3Horizontal Issues Agreements on Commissions Insurer AgreementsAgreements among competing insurers to fix agent commissions would be per se unlawful absent McCarran.In California League of Independent Insurance Products v. Aetna (N.D. Cal. 1959), the court held that McCarran exempted such agreements from potential antitrust liability, but this result is somewhat less certain after the Supreme Court’s 1979 ruling in Royal Drug US 205, n. 32 (“It is clear that the fixing of rates is the business of insurance. The same conclusion does not so clearly emerge with respect to fixing agent commissions”).Agent AgreementsAgreements among agents regarding the commissions they will accept from insurers are similarly per se unlawful absent McCarran.However, unlike the circumstance with respect to insurer agreements, no case has found an agreement among agents regarding the commission levels they would accept from insurers to be McCarran-exempt conduct. Moreover, the likelihood that such an argument would be accepted -- given that the requirements of the “business of insurance” test set forth in Royal Drug require that the conduct be “an integral part of the policy relationship between the insurer and the insured” -- seems highly unlikely.
4Enforcement ActionsThe FTC has taken action against an independent agent association that proposed that all member agents boycott an insurer that announced it would adopt a direct-to-consumers marketing program, which would adversely effect, if not eliminate, agent commissions. Independent Insurance Agents of America, Inc., 108 F.T.C. 87 (1986)The California Attorney General’s Office has expressly declared that “Agents may not agree to fix commission rates. Such agreements are price fixing agreements, and are per se illegal.” Antitrust Guidelines for the Insurance Industry, Cal. Attorney General’s Office 1990
5Agreements to Allocate Insurance Markets Agreements among competing insurers or agents to allocate customers along territorial or product lines are not McCarran exempt and have been held to constitute per se unlawful conduct. Garot Anderson Mktg, Inc. v. Blue Cross of Wisconsin (N.D. Ill. 1990) (insurer agreement to allocate insurance lines); Maryland v. Blue Cross & Blue Shield Association (D. Md. 1985) (agreement among insurers regarding territories of operation)
6Vertical Issues Agreements on the Rebating of Commissions Rebating is a form of price discounting by agents used to compete for business. Rebating effectively lowers the price paid by policyholders because the agent does not collect from the insured a portion of the stated premium that would be provided to the agent in the form of a commission.The antitrust issue raised by rebating is whether an insurer’s prohibition on agent rebating, absent a state law prohibition on the practice, constitutes an unlawful vertical restraint on competition.
7Anti-Rebate StatutesRebating has traditionally been unlawful by statute in many states. The stated rationale for such statutes is that rebating can lead to “insurer insolvencies, unfair discrimination between insureds, and decreased service to insurance customers.” The states that prohibit rebating of any portion of an agent commission include the following:Alabama North CarolinaGeorgia New YorkIllinois OhioMichigan VirginiaState law penalties for the violation of anti-rebating statutes varyby state, and include the loss of an agent’s license, a fine, or acriminal misdemeanor. Wacaser v. Insurance Commissioner(Ark. 1995) (loss of license for rebating).
8California Law on Rebating California, however, takes a decidedly different position on the issue.California law permits rebating (Cal. Ins. Code §750), and the California Antitrust Guidelines for the Insurance Industry come close to characterizing prohibitions on rebating as per se unlawful. They state:“An insurer may lawfully set only the price at which to sell, and coercive arrangements to prohibit agents from granting or advertising rebates are unlawful.”Despite this strong pronouncement, the California A.G. Office has not aggressively enforced these principles in any reported decision.
9Florida Law on Rebating Florida law on rebating also differs from that in most other states, thus also presenting potential compliance issues.Department of Insurance v. Dade County Consumer’s Advocate Office (Florida Supreme Court, 1986). “Insurance agents’ commissions do not affect the net written premium and are unrelated to the actuarial soundness of insurance policies. We find [the Florida anti-rebating statute] unconstitutional under Article 1, Section 9 of the Florida Constitution.”Florida Stat (1994)Rebating, when allowedwhere the rebate is available to all insureds in the same actuarial classwhere the rebate is offered pursuant to a schedule provided to the insurer issuing the policythe rebating schedule is uniformly appliedrebates shall not be given to an insured with respect to a policy purchased from an insurer that prohibits rebates
10Recent Florida Rebate Case In 2000, in Chicago Title Insurance v. Butler, the Florida Supreme Court reconfirmed that agent rebating of commissions is permitted under Florida law, and extended that principle to title insurance. The Court held:“While we acknowledge the Legislature’s interest in protecting title insurers and agents from insolvency, such purpose is not furthered by an anti-rebating provision.”
11Other Vertical Issues Exclusive Agency Agreements Exclusive Agency Agreements can violate the antitrust laws if they significantly limit the opportunities of competing insurers to enter or remain in the market. However, the right of an insurer to insist that an agent enter into a exclusive relationship with the insurer has been held to be the “business of insurance,” and McCarran exempt. Black v. Nationwide Mutual (3rd Cir. 1978).Nevertheless, antitrust issues canarise where an insurer’sdistribution system includes asystem of agents and subagents,and restrictions are imposed uponthe ability of subagents to transferbetween supervising agents.
12Recent Exclusive Agency Antitrust Cases In Bogan v. Northwestern Mutual Life Insurance Company (2nd Cir. 1999), the Second Circuit analyzed a Northwestern Mutual policy that prohibited low level “district agents” from transferring from one “supervising general agent” to another without the approval of both supervising general agents. When a district agent’s transfer request was denied, he sued, claiming that the restriction violated the federal antitrust laws.In rejecting the agent’s claim, the Court concluded that the applicable market was not a market limited to the sale of Northwestern Mutual policies (as plaintiff maintained), but was instead the broader market for life insurance products. Accordingly, because the plaintiff could not demonstrate that Northwestern Mutual’s policy on agent transfers had an adverse impact on the market for life insurance, plaintiff’s claims failed.Notably, however, the Court rejected the insurer’s initial contention that the conduct was McCarran exempt, requiring that the case proceed into discovery before ultimately granting Northwestern Mutual’s motion for summary judgment.
13Other Vertical Issues Agent Terminations An agreement between an insurer and an agent to terminate another agent can be unlawful if it can be shown to have a significantly adverse effect on competition, and if it is not outweighed by pro-competitive effects.
14Are Vertical Agreements with Agents McCarran Protected? Traditionally the termination of an insurance agent has been held to be protected under the McCarran-Ferguson ActCard v. National Life Insurance Co. (10th Cir. 1979)Black v. Nationwide Mutual Insurance Co. (W.D. Pa. 1977)Gribbin v. Southern Farm Bureau Life Insurance Co. (W.D. La 1984)Blackley v. Farmers Insurance Group (D. Utah 1976)
15However, the some recent cases indicate the issue is not free from doubt In Noack v. Blue Cross and Blue Shield of Florida (Fla. App. 1999) a Florida appellate court concluded that McCarran is inapplicable to agent terminations because a decision to terminate an agent has “nothing to do with the spreading of insurance risks or the issuance of insurance policies,” and thus is not “the business of insurance.”
16Other Recent Insurance Agent Termination Cases Agency Development, Inc. v. Med-America Insurance Company (W.D. N.Y. 2004) (Summary Judgment entered for insurer on terminated agent’s Section 1 and 2 antitrust claims, not based upon McCarran, but because the agent could not demonstrate harm to competition).Charts v. Nationwide MutualInsurance (D. Conn. 2005)(Terminated agent recovered over$2 million for termination “withoutcause” under the ConnecticutFranchise Act, notwithstanding thatno “for cause” terminationrequirement exists under theConnecticut Insurance Code).
17Enforcement of Non-Compete Clauses in Agent Agreements THE TEST TYPICALLY APPLIED FOR ASSESSING THE ENFORCEABILITY OF NON-COMPETE PROVISIONS IS THE REASONABLENESS OF THE RESTRICTION IN TERMS OF SCOPE AND DURATIONWood v. Accordia of West Virginia (W.Va. 2005) (upholding an insurer’s restriction on a terminated agent’s future employment, finding that the restriction would have a “very limited effect” on the plaintiff’s ability to continue to work in the insurance industry and that the insurer’s interest in restricting the agent’s activities was legitimate)Hamilton Insurance Services v. Nationwide Insurance Co. (Ohio, 1999) (Prohibition in agent agreement barring him from competing with the insurer with a twenty five mile radius, for a period of one year after termination, held to be reasonable and enforceable)
18However, The Enforcement of Such Clauses is Not Without Risk Under California law, non-compete clauses are against public policy. In 1999, in Walia v. Aetna, a San Francisco jury awarded a terminated agent $1.2 million in compensatory and punitive damages based upon Aetna’s insistence that the agent execute a non-compete agreement as a condition of employment.Under Oklahoma law, only the active solicitation of former customers can be barred by an agent non-compete clause. It is unlawful for an insurer to try to prohibit terminated agents from dealing with former customers that contact them. Blacksten v. Federated Mutual Insurance Co. (10th Cir. 2000)
20Broker IssuesThe antitrust issues raised with respect to brokers are largely the same as those found with agents. However, because the broker’s relationship to the insurer is clearly not one of principal/agent (the broker’s duty is to the insured, not the insurer), an agreement between an insurer and a broker is likely to be viewed as an agreement between two independent entities – providing the necessary predicate for a Section 1 violation that can be missing in the insurer/agent context.
21State Enforcement NY Attorney General Broker Investigation Alleged a “Hub and Spoke” Conspiracy between various brokers and the insurers they did business with under the Donnelly Act, New York’s Antitrust LawSeveral brokers and insurers have reached settlements with regulators, both in New York and in other states.In March of this year, the Florida AG commenced its own action directed at the same activities
22Private ActionsA number of private party class action proceedings have been filed based upon the conduct investigated by the New York Attorney General’s Office. In 2005, many of these actions were consolidated in an MDL proceeding in the District of New Jersey as In Re Insurance Brokerage Antitrust Litigation. Private party litigation was subsequently commenced in the Northern District of Georgia, although defendants have moved to have the case consolidated with the MDL proceeding in the District Court in New Jersey.In March of 2006, Zurich American became the first defendant to settle the claims against it in the MDL proceeding, including it within the scope of a $171 million settlement with 9 states (Texas, California, Florida, Hawaii, Maryland, Massachusetts, Oregon, Pennsylvania and West Virginia). The private plaintiff share of the settlement is reportedly $100 million.
23Does McCarran Provide any Defense to Insurer/Broker Interactions? The NY AG office, in comments to the Antitrust Modernization Commission in support of a request to repeal McCarran, suggested that the protections afforded by the McCarran-Ferguson Act precluded it from taking action under the federal antitrust laws to address conduct uncovered in the broker investigationWhether the NY AG office is correct – that McCarran exempts such conduct from the federal antitrust laws – will be decided by the Court in the In re Brokerage Antitrust Litigation. The parties have fully briefed the issue for decision by Judge Faith Hochberg. When decided, the issue will likely be appealed to the 3rd Circuit, if not the Supreme Court.
24Legislative Issues Concerning Agents and Brokers
25Optional Federal Chartering In early April, Senate Bill 2509, the National Insurance Act of 2006, was introduced by Senators Sununu and Johnson. The bill would permit life and p&c insurers to obtain a federal charter and avoid state licensing. Federally-chartered insurers would not be subject to most state regulation, but would lose the protections of the McCarran-Ferguson Act for all conduct except the development of policy forms.The legislation is opposed by the “Big I” (the Independent Insurance Agents and Brokers Association), which prefers the SMART Act, which would instead attempt to harmonize state-based regulation and would not eliminate McCarran.
27Recurring Horizontal Issues Provider Agreements regarding how to deal with InsurersInsurer Agreements regarding how to deal with ProvidersAgreements on the Fees Paid for Products or ServicesAgreements on the Fees Charged for Products or ServicesAgreements not to do business with a particular provider or class of providers (Boycott claims)Agreements not to do business with a particular insurer or class of insurers (Boycott claims)
28Horizontal Agreements Insurer Agreements on How to Treat Providers Academy of Medicine v. Aetna Health (Ohio 2005) (alleged conspiracy of Cincinnati-area insurers to restrain provider fees; challenged under the Valentine Act, Ohio’s antitrust law)After defendants’ motions to dismiss the Complaint on the grounds that the Valentine Act does not apply to insurers failed, as did the argument that the claims were required to be arbitrated pursuant to arbitration clauses in each doctor/insurer agreement, several insurer defendants settled the claims against them for several hundred million dollars in reimbursement increases.
29Horizontal Agreements Provider Agreements on How to Treat Insurers UnitedHealth v. Advocate HealthCare (Arbitration, 2005) (arbitrators applied the rule of reason to an insurer claim that a provider group had misused the “Messenger Model,” and held that because the provider group had no more than a 15% market share, and the insurer had encouraged joint negotiations, the insurer’s claim for $250 million in damages failed)Medical Savings Insurance v. HCA (M.D. Fla. 2005) (Insurer claim that area hospitals conspired to increase charges to insurer and/or boycott the insurer failed to state a claim on standing grounds, because the insurer was neither a customer nor competitor with the providers)HealthAmerica v. Susquehanna Health System (M.D.Pa. 2003) (“Virtual merger” of hospital systems held sufficient to constitute one entity, incapable of conspiracy under Copperweld, and thus joint contracting by the systems with insurers was lawful; summary judgment to health system)International Healthcare Management v. Hawaii Coalition for Health (9th Cir. 2003) (joint negotiations with insurer by medical association and IPA not unlawful where no agreement existed on provider prices and no threat to boycott the insurer was demonstrated, distinguishing Pennsylvania Dental Ass’n v. Medical Serv. Ass’n of Pennsylvania (3d Cir. 1987))
30Recurring Vertical Issues Insurer/Provider Agreements on Reimbursement Levels – Most Favored Nations ClausesInsurer/Provider Exclusive Dealing RelationshipsInsurer/Provider Agreements to Exclude or Terminate other Providers from Networks“All Products” Clauses
31Does the McCarran-Ferguson Act provide protection for these insurer/provider practices? Clearly No!
32Vertical Agreements with Providers are not considered to be “The business of insurance” Podiatrists Association v. La Cruz Azul de Puerto Rico (1st Cir. 2003) (an alleged insurer agreement to exclude podiatrists from a plan network does not constitute the business of insurance)Pritt v. Blue Cross (S.D. W.Va. 1988) (termination of physician’s provider agreement was not the business of insurance)Proctor v. State Farm Mutual Automobile Insurance (D.C. Cir. 1982) (arrangements between insurers and repair shops are not the business of insurance)Liberty Glass Co v. Allstate Insurance (5th Cir. 1979) (insurer agreements with glass shops are not the business of insurance)
33Most Favored Nations Clauses MFN clauses assure an insurer that it will receive the benefit of any price concessions that a provider extends to other insurersTraditionally, such agreements have been upheld by the Courts on the grounds that they reduce consumer costsOcean States Physicians Health Plan v. Blue Cross & Blue Shield (1st Cir. 1989) (upholding insurer use of MFN clause)Kartell v. Blue Shield of Massachusetts (1st Cir. 1984) (Upholding insurer MFN clause because it reduced health care costs and thus enhanced consumer welfare; “courts should be cautious – reluctant to condemn too speedily – an arrangement that, on its face, appears to bring low price benefits to the consumer”)However, more recently, MFN clauses have increasingly come under attack, particularly where the insurer is alleged to have market power. The DOJ has successfully challenged some insurer MFN clauses.United States v. Medical Mutual of Ohio (N.D. Ohio 1999) (consent decree entered barring Ohio’s largest health insurer from enforcement of MFN)United States v. Delta Dental (D.R.I. 1997) (after failing to prevail on a motion to dismiss the complaint, the insurer agreed to a consent decree barring enforcement of the MFN)
34More Recent Challenges DOJ InvestigationsThe Antitrust Division has acknowledged that it has conducted investigations into MFN clauses implemented by the Alabama and Western Pennsylvania Blues; each insurer terminated enforcement of such provisions in its contracts upon commencement of the DOJ investigationPrivate LitigationRocky Mountain Medical Center Case – in January 2004, a Utah State Court rejected plaintiff’s claim that a rival hospital’s contract with insurers, which allegedly required them to pay higher fees if they also contracted with Rocky Mountain, was anti-competitive
35Exclusive Dealing Arrangements The lawfulness of these agreements typically turns on whether they foreclose a “substantial share” of the relevant marketBlue Cross of Washington & Alaska v. Kitsap Physicians Service (W.D. Wash. 1981) (HMO bylaw precluding physicians from participating in rival HMOs unlawful where all but three doctors in area were HMO members)US Healthcare v. Healthsource (1st Cir. 1993) (Agreement effecting 25% of market not unlawful)
36Other Recent Exclusive Dealing Cases Insurer DefendantStop & Shop Supermarket v. Blue Cross & Blue Shield of Rhode Island (1st Cir. 2004) (The District Court denied summary judgment to an insurer with a 60% market share that was alleged to have agreed to an exclusive agreement with Rhode Island’s largest pharmacy; however, at trial the District Court found that the plaintiff had not presented adequate evidence to demonstrate that the agreement had anticompetitive effects, and therefore granted the insurer a directed verdict at the conclusion of plaintiff’s case. The First Circuit subsequently affirmed the District Court’s ruling).Provider DefendantMcKenzie-Willamette Hosp. v. PeaceHealth (D. Or. 2003) (Provider exclusive with insurer led to jury finding of attempted monopolization and $16 million judgment)Woman’s Clinic v. St. John’s Health System (W.D. Mo. 2002) (summary judgment for defendant hospital and insurer; exclusive agreement between defendants was terminable on short notice, and thus did not adversely effect competition)Surgical Care Center of Hammond v. Hospital Service District (5th Cir. 2002) (exclusive contract with insurer did not violate the antitrust laws)
37Exclusion/Termination of Providers American Chiropractic Association v. Trigon Healthcare (4th Cir. 2005) (summary judgment for insurer; no evidence existed that the insurer had conspired with its medical board to cause anticompetitive harm to plaintiff chiropractors)Podiatrist Ass’n v. La Cruz Azul De Puerto Rico (1st Cir. 2003) (affirmed dismissal of claim that Puerto Rico insurers had excluded podiatrists from inclusion in basic health care plans pursuant to conspiracy between insurers and the physicians on the insurers’ medical boards; no evidence that insurers were controlled by the physicians or acted outside their self-interests)Griffiths v. Blue Cross/Blue Shield (N.D. Ala. 2001) (chiropractor claim of exclusion survived dismissal where plaintiffs alleged conspiracy included payments by physical therapists to insurer to disadvantage chiropractors)
38Termination/Nonrenewal of a Provider CALIFORNIA LAW LIMITS AN INSURER’S RIGHT TO TERMINATE A PROVIDERPotvin v. Metropolitan Life Insurance (Cal. 2000) (physician removed from PPO plan has a “due process” right to a hearing to challenge the decision if the insurer has market power)Palm Medical Group v. State Compensation Insurance Fund (San Fran. Sup. Ct., 2006) ($1.13 million judgment for wrongfully excluded provider)BUT OTHER STATES HAVE REFUSED TO GRANT PROVIDERS SIMILAR RIGHTSPannozzo v. Anthem Blue Cross (Oh. App. 2003); Oh v. Anthem Blue Cross (Oh. App. 2004) (Ohio courts have refused to create a “due process” right to a hearing on nonrenewal or to adopt Potvin as the law in Ohio)Mendez v. Blue Cross of Florida (Fla. App. 2001) (rejecting “due process” right set forth in Potvin)Grossman v. Columbine Medical Group (Colo. App. 2000) (rejecting Potvin)Singh v. Blue Cross/Blue Shield of Massachusetts (1st Cir. 2002) (physician claims arising from nonrenewal barred by the 1986 Health Care Quality Improvements Act)
39All Products ClausesIn the late 1990s, providers began to complain about “all products” clauses in health insurer contracts, claiming they were anticompetitive.In 1998, the Nevada Insurance Commissioner declared all products clauses to be a violation of the state Unfair Trade Practices Act, and in the same year the Texas AG settled an action against Aetna by restricting Aetna’s ability to utilize all products clauses in the state. Some other states, including North Dakota and Virginia, passed legislation barring insurers from implementing all products clauses.However, in a recent twist on the use of such clauses, in March of this year an insurer complained about the use of an all products clause imposed by a health provider. Wisconsin Physicians Insurance alleged that Aurora Health Care’s insistence on an “all products” clause in its agreements with insurers is anticompetitive. The case is currently pending in the Federal District Court in Wisconsin.In all such matters, the key issue is whether the entity insisting on the use of an all products clause has market power. Absent market power, the likelihood that anticompetitive effects can be demonstrated is remote.
40Alternate Legal Theories RICO Claims In re Managed Care Litigation (S.D. Fla. 2002). A RICO class action complaint brought on behalf of over 700,000 physicians, alleging that several health insurers unlawfully conspired to reduce physician reimbursement rates. District Judge Moreno certified a physician class (while denying a consumer class in a companion case). That ruling was subsequently affirmed on appeal to the 11th Circuit and certiorari was not granted by the Supreme Court. Several insurer defendants subsequently settled, with the total value of all settlements reported to be close to $1 billion, with well over $100 million in attorneys fees, the case continues against the remaining defendant.
42ACTIONS INSTITUTED BY THE ANTITRUST DIVISION AGAINST PROVIDERS (for anticompetitive action effecting insurers)U.S. v. Federation of Physicians and Dentists (S.D. Ohio 2005) (contending that the doctors had unlawfully coordinated their negotiation of fees with Cincinnati health insurers; consent judgment required a modification in negotiating practices)U.S. v. Mountain Health Care (W.D. N.C. 2002) (challenging joint negotiations by provider network; required the network to disband as a condition to settlement)U.S. v. Federation of Physicians and Dentists (Del. 2002) (challenging provider joint negotiations with insurers; consent decree required change in manner of negotiations)U.S. v. Federation of Certified Surgeons and Specialists (M.D. Fla. 1999) (challenging provider joint negotiations with insurers; consent settlement required change in manner of negotiations)U.S. v. Healthcare Partners (D. Conn. 1996) (challenging joint negotiations with insurers by IPA; consent settlement barring practice entered)
43ACTIONS BY THE FTCOver 30 Actions Have Been Commenced By the FTC Against Doctor/Hospital Groups for Unlawful Collective Bargaining with Insurers, most typically concluding in a Consent Decree barring continued collective actionPartners Health Network (Aug. 2005) (South Carolina PHO was alleged to have violated Section 5 of the FTC Act by misusing the Messenger Model in negotiations with insurers; consent decree entered requiring a change in practices)San Juan IPA (May 2005) (New Mexico IPA was alleged to have violated Section 5 by dissuading physicians from accepting individual offers from insurers; consent decree entered)Evanston Northwestern Healthcare (April 2005) (Chicago-area doctors were alleged to have violated Section 5 by refusing to negotiate individually, where their was no integration of services or risk sharing; consent decree entered)Preferred Health Services (March 2005) (South Carolina PHO was alleged to have violated Section 5 by misusing the Messenger Model; consent decree entered)Only one physician group has litigated an FTC action to trial within the last twenty years. In 2005, in North Texas Specialty Physicians, the FTC held that the doctors collective bargaining practices did not comply with the “Messenger Model” requirements of the Health Care Guidelines, and were unlawful. The doctors have appealed the decision to the 5th Circuit Court of Appeals.
45Federal Legislation Doctor Collective Bargaining Legislation Federal legislation has repeatedly been introduced in the last few years that would permit physicians to negotiate collectively with insurers concerning rates. The American Medical Association maintains that collective action on fee negotiation is necessary to “level the playing field.”Most recently, in 2005 the “Quality Health Care Coalition Act of 2005,” H.R. 3074, was introduced by Representative Ron Paul of Texas.
46State Legislation “ANY WILLING PROVIDER” LEGISLATION Enacted in approximately 20 states; requires health plans to admit any provider willing to abide by the plan’s requirementsIn Kentucky, the law extends to doctors (in most other states, the law only applies to pharmacists)In 2003, the Supreme Court resolved a split in the circuits regarding whether “Any Willing Provider” laws were preempted by ERISA, finding they were NOT preempted. Kentucky Association of Health Plans v. Miller (U.S. 2003)The FTC opposes this Legislation as wellPHYSICIAN COLLECTIVE BARGAINING LEGISLATIONLegislation EnactedTexas; Texas Insurance Article et seq.New Jersey; N.J.S.A. 52:17B-196 et seq.In 2005, similar legislation was introduced in Rhode Island, Massachusetts, Pennsylvania and Connecticut, and was recently reintroduced in 2006 in Connecticut (SB 670).THE FTC IS VEHEMENTLY OPPOSED TO ALL SUCH LEGISLATION AS “UNNECESSARY SPECIAL TREATMENT” FOR PHYSICIANS THAT CONSTITUTES “PER SE PRICE FIXING UNDER THE FEDERAL ANTITRUST LAWS.”