Customers and healthcare providers are accusing Blue Cross Blue Shield companies of exploiting the franchising model to inflate premiums and unfairly control market share, according to lawsuits that threaten Anthem’s M&A strategy and could empower health systems and other insurers across the country.
Cigna declined Anthem’s $53 billion takeover offer this week, citing issues such as a massive data breach last year, a “lack of a growth strategy,” and “complications” with the company’s membership in the Blue Cross Blue Shield Association and “related antitrust actions.”
Consumers and healthcare providers have sued Anthem’s 14-state Blue Cross and Blue Shield plans and 23 other nonprofit Blues insurers, posing a huge risk to Anthem’s future, argued Cigna CEO David Cordani and board chair Isaiah Harris.
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[Also: Anthem, United eye big deals]
“These lawsuits, which recently survived a motion to dismiss, have enormous consequences for the BCBSA and could redefine the market for all of its member companies,” Cordani and Harris wrote to the Anthem board in a public letter. Anthem CEO Joseph Swedish “has indicated significant concerns to us about the status of the pending litigation, including the joint and several liability that may be imposed on Anthem, the largest member of the BCBSA,” they said. “Given the critical nature of this litigation and the potential for value erosion to the combined company, we are concerned that you have not addressed this risk.”
Cigna may still be open to a deal on terms offering more money and also more control for Cordani and other Cigna leaders in the new company -- 65-year-old Swedish would be board chair, CEO, president and “head of integration,” while 49-year-old Cordani would be president, chief operating officer and co-chair of integration. The new board would be a “near-even” split, 8 for Anthem and 6 for Cigna.
But the lawsuits against the Blues are a real threat for Anthem’s growth going forward, as well as all the other Blue Cross companies. It could derail Anthem’s potential mergers and acquisitions prospects, and also leave nonprofit Blues vulnerable to takeovers themselves if they have to dip into reserves or take losses to pay out settlements.
Since their inception during the industrial boom of World War II, the Blues have grown to cover more than 30 percent of Americans in commercial, Medicare Advantage and Medicaid plans. In the course of accumulating significant local market share, especially in Alabama, Michigan, Mississippi and North Dakota, the 37 independent licensees of the BCBS Association have been accused of conspiring to prevent and quash competition, inflate premiums, deny claims and impose low reimbursement on hospitals and physicians.
Lawsuits against the the companies have been consolidated into two parts in federal court in Alabama, where U.S. District Judge R. David Proctor denied the Blues’ motion to dismiss last year. The providers and consumers suing the Blues “have alleged a viable market allocation scheme,” he wrote. “If that scheme is proven, it may subject defendants to antitrust liability.”
The suit by providers, including medical practices, surgery centers and community hospitals, alleges that the BCBSA’s “service area” licensing has amounted to “horizontal market allocation,” with “price fixing and boycott conspiracy.”
Each of the Blue-licensed plans has “have agreed that in exchange for having the exclusive right to use the Blue Cross Blue Shield brand and trademark within a designated geographic area, each Blue will derive none of its revenue from services offered under the Blue brand outside of that area, and will derive at most one-third of its revenue from outside of its exclusive area using services offered under a non-Blue brand,” wrote Edith Kallas, an attorney from the Whatley Kallas representing the providers. The lawsuit is seeking class action status to pursue court-ordered business changes and awards that could reach into the multi-millions.
The individual and small group plan consumers suing the Blues include businesses like Galactic Funk Touring, CB Roofing LLC, and Gaston CPA. They’re represented by a law firm well-versed in both extracting payouts from corporations and defending them in Boies, Schiller & Flexner, which recently helped win a $663 million judgement against Trinity Industries for problematic highway guardrails.
Their lawsuit also accuses the Blues of market allocation, via licensing, to prohibit competition between them and limit business in non-Blue health plan subsidiaries. “Many of the individual Blue plans have developed substantial non-Blue brands that could compete with other of the individual Blue plans,” lawyers wrote. “But for the illegal agreements not to compete with one another, these entities could and would use their Blue brands and non-Blue brands to compete with each other throughout their service areas, which would result in greater competition and competitively priced premiums.”
They also criticize the use of “most favored nation” clauses that would require a hospital or provider to charge a Blue insurer’s competitors either more or no less than what the Blue insurer pays for any given treatment or service. According to the suit, BCBS of Michigan, BCBS of North Carolina, Highmark BCBS and BCBS of South Carolina have relied on the practice in the past, although they’ve also been phased out. The consumer’s suit, too, is seeking class action status.
Whether or not they can succeed depends on how the courts apply and reconcile antitrust laws and trademark laws, like those governing fast food franchisees that grant operators certain territories. “You’ll be looking for cartel-like behavior or the protection of intellectual property,” Duke University law professor Barak D. Richman told the Wall Street Journal.
The BCBSA is fighting the lawsuit and has defended its members’ track record, arguing that lately they are leading the way in bringing Americans health plans with high value-primary care and quality-based coverage. The licensing deals, the Association argues in court filings, “do not constitute an unlawful restraint.”
The BCBSA also cites the Supreme Court’s interpretation of licensing and antitrust from a suit filed by American Needle, Inc. accusing the National Football League of suppressing competition by granting exclusive apparel manufacturing contracts to Reebok for all of its 32 teams.
“The Court considered agreements among NFL teams to jointly license their separate intellectual property,” lawyers for the BCBSA wrote. “It concluded that the teams were direct competitors ‘in the market for intellectual property’ and, as such, had entered into a horizontal restraint. Nonetheless, even when faced with a horizontal agreement, the Court determined that the rule of reason analysis applied because of the agreement’s possible procompetitive benefits.”
“This is a model that has withstood scrutiny over our entire history,” Scott Nehs, general counsel of the Blue association, told the Wall Street Journal. “There’s no smoky room involved, there’s no dividing up.”