Antitrust Lawsuits Target Blue Cross and Blue Shield

By Anna Wilde Mathews
The Wall Street Journal, May 27, 2015

Blue Cross and Blue Shield health insurers cover about a third of Americans, through a national network that dates back decades. Now, antitrust lawsuits advancing in a federal court in Alabama allege that the 37 independently owned companies are functioning as an illegal cartel.

A federal judicial panel has consolidated the claims against the insurers into two lawsuits that represent plaintiffs from around the country. One is on behalf of health-care providers and the other is for individual and small-employer customers.

The antitrust suits allege that the insurers are conspiring to divvy up markets and avoid competing against one another, driving up customers’ prices and pushing down the amounts paid to doctors and other health-care providers.

The suits, which name all of the Blue Cross and Blue Shield companies as defendants as well as the Blue Cross Blue Shield Association, have already survived the insurers’ first major legal challenge.

The Blue Cross and Blue Shield companies trace their roots to the 1930s, when hospital and doctor groups started insurance plans to help people pay for medical care. Hospital plans used the Blue Cross name, and the physician plans were sold under the Blue Shield banner. Eventually, the names were trademarked.

Today, the Blue Cross Blue Shield Association licenses the brands to the insurers that use them. Companies typically hold exclusive rights to the Blue Cross and Blue Shield names within a certain territory.

Most of the 37 Blue Cross and Blue Shield companies are not-for-profit. Many do business in a single state. The biggest Blue Cross and Blue Shield company is publicly traded Anthem Inc., which operates the plans in 14 states. In a few places, Blue-branded plans compete directly against one another, as in California, where Anthem Blue Cross battles Blue Shield of California.

“This is a model that has withstood scrutiny over our entire history,” said Scott Nehs, general counsel of the Blue association. “There’s no smoky room involved, there’s no dividing up.” Also, he said, the insurers’ rates are closely watched by state regulators.

The plaintiffs, however, allege that the Blue association is controlled by its members, who use it to engage in “illegal market division.” The customer suit says the association also limits the amount of insurance business insurers can do under non-Blue brands. The suit also alleges that the Blue agreements result in “inflated premiums.”

“You have less competition in a market, so prices are higher,” said William Isaacson, an attorney with Boies, Schiller & Flexner LLP, which represents the customer plaintiffs. “That’s one of the basics of antitrust law.”

The plaintiffs have “some surprisingly strong claims,” said Mark Hall, a professor at Wake Forest University School of Law. “It’s sort of antitrust law 101 that direct competitors can’t agree to divvy up their territory.”

http://www.wsj.com/articles/antitrust-lawsuits-target-blue-cross-and-blu…

Although this lawsuit is basically over whether or not the Blue Cross Blue Shield Association and its 37 licensees are functioning as an illegal cartel, its significance for those of us interested in health care reform is much deeper. Even the best of the private insurers can become corrupted when they operate under the rules of the free marketplace, which is quite a contrast to the rules under which a public program such as Medicare operates, or should operate.

This is not to say that government bureaucrats are never corrupt. Rather the point is that, whereas corrupt bureaucrats would be ferreted out and prosecuted for their illegal acts, the business world thrives on manipulating markets to serve their own interests. A government bureaucrat whose function it is to help citizens obtain and finance their health care is guided by an ethic that places the patient first, whereas an intermediary that creates a business entity designed to manage the money that flows within the health care system functions under an amoral business ethic.

The executives of the Blue Cross Blue Shield entities are not crooks. But look at the largest one of all – Anthem Blue Cross. Read any of its annual reports and the emphasis is primarily on enhancing investor value. Though most Blue Cross Blue Shield plans are nonprofit, they adopt the same innovations as the for-profits that are trying to gain an advantage in the competitive markets. In California, it is difficult to see any differences between the innovative leader – for-profit Anthem Blue Cross – and nonprofit Blue Shield of California that has adopted the same business innovations.

What about Medicare? The traditional Medicare program is subject to abuses by the health care providers – abuses which occur with private plans as well – but these abuses are prosecuted in the public sector whereas the private sector seems to consider them to be business as usual.

An example is the approach to current outrageous drug prices. Public programs such as Medicaid and the VA demand fair pricing in contrast to the modest marketplace discounts that protect the excessive profits of not only the pharmaceutical firms but also the intermediary pharmacy benefit managers. The latter is good business whereas the former is good governance. There is a difference.

Yet there is a serious problem that has crept into our Medicare program, and that is the expanding privatization of Medicare through the private Medicare Advantage plans. We have recited repeatedly the abuses of this industry stemming largely from their adherence to “good business practices” – behavior that covertly shortchanges the taxpayers who finance Medicare while enhancing profits for their passive investors.

It will be interesting to see if the courts determine the prohibition of geographic overlapping of the Blue Cross Blue Shield trademarks to be anticompetitive behavior. But do we really care? If we were to establish one uniform public program that covered everyone, this issue goes away.