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BCBS North Carolina lawsuit claims Big Blues agreed not to compete

This February, while the battle over health care reform ratcheted up to the Supreme Court, attorneys from the litigation powerhouse Boies Schiller and their North Carolina co-counsel launched a health care salvo of another sort in Statesville, N.C.

There, in a one-courtroom courthouse, where U.S. District Judge Richard Voorhees holds sessions only during two-to-three week periods every other month, they dropped a class action complaint against Blue Cross Blue Shield that just might blow open the health insurance market in North Carolina, South Carolina, and 36 other states where BCBS dominates.

In Cerven v. Blue Cross and Blue Shield North Carolina, three individuals and two businesses contend — on behalf of a nationwide and a state class — that BCBS North Carolina and its national affiliate Blue Cross and Blue Shield Association, along with 37 other BCBS entities across the country, unlawfully agreed not to compete with one another. Those agreements, along with other anticompetitive practices, have enabled the Blues to dominate the health insurance markets in their respective states, driving up consumer health care costs and insurance premiums in the process, according to plaintiffs.

BCBS North Carolina“It is a suit that, if brought to its fruition, could bring meaningful competition to regional insurance markets,” said Duke University School of Law professor Barak Richman. “It targets conduct that has both anticompetitive purposes and effects.”

What makes this action different from other complaints filed against the Blues and other health insurers, and in some ways more compelling according to Duke’s Richman, are the allegations of a conspiracy to divide the markets and eliminate competition.

“This is a very thoughtful, very serious, and probably a very lucrative suit against BCBS,” Richman said.

The ramifications of the action and the potential effects of an adverse judgment have not been lost on the parties, and both sides are lawyering up. Among the attorneys representing plaintiffs are Kathleen Kiernan and William Isaacson from Boies Schiller in Washington – the firm headed by David Boies, who served as Special Trial Counsel for the Justice Department in its antitrust suit against Microsoft. BCBS North Carolina has brought in a team that includes attorneys from the Washington office of Hogan Lovells, among them J. Robert Robertson, the former chief trial counsel for the Federal Trade Commission’s Bureau of Competition.

Big Blue

Blue Cross Blue Shield of North Carolina is without question the largest health insurer in the state.

As alleged in the complaint, more than 73 percent of state residents who subscribe to commercial health insurance, whether group or individual, are BCBS-NC subscribers. The next-largest insurer is Coventry, with seven percent of that market.  And BCBS-NC has a greater-than-50-percent share in all 15 of the major metropolitan health insurance markets in state. In 10 of those markets, that share rises to more than 75 percent.

Its market dominance here mirrors that in other states. But that hasn’t always been the case. “Historically, the Blue Cross plans [which originally covered hospital services] and Blue Shield plans [which covered physician services] were fierce competitors,” plaintiffs contend. “During the early decades of their existence, there were no restrictions on the ability of a Blue Cross plan to compete with or offer coverage in an area already covered by a Blue Shield plan. Cross-on-Cross and Shield-on-Shield competition also flourished.”

But over time, in the face of non-Blue competition, the groups consolidated by Cross and Shield plans and then within their respective states to become one plan, today operating in 38 distinct state markets. Together, they form the membership of the Blue Cross and Blue Shield Association – the vehicle through which, plaintiffs allege, the plans have agreed to divide up the nationwide health insurance market among themselves and eliminate competition.

BCBS dominance extends across the country. According to the complaint, “the largest health insurance company in the nation by some measures is WellPoint, a BCBSA licensee. Similarly, fifteen of the twenty-five largest health insurance companies in the country are BCBSA licensees.”  The Association estimates that its members together provide coverage for 100 million Americans, as stated on its website.

In North Carolina and elsewhere, BCBS-NC has achieved its dominant market share by agreeing – through license agreements with the Association – not to compete with other plans in their respective markets.

That elimination of competition, and the plan’s use of anticompetitive practices, have led to higher health care costs in state and skyrocketing premiums for consumers while giving the plan a $1.4 billion surplus, according to plaintiffs.

Most Favored Nations —
Most Favored Tactic

The filing comes at a time when Blues across the country have come under attack for their use of “most favored nation” clauses in their agreements with hospitals and physicians. Critics say that such clauses effectively allow BCBS to set the floor on pricing, as providers agree to charge other insurers at least as much, and sometimes more, than they charge the BCBS plan. Other insurers are thus undercut and effectively driven from the market, and health care costs are artificially inflated.

In October 2010, the Justice Department sued BCBS-Michigan, contending that the plan’s use of MFNs cause hospitals to raise prices to BCBS competitors, or demand prices that are too high to compete, thus excluding them from the market, preventing competition, leading to increased prices for health insurance sold by BCBS and competitors, and higher prices for hospital services paid by insureds.

In August 2011, U.S. District Judge Denise Page Hood denied Blue Cross’s motion to dismiss that complaint.

And in the spring of 2011, the Justice Department sent out civil investigative demands to a number of state BCBS plans seeking information regarding the use of most favored nation provisions.

“Our company is among several Blue plans that received a CID from the Department of Justice” said Lew Borman of BCBS-NC. “As is general policy, we don’t comment specifically about pending investigations or litigation.”

And though BCBS-South Carolina did not respond to a request for comment, it previously confirmed to the Charleston Post and Courier that it had likewise received a request for information from the Justice Department.

Gina Talamona from the Justice Department could not elaborate on the investigation other than to say that it was ongoing.

State legislators in North Carolina and South Carolina have likewise weighed in on insurers’ use of MFN provisions. In North Carolina, Sen. Tom Apodaca, a Republican from Hendersonville, sponsored S-517, which would ban the use of MFNs by North Carolina health plans. As of June 2011, that bill had passed through three senate readings and had been referred to the House Judiciary Committee.

In South Carolina, Sen. A. Shane Massey, an Edgefield Republican, introduced a similar bill, S-316, in January 2011. Massey told the Post and Courier in July that the bill had not gotten far, due in part to the “evolving situation” with the Justice Department investigation.

BCBS North Carolina, a different shade of blue

In Cerven, the plaintiffs do allege that BCBS-NC’s use of MFNs have enabled it to achieve and extend dominant market share in the state:

“The use of MFNs unreasonably reduces competition by establishing that the dominant market provider will be charged the lowest prices charged, thus making it indifferent to the actual price charged and eliminating an incentive to reduce overhead prices, and by preventing other health insurers in North Carolina from achieving lower costs with providers and thereby becoming significant competitors to BCBS-NC.”

But the use of MFNs is alleged to be an anticompetitive practice employed in connection with the overarching conspiracy to divide markets.  “BCBS-NC has used its market and monopoly power . . . to engage in a number of anticompetitive practices,” the plaintiffs allege.  “For example, BCBS-NC has required key health care providers to agree to most favored nation clauses (MFNs)  . . . to ensure that [it] receives the best pricing for health care services in the market.”

That distinction is what makes this action more compelling, according to Duke’s Richman.  “Unlike the suits against BCBS of Michigan, this suit is essentially an accusation of a per se antitrust violation,” he said.  “BCBS’ best defenses are probably that either trademark law or the McCarran Ferguson Act precludes standard antitrust analysis. In my view, both of those defenses are quite weak.”

The plaintiffs seek on behalf of a nationwide class to stop BCBSA from dividing markets and eliminating competition and, on behalf of a North Carolina class, to recover treble damages based upon the amount by which premiums have been artificially inflated since February 2008.

That amount is not quantified in the complaint, but the plaintiffs point to the fact that, at a time when many insurers lost customers, BCBS-NC grew its surplus to $1.4 billion and lavished its executives with million-dollar salaries. “[R]ising premiums have enabled BCBS-NC to lavishly compensate its executives and grow its surplus in excessive amounts, unusual practices for a self-described non-profit organization,” the plaintiffs alleged in their complaint.

According to court records, Blue Cross has until April 30 to answer the complaint.

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