The opinion of the court was delivered by: Weinstein, Senior District Judge.
REVISED MEMORANDUM & ORDER
Plaintiff, Empire Blue Cross & Blue Shield of New York
("Empire"), is suing major tobacco product manufacturers and
related entities ("Tobacco") for increased health care costs
arising from deceptions about the effects of tobacco use on
subscribers' health. Defendants proffer evidence that Empire
shifted heightened medical outlays onto its subscribers in the
form of premium increases and, consequently, that it has not
suffered damage. Claiming that such a "pass on" defense is
inapplicable to a RICO fraud action, plaintiff moves to exclude
this evidence. For the reasons developed in part III, infra
there is no pass on defense. Nevertheless, evidence of the basic
facts of the insurance industry — including pass on premium
practice to cover increased costs — will be admitted. This
apparent anomaly under relevancy rules 401 and 402 of the Federal
Rules of Evidence will be discussed in part IV, infra. The
practical realities of juror decision making must be considered.
It is better to shed light on the workings of the insurance
industry with appropriate legal instructions then risk sub rosa
speculations by an inadequately informed jury.
The factual allegations — fraud of defendants in denying
smoking caused disease, leading to increased costs to the
plaintiff — as well as Empire's theories of recovery have been
set out at length. See Blue Cross v. Philip Morris,
113 F. Supp.2d 345 (E.D.N.Y. 2000); see also Simon v. Philip Morris,
124 F. Supp.2d 46 (E.D.N.Y. 2000) (collecting references to
Plaintiff moves in limine to bar evidence which shows that it
has passed increased health care costs onto its insured in the
form of higher premiums. Examples include the proposed testimony
for the defendants of Dr. Robert Hoyt and Dr. Harvey M. Sapolsky,
experts on health insurance practice. Dr. Hoyt's testimony would
counter arguments that "smoking related" costs are suffered by
Empire. His conclusions appear in expert reports produced
pursuant to Rule 26(a)(2)(B) of the Federal Rules of Civil
1) "Insurance companies, [Empire] included, are
financial intermediaries that set their rates so as
to cover all anticipated claim costs. They function
as a conduit though which health care costs for the
aggregate pool of insureds are transferred."
Report at 4 (Feb. 15, 2000).
2) "Demand for both medical care and health insurance
is relatively inelastic. Hence, increases in costs
can be shifted to insurance consumers without
significantly reducing demand. As a result, as
costs increase, from whatever source, insurers can
pass the majority of these costs onto the insurance
buyers through subsequent premium increases." Id.
3) There are no economic or regulatory impediments to
[Empire's] ability to pass on the costs of smoking.
Report at 4 (Mar. 6, 2000).
Dr. Sapolsky would offer similar testimony. Report at 15 (Feb.
17, 2000) ("Insurance companies, [Empire] included, are largely
passthroughs for hospital and physician charges. The risks, with
a brief lag, are borne by the buyers. This years experience is
reflected in next year's premium."). The notion that insurance
companies pass on their costs to consumers would also be
supported by defendants' general testimony about the health
insurance business, how it sets rates, and how it is financed.
III. The "Pass On" Defense Under RICO
Empire agrees that most of its costs are eventually passed on
to subscribers through premiums. Nevertheless, it argues that
under the dictates of Hanover Shoe v. United Shoe Machinery
Corp., 392 U.S. 481, 88 S.Ct. 2224, 20 L.Ed.2d 1231 (1968), that
is not a defense to a RICO violation.
"The `collateral benefit' rule of tort law rests on the belief
that the wrongdoer should be made to pay — the better to deter
like conduct — whether or not the victim has providently supplied
another source of compensation." Carter v. Berger,
777 F.2d 1173, 1175 (7th Cir. 1985). Since Hanover Shoe, Inc. v. United
Shoe Machinery Corp., 392 U.S. 481, 88 S.Ct. 2224, 20 L.Ed.2d
1231 (1968), federal antitrust law has rested on a similar
enforcement principle. See Square D Co. v. Niagara Frontier
Tariff Bureau Inc., 760 F.2d 1347, 1352 (2d Cir. 1985) ("The
Supreme Court has also rejected the argument that a plaintiff
cannot recover damages it was able to pass on to its customers in
the antitrust context") (Friendly, J.).
In Hanover Shoe the Supreme Court disallowed a defense by
antitrust defendants who claimed that plaintiff was not entitled
to damages for costs passed on to its customers. Hanover Shoe,
Inc. v. United Shoe Machinery Corp., 392 U.S. 481, 88 S.Ct.
2224, 20 L.Ed.2d 1231 (1968). The case involved an antitrust
treble-damages action brought against a producer of shoe
machinery by one of its customers, a manufacturer of shoes. Id.
at 483, 88 S.Ct. 2224. The defendants argued that because Hanover
Shoe had been able to recoup its losses by charging its customers
more for its shoes it did not suffer any cognizable injury: it
had passed on any illegal overcharge. Id. at 492, 88 S.Ct.
2224. The Court rejected the defense, holding that, except in
limited circumstances, defendants may not introduce evidence that
another party absorbed the plaintiff's increased costs resulting
from antitrust violations. Id. at 494, 88 S.Ct. 2224.
The Court provided two reasons for the rejecting a pass on
defense. First, it was unwilling to "complicate treble-damages
actions" with attempts to trace the effects of an illegal
overcharge on the shoe manufacturer's "prices, sales, costs and
profits, and of showing that these variables would have behaved
differently without" the violation. See Illinois Brick Co. v.
Illinois, 431 U.S. 720, 725, 97 S.Ct. 2061, 52 L.Ed.2d 707
(1977) (discussing reasoning of Hanover Shoe). Second, the
Court was concerned that allowing a pass on defense would
diminish the advantages of private antitrust enforcement,
increasing the likelihood that violators of antitrust laws would
escape liability. It declared:
In addition, if buyers are subjected to the
passing-on defense, those who buy from them would
also have to meet the challenge that they passed on
the higher price to their customers. These ultimate
consumers, in today's case the buyers of single pairs
of shoes, would have only a tiny stake in a lawsuit
and little interest in attempting a class action. In
consequence, those who violate the antitrust laws by
price fixing or monopolizing would retain the fruits
of their illegality because no one was available who
would bring suit against them. Treble-damage actions,
the importance of which the Court has many times
emphasized, would be substantially reduced in
Hanover Shoe, 392 U.S. at 493, 88 S.Ct. 2224.