: failure to state a claim; lack of
subject matter jurisdiction; immunity from the federal
antitrust laws by virtue of the McCarran-Ferguson
Act, 15 U.S.C. §§1011-1015, and the state action
doctrine of Parker v. Brown, 317 U.S. 341 (1943),
and its progeny; lack of standing; failure to allege a
"properly cognizable relevant market;" estoppel by
virtue of unclean hands and inequitable conduct on
plaintiffs part; and immunity by reason. of
defendant’s statutory duty to contain hospital and

App. 59c

medical costs by preserving a competitive
marketplace. (Dkt. 13, Ans. & Counterclaim, pp.
1-12.) In their counterclaim BCBSK and HMOK
alleged plaintiffs and HCA had, during the summer
of 1984, conspired with the Wichita Clinic and the
Hillside Medical Office to illegally boycott HMOK,
exclude it from the Wichita market, and refuse to do
business with HMOK in the future, for the purpose
and with the effect of restraining trade and
eliminating competition for HMO services in Wichita.
BCBSK and HMOK also claimed HCA’s acquisitions
of New Century, Wesley Medical Center and Health
Care Plus were undertaken with the intent and actual
effect of becoming vertically integrated in the market
for health care services and health care financing in
Wichita, "and for the anticompetitive purpose of
eliminating competition from Blue Cross, HMO
Kansas, other Wichita hospitals, and others in said
market." Counterclaim defendants’ activities vis-a-
vis HMO Kansas were alleged to constitute a group
boycott and concerted refusal to deal per se in
violation of Section 1 of the Sherman Antitrust Act,
1S U.S.C. §1, as well as tortious interference with
BCBSK’s and HMOK’s prospective advantages and
contractual relations. Additionally, both the activities
with the Hillside Medical Office and the Wichita
Clinic, and HCA’s acquisitions, were challenged as "a
contract, combination, or conspiracy unreasonably to
restrain trade in the market for health care financing
and health care services" in Wichita, Sedgwick
County, and the State of Kansas, in violation of the

App. 60c

rule of reason under Section 1 of the Sherman Act;
"monopolization, attempt to monopolize . . . and/or
a conspiracy to monopolize" that market in violation
of Section 2 of the Sherman Act; and a violation of
Section 7 of the Clayton Antitrust Act, 15 U.S.C.
§18,* because the effect of HCA’s acquisitions "has_
in fact been, and/or will be, substantially and
unreasonably to restrain trade and_ eliminate
competition in the market." (Dkt. 13, Ans. &
Counterclaim, pp. 12-28.) Counterclaim plaintiffs
requested actual damages, together with trebled
damages as required by law; punitive or exemplary
damages; injunctive relief; costs and attorneys’ fees.
(/d., pp. 28-29.)

Plaintiffs opposed defendant’s motion to join
HMOK and HCA, arguing the proposed counterclaim
ought not to be considered in this action and joinder
was therefore unnecessary. Plaintiffs alternatively
requested that if the court admitted the counterclaim
and permitted joinder, the court aiso order separate
trials and discovery schedules for plaintiffs’ claims
and defendant’s counterclaim. (Dkt. 20.)

On January 8, 1986, I upheld BCBSK’s right to
plead its permissive counterclaim under Fed.R.Civ.P.
13(b), and ordered joinder of HMO, Kansas as an
additional counterclaim plaintiff, and HCA as an
additional counterclaim defendant, under
Fed.R.Civ.P. 13(h), 19(a) and 20(a). (Dkt. 24.) I
also conditionally ordered separate trials of the
complaint and counterclaim for reasons which
assumed increasing importance as the case

App. 61c

progressed, and which bear repeating now:

Unquestionably, the claims set forth in plaintiffs’
complaint and defendant’s counterclaims are
different in character. Although there may be
some duplication among the evidence supporting
the parties’ respective claims, specifically
evidence relating to the parties’ position in the
industry, current market conditions, etc., by and
large the evidence will be different. The acts
and evidence supporting BCBS’s counterclaims
historically precede that company’s termination
of the Contracting Provider Agreement by a
period of months or years. Further, it is well
established the alleged illegal action of HCA and
plaintiffs in violation of the antitrust laws cannot
stand as BCBS’s defense against the independent
antitrust violations alleged in _ plaintiffs’
complaint. See Kiefer-Stewart Co. v. Joseph E.
Seagram & Sons, 340 U.S. 211, 214 (1951);
Moore v. Mead Service Co., 190 F.2d 540 (10th
Cir. 1951): Magna Pictures Corp. v. Paramount
Pictures Corp., 265 F. Supp. 144 (C.D. Cal.
1967). Taking the allegations of both the
coimplaint and counterclaims as true, it may well
be both the plaintiffs and the counterclaim
plaintiffs are entitled to relief.

App. 62c

Plaintiffs’ last challenge to the motion is
that it will escalate what is already complex
litigation by the introduction of difficult issues
requiring extensive discovery, delay, and a
lengthy trial. Those concerns cannot prevent a
defendant from pleading a counterclaim, but
rather are properly addressed in a motion for
separate trials. PLC, Inc. v. Prescon Corp., 77
F.R.D. 678, 680 (D. Del. 1977). Such relief has
been requested in the alternative by plaintiffs,
and at this stage of the proceedings appears
justified. As previously noted, the alleged illegal
conduct of a plaintiff in an antitrust action
cannot legalize the alleged unlawful conduct of
the defendant or immunize it against liability.
Kiefer-Stewart, supra. Nor are the defenses of
"unclean hands" and, "In pari delicto" properly
invoked in an antitrust suit for money damages.
Pearl Brewing Co. v. Jos. Schlitz Brewing Co.,
415 F.Supp. 1122 (S.D. Tex. 1976). In the Pearl
Brewing case, after a thorough review of the
limitations on a_ defendant’s antitrust
counterclaims in a suit of this type, the court
said:

On the present record, the Court
is unable to determine whether, and
the extent to which, the same evidence
would be presented by defendant for
its counterclaim as for the plaintiffs’

App. 63c

case-in-chief. Even accepting the
premise of total dependency arguendo,
the Court concludes that plaintiffs have
demonstrated sufficient grounds to
merit consecutive rather than
concurrent presentation of the two.
cases. Simultaneous presentation of
the claim and the counterclaim in this
case could well confuse the jury into
basing a decision, at least in part, upon
the allegedly "uaclean hands" of
plaintiffs, in acting within the
appropriate market, when the proper
inquiry as to plaintiffs’ entitlement to
recovery should be whether the
defendant has engaged in any activity
violative of the Sherman Act so as to
have caused injury and measurable
damages to any or all of the plaintiffs.

Not only to avoid confusion but
also to preserve a logical presentation,
defendant's case should be queued
behind _ plaintiffs’ case and_ not
superimposed upon it.... Duplication
of testimony may be avoidable in a
second trial phase through utilization in
transcribed form of pertinent testimony
brought out in the case-in-chief. Thus,

App. 64c

in the exercise of its discretion, .. . the
Court concludes tha separate trials are
required here to avoid prejudice and
confusion... .

415 F.Supp. at 1133-34 (citations omitted).

In this case, BCBS contends it is justified
in terminating the contract with Wesley Medical
Center because of HCA’s acquisitions of health
care and insurance providers, its vertical
integration within the market, and_ the
consequent competitive threat posed to BCBS.
Assuming defendant can present evidence
thereof to the jury as the underlying reason for
its proposed termination of the contract,
nevertheless to further permit the allegations
those actions are themselves antitrust violations
would unduly complicate and confuse the jury,
much as it was found to in Pearl Brewing. Both
the parties to the suit and the public at large
have a pressing need to quickly resolve the
matter of the Contracting Provider Agreement
between BCBS and Wesley Medical Center. By
contrast, the acts and occurrences implicated in
defendant’s counterclaims are a fait accompli
and, while undeniably important, are not matters
awaiting judicial action for their outcome in the
same sense as the contract. Thus, considera-
tions of both the public welfare and fairness to
the parties point to separate trials.

a

App. 65c

That said, the Court acknowledges discovery
is still in its initial stages. Subsequent proof by
the counterclaim plaintiffs may demonstrate the
need to reconsider this ruling. BCBS and HMO
Kansas are granted leave to fully brief this issue
and request reconsideration of the Court’s ruling
at or before pretrial conference.

(Dkt. 24, Memorandum & Order Jan. 8, 1986, pp. 2,
5-8.) Following extensions of time and the court’s
order, BCBSK_ formally filed its answer and
counterclaim on January 13, 1986. (Dkt. 25.)
Throughout this period, in preparation for the
March 25 trial date, counsel for the parties
undertook the most intensive, thorough and
productive discovery this court has ever supervised.
On March 3, 1986, defendant BCBSK moved
for summary judgment on the entirety of plaintiffs’
complaint. (Dkt. 50, 51.) The motion was premised
on three arguments: first, plaintiffs HCP, New
Century, and Dr. Reazin lacked standing to sue;
second, Wesley had no viable federal antitrust
claims; and third, the pendent state law claims were
invalid under controlling case law from the Kansas
Supreme Court. The March 25 trial setting was
cancelled. Oral argument on the motion was heard
May 9; my written opinion was filed May 23, 1986.
Reazin v. Blue Cross & Blue Shield of Kansas, Inc.,
635 F.Supp. 1287 (D. Kan. 1986). (Dkt. 135.) For
reasons fully set forth in that opinion, I held HCP
had standing to bring an action for actual damages

App. 66c

under the federal antitrust laws, while New Century
and Dr. Reazin had standing only to pursue
injunctive _ relief. Reazin, 635 F.Supp. 1287,
1309-1320. I disagreed with BCBSK’s contention the
Wesley termination was purely a_ unilateral act,
holding the evidence, and derivative inferences, of
defendant’s interactions with the other Wichita
hospitals sufficiently raised a jury question about the
existence of a concerted refusal to deal and/or group
boycott amounting to a per se violation of Section |
of the Sherman Act. Reazin, 635 F.Supp. at 1320-27.
Based on prevailing case law, I further held
plaintiffs’ antitrust damage claims under Section 1
would be presented to the jury with alternate
instructions on the per se and rule of reason
analyses. J/d., pp. 1327-28. Although concerned
about the sufficiency of plaintiffs’ evidence support-
ing their claims under Section 2, specifically the
disputed evidence BCBSK holds a 60% market
share, | held defendant had not clearly shown it was
entitled to judgment in its favor as a matter of law
on plaintiffs’ claims of monopolization, attempt to
monopolize, and conspiracy to monopolize the
relevant market. /d., pp. 1328-33. And, rejecting
defendant's arguments, I concluded plaintiffs’
pendent claims were not controlled by the two
Kansas Supreme Court cases defendant relied on,
and denied summary judgment on those issues as
well. Reazin, 635 F.Supp. at 1333-35. Finally, based
on my fuller understanding of the breadth and

App. 67c

complexity of the issues the jury would address, |
denied defendant’s request for reconsideration of my
order for separate trials of the complaint and
counterclaim. Trial to the jury on Wesley’s and
HCP’s complaint was set for July 22, 1986. /d., pp.
1335-36.

One of the most difficult analytical problems
pervading this entire case is the conflict between
defendant’s inability to use the alleged antitrust
violations of plaintiffs and HCA as its defense to
plaintiffs’ claims (Kiefer-Stewart Co. v. Jos. E.
Seagram & Sons, 340 U.S. 211, 214 (1951)), and
defendant’s right, under the rule of reason analysis,
to show the factfinder the "real world scenario":

The true test of legality is whether the restraint
imposed is such as merely regulates and perhaps
thereby promotes competition or whether it is
such aS may suppress or even destroy
competition. To determine that question the
court must ordinarily consider the facts peculiar
to the business to which the restraint is applied;
its condition before and after the restraint was
imposed; the nature of the restraint and _ its
effect, actual or probable. The history of the
restraint, the evil believed to exist, the reason
for adopting the particular remedy, the purpose
or end sought to be attained, are all relevant
facts. This is not because a good intention will
save an otherwise objectionable regulation or

App. 68c

the reverse; but because kiowledge of intent
may help the court to interpret facts and to
predict consequences.

Chicago Board of Trade v. United States, 246 U.S.
231, 238 (1918). Prior to trial BCBSK gave the

following indications of its defenses to plaintiffs’
complaint:

The defense of this case will rest, in part, on
Blue Cross’ evidence that its termination of
Wesley's agreement was in fact a legitimate and
procompetitive response to a course of
anticompetitive conduct entered into by HCA
and the Plaintiffs that not only threatens to
foreclose, but had in_ fact substantially
foreclosed, competition for health care financing
and health care services in Kansas.

In the present case, in order to show that the
termination of Wesley does not violate Section
1 under the rule of reason analysis, Blue Cross
will be permitted to show the history of and
changes in the health care financing market in
Wichita, including both the Health Care Plus
boycott freezing HMO Kansas out of the market
and the subsequent HCA acquisitions cementing
the Health Care Plus monopoly position.

(Blue Cross’ Memorandum in Support of Motion for

App. 69c

Reconsideration of Court’s Order of Separate Trials,
pp. 3, 10.) .

On July 11, 1986, plaintiffs filed a motion in
limine seeking to prohibit any reference, in the jury’s
presence, to the counterclaims and the alleged
illegal activities of plaintiffs and HCA. (Dkt. 154.)
[ entertained oral argument on this motion and other
matters on July 21 and 22, 1986, immediately prior to
trial. (Dkt. 292; Tran. of /n Limine Proceedings,
July 21-22, 1986.) Plaintiffs identified nine separate
matters which they sought to exclude from the jury.
| fully sustained plaintiffs’ motion on four of those
items:

Alleged price fixing by, or an alleged conspiracy
to fix prices involving Wesley.

The decision of the Federal Trade Commission
rendered in Hospital Corporation of America,
No. 9161 (FTC Oct. 25, 1985), or any conduct
or allegations of conduct on the part of Hospital
Corporation of America which are the subject of
that proceeding or any other reference to
HCA’s having allegedly previously violated
antitrust law.

HCA’s alleged efforts to acquire American
Hospital Supply Corporation and its alleged
threat to cancel a supply contract with Baxter
Travenol.

App. 70c

Alleged pressure from or upon doctors
contracting with HCP not to hospitalize patients
requiring hospitalization, and other alleged
conduct relating to the quality of care provided
by HCP contracting doctors.
(Tran. of /n Limine Proceedings, July 21-22, 1986,
pp. 40-49.)

The remaining in limine questions were more
difficult, requiring reconciliation of defendant’s
evidentiary privileges under the rule of reason and
plaintiffs’ rights to a trial solely on their complaint,
unimpeded by any consideration of the counter-
claim. A balance was necessary, as | indicated at the
hearing:

The defendants are at liberty to defend this case
to the fullest, but we are going to defend the
plaintiffs’ case and not going to try the
detendant’s [counterclaim] in this case. This is
a difficult case, to say the least. It’s taken much
of our time trying to come to grips with it... .
I think there is a balance here. I think I have
met it. In doing that, I have to say to all of you
I never guarantee a perfect trial -- in this case,
no way -- but just the fairest I know how, and
simply suggest[ |] that what we should do is go
slow, let me see how it plays and comes in and
decide as it arises what is admissible, but
somewhat within the[se] guidelines. .

App. 71c

(Tran. of In Limine Proceedings, July 21-22, 1986, p.
64.)

Plaintiffs first sought to exclude all evidence and
arguments concerning the allegations HCA’s
acquisitions of Wesley, HCP and New Century were
illegal, anticompetitive, etc. Plaintiffs acknowledged
defendant was entitled to show the facts and effects
of HCA’s activities in these markets; defendant
agreed it would proceed without attempting to
characterize the activities of HCA and HCP as
violations of federal antitrust laws. (Tran. of /n
Limine Proceedings, July 21-22, 1986, pp. 15-18.)
The second item concerned the alleged boycott of
HMOK, involving HCP and_ physicians under
contract with HCP. Plaintiffs argued this evidence
was irrelevant because it was never given as a reason
underlying Wesley's termination, but even if relevant,
it was inflammatory and prejudicial. I again
deferred to the broad rule of reason analysis, ruling
defendant could present evidence and arguments
about HCP’s activities without referring to them as a
"boycott" or otherwise illegal. (/d., pp. 19-22, 55-56.)
Plaintiffs’ third in limine item was the price HCP
investors paid for the stock in the private placement,
and profits they enjoyed from the sale to HCA.
Defendant argued the stock was the mechanism by
which HCP kept HMOK out of the market, and
HCA, by purchasing HCP, effectively bought "the
exclusive loyalty of the doctors." BCBSK insisted it

App. 72c

had evidence certain providers were offered stock by
HCP in exchange for taking adverse actiois against
HMOK. I permitted defendant to proceed with this,
admonishing counsel to be sure that evidence truly
supported their contentions because of the risk of
unfair prejudice to plaintiffs’ case if it did not. (/d.,
pp. 24-34, 57-68.) The fourth item of plaintiffs’
motion concerned alleged contacts, relations and
future plans between HCA and _ Physicians
Corporation of America, a new organization founded
by Dr. Stanley Kardatzke. Dr. Kardatzke worked
closely with Gary Bugg in the development,
marketing and ultimate sale of HCP, after which
Kardatzke left HCP and began Physicians
Corporation of America, which is pursuing other
alternative delivery systems in the Wichita/Sedgwick
County health care financing and services markets.
Physicians Corp. had announced plans to start its
own HMO program. | permitted defendant to use
this evidence as it related to the presence or absence
of market power and monopoly power by BCBSK,
but prohibited any reference to an_ alleged
relationship between Physicians Corp. and HCA
because none was established by the evidence. (/d.,
pp. 34-38, 70-72.) The last item of the in limine
motion concerned "an alleged policy of HCA,
Wesley and HCP to channel patients to HCA
hospitals and their alleged intention to take steps to
cause another Wichita hospital to go out of
business." [ overruled plaintiffs’ requested exclusion

App. 73c

of this evidence, particularly in light of the testimony
concerning Berry’s alleged remark at the July 24,
1985 meeting with BCBSK’s Dauner and Knack.
(/d., pp. 38-40.)

Another matter I addressed before trial was the
propriety of my earlier ruling plaintiffs’ Section 1
claims would be submitted to the jury under
alternate instructions on the per se and rule of
reason analyses. The Supreme Court decided
Federal Trade Comm. y. Indiana Federation of
Dentists, 476 U.S. __, 106 S.Ct. 2009, 90 L.Ed.2d 445
(1986), ten days after my summary judgment ruling
in this case. In Indiana Federation of Dentists, the
FTC found the "work rule" of a professional dental
association, which required members to withhold x-
rays requested by dental insurers for use in
evaluating claims, to be an unreasonable restraint of
trade violating §1. The Seventh Circuit Court of
Appeals vacated the FTC’s order, but the Supreme
Court reversed. In the course of its opinion, the
Court noted:

The policy of the Federation with respect
to its members’ dealings with third-party insurers
resembles practices that have been labeled
“group boycotts": the policy constitutes a
concerted refusal to deal on particular terms
with patients covered by group dental insurance.
Although this Court has in the past stated that
group boycotts are unlawful per se, we decline

App. 74c

to resolve this case by forcing the Federation’s
policy into the "boycott" pigeonhole and invoking
the per se rule. As we observed last Term in
Northwest Wholesale Stationers, Inc. v. Pacific
Stationery and Printing Co., 472 US. _ , 86
L.Ed.2d 202, 105 S.Ct. 2613 (1985), the category
of restraints classed as group boycotts is not to
be expanded indiscriminately, and the per se
approach has generally been limited to cases in
which firms with market power boycott suppliers
or customers in order to discourage them from
doing business with a competitor -- a situation
obviously not present here. Moreover, we have
been slow to condemn rules adopted by
professional associations as unreasonable per se,
and, in general, to extend per se analysis to
restraints imposed in the context of business
relationships where the economic impact of
certain practices is not immediately obvious.
Thus, as did the FITC, we evaluate the restraint
at issue in this case under the Rule of Reason
rather than a rule of per se illegality.

Indiana Federation of tienes 476 US. __, at __,
9) L.Ed.2d 445, at 456-57 (certain citations omitted).
In its rule of reason analysis, the Court found the
federation’s policy was a horizontal agreement among
the participating dentists to withhold from customers
a particular service, the forwarding of x-rays to
insurance companies, and noted [while this is not
price fixing as such, no elaborate industry analysis Is

App. 75c

required to demonstrate the anticompetitive
character of such an agreement.” Indiana
Federation of Dentists, 90 L.Ed.2d at 457 (quoting
National Society of Professional Engineers v. United
States, 435 U.S. 679, at 692 (1978)). The federation
advanced no countervailing procompetitive effects of
its agreement, but argued there was no unreasonable
restraint of trade because the FTC had not engaged
any detailed market analysis, the FTC made no
finding the federation’s activities resulted in higher
cost dental care, and the FIC failed to consider
"quality of care" justifications for the federation’s
policy. The Supreme Court rejected all three
arguments, and made the following significant
observations about the first:

"As a matter of law, the absence of proof of
market power does not justify a naked
restriction On price or output,” and... such a
restriction "requires some competitive
justification even in the absence of a detailed
market analysis." [NCAA v. Board of Regents
of Univ. of Okla.,} 468 U.S. [85], at 104-110, 82
L.Ed.2d 70, 104 S.Ct. 2948 [(1984)]. Moreover,
even if the restriction imposed by _ the
Federation is not sufficiently "naked" to call this
principle into play, the Commission’s failure to
engage in a detailed market analysis is not fatal
to its finding of a violation of the Rule of
Reason.... Since the purpose of inquiries into

App. 76c

market definition and market power is to
determine whether an arrangement has the
potential for genuine adverse effects on
competition, "proof of actual detrimental effects,
such as a reduction of output" can obviate the
need for an inquiry into market power, which is
but a "surrogate for detrimental effects." 7
P.Areeda, Antitrust Law §1511, p. 429 (1986).
In this case we conclude that the [FTC's]
finding of actual, sustained adverse effects on
competition in those areas where IFD dentists
predominated, viewed in light of the reality that
markets for dental services tend to be relatively
localized, is legally sufficient to support a
finding that the challenged restraint was
unreasonable even in the absence of elaborate
market analysis.

Indiana Federation of Dentists, 90 L.Ed.2d at

457-58.

The Tenth Circuit Court of Appeals decided
Westman Com’n. Co. v. Hobart Intern., Inc., 796
F.2d 1216 (1986), approximately three weeks later.
That case !nvolved a kitchen equipment distributor's
Section 1 claims against the manufacturer, Hobart,
for its refusal to grant plaintiff a distributorship. A
competing distributor urged Hobart to deny plaintiff
the distributorship, and Westman claimed Hobart’s
compliance with that request amounted to a
conspiracy to prevent plaintiff from competing in the
Denver-area market. The trial court determined

App. 77c

Hobart’s refusal to deal was a per se violation of
Section 1 and, even under a rule of reason analysis,
defendant’s conduct violated the antitrust laws.
Hobart, 796 F.2d 1216, at 1219-20. The Circuit
reversed, holding that the Section 1 per se analysis
applies to vertical restraints only where there is
evidence of intent to raise prices:

Since the record reveals not the slightest
hint of price maintenance or price fixing,
Hobart’s refusal to deal cannot be illegal per se.
Of course, if there were allegations of retail
price maintenance, price fixing, or tying
arrangements, our analysis would be quite
different.

Hobart, 796 F.2d at 1224. In its rule of reason
analysis the circuit pointed to the procompetitive
benefits of a manufacturer limiting the number of its
distributors, and held:

Because we believe that manufacturers
should be free to choose and terminate their
distributors free of antitrust scrutiny so long as
their motivation does not involve illegal pricing
or tying arrangements, we hold that section one
of the Sherman Act does not proscribe refusals
to deal absent a showing of monopoly or market
power on the part of the manufacturer. See
[United States v. Arnold, Schwinn & Co., 388

App. 78c

U.S. 365, at 376 (1967), overruled on other
grounds by Continental T.V., Inc. v. GTE
Sylvania, Inc., 433 U.S. 36 (1977).] The evil to
be avoided is the reduction of interbrand
competition between the manufacturer’s
distributors, not the reduction of intrabrand
competition. The trial court’s findings in this
case compel the conclusion that, on an
interbrand basis, the restaurant equipment
supply market in the Denver area is highly
competitive. Moreover, nothing in the record
demonstrates that Hobart had market power.
Thus, Hobart’s refusal to grant Westman a
distributorship at the insistence of Nobel [the
competing distributor] did not violate section
one of the Sherman Act. If Westman has any
remedy against Hobart or Nobel, it must resort
to state law.

Hobart, 796 F.2d at 1229 (emphasis original). The
court defined "market power" as "either ‘power to
control prices’ or ‘the power to exclude
competition,” distinguishing it from "monopoly
power" which for purnoses of a Section 2 analysis
requires proof of both elements together. /d., pp.
1225-26, n. 3. The Tenth Circuit, in Hobart, did not
address the Supreme Court’s statements in /ndiana
Federation of Dentists that a market analysis is "but
a ‘surrogate for detrimental effects," and is therefore
unnecessary where there is evidence of actual.

_—

App. 79c

sustained adverse effects on competition. 90 L.Ed.2d
at 457-58 (quoted supra).

It was the two courts’ treatment of the per se
analysis that immediately concerned me. BCBSK
argued Hobart clearly meant Section 1 challenges to
termination of vertical relationships, absent price
fixing, must be treated under the more lenient rule
of reason standard. Plaintiffs countered that Hobart
did not prohibit application of the per se analysis in
this case; while Hobart involved a purely vertical
arrangement between the manufacturer and
distributor, the arrangement at issue here has
horizontal ramifications in both the hospital market
and the health care insurance/financing market. |
permitted plaintiffs to go forward with their evidence
and attempt to show the applicability of the per se
analysis. (Tran. of /n Limine Proceedings, July
21-22, 1986, pp. 2-12.)

Prior to trial, plaintiffs and HCA filed a motion
for summary judgment on the counterclaim. (DKt.
160-61.) The motion was held in abeyance pending
trial of plaintiffs’ complaint.

That trial began July 22, 1986. After four days
of testimony from as many witnesses, defendant
moved for a directed verdict on all of plaintiffs’
Section | claims, the conspiracy to monopolize claim
under Section 2, and the state law civil conspiracy
claim. (Dkt. 184-85.) That motion was taken under
advisement. (Dkt. 206.) On August 18, defendant
moved to allow the counterclaim to be decided by

App. 80c

the jury or, in the alternative, to retain the jury and
proceed with the counterclaim following the verdict
on plaintiffs’ claims. (Dkt. 192-93; Tran. 19, pp.
3124-30.) I denied that motion (Dkt. 194; Tran. 20,
pp. 3298-3305), after which defendant sought
mandamus from the Tenth Circuit Court of Appeals
(Dkt. 198). The petition was likewise denied. (DkKt.
201.)

Trial lasted for six weeks; defendant rested on
September 2, 1986. I ruled that plaintiffs’ evidence,
in light of Hobart, was insufficient to go to the jury
on their claims of per se violations of Section 1.
Plaintiffs voluntarily limited their numerous pendent
state law claims to two: tortious interference, by
BCBSK, with Wesley's and HCP’s present and
prospective business relationships. At the conclusion
of all evidence, defendant renewed its motion for
directed verdict, seeking judgment on_ plaintiffs’
Section | claims under the rule of reason; the claims
of monopoly, attempt to monopolize, and conspiracy
to monopolize under Section 2; and the pendent
claims. (Dkt. 252; Tran. of Post-Trial Motions Sept.
2, 1986, pp. 3-10.) I took under advisement
defendant’s motion with regard to plaintiffs’ Section
1 claims, expressing misgivings about the sufficiency
of their conspiracy evidence, and overruled the
motion as to plaintiffs’ Section 2 and pendent claims.
(Dkt. 243; Tran. of Rulings & Findings on Post-
Trial Motions Sept. 2, 1986, pp. 2-22.) Plaintiffs’
own motion for directed verdict in its favor was also
overruled. (/d., p. 21.)

7

App. 8lc

The jury began its deliberations on September 3,
and consumed a full month with its labors. During
this 4-week period, the court received over 20
written inquiries from the jury ranging from requests
for supplies, through requests for particular
testimony, and including intricate, probing questions
relating to the substantive law the jury was to apply.
(Dkt. 211.) On September 30, 1986, the jury
returned its verdict:

A. SHERMAN ACT, SECTION 1.
RESTRAINT OF TRADE.

1. Did Blue Cross engage in a contract,
combination or conspiracy with St. Francis
and/or St. Joseph Hospitals, encompassing within
its terms the termination of Wesley as a
contracting provider, and the reduction of the
MAPs for the remaining Peer Group V
hospitals?

Yes x No

[If you answer "no" to this question, do not
respond to Nos. 2 through 5, but instead
proceed directly to No. 7 relating to plaintiffs’
monopolization claim. If you answer "yes" to
this question, then proceed to No. 2].

2. What do you find to be the relevant
geographic market at issue in this case? (check

App. 82c

one.)

_x_ The State of Kansas, excluding Johnson and
Wyandotte Counties

Sedgwick County

The relevant market is the private health care
financing market in the geographic area you
identify.

3. Does Blue Cross possess market power
in the relevant market, that is, either the power
to control prices or the power to exclude
competition?

Yes x No

4. Did Blue Cross’ participation in a
contract, combination or conspiracy result in a
restraint of trade in the relevant market?

Yes x No

5. If, in No. 4 you find a restraint of trade,
was the restraint unreasonable?

Yes x. No

6. If you answered "yes" to Nos. 1, 3, 4 and
5, has either of the plaintiffs shown that it has

App. 83c

suffered injury to, or loss from, its business or
property as a direct or proximate result of Blue
Cross’ unreasonable restraint of trade?

HCA Health Services of Kansas,
Inc., d/b/a Wesley Medical
Center Yes x No

Health Care Plus Yes _ No _x_

B. SHERMAN ACT, SECTION © 2:

MONOPOLIZATION.

7. What do you find to be the relevant
geographic market at issue in this case? (Check
one.)

_x_ The State of Kansas, excluding Johnson

and Wyandotte Counties

__ Sedgwick County

The relevant market is the private health care

financing market in the geographic area you
identify.

8. Does Blue Cross possess monopoly
power in the relevant market identified in No.
7, that is, both the power to control prices and
the power to exclude competition? (You must

App. 84c

answer "no" to this question if you answer "no"
to No. 3.)

Yes x No

9. If you answer "yes" to No. 8, is this
monopoly by Blue Cross the result of willful
acquisition, maintenance or use of that power
by exclusionary or anticompetitive means?

Yes x We 2)

10. If you answer "Yes" to Nos. 8 and 9,
has either of the plaintiffs shown that it has
suffered injury to, or loss from, its business or
property as a direct or proximate result of Blue
Cross’ monopolization of the relevant market?

HCA Health Services of Kansas,
Inc., d/b/a Wesley Medical
Center Yes x No

Health Care Plus Yes __ No _x_
[If you answer "Yes" to Nos. 8 and 9, and you
find that either or both plaintiffs have suffered
injury to their businesses or property as a direct
' result of Blue Cross’ actual monopolization, then
do not respond to Nos. 11 through 19 below,
but proceed directly to No. 20 for a
determination of damages. However, if you find

App. 85c

no actual monopolization by Blue Cross, you
should next consider Nos. 11 through 19.]

C. SHERMAN ACT, SECTION 2: ATTEMPT
TO MONOPOLIZE.

11. Is there a dangerous probability that,
if unchecked, Blue Cross will succeed in
monopolizing the relevant market?

, (- No _
12. Did Blue Cross engage in predatory,
exclusionary or anticompetitive conduct in
furtherance of its attempt to monopolize?

Yes No
13. Did Blue Cross have the specific intent
to monopolize the relevant market?

Yes No
14. Did Blue Cross’ attempt to monopolize
occur in the relevant market?

Yes No
1S. If you answer "yes" to Nos. 11 through
14, has either plaintiff shown that it has suffered
injury to, or loss from, its business or property

App. 86c

as a direct or proximate result of Blue Cross’
attempt to monopolize the relevant market?

HCA Health Services of Kansas,
Inc., d/b/a Wesley Medical
Center Yes__— (No

Health Care Plus Yes __ No

D. SHERMAN ACT, SECTION 2:
CONSPIRACY TO MONOPOLIZE.

16. Was there a conspiracy between Blue
Cross and others to monopolize trade and
commerce in the relevant market?

Yes No
17. Did both Blue Cross and its co-
conspirators enter into the conspiracy with the
specific intent of monopolizing commerce?

Yes No
18. Was one or more of the acts at issue
done in furtherance of this conspiracy to
monopolize?

Yes No

App. 87c

19. If you answer "yes" to Nos. 16 through
18, has either plaintiff shown that it has suffered
injury to, or losses from, its business or property
as a direct or proximate result of Blue Cross’
conspiracy to monopolize?

HCA Health Services of Kansas,
Inc., d/b/a Wesley Medical
Center Yes ___—- No

Health Care Plus Yes No

FE. DAMAGES.

[Answer the following questions only if you find
plaintiffs have proven by a preponderance of the
evidence all of the elements of one or more of
their federal antitrust claims, as those claims
and elements are identified in Sections A, B, C
and D above. In other words, answer these
questions only if you find in plaintiffs’ favor on
one or more of their claims of restraint of trade,
actual monopoiization, attempted
monopolization, or conspiracy to monopolize. |

20. If you find that plaintiff Health Care
Plus was injured in its business or property as
a direct or proximate result of any antitrust
violations by Blue Cross [see Nos. 6, i0, 15 and
19 above], please state the amount of damages,

App. 88&c

if any, suffered by Health Care Plus.

$

21. If you find that plaintiff HCA Health
Services of Kansas, Inc., d/b/a Wesley Medical
Center, was injured in its business or property
as a direct or proximate result of any antitrust
violations by Blue Cross [see Nos. 6, 10, 15 and
19 above], please state the amount of damages.
if any, suffered by HCA Health Services of
Kansas, Inc., d/b/a Wesley Medical Center.

$_1,542,980.00

F. STATE LAW: TORTIOUS
INTERFERENCE.

-- Plaintiff Health Care Plus --

22. Did there exist a present business
relationship and/or the expectancy of future
relationships with economic benefit between
Health Care Plus, hospitals and other health
care providers?

, i oe an i

23. Did Blue Cross actually know of this
present business relationship and/or the
expectancy of future relationships between

App. 89c

Health Care Plus, hospitals, and other health
care providers?

Yes x ee

24. Was Health Care Plus reasonably
certain to have continued in its existing
relationship, or realized future expectancies, but
for Blue Cross’ termination of Wesley as a
contracting provider, and defendant’s related
acts and practices?

Yes x_ No __
25. Did Blue Cross undertake this conduct

with the wrongful intent of injuring or

destroying the business of Health Care Plus?

Yes No _x_

26. If you answered "yes" to Nos. 22
through 25 above, did Health Care Plus suffer
injury, loss or damage to its business relations
as a direct or proximate result of this
misconduct of Blue Cross?

Yes No

-- Plaintiff HCA Health Services of Kansas,
Inc., d/b/a Wesley Medical Center --

App. 90c

27. Did there exist a present business
relationship and/or the expectancy of future
relationships with economic benefit between
Wesley Medical Center and Blue Cross’
subscribers?

Yes _ x No __

28. Did Blue Cross itself actually know of
this present relationship and/or the expectancy
of future relationships between Wesley and Blue
Cross’ subscribers?

Yes x No.

29. Was Wesley Medical Center reasonably
certain to have continued in its existing
relationship, or realized future expectancies, but
for Blue Cross’ deliberate use of the media and
other efforts to discourage its subscribers from
using Wesley for medical services?

; i Caeser, eee

30. Did Blue Cross undertake this conduct
with the wrongful intent of injuring or
destroying the business of Wesley Medical
Center?

Yes x No

App. 91c

31. If you answered "yes" to Nos. 27
through 30 above, did Wesley Medical Center
suffer injury, loss or damage to its business
relations as a direct or proximate result of this
misconduct by Blue Cross?

Yes _ x No

G. STATE LAW: DAMAGES.
-- Actual --

32. If you answered "yes" to Nos. 22 through
26 above, that is, if you find Health Care Plus
has established by a preponderance of the
evidence the elements of its claim of tortious
interference by Blue Cross, please state the
amount of actual damages, if any, suffered by
Health Care Plus as a consequence of Blue
Cross’ tortious interfere

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385020_1577%3A2. Public record. Not legal advice.