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ADDINO v. GENESEE VALLEY MED. CARE

UNITED STATES DISTRICT COURT WESTERN DISTRICT OF NEW YORK


August 31, 1984

JOHN G. ADDINO, D.P.M., EDWARD J. BONAVILLA, D.P.M., DAVID CHAZIN, D.P.M., CHARLES F. COYLE, D.P.M., and LOUIS J. GIORDANO, D.P.M., Individually and on behalf of all other doctors of Podiatric Medicine having Participant contracts with GENESEE VALLEY MEDICAL CARE (A Blue Shield Plan), Plaintiffs,
v.
GENESEE VALLEY MEDICAL CARE, INC., a New York non-profit corporation and Blue Shield Plan, Defendant.

The opinion of the court was delivered by: TELESCA

INTRODUCTION AND PROCEDURAL HISTORY

Plaintiffs, five podiatrists, bring this action against Defendant, a Blue Shield plan, alleging violations of Sections 1 and 2 of the Sherman Act, (15 U.S.C. Sections 1 and 2), in addition to a pendent state law claim. Plaintiffs' original complaint was dismissed by decision and order of this court dated November 3, 1983, on the ground that it failed to sufficiently allege an impact upon interstate commerce caused by defendant's alleged unlawful activities. Plaintiffs filed an amended complaint on November 29, 1983, and now move for partial summary judgment on the issue of defendant's liability under the Section 1 Sherman Act count of the amended complaint. Defendant cross-moved for summary judgment seeking dismissal of the entire complaint. Both motions are now before this Court for determination.

 FACTS *fn1"

 Plaintiffs are licensed podiatrists practicing in the Rochester, New York area. Defendant, Genesee Valley Medical Care, Inc. ("GVMC") is a not-for-profit New York Corporation which operates a Blue Shield Plan in a five-county area surrounding the City of Rochester, New York. The plan has approximately 740,000 subscribers which accounts for approximately 74% of the commercial health care delivery market in that area. *fn2" As of April 1, 1982, GMVC had contracts with 1,333 participating physicians, i.e., doctors of medicine ("M.D.s") who, under the corporation's bylaws, are considered "Members". *fn3" Podiatrists and dentists are also permitted to contract with GVMC but unless they are elected to the board, they are merely considered "Participants" *fn4" and not "Members".

 A participant in the plan, (an M.D., Dentist or Podiatrist), who signs a contract with GVMC, agrees to accept the maxiumum fee set by GVMC for a given procedure for treatment provided to one of the plan's subscribers. Under this arrangement, a participant is directly reimbursed by GVMC for services rendered.

 An individual subscriber is free to seek treatment from a non-participating provider with several significant consequences. First, the subscriber must make payment to the provider and then seek reimbursement from GVMC. Additionally, if the provider charges more than GVMC's maximum rate for a given procedure, the subscriber will not be reimbursed for this additional amount. With this in mind, it is not difficult to accept plaintiffs' premise that most subscribers, if they have the choice, will seek out only participating providers.

 GVMC uses a two-tiered approach for setting the maximum reimbursement rate for a given procedure. The Medical Advisory Committee ("MAC") is the first body to review suggested rate changes. The MAC is made up of eleven M.D.'s and three non-health care providers (referred to as laypersons). The content of the MAC according to the by-laws, is left to the discretion of the board. (See GVMC By-laws Article VII, Section 1)

 Prior to the commencement of this action and up until some point afterwards, a Schedule Review Committee was also involved in rate setting. This committee was entirely composed of MD's and performed a reviewing function of the proposals already approved by the MAC. At present, the functions of the Schedule Review Committee are also performed by the MAC, and the former has been eliminated.

 Under either system, all proposed rates must be approved by GVMC's board of directors. The present number of directors on the board is 24, being composed of 12 MD's and 12 laypersons. However, the by-laws simply provide that the board may contain no less than 6 nor more than 24 directors, one-half of which must be participants. (See GVMC's By-Laws Article VI, Section 1). Although Podiatrists and Dentists are permitted to serve as board members, no Podiatrist or Dentist has ever been chosen or served in that capacity.

 The board is elected as follows. The old board determines how many vacancies (both layperson and participant) which need to be filled in a given year. The board then appoints a nominating committee of five persons, at least two of which must be layperson board members. According to plaintiffs, the other three have always been MD's.

 After a slate of participant candidates has been presented by the nominating committee, the 1,333 MD members of the corporation (and presumbly the 12 layperson board members) elect the participant board members. Thereafter, there is some dispute as to how the 12 layperson members are selected. The plaintiff contends that the doctor members of the board will control both the selection and appointment of the lay members which is indicative of the measure control enjoyed by the MD's. *fn5"

 The gravamen of plaintiffs' complaint is that GVMC constitutes a structural price fixing conspiracy controlled by MD's. Plaintiffs allege that this conspiracy resulted in the simultaneous reduction of the maximum reimbursement rates for seven podiatric procedures and increases in rates for procedures performed exclusively by MD's. They further allege that this case presents a per se violation of Section 1 of the Sherman Act.

 DISCUSSION

 I. SECTION 1, SHERMAN ACT CLAIM

 Section 1 of the Sherman Act provides that "every contract, combination . . . or conspiracy, in restraint of trade or commerce among the several states . . . is declared to be illegal . . .". 15 U.S.C. 1. Long ago, however, the Supreme Court recognized that Congress could not have intended the word "every" to be taken literally, and most alleged restraints have been judged under what is called the "rule of reason." United States v. Joint Traffic Assn., 171 U.S. 505, 43 L. Ed. 259, 19 S. Ct. 25 (1898), Standard Oil of New Jersey v. United States, 221 U.S. 1, 55 L. Ed. 619, 31 S. Ct. 502 (1911). The "rule of reason" requires that the fact finder determine, under all of the circumstances, whether the restrictive practice imposes an unreasonable restraint upon competition.

 Plaintiffs urge, however, that the rule of reason is inapplicable in this case and that the current state of the law is found in Arizona v. Maricopa Medical Society, 457 U.S. 332, 73 L. Ed. 2d 48, 102 S. Ct. 2466 (1982). That case held that where doctors established the maximum fees to be paid in full payment for health services provided to patients who were members of a health insurance plan, such an arrangement constituted per se illegal price fixing under Section 1 of the Sherman Act. Plaintiff urges that where a price fixing agreement is involved, there is no need for this Court decide whether under all the circumstances the restrictive practice imposes an unreasonable restraint on competition. It is the per se rule against price fixing applied in Maricopa which plaintiffs assert should also be applied in this case. Plaintiffs argue vigorously that the by-laws of GVMC provide the MD's with the power to control the corporation and therefore to make decisions concerning the pricing of their services rendered to approximately 74% of the community. This argument, they claim, is a logical extension of the Maricopa decision.

 A. APPLICATION OF THE ANTI-TRUST LAWS

 Before resolving the merits of plaintiff's motion, defendant has alleged in its cross motion that it is exempt from the anti-trust laws under the "state actin" doctrine. Parker v. Brown, 317 U.S. 341, 87 L. Ed. 315, 63 S. Ct. 307 (1943). Defendant alleges that it is pervasively regulated by the New York State Insurance Department and is therefore exempt from anti-trust analysis. *fn6"

 The decisions since Parker v. Brown establish a two-pronged test for anti-trust law immunity under the state action doctrine: (1) The challenged restraint must be "one clearly articulated and affirmatively expressed as state policy"; and, (2) the policy must be "actively supervised by the state itself." City of Lafayette v. Louisiana Power and Light Co., 435 U.S. 389, 410, 55 L. Ed. 2d 364, 98 S. Ct. 1123 (1978); California Liquor Dealers v. Midcal Aluminum, 445 U.S. 97, 105, 63 L. Ed. 2d 233, 100 S. Ct. 937 (1980). As the court noted in Goldfarb v. Virginia State Bar, 421 U.S. 773, 44 L. Ed. 2d 572, 95 S. Ct. 2004 (1975), in order to qualify for the state action exemption, it is not enough that anti-competitive conduct is "prompted by state action, rather, anti-competitive activities must be compelled by direction of the state acting as a soverign." Id. at 791 (emphasis added).

 In the present case, none of the alleged activities of defendant or its member physicians satisfy the test set forth in Lafayette. It cannot be seriously argued that the State of New York compels defendants to set rates utilizing this particular method. See Ratino v. Medical Service of District of Columbia, supra, 718 F.2d, 1260, 1268 (4th Cir. 1983). Nor can it be argued that New York State law does anything more than permit the present makeup of the GVMC board. Accordingly, the Parker v. Brown "state action" exemption is inapplicable to the case before this court.

 B. APPLICATION OF THE PER SE RULE TO THIS CASE

 Turning to plaintiffs' principal claim, it is alleged that the corporate structure of GVMC and the method it uses to set reimbursement rates presents a "structural conspiracy" among physicians to fix prices equivalent to the one found in Maricopa. *fn7" Plaintiffs argue that only MDs are permitted to be members of the corporation under the by-laws, MDs comprise a super majority of the Medical Advisory Committee which recommends rate changes (11 MDs to 3 laypersons) and that the board is controlled by MDs.

 GVMC argues in defense that no conspiracy has been shown, nor can one be established because it cannot conspire with itself. See Smith v. Northern Michigan Hospitals, Inc., 703 F.2d 942, 950 (6th Cir. 1983). This argument, however, ignores the basic allegations of the complaint. Plaintiffs allege that defendant is merely a vehicle for the member MDs to fix prices charged by those MDs as well as other health care providers. As the court stated in Virginia Academy of Clinical Psychologists v. Blue Shield of Virginia, 624 F.2d 476, 478 (4th Cir. 1980):

 "It is not sufficient to assert, as defendants do, that a corporation cannot conspire with itself. We must look at substance rather than form . . . Anti-trust law has always been sensitive to the realities of the marketplace and has been particularly watchful of organizations of various trades or professions. [citations omitted]

 We think the uncontradicted evidence and the district court findings show sufficient physician control of Blue Shield of Richmond to bring its actions within the purview of Section I of the Sherman Act."

 In the present case, plaintiff's allegations are more than sufficient to state a claim of conspiracy between and among GVMC's physician members.

 Defendant also argues that the affidavit of several board members submitted in support of its cross motion establish that the rate increases requested by the Medical Advisory Committee are often rejected by the board. Thus, it argues that a conspiracy cannot be proven. See Virginia Academy, supra, 624 F.2d at 483. (which held that although the Neurological Society of Virginia cooperated very closely with one of the defendant Blue Shield plans, many of the group's recommendations were rejected by the plan. Thus, a conspiracy between the two was not established.)

 Moreover, according to GVMC MD control over the corporation is impossible because 5 percent of the board, which must approve all rates, is composed of non-MDs. Defendant argues that the layperson board members, many of whom are employed by the largest employers in the area, are vitally interested in defendant's rate structure, and their presence on the board insulates GVMC from any analogy to the Maricopa physicians' pricefixing agreements.

 In Maricopa, the court held that price fixing by physicians, regardless of the potential or actual benefit to the consumer, was per se illegal under the Sherman Act. But neither side in this case quarrels with this premise. The crux of the issue presented here is whether the power to fix prices deserves the same per se treatment as price fixing in fact. Defendant argues that the issue of control by the physicians over GVMC and whether prices have actually been fixed, are questions of fact which cannot be resolved on this motion. Plaintiffs assert, however, that the reasoning applied in Maricopa is equally applicable here and that actual day to day control need not be specifically established once the power to control is. *fn8"

 Defendant argues that a similar "structural conspiracy" argument was rejected in Pa. Dental Ass'n. v. Medical Service Association of Pennsylvania, 574 F. Supp. 457 (M.D. Pa., 1983), aff'd without opinion, 722 F.2d 731 (3d Cir. 1983). In that case a group of dentists alleged that a Blue Shield plan was involved in price fixing and group boycott in violation of Section 1 through the use of the "usual, customary, and reasonable" (UCR) *fn9" method of reimbursement for services rendered by dentists to insureds under the plan. The plaintiff dentists alleged that the use of the UCR method constituted price fixing and also illegally coerced dentists into accepting UCR amounts as total payment and into joining the plan or face the loss of their patients.

 Pa. Dental Ass'n. is easily distinguished from the instant case. While the board in Pa. Dental Ass'n. was composed of 16 laypersons and 16 doctors (two of whom were dentists), the same ratio as in this case, the court did not discuss how the 16 layperson board members were elected. The method of election of non-medical board members is vital in the present case. As an example, in the instant case, any board member must first be nominated by the nominating committee which consists of three MDs and two laypersons. Thus, the medical majority on the nominating committee has the potential to control who will be presented for membership as a lay member.It is relevant to point out here that the rates to be paid under the plan to the participants and to the members are established by the medical advisory committee which is composed of eleven MDs and three lay people. The overwhelming majority membership of MDs on on the medical advisory committee is telling.

 Further, in the present case defendant controls 74% of the local market, a vast distinction from the 9% market position of the defendant in Pa. Dental Ass'n. And finally, in the instant case, only MDs can be members of the corporation and are permitted to vote. Such a structural distinction was not present in Pa. Dental Ass'n. since dentists were not only allowed to vote but held two board seats.

 In the alternative, defendant argues that the per se rule cannot be applied at this stage of the proceedings for even if structural control is granted in the by-laws, plaintiffs must prove that MDs assert actual control over GVMC and conspire to fix prices. Defendant points to St. Bernard General Hospital v. Hospital Service Ass'n, 712 F.2d 978 (5th Cir. 1983, *fn10" Glen Eden Hospital, Inc., v. Blue Cross and Shield of Michigan, 555 F. Supp. 337 (E.D. Mich. 1983); aff'd in part, rev'd in part, 740 F.2d 423 (6th Cir. decided July 16, 1984), *fn11" and Ratino v. Medical Service of the District of Columbia, 718 F.2d 1260 (4th Cir. 1983) *fn12" in contending that although summary judgment which had been granted to the defendants in these cases was reversed on appeal, the circuit courts failed to enter summary judgment in favor the plaintiffs. Again, however, the structure of the defendant in each of those cases was different than the structure of GVMC.

 In Glen Eden, the participating hospitals possessed a veto power over changes in reimbursement rates, but no arguable outright control over the decision making process.Thus, to establish a per se violation, the plaintiffs in Glen Eden were put to the additional task of establishing "collaboration between the participating hospitals and Blue Cross on the decision[s]" . . . plaintiffs contended constituted anti-competitive conduct. Glen Eden, supra, slip opinion at p.14

 In Ratino, the district court did not face the structural conspiracy question because it dismissed the plaintiff's complaint under the "business of insurance" exception to the anti-trust laws. 718 F.2d at 1268. Thus, the Fourth Circuit remanded the case for a full development of the issues. Id. The Court went on to state: "If the district court finds that in effect physicians control the customary fee, under Maricopa it must find such practice per se illegal." at 1271. Because the "structural conspiracy" issue was not fully developed at the time the circuit court reviewed the case, its failure to grant summary judgment to the plaintiff is not controlling over this court's decision on that issue.

 The St. Bernard case presents the most analoguous situation to the present case and thus the most compelling authority for defendant's proposition that plaintiffs must prove actual control. As discussed previously, the St. Bernard court held that Maricopa was not controlling due to two dissimilarities of fact, first that there was an element of vertical price fixing involved which was not present in Maricopa, and second, the defendants in St. Bernard sought to fix prices only as to others and not as to themselves. 712 F.2d at 986, 987.

 As for the first dissimilarity found by the court in St. Bernard, this court must disagree with the significance of the distinction, at least as it applies in the present case. In Maricopa, the agreement reached between the competing physicians as to the rates charged for a given procedure, were of no effect without the insurance companies and their customers who were the beneficiaries of those agreements. So too in the present case where prices are being fixed through the vehicle of an insurance plan which is alleged to be controlled by physicians. These agreements only bear fruit when the insureds seek medical services from participating physicians. The St. Bernard court found this to be a vertical link from supplier to customer, 712 F.2d at 986. However, this court fails to see how such a vertical link makes the structure in this case significantly different from the scheme found to be illegal in Maricopa.

 Thus, this court does not find the reasoning of the Fifth Circuit in St. Bernard to be controlling under the facts of the present case. Moreover, the court in St. Bernard prefaced its entire discussion by acknowledging that "[t]he question before us is not whether there was either in fact or in law an actual violation of the anti-trust laws." 712 F.2d at 983. With this in mind, the Fifth Circuit's failure to grant summary judgment to the plaintiff is not persuasive authority that it could not have done so, and further, that it shouldn't be granted here.

 In summary, the leading cases decided since Maricopa involving allegations of price fixing by Blue Cross/Blue Shield plans, do not present identical or even substantially similar corporate structures to the one found in this case. Therefore, this court must apply general per se principles to the unique facts alleged herein. After reviewing these principles as set forth in Maricopa, as well as those established by the Supreme Court in United States v. Socony-Vacume Oil Co., 310 U.S. 150, 60 S. Ct. 811, 84 L. Ed. 1129 (1940), and the other Supreme Court cases applying the per se rule against price fixing agreements, the arguments in favor of applying a per se rule to a case such as this outweigh those against. Just as the per se rule has been utilized to eliminate the "necessity of minute inquiry whether a particular price was reasonable or unreasonable as fixed" and to "eliminate the burden of ascertaining from day to day whether it has become unreasonable through the mere variation of economic conditions . . .", United States v. Trenton Potteries, 273 U.S. 392, 398, 71 L. Ed. 700, 47 S. Ct. 377, so too, the per se rule should be applicable to eliminate the necessity, once the power to illegally fix prices is established, of ascertaining from day to day whether that power is being utilized. Accordingly, this court will apply the per se rule and if under the present corporate structure MDs enjoy the power to fix prices, that structure is illegal under Section 1 of the Sherman Act.

 An analysis of the corporate structure of GVMC clearly points out that the medical doctors have the potential to fix the rates that are to be paid to members and participants for medical services rendered. Significantly, only MDs are permitted to be members of GVMC. Both podiatrists and dentists (as well as all other types of non-MD health care providers) are clearly excluded from membership. *fn13" The board of directors consists of 24 members; 12 medical doctors and 12 laypersons. The nominating committee which selects participant and layperson candidates for the board is made up of three medical doctors and two laypersons (the laypersons being current members of the board). The medical advisory committee which recommends the rates to be charged for the various medical procedures covered by the plan is composed of 11 medical doctors and 3 laypersons.

 Defendant argues that the presence of responsible laypersons on the board, (which is clearly established by the affidavits submitted), is persuasive proof that absolute control to establish rates is not solely within the power of the medical doctor members. However, the structure of the corporation makes this alleged safeguard illusory since the built-in majority in the two critical committees (nominating committee and medical advisory committee) insure a medical bias as to rates, membership, and composition of the board of directors. If the composition of these committees were in reverse a much different case would be presented.

 The inescapable conclusion is that under the GVMC by-laws, MDs have the power to control the rate setting mechanism. Thus, these by-laws are per se illegal under Maricopa. Accordingly, plaintiffs' motion for partial summary judgment on the issue of liability with respect to the first count of the amended complaint is granted. *fn14"

 II. SECTION 2, SHERMAN ACT CLAIM

 Count II of the plaintiff's amended complaint attempts to allege an unlawful attempt to monopolize by GVMC in violation of Section 2 of the Sherman Act. The plaintiff alleges in the amended complaint that GVMC arbitrarily acted to reduce a significant percentage of the maximum amount to be paid for certain podiatric procedures ". . . at an unreasonably low level so as to retain its monopoistic position in the market as well as its overwhelming competitive advantage over other available forms of pre-paid medical care and to eliminate competition from insureds of pre-paid medical care and services." (Amended complaint, paragraph 52). The plaintiffs further complain that as a result of this, ". . . other insurers outside of the State of New York and/or the designated counties are excluded from the market and precluded from any meaningful form of competition with GVMC . . .". (Amended complaint paragraph 53)

 Plaintiff has failed to state a claim in alleging GVMC refused to deal with podiatrists unless they accept "arbitrarily" reduced reimbursement rates. Plaintiffs' complaint does not provide any logical link between GVMC's reduction of podiatric reimbursement rates and GVMC's retention or enhancement of its market power. Official Airline Guides, Inc. v. F.T.C., 630 F.2d 920 (2d Cir. 1980), cert. denied, 450 U.S. 917, 67 L. Ed. 2d 343, 101 S. Ct. 1362 (1981); see also, United States v. Colgate, Inc. Co., 250 U.S. 300, 39 S. Ct. 465, 63 L. Ed. 992 (1919).

 And finally, it is extremely doubtful that the plaintiffs have standing to raise these Section II claims since they are not competitors of GVMC in the pre-paid insurance market. See 15 U.S.C. Section 15; Pa. Dental Ass'n. v. Medical Services Association of Pennsylvania, supra, 574 F. Supp. at 469.

 Accordingly, Count II of the amended complaint fails to state a valid claim upon which relief can be granted and must be dismissed pursuant to F.R.Civ.P. 12(b)(6).

 III. STATE LAW CLAIM

 Plaintiff's final claim is that GVMC has breached its duty of good faith to plaintiffs by their reduction of the reimbursement rates for podiatric procedures. Plaintiffs claim that under New York State Corporate Law, GVMC owes a fiduciary duty to its members, even though defendant is a not-for-profit corporation. Plaintiffs have failed to cite any New York authority for this dubious proposition, nor has this court been able to find any.

 It must be remembered that plaintiffs are merely "participants" and not "members" of GVMC under its present by-law structure. This status is contractual in nature. If GVMC has failed to follow the correct reimbursement rate modification procedures contemplated in the contract, plaintiff's remedy is a breach of contract action.Thus, (Count III) of plaintiff's amended complaint fails to state a claim and must be dismissed pursuant to F.R.Civ.P. 12(b)(6).

 IV. CONCLUSION

 In summary, this court holds that the present structure of GVMC provides the corporation's physician members with the power to horizontally fix prices among competitors and is thus, per se, illegal pursuant to the reasoning set forth in Arizona v. Maricopa County Medical Society, 457 U.S. 332, 73 L. Ed. 2d 48, 102 S. Ct. 2466 (1982). Although this Court recognizes that maximum fee schedules may very well provide a benefit to the community by way of reduced health care costs, it is in no way essential "that the doctors do the price fixing". Id., 457 U.S. at 352.

 Accordingly, plaintiff's motion for partial summary judgment pursuant to F.R.Civ.P. 56 on the issue of liability in regard to Count I of the plaintiff's amended complaint is granted; Counts II and III of the amended complaint are dismissed pursuant to F.R.Civ.P. 12(b)(6).

 ALL OF THE ABOVE IS SO ORDERED.


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