I. STATEMENT OF JURISDICTION

This appeal is from a Decision and Order dated November 27, 1996 of Linda S. Kaiser, Insurance Commissioner of the Commonwealth of Pennsylvania (the "Decision and Order") that (1) approved the transfer of control of certain insurance company and HMO subsidiaries of Medical Service Association of Pennsylvania d/b/a Pennsylvania Blue Shield ("Blue Shield") and Veritus, Inc. d/b/a Blue Cross of Western Pennsylvania ("BCWP") (collectively, the "Consolidating Companies") to a new corporation, Highmark Inc. ("Highmark") pursuant to a Plan of Consolidation; and (2) approved the proposed bylaws for Highmark. In the Decision and Order, the Commissioner also held, as a matter of law, that she did not have jurisdiction to review the consolidation of Blue Shield and BCWP, that a single corporation could legally operate both a hospital plan and a health service plan, and that the certificates of authority heldby Blue Shield and BCWP were property rights which would pass, by operation of law, to Highmark upon consolidation. This Court has jurisdiction in this matter pursuant to 42 Pa. C.S.A. SS 763 and 2 Pa. C.S.A. SS 702.

II. ORDER OR OTHER DETERMINATION IN QUESTION

The Decision and Order in question is 52 pages long, the Order itself being six pages long, and is too voluminous to reproduce here verbatim. A copy of the full Decision and Order is appended hereto as Exhibit "A". The Order states, in part:

Upon consideration of the foregoing, the Insurance Commissioner of the Commonwealth of Pennsylvania ... hereby approves 1) the bylaws of Highmark and 2) the change in control, filed on March 27, 1996, for Keystone Health Plan West, Inc., Trans-General Casualty Insurance Company, Inc., Keystone Health Plan Central, Inc., Keystone Health Plan East, Inc., United Concordia Life and Health Insurance Company, and HealthGuard of Lancaster, Inc....

(Decision and Order at 47). This approval was made subject to 25 enumerated conditions. (Decision and Order at 47-52).

In her Decision and Order, the Commissioner concluded that she lacked jurisdiction over the proposed consolidation and therefore did not consider any issues relating to the consolidation of the parent companies. (Decision and Order at 6, 1 24, at 39, 1 4 and at 40, T 8). The Commissioner also concluded, as a matter of law, that the certificates of authority held by Blue Shield and BCWP were property rights of each entity and vested in Highmark by operation of law as a result of the consolidation. (Decision and Order at 22-23, T 140-46 and at 40, T 15). The Commissioner also concluded, as a matter of law, that the consolidation of Blue Shield and BCWP was permissible under Pennsylvania law and that Highmark could legally operate, subject to the jurisdiction of the Commissioner, both a hospital plan and a professional health services plan. (Decision and Order at 21-22, T 130-137, at 40, 1 1 0 and at 41, 1 16). Although the Commissioner's formal Order contained no provisions regarding these issues, the Order was premised upon the Commissioner's conclusions of law.

III. STATEMENT OF THE QUESTIONS INVOLVED

1. Whether the Commissioner erred when she concluded, as a matter of law, that she lacked jurisdiction to determine whether the consolidation of Blue Shield and BCWP violated the terms of the Hospital Plan Act and the Health Services Plan Act. The Commissioner answered this question in the negative.

2. Whether the Commissioner erred when she concluded, as a matter of law, that a certificate of authority is a property right of the holder that may be transferred by the holder, upon merger or consolidation, by operation of law and without review by the issuing authority. The Commissioner answered this question in the negative.

3. Whether the Commissioner erred when she concluded, as a matter of law, that Highmark may operate both a hospital plan and a health services plan under Pennsylvania law. The Commissioner answered this question in the negative.

4. Whether the Commissioner erred in allowing the consolidation to go forward, despite the Consolidating Companies' failure to provide an adequate plan for meeting their social mission as charitable and benevolent institutions formed under the Health Services Plan Act and the Hospital Plan Act. The Commissioner answered this question in the negative.

5. Whether the Commissioner's findings concerning the anticompetitive effect of the transfer of control of the subsidiaries are supported by substantial evidence when the Commissioner ignored the dynamic nature of the health care delivery and financing industry and the Consolidating Companies' actual dominance in that industry. By implication, the Commissioner answered this question in the affirmative.

6. Whether the Commissioner erred in refusing to consider whether the changes to the governance of Blue Shield to be effected by the consolidation were fair to Blue Shield's existing corporate members and their patients and in dismissing these issues with the assertion that health care professionals had no legal right to challenge the composition of Highmark's board. The Commissioner answered this question in the negative.

7. Whether the record before the Commissioner is adequate for purposes of appellate review of an agency adjudication. The Commissioner did not address this question below. Highmark but not the Commissioner, has filed a motion to quash this appeal on the ground that there was no adjudication. The Court (Leadbetter, J) has rejected Highmark's argument that there was no adjudication because there was no adversary hearing below, but has referred to the merits panel the question whether the record is adequate for purposes of review.

IV. STATEMENT OF THE CASE

A. Form of Action and Procedural History

This appeal arises out of proceedings before the Insurance Commissioner of the Commonwealth of Pennsylvania, initiated when two non-profit entities under her 'jurisdiction, Blue Shield and BCWP, sought to consolidate and to transfer control of their various subsidiaries to the new corporation. The legislation which has long permitted Blue Shield and BCWP, as a professional health services plan and a hospital plan, respectively, to operate as non-profit institutions also subjects them to the authority of the Commissioner. See Hospital Plan Act, 40 Pa. C.S.A. SS SS 6101-6127, and Health Services Plan Act, 40 Pa. C.S.A. SS SS 6301-6335. The Commissioner's authority extends to, inter alia, the certification of professional health service corporations and hospital plan corporations in this Commonwealth. 40 Pa. C.S.A. SS 6102; 40 Pa. C.S.A. SS 6304.

The proceedings before the Insurance Commissioner were initiated on or about December 26, 1995, when the Consolidating Companies first submitted to the Commissioner a plan proposing to consolidate Blue Shield and BCWP into a new corporation, together with proposed bylaws for the new corporation. (R. 6a-27a; Supp. App. 1346a- I 463a; Decision and Order at 6, paragraphs 25-26, 28). [1] On February 10, 1996, the Insurance Commissioner published official notice in the Pennsylvania Bulletin of the filing with the Insurance Department of the proposed Plan of Consolidation submitted by the Consolidating Companies. (Supp. App. 1469a; Decision and Order at 6, @28). The Insurance Commissioner's Notice, entitled "Application and Request for Approval of a Plan of Consolidation," included an invitation to interested persons to submit written comments regarding the request to the Insurance Department within thirty days of the publication date. During March and April 1996, Petitioner Robert B. Sklaroff, M.D., as well as the Pennsylvania Medical Society, the Philadelphia County Medical Society, and other medical organizations and commentors (collectively "the commentors") responded to the Notice and submitted written comments. [2] (See, e.g., R. 929a -934a; Supp. App. 1700a-1866a). The comments included a request that the Insurance Commissioner hold a public hearing on the proposed Plan of Consolidation pursuant to 40 Pa. C.S.A. SS SS 6102 and 6304, which, the commentors asserted, mandate that a hearing be held prior to the issuance of a certificate of authority to the new consolidated entity to operate a nonprofit hospital plan and/or a nonprofit professional health services plan. (Supp. App. 1700a, 1788a, 1793a). The commentors also requested that the Insurance Commissioner hold a public hearing pursuant to her discretionary authority under the Insurance Holding Companies Act, 40 P.S. SS 991.1401 et 5Q. (Supp. App-1700a).

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[1] Pursuant to a stipulation of the parties, documents that were contained in the Commissioner's file, but not certified by the Commissioner as part of the Record, have been separately bound as a supplemental Petitioners' Appendix and filed with the Court. The parties have stipulated to the authenticity of the documents contained in the supplemental Appendix, but disagree as to whether those documents are properly part of the Record of the proceedings below. Citations to "Supp. App. _" are to page numbers of Petitioners' Appendix. All of the documents listed in the Certification of Record are reproduced in the Reproduced Record filed with this Court. Citations to "R. if are to page numbers of the Reproduced Record.

[2] Although referenced in her Decision and Order, many of these comments have been excluded from the Commissioner's Certification of the Record.

The commentors additionally submitted comments addressed both to the Insurance Commissioner and to the Acting Secretary of the Department of Health, in which they repeated the request for a public hearing and also raised substantive concerns about the potential effects of the proposed Plan of Consolidation on health care consumers and on the health care industry in Pennsylvania. (Supp. App. 1774a, 1790a, 1791a, 1794a, 1818a). These concerns included, inter alia, (a) the lack of any defined commitment, in either programmatic or financial terms, to the continuation of the social mission responsibilities of the two organizations; (b) a governance structure that would reduce the ability of health care providers to influence the policy directions of the new entity on issues such as quality and cost of patient care and that would protect incumbent management; and (c) the potential anticompetitive impact of the consolidation and resulting adverse effects on quality and cost of care. In addition, the commentors questioned whether any statutory basis existed under Pennsylvania law either for the Consolidation itself or for the operation of both a hospital plan and a health services plan by the same entity.

The Consolidating Companies sought an exemption from the filing requirements of the Insurance Holding Companies Act, 40 P.S. SS 991.1402. (Decision and Order at 6, T 27; Supp. App. 1464a- I 466a). That request was denied by the Commissioner on March 21, 1996. (Decision And Order at 7, T 30; Supp. App. 1467a- 1468a). The Consolidating Companies submitted their Form A filings pursuant to Section 991.1402 on March 27, 1996. (R. 28a-464a). The Form A filings, which formally requested approval of the change in control of the subsidiaries, were not made public by the Commissioner at that time or at any time prior to this petition for review.

On April 6, 1996, the Insurance Commissioner published official notice in the Pennsylvania Bulletin that the Insurance Department would hold a "public informational hearing" to hear a presentation by BCWP and Blue Shield concerning the transfer of their insurance company subsidiaries and their health maintenance organization (hereinafter "HMO") subsidiaries to the proposed new consolidated corporation. (R. 465a-466a). At the "public informational hearing" held on April 26, 1996, the Insurance Department Hearing Officer announced that the "hearing" was being conducted pursuant to the Insurance Holding Companies Act. The Hearing Officer also announced that the Insurance Commissioner would not exercise jurisdiction over the Plan of Consolidation, except to the extent that it called for a change in control of insurance and HMO subsidiaries. Members of the public and other interested parties were not permitted to present testimony or to cross-examine witnesses concerning the proposed Plan of Consolidation or the change in control of BCWP and Blue Shield subsidiaries. (See R. 965a-966a). Only representatives of the Consolidating Companies, who presented prepared statements, were allowed to speak at the "hearing." (Id.).

On May 28, 1996, Thomas W. Corbett, Jr., Attorney General of Pennsylvania, submitted comments to the Insurance Department concerning the proposed Plan of Consolidation in which he stated:

The threshold issue is whether the enabling statutes for Pennsylvania Blue Shield and BCWP [Blue Cross], the Health Service Plan Act and the Hospital Plan Act, respectively, allow the consolidation contemplated here.

(R. 108 1 a). In his comments, Attorney General Corbett did not express an opinion on that issue, explaining that this "question is solely within the jurisdiction of the [Insurance] Department." Id. In his comments, the Attorney General also urged the Insurance Commissioner to "hold a full hearing on the charitable and competitive aspects of this transaction." (R. 1078a). The Attorney General declared that Blue Shield and BCWP had reached a "critical time in the evolution of these historic health-care insurers" and that it was "imperative" that the Companies provide detailed information describing how they would continue to fulfill their "defining social mission" after the consolidation. (R. 1084a).

Subsequent to the April 26, 1996 hearing, the commentors submitted additional comments which continued to raise questions and concerns about the proposed Plan of Consolidation. [3] (R. 1009a- 1 022a, 1025a- 1074a). These included a study of antitrust issues prepared by Dennis G. Shea, Ph.D. and Stephen Earl Foreman, J.D., Ph.D. (R. 1035a-1065a). The Commissioner has held that because she did not personally preside over the "informational hearing," there was no significant distinction between the submission of written comments and the presentation of oral comments by representatives of the Consolidating Companies at the April 26, 1996 hearing. (Decision and Order at 15, Paragraph 94).

As is apparent from the record, there were also further contacts between the Commissioner and the Consolidating Companies. These contacts were not public, and members of the public had no opportunity to respond. They include: the submission by the consolidating Companies of an "Information Statement About Social Mission" and other materials addressing the social mission issues (R. 1279a- 1282a, 1329a- 1 334a); a private meeting between representatives of the Consolidating Companies and one or more representatives of the Commissioner in November 1996 at which the social mission was discussed (= R. 1329a); and an Agreement entered into between the Attorney General of the Commonwealth of Pennsylvania and the Consolidating Companies (R. 1283a- I 288a). Apparently as a result of these non-public communications, the Commissioner retreated from her Department's initial intent to require that Highmark devote 1.5% of its direct written premiums to social mission. (See R. 1321a). She included in her order only a 1.25% requirement -- a difference, according to Highmark's figures, of approximately S 1 3-15 million per annum. (See R. 1333a). The Commissioner also attached a number of conditions to her approval which overlap those found in the compromise between the Office of the Attorney General and the Consolidating Companies (see Decision and Order at 47-52), while apparently giving no further attention to the issues raised by the commentors, including the expert reports submitted by the Pennsylvania Medical Society. (See R. 1025a-1074a). The Insurance Commissioner, however, has continued to deny jurisdiction over the question whether the proposed Plan of Consolidation is permitted by 40 Pa. C.S.A. SS 6101 et (the "Hospital Plan Act") and 40 Pa. C.S.A. SS 6301 et @. (the "Health Services Plan Act"). (Decision and Order at 40, 18). As a result of the Insurance Commissioner's refusal to assert her jurisdiction over the Plan of Consolidation, the "threshold issue" of whether the Proposed Consolidation is permitted under those laws has not been and will not be addressed by any executive agency of Commonwealth government.

The Commissioner issued her Decision and Order on November 26, 1996. Petitioners promptly sought review of the Decision and Order in this Court.

B. Prior Court Determinations

On December 5, 1996, Petitioners filed their Petition for Review of Agency Order and an Application for a Stay Pending Appellate Review. The Application for Stay was denied, without prejudice, for want of compliance with Pa. R.A.P. 178 1 (a). Philadelphia County Medical Society v. Kaiser, 3309 C.D. 1996 (Pa. Cmwlth. Ct. Dec. 9, 1996) (per curia).

On December 6, 1996, Highmark Inc. filed an Application to Intervene. The Application to Intervene was granted. Philadelphia County Medical Society v. Kaiser, 3309 C.D. 1996 (Pa. Cmwlth. Ct. Dec. 9, 1996) (per curia).

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[3] Petitioners and other concerned members of the public were afforded 30 days following the hearing to submit comments. (R. 466a). The Commissioner has excluded from the certified record comments received from the Pennsylvania Medical Society and from Petitioner Sklaroff after the close of the 30 day period.

On December 11, 1996, Petitioners filed an Application for an Injunction Pending Appellate Review. Oral argument was held on December 30, 1996. In an unreported opinion filed March 27, 1997, the Court denied the injunction. [4] Philadelphia County Medical Society v. Kaiser, 3309 C.D. 1996 (Pa. Cmwlth. Ct. Mar. 27, 1997) (Leadbetter, J.). A copy of Judge Leadbetter's Decision and Order is attached hereto as Exhibit H.

On December 24, 1996, the Commissioner filed an Application to Quash Petition for Review for Lack of Standing. The Commissioner's Application was denied in an unreported opinion filed March 27, 1997. Philadelphia County Medical Society v. Kaiser, 3309 C.D. 1996 (Pa. Cmwlth. Ct. Mar. 27, 1997) (Leadbetter, J.).

On January 6, 1997, Highmark filed an Application to Quash Petition for Review. Highmark's Application to Quash argued (1) that Petitioners lacked standing; (2) that there had been no appealable "adjudication"; and (3) that Petitioners had failed to exhaust available administrative remedies. In an unreported opinion filed March 27, 1997, the Court denied Highmark's Application to Quash Petition for Review, except insofar as the Court referred to the merits panel the question of whether the record before the Commissioner was adequate for purposes of appellate review. Philadelphia County Medical Society v. Kaiser, 3309 C.D. 1996 (Pa. Cmwlth. Ct. Mar. 27, 1997) (Leadbetter, J.).

On January 29, 1997, the Commissioner filed a Certification of Record. On February 6, 1997, Highmark filed an Application to Quash Record Certified by Insurance Department. Highmark's Application to Quash Record was denied in an unreported opinion filed March 27, 1997. Philadelphia County Medical Society v. Kaiser, 3309 C.D. 1996 (Pa. Cmwlth. Ct. Mar. 27, 1997) (Leadbetter, J.).

During the course of the above proceedings, the Commissioner and Highmark filed various motions to file reply memoranda, which were granted by the Court.

Petitioners' Application for an Extension of Time To File Their Brief and Designations for the Reproduced Record and Petitioners' Application for an Order Directing the Insurance Department of the Commonwealth of Pennsylvania To Prepare and File a Supplemental Certification of Record, both filed April 7, 1997, have been withdrawn by Stipulation, filed April 21, 1997.

C. Official Whose Determination is to be Reviewed

Linda S. Kaiser, Commissioner of the Insurance Department of the Commonwealth of Pennsylvania, issued the Decision and Order below.

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[4] On January 27, 1997, Highmark filed an Application for Hearing regarding the Application for Injunction Pending Appellate Review. The Application for Hearing was denied as moot on March 27, 1997. Philadelphia County Medical Society v. Kaiser, 3309 C.D. 1996 (Pa. Cmwlth. Ct. Mar. 27, 1997) (Leadbetter, J.).

D. Statement of Facts

This appeal concerns the consolidation of two charitable and benevolent institutions providing health care services in the Commonwealth of Pennsylvania, and the concomitant change in control of their subsidiaries. Prior to the consolidation, Blue Shield was a professional health services plan, organized pursuant to the Health Services Plan Act, 40 Pa. C.S.A. SS SS 6301 et seq. Blue Shield. through its member doctors, provided those professional health services throughout the state. (Decision and Order at 3, paragraph 10). BCWP was a nonprofit hospital plan, organized pursuant to the Hospital Plan Act, 40 Pa. C:S.A. SS SS 6 1 01 et seq. One of several Blue Cross plans operating in Pennsylvania, its operations were limited to the western portion of the Commonwealth. (Decision and Order at 3, paragraph 10).

Both Blue Shield and BCWP were created in the late 1930's. In the face of the severe hardships of the Great Depression, the Pennsylvania legislature took action to assure adequate professional health services for the residents of this Commonwealth who are unable to obtain such services for themselves. Travelers Insurance Co. v. Blue Cross of Western Pennsylvania, ')61 F. Supp. 774, 775-76 (W.D. Pa. 1972); Pa. Legis. Journal-House, 2228-29 (April 6, 1937) (a copy of which is attached as Exhibit B); 40 Pa. C.S.A. SS 6303.

Neither Blue Shield or BCWP was a stock company. The companies were controlled by their members. BCWP had 17 members, who were also directors. (Decision and Order at 19, @ I 18). Blue Shield had 300 corporate members, including 150 professional and 150 lay members, who elected from their numbers a Board of Directors. (Decision and Order at 19, 1 117).

On December 6, 1996, nine days after the issuance of the Commissioner's Decision and Order, Highmark filed articles of incorporation, thereby effecting the consolidation of Blue Shield and BCWP. The stated reason for the consolidation was to allow economies of scale and more efficient operations. (Decision and Order at 4, T 12). The bylaws of the consolidated company, Highmark, require that 75% of the Board be made up of lay members, thereby limiting medical providers to no more than a 25% voice in the management of the corporation. (R. 7a).

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