June 18, 1997

SUBJECT: PSIM and Robert B. Sklaroff, MD vs. Linda S. Kaiser

FROM: John Nikoloff
PSIM Executive Director

PSIM has sued Pennsylvania’s state Insurance Commissioner to force the Commonwealth to study the grave implications of permitting PA Blue Shield and Blue Cross of Western Pennsylvania to merge. We were granted standing and filed our brief in PA’s Commonwealth Court. Oral arguments were held June 4, in Pittsburgh.

In 1995, Pennsylvania Blue Shield and Blue Cross of Western Pennsylvania’s corporate boards voted to seek a merger of the two insurance giants, both created by the General Assembly as not for profit health care insurers. To facilitate the merger, the companies sought approval of the Insurance Commissioner for the merged management of several for profit subsidiary companies. During 1996, PSIM voiced serious concerns about this action to the General Assembly, the state Attorney General, the Insurance Commissioner and state Health Secretary, calling for full public hearings on the merger to discuss its impact on patients and on the marketplace. Then acting State Attorney General Tom Corbett called for public hearings on the matter in May, and a lengthy process of negotiations began behind the scenes among the Attorney General’s Office, the Insurance Commissioner’s Office and officials of the Blues.

On November 27, 1996, Pennsylvania Insurance Commissioner Linda Kaiser approved the change in control of several subsidiaries, subject to certain conditions. This decision and order by the Insurance Commissioner had the effect of approving the consolidation.

On December 5, 1996, the Philadelphia County Medical Society and the Pennsylvania Society of Internal Medicine filed a petition for review of the order together with an application to the Commonwealth Court for a stay pending appellate review. In effect, we asked the Commonwealth Court to study the decision of the Insurance Commissioner and to order Pennsylvania Blue Shield/Blue Cross of Western Pennsylvania to cease any further action as a consolidated entity until the Court has reviewed that decision. Within hours, the respective boards formally approved creation of Highmark, Inc.

At the same time, PSIM and other medical organizations renewed efforts to seek a legislative hearing to assure full public input and consideration of issues involved in the creation of Highmark, Inc. These efforts continue.

In April, Judge Bonnie Brigance Leadbetter reviewed our petition and application, listened to oral arguments and granted us standing to pursue our arguments with the full Commonwealth Court.

We believe it is important that the Insurance Commissioner’s decision be analyzed in detail. Much pertinent information must be shared among those in the health care community so we can evaluate the justification for the consolidation. This should be done in a public forum.

Among the issues PSIM wants considered are the merger’s effect on quality of care and its antitrust implications (according to one Penn State University economist, Highmark and its various subsidiaries now control 85 percent of the health care dollar in the counties previously served by Blue Cross of Western Pennsylvania. The marketing tools endorsed by the Insurance Commissioner’s approval represent techniques that can yield Highmark a virtual 100 percent market share as either a nonprofit or for-profit organization.) Recently, Commissioner Kaiser proposed legislation which would have ceded the transitionally unemployed and uninsured individual health care market to the Blues.

PSIM’s suit also asks consideration of the social mission of the Blues (noting the potential to convert to a for profit corporation), the legislative authority (in Pennsylvania the Blue Cross and Blue Shield activities were authorized under separate Acts) and the transferability of licenses from the Blues to Highmark. We are also concerned about other changes in the overall structure of the Blues that are contemplated, or have been accomplished; their potential effect on the delivery of medical care in Pennsylvania must be probed.

Three times in the past six months, the PA Medical Society’s Interspecialty Section voted to request the Board of Trustees abide by the wishes of its House of Delegates and support efforts by the PSIM in its litigation on the Highmark merger. These votes were passed without dissent. The ISS resolution also called for the PMS Board to solicit additional funds through per member commitments for future legal efforts in the case. Following this third request, the PMS Board, which had voted 12-4 against supporting the action previously, reversed itself and voted 12-6 to put $10,000 toward the effort.

Despite the contribution from the PMS, PSIM is still seeking to raise substantial amounts of money as quickly as possible. The following lists include the names of counties, specialty societies and other state medical organizations which have contributed to the legal/legislative effort to date. Personal, corporate or organizational contributions can be made to PSIM by mailing a check to P.O. Box 671, Harrisburg, PA 17108-0671.

FINANCIAL CONTRIBUTIONS FROM COUNTY AND SPECIALTY SOCIETIES

SUPPORT FROM OTHER STATE COMPONENTS/MEDICAL SOCIETIES

PSIM has received additional support and research into legislation re blues mergers from the following state organizations:

Please feel free to call us at any time. I can be reached at (800) 846-7746. Dr. Sklaroff is available by calling (215) 663-8200.

IN THE COMMONWEALTH COURT OF PENNSYLVANIA

No. 3309 C.D. 1996

______________________________________________________________

Pennsylvania Society of Internal Medicine

and

Robert B. Sklaroff, M.D.

Petitioners,

V.

Linda S. Kaiser, Commissioner,

Insurance Department of the

Commonwealth of Pennsylvania

Respondent,

 

Highmark Inc.

Intervenor.

__________________________________________________________________

BRIEF OF PETITIONERS

_______________________________________________________________

Petition for Review of the November 26, 1996 Decision and

Order of Linda S. Kaiser, Commissioner, Insurance Department

of the Commonwealth of Pennsylvania Approving the Transfer of Control

of Certain Insurance Company and HMO Subsidiaries of

Pennsylvania Blue Shield and Blue Cross of Western Pennsylvania

and Approving The Proposed Bylaws for Highmark Inc.

__________________________________________________________________

Sara M. Staman, Esquire

Identification No. 47003

 

Susan Packer, Esquire

Identification No. 76242

HANGLEY ARONCHICK SEGAL & PUDLIN

One Logan Square, 12th Floor

Philadelphia, PA 19103

(215) 568-6200

Attorneys for Petitioners

Editorial Note:

This is an unofficial transcript.

The Original is on-file.

References in the text may be inaccurate.

TABLE OF CONTENTS

TABLE OF AUTHORITIES..................................................................................................................iii

I. STATEMENT OF JURISDICTION..............................................................................................1

II. ORDER OR OTHER DETERMINATION IN QUESTION..........................................................1

III. STATEMENT OF THE QUESTIONS INVOLVED....................................................................2

IV. STATEMENT OF THE CASE.....................................................................................................3

A. Form of Action and Procedural History..................................................................................3

B. Prior Court Determinations......................................................................................................5

C. Official Whose Determination is to be Reviewed....................................................................6

D. Statement of Facts....................................................................................................................7

V. SUMMARY OF ARGUMENT....................................................................................................15

VI. ARGUMENT...............................................................................................................................19

A. The Commissioner Had Jurisdiction Under the Hospital PlanAct and the Health Services Plan Act to Review the Proposed Consolidation.........................................................................................19

B. Pennsylvania Law Does Not Permit a Single Entity to Operate as Both a Hospital Plan Corporation and Health Services Plan Corporation............................................................................21

1. The Statutory Scheme..................................................................................................23

2. A Comparison of Pennsylvania's Statutory Scheme To the Statutes of States Which Permit Dual Licensure..............................................26

3. Blue Shield Should Not Be Permitted to Effect the Consolidation and Exceed its Authority Under the Nonprofit Medical Service Corporation Act of 1939..................................................28

C. Highmark, the Entity Arising from the Consolidation, May Not Operate Either a Health Services Plan or a Hospital Plan Unless and Until it Obtains its Own Certificate of Authority After a Thorough Investigation by the Commissioner...................................................................30

D. The Commissioner Is Required to Hold a Full Adversarial Hearing Before Issuing a Certificate of Authority, and Also Erred in Proceeding to Approve Highmark's Bylaws and the Change in Control of Blue Shield and BCWP Subsidiaries Without Following the Full Review and Approval Process Mandated by the Health Services Plan Act.......................................................................16

E. The Commissioner Has Failed to Take Adequate Steps to Assure That the Social Mission of Blue Shield and BCWP Will Be Protected................................................................................................17

F. The Commissioner's Findings Regarding the Anticompetitive Effect of the Change in Control of Subsidiaries Are Not Supported by Substantial Evidence..............................................................37

1. The Commissioner Should Have Considered the Entire Competitive Environment as Part of Her Analysis....................................37

2. The Commissioner's Definition of the Marketplace Was Not Supported by the Evidence and Undermined the Entire Competitive Analysis...................................................................................38

G. The Commissioner's Summary Dismissal of the Interests of Medical Providers in the Governance of Highmark and Her Assertion That the Doctors, Including Members of Blue Shield, Had No Legal Right to Challenge the Composition of Highmark's Board Was Unjustified and Improper.........41

H. The Court Has a Sufficient Record on Which to Rule on the Issues Presented or to Remand for Further Agency Action.....................................................45

VII. CONCLUSION........................................................................................................................47

TABLE OF AUTHORITIES

Aetna Casualty & Surety Co. v. Commonwealth, Ins. Dept., 536 Pa. 105, 638 A.2d 194 (1994) ...28

Knecht v. Medical Service Assn. of Pa., 186 Pa. Super. 456, 143 A.2d 820 (1958)........................28

LaFarge Corp. v. Commonwealth of Pennsylvania, Insurance Dept., 1997 WL 91352 (Pa. Cmwlth. Ct. 1997)...................................................................................46

Philadelphia County Medical Society v. Kaiser, 3309 C.D. 1996 (Pa. Cmwlth. Ct. Dec. 9, 1996)..........................................................11, 12, 45

Travelers Insurance Co. v. Blue Cross of Western Pennsylvania, 361 F. Supp. 774 (W.D. Pa. 1972)............................................................................................13

Turner v. Pennsylvania Public Utility Com’n., 683 A.2d 942(Pa. Cmwlth. 1996)...........................46

STATUTES

1 Pa. C.S.A. SS 1924..................................................................................................................28, 32

2 Pa. C.S.A. SS 702...........................................................................................................................1

2 Pa. C.S.A. SS 754........................................................................................................................46

5 Pa. C.S.A. SS 5309......................................................................................................................31

15 Pa. C.S.A. SS 5929.....................................................................................................................22

15 P.S. SS 21205.............................................................................................................................22

40 P.S. SS 991.1401 et seq..........................................................................................................6, 37

40 P.S. SS 991.1401........................................................................................................................37

40 P.S. SS 991.1402..............................................................................................................7, 17, 37

40 P.S. SS 991.1403........................................................................................................................39

40 Pa. C.S.A. SS 6101, et seq............................................................................5, 10, 13, 15, 19, 23

40 Pa. C.S.A. SS 6101.............................................................................................................23, 24

40 Pa. C.S.A. SS 6102............................................................................5, 6, 16, 19, 22, 3O, 32, 34

40 Pa. C.S.A. SS 6103...................................................................................................................24

40 Pa. C.S.A. SS 6104......................................................................................................16, 19, 3O

40 Pa. C.S.A. SS 6124.............................................................................................................19, 25

40 Pa. C.S.A. SS 6125...................................................................................................................19

40 Pa. C.S.A. SS 6127.............................................................................................................20, 22

40 Pa. C.S.A. SS 6301, et seq............................................................................5, 10, 13, 15, 19, 23

40 Pa. C.S.A. SS 6301...................................................................................................................24

40 Pa. C.S.A. SS 6302.............................................................................................................23, 24

40 Pa. C.S.A. SS 6303...........................................................................................13, 19, 23, 25, 35

40 Pa. C.S.A. SS 6304.......................................................................5, 6, 16, 19, 22, 25, 30, 32, 34

40 Pa. C.S.A. SS 6306...................................................................................................................32

40 Pa. C.S.A. SS 6307.............................................................................................................24, 25

40 Pa. C.S.A. SS 6308......................................................................................................16, 19, 3O

40 Pa. C.S.A. SS 6321...................................................................................................................19

40 Pa. C.S.A. SS 6322.............................................................................................................23, 26

40 Pa. C.S.A. SS 6324...................................................................................................................25

40 Pa. C.S.A. SS 6325.............................................................................................................25, 35

40 Pa. C.S.A. SS 6328.................................................................................................17, 25, 41, 44

40 Pa. C.S.A. SS 6329.............................................................................................................20, 26

40 Pa. C.S.A. SS 6334.............................................................................................................20, 22

40 Pa. C.S.A. SS 6335...................................................................................................................23

42 Pa. C.S.A. SS 763.......................................................................................................................1

72 Pa. C.S.A. SS 7901 et seq.........................................................................................................24

1939 Pa. Laws 1121.......................................................................................................................41

1939 Pa. Laws 1125.......................................................................................................................41

1949 Pa. Laws 583........................................................................................................................................29

1949 Pa. Laws 587........................................................................................................................................29

1949 Pa. Laws 1263......................................................................................................................................29

1949 Pa. Laws 1274......................................................................................................................................29

1972 Pa. Laws 1063, No. 271......................................................................................................................26

1980 Pa. Laws 801, No. 151.........................................................................................................................29

1982 Pa. Laws 220, No. 70...........................................................................................................................29

1988 Pa. Laws 363, No. 57...........................................................................................................................29

Mich. Comp. Laws SS 550.1216............................................................................................................27, 33

N.J. Stat. SS 17:48-2.1.................................................................................................................................27

N.J. Stat. SS 17:48E-2.................................................................................................................................27

N.J. Stat. SS 17:48E-3...........................................................................................................................27, 33

N.J. Stat. SS 17:48E-5................................................................................................................................ 33

N.J. Stat. SS 17:48E-6.................................................................................................................................27

N.Y. Ins. Law SS 4301 et seq......................................................................................................................27

N.Y. Ins. Law SS 4301................................................................................................................................27

W.V. Code SS 33-2-42..............................................................................................................................27

RULES AND REGULATIONS

1 Pa. Code SS 1.32.....................................................................................................................................32

31 Pa. Code SS 151.3.................................................................................................................................33

31 Pa. Code SS 151.6.................................................................................................................................33

Pa. R.A.P. 1973..........................................................................................................................................12

MISCELLANEOUS

Pa. Legis. Journal-House, 2228-29 (April 6, 1937)...............................................................................13, 19

William M. Angelos, A Legacy of Value: The Story of Pennsylvania Blue Shield (1989)...................................................................................6, 29, 42

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