1 Frankford Hosp. v. Blue Cross, 554 F.2d 1253 (3d Cir. 1977), cert. denied, 434 U.S. 860 (1977); Anderson v. Medical Service of District of Columbia, 551 F.2d 304 (4th Cir. 1977); Travelers Ins. Co. v. Blue Cross, 481 F.2d 80 (3d Cir. 1973). See also Proctor v. State Farm Mutual Auto Ins. Co., 561 F.2d 262 (D.C. Cir. 1977), vacated, 440 U.S. 942 (1979); Manasen v. Calif. Dental Servs., 424 F. Supp. 657 (N.D. Cal. 1976).

2 Id. For a general discussion of pre-Royal Drug applications of the Act, see Borsody, , The Antitrust Laws and the Health Industry, 12 Akron L. Rev. 417, 440-47 (1979).Google Scholar

3 The McCarran-Ferguson Act, 15 U.S.C. §§ 1011-15 (1970), shelters the “business of insurance” from federal regulation to the extent that the “business of insurance” is regulated by state law. For the text of the relevant portions of the Act, see note 9, infra.

4 The McCarran-Ferguson Act does not distinguish between different kinds of insurance, and the Act's antitrust exemption is not limited to health insurers. Compare Anderson v. Medical Service of District of Columbia, 551 F.2d 304 (4th Cir. 1977) with Proctor v. State Farm Mutual Auto Ins., 561 F.2d 262 (D.C. Cir. 1977), vacated, 440 U.S. 942 (1979).

5 440 U.S. 205 (1979).

6 Offering prepaid services or goods instead of cash reimbursement is one of the distinguishing features of “health service plans.” Such plans generally make contracts with providers such as hospitals or individual physicians, that agree to accept payment from the plan in exchange for serving the plan's customers, either for “free” or for a relatively small deductible payment.

7 440 U.S. at 233.

8 Removal of McCarran-Ferguson immunity will allow the FTC to take a more active role in regulating Blue Shield plans. FTC Bureau Of Competition, Medical Participation In Control Of Blue Shield And Certain Other Open-Panel Pre-Payment Plans 397-409 (1979) [hereinafter cited as FTC REPORT]. Section 4 of the Clayton Act, 15 U.S.C. §§12-27 (1970) creates a private right of action for “any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws … .” 15 U.S.C. § 15.

9 The text of the McCarran-Ferguson Act reads, in relevant part:

15 U.S.C. §§ 1011-15 (1970).

10 U.S. Const, art. I, § 8.

11 Federal legislation enacted to regulate interstate commerce normally would preempt any inconsistent state statute. For a discussion of the constitutionality of the McCarran-Ferguson Act and of Congress's ability to shield state laws from attacks based on the U.S. Constitution, see Prudential Ins. Co. v. Benjamin, 328 U.S. 408 (1946).

12 359 U.S. 65 (1959).

13 393 U.S. 453 (1969).

14 Variable annuities, like conventional annuities, pay out income beginning on a fixed date and continue to do so for the life of the annuitant. Unlike a conventional annuity, however, the variable annuity does not guarantee a fixed payment, but can yield more or less depending upon the value of a “pool” of securities held by the issuing insurance company. Day, A Variable Annuity is not a “Security,” 32 Notre Dame Law. 642, 642-45 (1957).Google Scholar Thus, the issuer of a variable annuity assumes the “mortality risk” that the annuitant will live longer than actuarially predicted, but, since the annuity payment shrinks if the stock market goes down, the issuer does not assume any investment risk. The risk that the held securities might not generate any significant income is borne by the annuitant. SEC v. Variable Annuity Life Ins. Co., 359 U.S. at 71-72.

15 Variable Annuity, 359 U.S. at 68.

16 Id. at 71. For a definition of investment and mortality risks, see note 14 supra.

17 Id. It probably would be more accurate to say that a variable annuity has characteristics of both an insurance policy and of a mutual fund or other security interest. Jones, , A Discussion and Analysis of the VALIC [Variable Annuity Life Ins. Co.] Decision, 5 Vill. L. Rev. 407, 422 (1960).Google Scholar Thus, as a matter of semantic classification, it is defensible to call a variable annuity either an insurance policy or an investment. Id. at 423. The problem, however, was not one of semantics, but of the accommodation of state and federal regulation under the terms of the McCarran-Ferguson Act. Unfortunately, Justice Douglas’ majority opinion is silent on what considerations should go into determining this accommodation, or on how the “risk-spreading” definition of insurance is relevant to the Act.

18 359 U.S. at 73-93 (Brennan, J., concurring).

19 Justice Brennan pointed out that the holder of a variable annuity was in the same position as a participant in an “investment trust,” and that, as such, the annuitant needed the protection of federal securities laws requiring full disclosure of the “details of the enterprise.” Variable Annuity, 359 U.S. at 77, 88.

20 Justice Brennan argued that “one must apply a [functional] test in terms of the purposes of the Federal Acts as a guide to interpreting the scope of an exemption from their coverage for ‘insurance’,” and that “[t]here is no reason to suppose that Congress intended to make an exemption to forms of investment to which its regulatory scheme was very relevant in favor of a form of state regulation which would not be relevant to them at all.” Id. at 80.

21 Id. at 75.

22 393 U.S. 453(1969).

23 Id. at 455.

24 Id. at 457.

25 Id. at 457.

26 [Arizona] is attempting to regulate not the “insurance” relationship, but the relationship between a stockholder and the company in which he owns the stock. This is not insurance regulation, but securities regulation. It is true that the state statute applies only to insurance companies. But mere matters of form need not detain us. The crucial point here is that the state has focused its attention on stockholder protection; it is not attempting to secure the interests of those purchasing insurance policies. Such regulation is not within the scope of the McCarran-Ferguson Act. Id. at 460.

27 Id. at 459.

28 Id. at 459-60.

29 Id. at 460.

30 See note 26 supra. For a detailed discussion of National Securities as it applies to the insurance industry in general, see Comment, , The McCarran Act's Exemption for “the Business of Insurance”: A Shrinking Umbrella, 43 Tenn. L. Rev. 329, 341-58 (1976).Google Scholar

31 National Securities, 393 U.S. at 463.

32 Group Life & Health Ins. Co. is also known as Blue Shield of Texas; the defendant pharmacies were Walgreen Texas Co., Sommers Drug Stores Co., and Reiger/Medi-Save Pharmacies, Inc., all of which operate in San Antonio, Texas. Group Life & Health Co. v. Royal Drug Co., 415 F. Supp. 343, 345 (W.D. Tex. 1976), rev'd, 556 F.2d 1375 (5th Cir. 1977), aff'd, 440 U.S. 205 (1979) [hereinafter, the district, circuit, and Supreme Court opinions will be cited as Royal Drug].

33 Kallstrom, , Health Care Cost Control by Third Party Payors, 1978 Duke L.J. 645, 649-50.Google Scholar

34 Royal Drug, 440 U.S. at 209. A policyholder, by going to a participating pharmacy, could obtain a $10 prescription for $2; going to a non-participating pharmacy would mean paying $10 out-of-pocket and filing for a reimbursement equal to 75% of the difference between the purchase price of $10 and the $2 deductible—$6. Thus, patronizing a non-participating pharmacy not only would cost more, but would require the policyholder to “tie up” his or her income while waiting for reimbursement.

35 The policyholders’ understandable preference for participating pharmacies was prej sumably the source of the economic harm claimed by the non-participating pharmacies.

36 Apparently, Group Life felt that reduction and “rationalization” of retail markups would reduce what it would have to pay for drugs. Since an insurer “must meet all charges s from a premium pool that is fixed in advance, the [insurer]… stands to gain as those charges are kept down.” Id. at 648. One aspect of this “gain” is the advantage a cost-controlling insurer would have over less thrifty competitors. Comment, , Controlling Health Care Costs Through Commercial Insurance Companies, 1978 Duke L.J. 728, 731.Google Scholar

Insurer-sponsored cost containment is seen by some as the key to controlling health care costs on a national level. Newhouse, & Taylor, , How Shall We Pay For Hospital Care?, 23 Pub. Int. 78, 83 (1971).Google Scholar

37 Royal Drug, 440 U.S. at 207. The plaintiffs probably alleged a boycott in an attempt to make use of § 3 of the McCarran-Ferguson Act, which renders the Act “inapplicable to any agreement to boycott, coerce, or intimidate… .” 15 U.S.C. § 1013 (1970).

38 Royal Drug, 440 U.S. at 207. “Price fixing,” as the term is used in antitrust cases, refers not just to explicit agreements between competitors to charge a uniform price, but to any agreement between competitors for the purpose of controlling prices or output. United States v. Socony-Vacuum Oil Co., 310 U.S. 150 (1940).

39 Royal Drug, 556 F.2d at 1378.

40 15 U.S.C. §§ 1-7 (1970).

41 Royal Drug, 440 U.S. 207 (1979).

42 Royal Drug, 415 F. Supp. at 351.

43 Royal Drug, 556 F.2d at 1387. The circuit court heldthat the provider agreements were not exempt under the McCarran-Ferguson Act because they were not part of the “business of insurance.” Id. at 1387.

44 The Supreme Court saw a conflict between the Fifth Circuit's decision and decisions rendered by the Third, Fourth, and District of Columbia Circuits. Compare Royal Drug, 556 F.2d 1375 with Frankford Hosp. v. Blue Cross, 554 F.2d 1253 (3d Cir. 1977); Anderson v. Medical Service.of D.C., 551 F.2d 304 (4th Cir. 1977); Proctor v. State Farm Mutual Auto Ins. Co., 561 F.2d 262 (D.C. Cir. 1977); Travelers Ins. Co. v. Blue Cross, 481 F.2d 80 (3d Cir. 1973). See also Manasen v. Calif. Dental Servs., 424 F. Supp. 657 (N.D. Cal. 1976).

45 Royal Drug, 435 U.S. 903 (1978).

46 Royal Drug, 440 U.S. at 210. See note 9 supra for the text of the relevant portions of the McCarran-Ferguson Act.

47 Royal Drug, 440 U.S. at 210-11.

48 For a general discussion of the “unique” aspects of the insurance business, see Burgoyne, , Special Characteristics of the Business of Insurance, 13 Forum 911 (1978).Google Scholar Burgoyne's discussion emphasizes an insurer's inability to control future costs, and the ineffectiveness of the supply/demand relationship as a limit on insurance prices.

49 Royal Drug, 440 U.S. at 211.

50 Burgoyne, supra note 48, at 912-13.

51 Royal Drug, 440 U.S. at 213.

52 Id. at 213-14. While the Court acknowledged that “some type of provider agreement is necessary for a service benefit plan to exist,” it pointed out that everything “necessary” to an insurer is not part of the “business of insurance.” Id. at 213-14 n.9.

53 Id. at 215 n.13.

54 Id. at 215-16.

55 Id.

56 Id. at 216-17.

57 Id. at 217-30.

58 Id. at 221. The Court noted that “the primary concern of both representatives of the insurance industry and the Congress was that cooperative ratemaking efforts be exempt from the antitrust laws.” Casualty insurers, when setting rates, usually cooperate with each other by sharing loss data or by explicitly agreeing on proposed rates. Keeton, Basic Text On Insurance Law § 8.4(a) at 560 (1971). In contrast, health insurers often set rates separately. See Hoh, Administration of Insurance Law, 1956 Ins. L.J. 24, 28.

59 Royal Drug, 440 U.S. at 224.

60 Id. at 224. The dissent chose to interpret the Act's legislative history as mandating a broad interpretation of the McCarran-Ferguson Act. Royal Drug, 440 U.S. at 246 (Brennan, J., dissenting). This might say more about the probative value of arguments made from legislative history than about the soundness of the majority's interpretation.

61 107 F.2d 239 (D.C. Cir. 1939).

62 Id.at 253.

63 Royal Drug, 440 U.S. at 230. The Supreme Court's interpretation of Jordan is questionable. The case involved an attempt by the District of Columbia's Superintendent of Insurance to force the Group Health Association to comply with the requirements of the District's insurance laws. 107 F.2d at 240-41. The court ruled that Group Health was not an insurer, and therefore was not subject to the insurance laws. Id. at 246.

The court's holding was based on Group Health's failure to assume any risk whatsoever: the association was not obligated to provide services to its members, but only to use its “best efforts” to obtain health services for them. Id. at 244. The association's by-laws disclaimed any guarantee that services would be obtained. Id. at 243 n.9. Group Life, on the other hand, did assume risk and did guarantee services to policy holders. Royal Drug, 440 U.S. at 205. Under the Jordan rationale, Group Life's drug plan would have been part of the “business of insurance.”

64 Id. at 231.

65 Id.

66 Id. at 232-33. The Court stated: “There is no principled basis upon which a line could rationally be drawn that would extend the McCarran-Ferguson Act exemption only to an insurer's agreements with providers of goods and services to be provided to its policyholders.” Id. at 232 n.40.

67 Id. at 254-56 (Brennan, J., dissenting).

68 Id. at 239.

69 Id. at 243-48.

70 Id. at 244. FTC v. National Casualty Co., 357 U.S. 560 (1958), held that insurance advertising, if regulated by state laws, cannot be regulated by the FTC. But see Comment, supra note 30, at 346 (arguing that National Casualty has been overruled by National Securities).

71 Royal Drug, 440 U.S. at 244 (Brennan, J., dissenting).

72 Id.

73 Id. at 249-52.

74 Id. at 249.

75 “Obviously, Congress’ purpose was broadly to give support to the existing and future state systems for regulating and taxing the business of insurance.” Prudential Ins. Co. v. Benjamin, 328 U.S. 408, 429 (1946). See also Rosdeitcher, , Judicial Interpretations of the McCarranAct, 13 Forum 873, 874 (1978).Google Scholar “The antitrust exemption is only one part—albeit a critical one—of the overall statutory scheme designed to carry out that congressional policy [of protecting state insurance regulation].” Id.; Weller, , The McCarran-Ferguson Act's Antitrust Exemption for Insurance: Language, History and Policy, 1978 Duke L.J. 587, 598 (1978)CrossRefGoogle Scholar [hereinafter cited as Weller I]; Weller, , To Preempt or Accommodate: The Question of State and Federal Antitrust Laws Under the McCarran-Ferguson Act, 9 U. Toledo L. Rev. 421, 423 (1978)Google Scholar [hereinafter cited as Weller II].

76 For a discussion of the relevant Texas law, see note 91 infra.

77 393 U.S. 453 (1968).

78 359 U.S. 65 (1959).

79 Royal Drug, 440 U.S. at 212, 216.

80 Texas's power to regulate insurance rates and control policy provisions is not threatened by the Royal Drug decision. Cf., SEC v. National Securities, 393 U.S. 453 (1969) (federal regulation of insurance mergers held not to impair state insurance regulation).

81 Presumably, if Group Life had been able to invoke the McCarran-Ferguson exemption, the participating pharmacies would have been able to do so as well. There is little to distinguish the facts of Royal Drug from an arrangement involving, for example, a large auto insurer and a group of large auto repair shops. Cf., Proctor v. State Farm Mutual Ins. Co., 561 F.2d 262 (D.C. Cir. 1977) (McCarran exemption for auto shops—overruled by Royal Drug).

82 The Sherman Act became law in 1890.

83 393 U.S. 453(1968).

84 359 U.S. 65(1959).

85 Weller I, supra note 75, at 602, 606; Weller II, supra note 75, at 428-30. As Mr. Weller notes, “not all state laws which may affect the insurance industry are relevant for the purposes of the McCarran Act's antitrust immunity. Weller II, at 430. The Act is only concerned with laws passed for the purpose of regulating the “business of insurance.” See note 9 supra.

86 See notes 18-21 supra and accompanying text.

87 See note 19 supra and accompanying text.

88 In Variable Annuity, state insurance regulation was not particularly relevant to protecting investors in variable annuities, 359 U.S. at 85-86. Similarly, state insurance regulation in Royal Drug did not address the problems of competition in the retail pharmacy trade. See note 91 infra.

89 Note, , The McCarran-Ferguson Act: A Time for Procompetitive Reform, 29 Vand. L. Rev. 1271, 1291 (1976).Google Scholar

90 Tex. Ins. Code art. 3.42(a) (Vernon 1963).

91 The Board's power to disapprove insurance policies does extend to policies that are “contrary to law or public policy,” Tex. Ins. Code art. 3.42(f)(2) (Vernon 1963), but review of policies is not the same as review of provider contracts. Texas courts have ruled that the purpose of Art. 3 of the Texas insurance statute is to regulate policy forms. American Nat. Ins. Co. v. Hawkins, 189 S.W. 330 (Tex. Civ. App. 1916).

Although the district court in Royal Drug had no doubt that the conduct challenged by plaintiffs was regulated by Article 21.21 § 3 of the Texas Insurance Code, 415 F. Supp. at 349, closer examination of the Code and its definitions of “unfair” practices, casts doubt on the court's conclusion. The only provision of the Texas Insurance Code even remotely relevant to Group Life's pharmacy agreements is Article 21.21 § 2, outlawing boycotts, coercion, and acts of intimidation. Tex. Ins. Code art. 21.21, § 4 (Vernon 1963). The Texas courts have interpreted the statute to apply only to insurance monopolies, Russell v. Hartford Cas. Ins. Co., 548 S.W.2d 737,742 (Civ. App. 1977), and not to create a right of action for those outside the insurance industry, Ceshker v. Bankers Comm. Life Ins. Co., 558 S.W.2d 102, 104 (Tex. Civ. App. 1977).

92 Kallstrom, supra note 33, at 659-65.

93 In 1977, for example, Blue Shield plans covered more than one-third of all Americans and paid out billions of dollars for medical services. Blue Shield plans usually are the largest underwriters of medical coverage in the areas they serve. FTC Report, supra note 8, at 80-81.

94 Group Life, for example, was able to “channel” much of the demand for prescription drugs to the participating pharmacies. 556 F.2d at 1378-79. An insurer's decision to pay for one sort of service, and not another, could have significant impact on the “excluded” providers.

95 This fear is founded on the fact that, in some areas, health insurers cover such a large segment of the population that they have a “monopoly” on demand—often called monopsony power—and could dictate terms to providers on a “take it or leave it” basis. Kallstrom, supra note 33, at 663.

96 Kallstrom observes that “the basic policy concern in insurer-provider cost control schemes [is] … the danger of horizontal price [fixing] agreements among providers.” Id. at 674. If large insurers are provider-dominated, then the problem of insurer-provider conspiracy is probably the principal regulatory concern.

97 See note 26 supra.

98 Antitrust & Trade Reg. Rep. (BNA) at D-5 (No. 918) (1979).

99 Id.

100 [1979] 1 Trade Reg. Rep. (CCH) (1979-1 Trade Cases 77, 603) ¶ 62, 635 (E.D. Va. 1979).

101 Id. at 66, 611.

102 Id.

103 Id. at 77, 608.

104 No. 76-4309 (S.D.N.Y. 1979).

105 Id. at 2.

106 Id. at 12.

107 The insurance policies covered all “reasonable” charges, but did not refer to peer review of “reasonableness.” Id. at 4.

108 Id. at 3.

109 with the elimination of the McCarran-Ferguson defense, insurers may look to the “state action” exemption from the antitrust laws originally formulated in Parker v. Brown, 317 U.S. 341 (1943). The Parker doctrine, however, has been narrowly interpreted by recent Supreme Court decisions and is now available to private parties only when state government has compelled a private party to take anti-competitive action. Sklar, , The Parker v. Brown Exemption: How Much is Left After Cantor v. Detroit Edisonl, 13 Forum 896, 902 (1978)Google Scholar; Von Kalinowski, 7 Antitrust Laws And Trade Regulation § 46.03 [2] (1978). The defendants in Royal Drug certainly could not have claimed that their activities were “compelled” by the State of Texas.

110 See notes 92-96 supra and accompanying text.

111 Sullivan, Handbook Of The Law Of Antitrust, § 110, at 315 (1977). For an example of explicit price-fixing agreements between competing pharmacies, see Northern California Pharmaceutical Ass'n v. U.S., 306 F.2d 379 (9th Cir.), cert. denied 371 U.S. 862 (1962).

112 Interstate Circuit, Inc. v. U.S., 306 U.S. 208 (1939). Sullivan, supra note 111, at 315-16.

113 Theatre Enterprises v. Paramount Film Distributing Corp., 346 U.S. 537 (1954); Sullivan, supra note 111 at 317.

114 See Sullivan, supra note 111, at 32 n.3; Kallstrom, supra note 33, at 663.

115 Unless the insurer actually has the power to control the price paid for goods or services without losing business, the insurer does not truly have a “monopoly” on the demand for those products. See generally Sullivan, supra note 111, at 30-33.

116 See, e.g., Newhouse & Taylor,supra note 36, at 80; Arrow, , Uncertainty and the Welfare Economics of Medical Care, 53 Am. Econ. Rev. 941, 941 (1963).Google Scholar

117 See Kallstrom, supra note 33, at 659-65, tor a discussion of an antitrust defense of cost-control programs similar to the one challenged in Royal Drug.

Since United States v. Socony-Vacuum Oil Co., 310 U.S. 150 (1940), agreements between competitors to fix prices have been considered illegal per se, that is, without any consideration of defenses of reasonableness. Application of this per se rule is usually limited to clearly anticompetitive business practices that lack any redeeming virtues; novel arrangements of unknown or possibly beneficial economic impact may be judged by the “rule of reason.” E.g., White Motor Co. v. United States, 372 U.S. 253 (1963). A rule of reason analysis, which considers possible economic and social benefits of allegedly anticompetitive arrangements, might uphold the use of provider agreements. Kallstrom, supra note 33, at 659-65; Oppenheim, , Antitrust Policy and Third-Party Prepaid Prescription Drug Plans, 40 Geo. Wash. L. Rev. 244, 264-66 (1971).Google Scholar

118 211 Va. 180, 176 S.E.2d 432 (1970).

119 Id. at 189-90, 176 S.E.2d at 445-46.

120 The Virginia Court ruled that the defendants also had violated the Virginia antitrust act. Id. at 190, 176 S.E.2d at 446. Thus, the decision rests upon an “independent state ground” and is not reviewable by the Supreme Court. Fox Film Corp. v. Muller, 296 U.S. 207 (1936). Additionally, since the decisions of lower federal courts cannot be reviewed by state courts, state interpretations of federal law are not binding on federal courts.

121 Id. at 187, 176 S.E.2d at 444.

122 Id. at 190, 176 S.E.2d at 446.

123 Comment, , A “Fix” at the Local Drugstore—Blue Cross Runs Afoul of the Sherman Act, 57 Va. L. Rev. 315 (1971).Google Scholar

124 For a detailed analysis of, and an attack upon, the Virginia court's opinion, see Oppenheim, supra note 117, at 244. The essential case ignored by the state court is Theatre Enterprises v. Paramount Film Distributing Corp., 346 U.S. 537 (1954), in which the Supreme Court put limits on how easily conspiracy may be inferred from parallel behavior of competitors. Oppenheim, supra note 117, at 253.