Lawsuit: Blue Cross Stifles Competition

As the plaintiffs tell it, the arrangement works like this: 38 Blue Cross and Blue Shield plans nationally have illegally agreed not to compete on one another's turf. Consequently, Blue Cross plans in South Carolina and Virginia don't compete with Blue Cross and Blue Shield of North Carolina.

Blue Cross strongly disputes the allegations, saying that it is simply trying to get its customers the best prices available. The company says its territorial restrictions and contracts have withstood legal challenges and government scrutiny for years.

The plaintiffs -- three Mooresville residents and two small businesses -- are represented by lawyers with a powerhouse firm in Washington, and some antitrust experts predict they will win in court.

The various Blue Cross plans are independent insurance companies. But the lawsuit alleges that they have colluded through their national trade group -- the Blue Cross and Blue Shield Association.

More competition would mean lower prices, the lawsuit contends. Instead, the arrangement has allowed the insurers to dominate their markets and to charge inflated premiums.

For years, Blue Cross and Blue Shield of North Carolina required hospitals and other key health care providers to agree to contract provisions, commonly known as "most favored nation" clauses, which ensured that Blue Cross received the best prices for health care services.

The lawsuit argues that those clauses stifle competition by preventing other insurers from negotiating for lower costs. That, in turn, leads to higher premiums at the other insurance companies.

Blue Cross and Blue Shield of North Carolina, a not-for-profit company that is fully taxed, is the largest private health insurer in North Carolina, controlling more than 70 percent of the market. It has reserves of more than $1.8 billion.

'We will vigorously defend'

In court filings, Blue Cross said the N.C. Department of Insurance thoroughly regulates and approves its contracts with providers, including provisions like the MFN clauses.

Blue Cross also said plaintiffs have yet to point to facts showing that the MFN clauses have driven up prices.

The U.S. Justice Department has been investigating whether Blue Cross MFN clauses in North Carolina and other states violate antitrust laws. A Blue Cross and Blue Shield of North Carolina spokesman said that the company is cooperating fully with the ongoing investigation.

The company said it is no longer including MFN clauses in new contracts and has recently removed them from old ones.

The North Carolina case, filed in early 2012, was the first of more than 20 class actions making similar allegations against Blue Cross plans nationwide. Those cases recently have been consolidated before a federal judge in Alabama, which means that the litigation's outcome likely would affect companies and policyholders nationwide.

Among those representing the North Carolina plaintiffs are lawyers from Boies, Schiller and Flexner, a high-profile Washington firm known for taking on complex cases. The U.S. government hired the firm's chairman, David Boies, to litigate its antitrust case against Microsoft.

The Blue Cross and Blue Shield Association called the lawsuits "meritless."

"We will vigorously defend the Blue Cross Blue Shield system, because it provides a distinct advantage for our customers: affordable access to a broad network of doctors and hospitals serviced by a local company with deep knowledge of, and commitment to, the local community," the association said in a statement.

'Benefits of competition'

But some antitrust experts find the plaintiffs' arguments credible.

Duke University law professor Barak Richman, an expert on health care policy and antitrust law, said he thinks antitrust law is in the plaintiffs' favor.

"We've always known that Blue Cross of America uses its trademark to prevent competition," he said. "And we've always questioned whether it's legal."

Nationally, "Blue" plans cover about 100 million Americans.

The case could prove particularly significant for Charlotte residents -- and others who live near state lines -- if Blue Cross' territorial divisions are found to be illegal, he said.

"This would allow Blue Cross of South Carolina to compete in North Carolina, so the people of Charlotte would have the benefits of competition," he said.

Roger Feldman, a health economist and insurance expert at the University of Minnesota, said the lawsuit could lead to reduced insurance premiums nationwide.

"Let's imagine what (Blue Cross plans) could do if they were turned loose to compete in other markets," Feldman said.

Rivalries and animosities

There was a time when many of the nation's "Blue" plans vigorously competed, according to the lawsuit.

The Blue Cross plans started as prepaid hospital plans associated with the American Hospital Association. The companies initially agreed not to compete with each other, but the national Blue Cross committee had no power to stop it. A Blue Cross sponsored history recounts "bitter fights between interstate rivals" and "bickering over non-existent boundaries."

Blue Shield plans imitated the Blue Cross model, but for physician care. Blue Shield organizations developed their plans together with the American Medical Association, the doctors' lobbying and professional arm.

Blue Cross and Blue Shield competed fiercely, the lawsuit says, and Cross-on-Cross and Shield-on-Shield competition flourished. "Rivalries, animosities ... pure unadulterated hatred of each other," according to a former national Blue Shield executive quoted in the lawsuit.

In 1982, the two national associations merged to form the Blue Cross and Blue Shield Association, a trade group whose members were the individual plans from around the country. There were 110 independent health insurance companies in 1984; that number is now 38. Each plan is a separate independent corporation whose president sits on the national BCBSA board.

Since then, the lawsuit alleges, the Blue Cross and Blue Shield companies have used the national association -- and a web of licensing agreements, membership rules and regulations -- to keep the 38 corporations from competing with other.

'Ample case law'

According to the lawsuit, Blue Cross and Blue Shield plans are the largest health insurers in 44 states. And the plaintiffs allege that Blue Cross' market dominance results largely from its efforts to stifle competition.

As far back as 2004, some North Carolina lawmakers tried without success to eliminate the MFN clauses. In 2011, state Sen. Tom Apodaca, a Hendersonville Republican, introduced a bill that would prohibit North Carolina health carriers from using MFN clauses. The bill passed in the Senate but stalled in the House.

Blue Cross says MFN clauses are tools that help them enter into longer term contracts without the need for frequent renegotiations.

The company argues in its court filings that "ample case law" has found that MFN provisions encourage competition and keep prices down.

"Plaintiffs have not alleged any facts showing any actual increases in provider prices, much less any increase resulting from an alleged MFN," the company wrote in a court brief.

Still, in 2012 Blue Cross and Blue Shield of North Carolina stopped putting the clauses into new contracts, and is no longer enforcing them.

Feldman, the health economist, said he suspects the pressure of a federal investigation brought an end to the practice. Given the insurance company's dominance in the North Carolina market, he said, Blue Cross would not likely prevail in court.

"It's anticompetitive," Feldman said. "They don't have a leg to stand on."

Alexander: 704-358-5060 Neff: 919-829-4516

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