DocketNumber： 59320, (Calendar No. 2)
Citation Numbers： 270 N.W.2d 845, 403 Mich. 399, 1978 Mich. LEXIS 351
Judges： Williams, Fitzgerald, Ryan, Moody, Coleman, Kavanagh, Levin
Filed Date： 10/2/1978
Status： Precedential
Modified Date： 10/19/2024
Blue Cross and Blue Shield of Michigan (BCBSM) is seeking a declaratory judgment defining the nature and extent of the State Insurance Commissioner’s (Commissioner) regulatory powers over BCBSM as set forth by the Legislature in Public Acts 108 and 109 of 1939.
After this case was briefed and argued, the Legislature’s Joint Administrative Rules Committee approved rules which affect the Commissioner’s powers.
1. The Commissioner’s continuing statutory authority over the rates charged to subscribers by BCBSM for hospital service coverage and the rates paid by BCBSM to hospitals for services rendered includes the power to disapprove a rate increase request to the extent that wasteful expenditures included in the rate base are found to be not "fair and reasonable”, but does not include the power to order BCBSM to implement specific cost containment programs. Management of BCBSM has been entrusted to its board of directors.
2. The Commissioner’s continuing statutory authority over BCBSM’s financial reserves does not include the power to disapprove directly or indirectly an increase in the rates of payment to physicians. The Commissioner’s only power with respect to reserves is to determine actuarially and require BCBSM to maintain reserves in an amount sufficient to assure the maturity of BCBSM’s contracts.
3. The Commissioner may consider the dollar amount budgeted for advertising in so far as it affects his statutory authority to approve subscriber rates for hospital services. He does not have the power to consider the content of BCBSM’s hospital service advertising.
4. The question of benefits was not raised by the parties and is not a matter in controversy. The circuit court was in error to have encompassed the matter in its opinion and we therefore hold that part of the judgment which concerns benefits to be void.
The factual background of the case is pertinent only so far as it reveals the areas of disputed authority.
In 1975 BCBSM requested a subscriber fee rate increase of 33% totaling approximately 335 million dollars for the year. After the appointment of a master and extensive hearings, the Commissioner issued an order denying the rate increase. Accompanying that order was a voluminous opinion detailing the reasons why he was disapproving the increase. Important to the instant case are the portions of the opinion relating to overbedding, overutilization, physician screens (rates of payment to physicians)
The Commissioner’s opinion addressed in detail the problem of overbedding and on the basis of several major studies (including one by the Department of Public Health) concluded that more than 23 million dollars of BCBSM’s requested rate increase would be paid to hospitals for the subsidization of excess beds. The opinion similarly addressed the problem of overutilization and concluded that an additional 23 million dollars of the requested rate increase would be spent on unnecessary health care. The opinion briefly discussed proposed increases in the physician screens and concluded that such increases were not justified. The opinion then examined the content of BCBSM’s advertising and concluded that nearly 700 thousand dollars of it was wasteful.
In June of 1975, BCBSM filed a complaint for declaratory judgment in circuit court challenging the nature and extent of the Commissioner’s regulatory power. The circuit court upheld the Commissioner’s authority with respect to virtually all of the actions he had taken during the 1975 rate review proceedings. The only area in which the court did not agree with the Commissioner concerned a contention that the Commissioner had the authority to require BCBSM to submit its proposed advertising in advance of publication to the Commissioner for approval. The court found no authority in the enabling legislation to support such a contention.
Subsequently, the petition for review of the rate increase originally filed by BCBSM in the circuit court was dismissed by stipulation of the parties. The only relief requested on appeal was by-pass to this Court and a review of the declaratory judgment defining the Commissioner’s powers. By-pass was granted. As a result, we are here engaged only in the task of determining whether the Commissioner had the authority to act, not whether he exercised authority reasonably during the 1975 rate review proceedings.
II
BCBSM is a unique creation. It is a non-profit,
BCBSM acts as an intermediary between its members, commonly known as the subscribers, and the hospitals and physicians who provide health care services, commonly known as the providers.
Most subscribers belong to groups such as labor unions, fraternal organizations, or governmental or professional associations. These groups independently determine what health care services they wish to secure for their members and then enter into individual contracts with BCBSM. Generally, the contracts provide that the subscribers will each pay a periodic subscription fee to BCBSM and BCBSM in return will arrange for the provision of the desired services. The subscribers pay the subscription fee regardless of whether they actually utilize the services. Thus, the cost of the services to any individual subscriber who does utilize them is shared by the entire group to which that subscriber belongs. In many cases, the subscription fee is paid by the subscriber’s employer. Often, such arrangements are the result of hard-fought collective bargaining agreements.
After the subscriber contracts have been negotiated, BCBSM enters into separate contracts with providers. The providers agree to furnish the desired services in return for a set fee to be paid by BCBSM. The providers who enter into such contracts are known as participating providers, while
If a subscriber obtains covered health care services from a participating provider, the subscriber pays no charge. The participating provider accepts the set fee from BCBSM as payment in full. If, however, the subscriber obtains covered services from a non-participating provider, the subscriber pays that provider whatever fee the provider charges for the services. Then, BCBSM reimburses the subscriber, but only up to the amount that would be paid to a participating provider for the same services.
BCBSM has a direct and distinct contractual relationship both with its subscribers and with the participating providers. Other entities in the health care protection field, most notably health insurance companies, do not enjoy such a position. They have a contractual relationship only with their policyholders. Unlike BCBSM, they do not have direct access to both sides of the health care equation.
In the past BCBSM has acted not merely as a passive conduit in its role as an intermediary between the subscribers and the providers. For example, it has required participating hospitals to comply with certain "participation qualifications”, including such requirements as the maintenance of effective cost accounting systems and committees to review hospital utilization policies. Some of these requirements were instituted at the request or direction of the Commissioner.
Although BCBSM is regulated by the Commissioner, it is not managed by the Commissioner. It has its own officers and a board of directors to which management of the corporation is statutorily entrusted.
BCBSM is the largest single health care protection entity of any kind in the State of Michigan.
Ill
Although Michigan’s health care enabling legislation has been amended through the years since its enactment in 1939, its prior history is enlightening to any analysis. .
By the 1920’s it was becoming apparent that there was a serious nationwide problem in the distribution of medical care. Many people who needed it were not receiving it. The poverty of the Great Depression intensified this problem. According to one article, "a vast number of the popula
The high relative cost of medical care was one cause of this distressing situation. Another equally important cause was the irregular manner in which disease and injury strike and the wide variations in the services and the costs involved. As one commentator said:
"The costs of illness or medical need are highly variable in their impacts upon family budgets and security. Small costs for medical care may be absorbed in a family budget which is above the bare subsistence level; but the occurrence of a 'high cost’ illness, even when moderate fees are charged for each unit of service, may be a financial catastrophe for a family of small, modest or even substantial means.
"Illness and disability are not considerate of the family exchequer, and large costs may fall upon small purses. The plain fact, well attested by numerous studies, is that families cannot, even if they would, budget against expenditures which fluctuate within such broad ranges that they may exceed even annual income, and at the same time destroy earning power.”17
The business sector had not moved to rectify the problem of bringing together the people in need of health care and those who could provide it. Health insurance policies were usually too expensive and
A small but vociferous movement across the country advocated the establishment of government controlled socialized medicine as a solution to this problem. The medical and health care professions on the other hand were fiercely opposed to this idea.
Between the extremes, various private organizations around the country began to experiment with different plans for providing the needed health care services. One of the most successful was the group health service benefit plan under which subscribers each paid a relatively small periodic fee to the entity administering the plan; the entity then negotiated contracts with physicians and hospitals; and, when needed, the subscribers received specified medical services in return.
Despite the initial success of these plans, some serious obstacles soon threatened their continued existence. They were accused of operating as insurance companies without having complied with state insurance regulations. Some courts dismissed these accusations because the plans were providing services instead of cash, but other courts did not.
In addition to these obstacles, some of the organizations experimenting with the plans were more interested in profits than in providing adequate medical care.
These facts led to the conclusion that comprehensive legislation was necessary. As one commentator said:
"The final answer, however, must lie in special legislation. Assuming the most favorable judicial action, it is clear that the present uncertain state of the law permits attacks on groups already organized and deters the formation of new ones. Moreover, the field is certainly not one which should be left entirely unregulated; the very attractiveness of the plans offers peculiar opportunities for unscrupulous commerical activity. And the cooperatives themselves, as they become larger, must inevitably tend to become impersonal, with practical control concentrated in the hands of salaried directors and officers. ” (Emphasis added.)22
The Michigan enabling legislation sought to legitimatize the prepaid group health benefit plans. The ultimate purpose of the legislation was to enable the people in need of health care protection to become members of a group plan so that adequate hospital and medical care would be within
In an effort to keep the rates charged to the subscribers of the plans as low as possible, the Legislature decreed that the plans must operate on a nonprofit basis.
IV
Prior to 1975, BCBSM consisted of two separate but similar corporations — Blue Cross of Michigan and Blue Shield of Michigan. Blue Cross was concerned primarily with the provision of hospital services, while Blue Shield was concerned with the provision of physician’s services and related medical care. The two corporations were incorporated and regulated pursuant to similar but distinctive enabling legislation.
The Commissioner has no inherent regulatory authority over BCBSM. Whatever authority he does have comes solely from the Legislature. In this case this authority is embodied in the special enabling legislation enacted by the Legislature in 1939 and the subsequent amendments thereto. Several sections of that legislation will play important roles in our analysis of the issues presented.
MCL 550.302; MSA 24.592, as amended, refers generally to incorporation and touches the Commissioner’s authority with regard to benefits:
"Any number of persons not less than 7 * * * may form a corporation * * * for the purpose of * * * operating a voluntary nonprofit medical care plan, whereby medical care is provided at the expense of the corporation to persons or groups of persons as shall become subscribers to the plan, under contracts which will entitle each subscriber to deñnite medical and surgical care, appliances and supplies * * *. Such other beneñts may be added from time to time as the corporation may determine, with the approval of the commissioner of insurance. ” (Emphasis added.)29
MCL 550.305; MSA 24.595 first sets forth certain requirements that the corporation must fulfill before beginning business:
"The persons so associating, before entering into any*425 contracts or securing any applications of subscribers, shall file in the office of the commissioner of insurance * * * a statement showing in full detail the plan upon which it proposes to transact business, a copy of bylaws, a copy of contracts to be issued to subscribers, a copy of its prospectus, and proposed advertising to be used in the solicitation of contracts of subscribers.” (Emphasis added.)
This section then sets forth the powers of the Commissioner prior to permitting the corporation to begin business:
"The commissioner of insurance shall examine the statements and documents so presented to him * * *, and shall have the power to conduct any investigation which he may deem necessary, and to hear such incorporators, and to examine under oath any persons interested or connected with the said proposed corporation. If, in the opinion of the commissioner of insurance, the incorporation or solicitation of contracts would work a fraud upon the persons so solicited, he shall have the authority to refuse to license the said corporation * * *.” (Emphasis added.)
In addition, this section outlines certain prerequisites that must be satisfied prior to issuing a license to the corporation and sets forth the Commissioner’s authority over the contracts between the corporation and the subscriber:
"If, upon examination of the said articles of association, the documents and instruments above mentioned, and such further investigation as the commissioner of insurance shall make, he is satisñed that (a) the solicitation of subscriptions would not work a fraud upon the persons so solicited; (b) the rates to be charged and the beneñts to be provided are fair and reasonable; * * * and (e) adequate and reasonable reserves to insure the maturity of the contracts are provided, he shall * * * deliver to such corporation a certificate of authority to*426 commence business and issue contracts entitling subscribers to definite medical and surgical care, which contracts have been approved by him.” (Emphasis added.)
Finally, this section sets forth the Commissioner’s continuing authority to combat fraud:
"The said commissioner of insurance shall have power and authority, at any time to revoke, after reasonable notice and hearing, any certificate, order or consent made by him to the said corporation, to proscribe applications for membership, upon being satisfied that the further solicitation of subscribers will work a fraud upon the persons so solicited, and he shall have authority to make such investigation from time to time as he may deem best, and grant hearings to such incorporators in their relation thereto.”30
MCL 550.311; MSA 24.601 sets forth the Commissioner’s continuing authority with respect to the corporation’s reserves:
"[The corporation] shall, before beginning business, and at all times thereafter while engaged in business, maintain reserves in such form and amount as the commissioner of insurance may determine.”31
MCL 550.503; MSA 24.623 as originally enacted set forth the Commissioner’s continuing rate approval authority as to hospitalization as follows:
"The rates charged to the subscribers for hospital service, and the rates of payment by such corporation*427 to the contracting hospitals, shall at all times be subject to the approval of the commissioner of insurance.”32
This section was later amended to state that "[t]he rates * * * are subject to the approval of the commissioner of insurance”.
MCL 550.512; MSA 24.632 sets forth the Commissioner’s continuing authority with respect to the corporation’s acquisition and administrative expenses:
"All acquisition and administrative expenses in connection with such hospital service plan shall at all times be subject to the approval of the commissioner of insurance.” (Emphasis added.)33
V
Does the Commissioner have authority to determine whether the rates charged to the subscribers for hospital services are "fair and reasonable” and to disapprove rate increase requests which he finds are not, in order to keep the rates within the financial grasp of as many people as possible? This question encompasses what power, if any, the Commissioner has to examine the content of a rate request and disapprove it to the extent that wasteful expenditures are included in the rate base.
BCBSM argues that the Commissioner cannot require the corporation to implement specific hospital cost containment programs and that the Commissioner cannot disapprove a rate increase request on the ground that it includes waste. BCBSM contends that the Commissioner’s continuing authority to approve the rates charged to
The section of the enabling legislation which grants the Commissioner continuing rate approval authority, MCL 550.503; MSA 24.623, applies only to hospital services and does not state what standards are to guide the Commissioner in exercising that authority. It only provides that "[t]he rates charged to the subscribers for hospital service, and the rates of payment of the corporation to the contracting hospitals * * * are subject to the approval of the commissioner of insurance”. However, the section which sets forth the Commissioner’s authority prior to issuing a certificate of authority to do business, MCL 550.305; MSA 24.595, provides guidance as to the proper standard. That section states that prior to issuing the certificate, the Commissioner must be satisfied that "the rates to be charged * * * are fair and reasonable (Emphasis added.) No other section of the enabling legislation speaks of a standard for exercise of the Commissioner’s continuing rate approval authority. In addition, there is no indication in the legislation that some different standard is to guide the Commissioner after issuing the certificate of authority. It is logical to assume therefore that the Legislature intended the standard of "fair and
The next question is whether rates which include waste are "fair and reasonable”. We believe that they may not be. Rates unnecessarily inflated by waste retard rather than promote the availability of financial health care protection. We believe the Legislature did not intend that health care corporations, such as BCBSM, which were designed as a solution to the problem of inadequate health care, were to be free to engage in a course of action or inaction that would make them a contributing cause of the problem.
Three caveats to this conclusion are in order. First, the Commissioner cannot disapprove a rate increase request on the basis of expenditures which the corporation can affect only by invading the physician-patient relationship, usurping the physician’s control over the practice of medicine, or by limiting the subscriber’s free choice of hospitals and doctors. Numerous sections of the enabling legislation make it clear that any such action by the corporation is prohibited.
Second, the Commissioner only has the authority to consider waste in determining if a rate increase is fair and reasonable. No section of the legislation indicates that the Commissioner has the additional authority to prescribe the specific remedy which the corporation must utilize to reduce or eliminate the waste. His only powers are to approve or disapprove rates in whole or in part. The management of the corporation has been specifically entrusted to the board of directors, not to the Commissioner.
VI
Actions taken by the Commissioner with respect to physician screens during the 1975 rate review proceedings lead to the second major area of disputed authority.
The issue is whether the Commissioner has the authority to do indirectly what he cannot do directly — regulate increases in the rates of payment by BCBSM to physicians — by manipulating reserves.
MCL 550.311; MSA 24.601 grants the Commissioner continuing authority to determine the "form and amount” of reserves that BCBSM must maintain. The Commissioner contends that this authority empowers him to require BCBSM to submit all proposed increases in the physician screens to the Bureau of Insurance for approval since any increase in the screens could cause the level of the reserves to fall, provided he did not approve a corresponding increase in rates charged subscribers to cover the increased physician costs. The Commissioner also contends that his authority over reserves empowers him to disapprove proposed increases in the screens if he believes them to be unwarranted. The circuit court agreed with these contentions.
Although MCL 550.311; MSA 24.601 does not
There is no indication in the legislation that the Commissioner was to have the authority to approve or disapprove increases in the physician screens indirectly via his authority over reserves. In fact, there are persuasive indications that the Commissioner was not to have such authority. In MCL 550.503; MSA 24.623, the Legislature specifically authorized the Commissioner to approve the rates of payment by the corporation to the hospitals that provide service to the corporation’s subscribers. However, the Legislature did not enact a comparable provision authorizing the Commissioner to approve the rates of payment to physicians.
As noted earlier, the Commissioner’s regulatory
VII
The third disputed area of authority concerns the Commissioner’s powers with respect to the advertising practices of BCBSM.
During the 1975 rate review proceedings, the Commissioner examined the content of BCBSM’s advertising and concluded that some of it was wasteful. As a result, BCBSM’s revised rate in
MCL 550.512; MSA 24.632 does grant the Commissioner the continuing authority to approve "[a]ll acquisition and administrative expenses” of the corporation with respect to hospital services. There is no specific grant of continuing authority over advertising per se. The Commissioner contends that this authority and his general authority to approve the rates charged to the subscribers empower him to regulate the content of BCBSM’s advertising through control of the pursestrings of BCBSM’s advertising budget. The circuit court agreed with this contention but did not agree that the Commissioner also had the authority to require prior submission of BCBSM’s advertising to the Commissioner.
Advertising expenses do fall within the context of "acquisition and administrative expenses” and necessarily play a part in the rates charged to subscribers by BCBSM. The Commissioner thus can properly consider the total dollar amount budgeted for hospital service advertising in determining whether to approve or disapprove a rate increase request. However, it does not follow that the Commissioner also has the authority to consider the substantive content of BCBSM’s hospital service advertising. Indeed, such power could raise serious questions of freedom of speech and of prior restraint. The Legislature has provided for no control over advertising other than as it affects the rate base for hospital services.
VIII
The final question we must resolve was generated by certain language employed by the circuit court in rendering its opinion. That court said that
This language has given rise to uncertainty and apprehension regarding the status of negotiated benefits. BCBSM and some of the amici curiae who have filed briefs, including such diverse groups as the AFL-CIO, Bendix Corporation, the UAW, and Ford Motor Company, are concerned about the implications of the language emphasized above. Many benefits are hammered out in the course of negotiating collective bargaining agreements. It is feared that each time a rate increase request is made the Commissioner may now start examining the benefits an employer has agreed to provide its employees and vetoing any agreed benefits which the Commissioner feels are not "fair and reasonable”.
Because the subject of benefits never was raised in the circuit court, it was error for the court, sua sponte and without background of record, to include reference to benefits in the final order. Therefore, we find that portion of the order to be void.
Reversed in part, affirmed in part. No costs, a public question.
MCL 550.301 et seq.; MSA 24.591 et seq. and MCL 550.501 et seq.; MSA 24.621 et seq.
1978 AACS R 550.1 et seq. (January, 1978).
1978 PA 368.
Physician screens is a term used by BCBSM to describe the monetary level at which BCBSM will pay physicians for given health care services. The screens are determined on a geographic basis. Studies are made of the fees charged by the physicians in a given area for the services. The screen for those services in that area is then set at a certain percentile of the fees charged by the physicians. The screen represents the maximum amount BCBSM will pay for the services in that geographic area.
MCL 550.315; MSA 24.605 and MCL 550.515; MSA 24.635.
1939 PA 108, 109.
See Michigan Governor’s Study Commission on Prepaid Hospital and Medical Care (1962), pp 29-30.
See Nankin Hospital v Michigan Hospital Service [Blue Cross], 361 F Supp 1199, 1203-1204 (ED Mich, 1973), especially footnote 9 and the corresponding text and MCL 550.503; MSA 24.623 as amended, which states that the "corporation shall not deny the subscribers the right
See Michigan Hospital Service [Blue Cross] v Sharpe, 339 Mich 357; 63 NW2d 638 (1954).
See Burns (Executive Secretary, Michigan State Medical Society), The Michigan Enabling Act for Non-Proñt Medical Care Plans, 6 Law and Contemporary Problems 559, 560 (1939).
Panchuk (Assistant Attorney General), Hospital and Medical Service Plans, 19 Michigan State B J 570, 572 (1940).
MCL 550.502; MSA 24.622.
These figures are from Michigan Hospital Association’s brief amicus curiae, appendix D, pp 56-59.
These figures are from BCBSM’s brief, pi.
Comment, Insurance: Medical Service Policies: Contract by Corporation to Render Medical Services, 25 Cal L Rev 91, 93 (1936).
Note, The Legal Problems of Group Health, 52 Harvard L Rev 809-810 (1939).
Falk, An Introduction to National Problems in Medical Care, 6 Law and Contemporary Problems 497, 503 (1939).
Legal Problems of Group Health, supra, 810.
Brown, American Experimentation in Meeting Medical Needs by Voluntary Action, 6 Law and Contemporary Problems 507 (1939).
Panchuk, Hospital and Medical Service Plans, supra, 573.
Legal Problems of Group Health, supra, 811-816
Id., 816.
MCL 550.302; MSA 24.592 and MCL 550.501; MSA 24.621.
MCL 550.315; MSA 24.605 and MCL 550.515; MSA 24.635.
MCL 550.313; MSA 24.603 and MCL 550.510; MSA 24.630.
See fn 1 supra.
MCL 550.309a; MSA 24.599(1) and MCL 550.503b; MSA 24.623(2).
ibid.
MCL 550.501; MSA 24.621 is substantially similar to this statute except that it does not contain any language concerning the addition of further benefits with the approval of the Commissioner of Insurance.
MCL 550.506; MSA 24.626 is substantially similar to this statute except that it contains no language concerning the approval of the contracts between the corporation and the subscribers by the Commissioner prior to issuing a certificate of authority to do business.
MCL 550.509; MSA 24.629 is identical to this statute.
There is no comparable provision in the Medical Care Corporation legislation, MCL 550.301 et seq.; MSA 24.591 et seq.
There is no comparable provision in the Medical Care Corporation legislation, MCL 550.301 et seq.; MSA 24.591 et seq.
See MCL 550.310; MSA 24.600, MCL 550.501; MSA 24.621 and MCL 550.503; MSA 24.623.
See Taylor v Michigan Public Utilities Commission, 217 Mich 400; 186 NW 485 (1922), G F Redmond & Co v Michigan Securities Commission, 221 Mich 1; 192 NW 688 (1923), Sparta Foundry Co v Michigan Public Utilities Commission, 275 Mich 562; 267 NW 736 (1936), and 2 Cooper, State Administrative Law, pp 691-697.
Appellant’s appendix, pp 240a-241a.