Is Blue Cross/Blue Shield a Cartel?

5/29/2015

A federal judicial panel in Alabama has consolidated two lawsuits into a single claim, alleging that the networked structure of insurance group Blue Cross/Blue Shield violates federal antitrust law. Both suits, one filed on behalf of healthcare providers, and the other on behalf of individuals and small-business customers claim that the 37 separate entities that represent the brand operate as a “cartel.” While both lawsuits say that their structure limits competition, the healthcare providers’ suit claims the competition lowers provider pay, the other suit alleges that the lack of competition unfairly inflates premiums. Last year, Judge David Proctor ruled against motions to dismiss filed by the insurers, saying that the plaintiffs “have alleged a viable market-allocation scheme,” that if proven, would be considered a violation of antitrust law. The consolidated case has made it to the discovery phase in Alabama federal court. Many legal experts anticipate the case to drag on for years if a settlement is not negotiated.

The Blue Cross/Blue Shield insurance network has existed since the 1930’s when hospitals and doctors combined early efforts at modern health insurance. Eventually the two names became trademarked and the parent association began to license the brand and trademark to insurance companies. Those insurers generally receive territorial rights to use the Blue Cross/Blue Shield name and logo. Currently the network insures roughly one-third of all Americans through the 37 individual companies, many of them operating within a single state. There are some larger providers like Anthem, which operates in 14 states and directly competes with Blue Shield of California, however, many of the companies dominate specific locations or market sectors, if not the state’s entire insurance market at large. In Alabama, for example, Blue Cross/Blue Shield insures 97 percent of all small business insurance for companies with less than 100 employees and 91 percent of the entire business insurance market.

The lawsuits allege that the association’s dividing of territory and prevention of its license-holders to sell other forms of insurance violates free-market principles. Scott Nehs, general counsel for the Blue Association, disagrees stating that, “This is a model that has withstood scrutiny over our entire history. There’s no smoky room involved, there’s no dividing up.” In a court brief, the insurers said, “Federal regulators have long known about the licenses and taken no antitrust action.” While Alabama premiums are among the lowest in the country, the lawsuit notes that from 2000 to 2007, Louisiana health insurance premiums increased by 75.3 percent, more than three times faster than Louisiana wages.According to one plaintiff’s attorney, William Isaacson, “You have less competition in a market, so prices are higher. That’s one of the basics of antitrust law.” University of Pennsylvania Wharton School professor, Scott E. Harrington believes however; that “it’s going to be hard to show those entities are making the large margins implied” in the lawsuit.

Many legal experts are considering the case to have groundbreaking potential. Wake Forest law professor, Mark Hall, says the lawsuit brings forth “some surprisingly strong claims,” saying that, “It’s sort of antitrust law 101 that direct competitors can’t agree to divvy up their territory.” Others like Duke law professor, Barak D. Richman, believes it will be left up to the judicial interpretation of the network’s structure, if it represents a franchise, or a more conspiratorial makeup. Richman believes that, “You’ll be looking for cartel-like behavior or the protection of intellectual property. That will probably be the most significant evidentiary test.” Blue Association spokesman Caleb Weaver reiterates that the claims have no merit, citing the organization’s 80 years of successful history, saying that “During that time, the Blue model of service has been validated and enforced by numerous courts and regulatory agencies. However, leading plaintiff’s attorney, Joe Whatley observes, “The fact that someone’s been doing something a long time doesn’t make it right, and doesn’t make it legal.”

Sources:

The Advocate – Ted Griggs

Triad Business Journal – Owen Covington

Wall Street Journal – Anna Wilde Mathews