Insurer Relationships with Third Parties – Agents, Brokers and Providers The Antitrust Issues. James M. Burns ABA Antitrust Section Insurance Industry Program May 17, 2006 . Relationships with Agents. Insurer Agreements
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James M. Burns
ABA Antitrust Section Insurance Industry Program
May 17, 2006
Insurer Agreements and Providers
Agreements 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. 440 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”).
Agreements 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.Horizontal IssuesAgreements on Commissions
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
The 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)
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)
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.
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.
by state, and include the loss of an agent’s license, a fine, or a
criminal misdemeanor. Wacaser v. Insurance Commissioner
(Ark. 1995) (loss of license for 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.
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.”
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.”
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).
arise where an insurer’s
distribution system includes a
system of agents and subagents,
and restrictions are imposed upon
the ability of subagents to transfer
between supervising agents.
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.
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.
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.
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.
Traditionally the termination of an insurance agent has been held to be protected under the McCarran-Ferguson Act
Card 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)
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).
Insurance (D. Conn. 2005)
(Terminated agent recovered over
$2 million for termination “without
cause” under the Connecticut
Franchise Act, notwithstanding that
no “for cause” termination
requirement exists under the
Connecticut Insurance Code).
THE TEST TYPICALLY APPLIED FOR ASSESSING THE ENFORCEABILITY OF NON-COMPETE PROVISIONS IS THE REASONABLENESS OF THE RESTRICTION IN TERMS OF SCOPE AND DURATION
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.
The 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.
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.
Insurer Agreements regarding how to deal with Providers Interactions?
Provider Agreements regarding how to deal with InsurersRecurring Horizontal Issues
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.
Does the McCarran-Ferguson Act provide protection for these insurer/provider practices?
MFN clauses assure an insurer that it will receive the benefit of any price concessions that a provider extends to other insurers
Traditionally, such agreements have been upheld by the Courts on the grounds that they reduce consumer costs
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.
Private Litigation “The business of insurance”
Rocky 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
The 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 investigationMore Recent Challenges
US Healthcare v. Healthsource “The business of insurance”(1st Cir. 1993) (Agreement effecting 25% of market not unlawful)
Blue 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)Exclusive Dealing Arrangements
The lawfulness of these agreements typically turns on whether they foreclose a “substantial share” of the relevant market
Insurer Defendant “The business of insurance”
Stop & 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).
McKenzie-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)Other Recent Exclusive Dealing Cases
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)
CALIFORNIA LAW LIMITS AN INSURER’S RIGHT TO TERMINATE A PROVIDER
Potvin 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 RIGHTS
Pannozzo 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)
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.
DOJ and FTC
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)
Over 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 action
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.
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.
PHYSICIAN COLLECTIVE BARGAINING LEGISLATION “The business of insurance”
Texas; Texas Insurance Article 29.01 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.”
“ANY WILLING PROVIDER” LEGISLATION
Enacted in approximately 20 states; requires health plans to admit any provider willing to abide by the plan’s requirements
In 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 wellState Legislation