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Ocean State Physicians Health Plan, Inc. v. Blue Cross & Blue Shield of Rhode Island

United States Court of Appeals for the First Circuit
883 F.2d 1101 (1989)


Blue Cross & Blue Shield of Rhode Island (Blue Cross) (defendant) had a monopoly over Rhode Island’s health-coverage market. Blue Cross paid doctors set fees to care for its subscribers. Ocean State Physicians Health Plan, Inc. (Ocean State) (plaintiff) was a relatively new health-maintenance organization (HMO) that contracted with many of the same doctors. However, the doctors had agreed to accept fees from Ocean State that were 20 percent lower than those paid by Blue Cross. Ocean State used these savings to offer very competitive prices and extra coverage benefits to subscribers, causing Blue Cross to lose business to Ocean State. Blue Cross responded with three actions. First, Blue Cross set up a competing HMO called HealthMate. Second, Blue Cross changed its pricing structure. Employers that offered only Blue Cross got the lowest prices. Employers that also offered HealthMate and any other HMO (including Ocean State) got mid-level prices for Blue Cross subscriptions. Employers that offered Blue Cross and only HMOs other than HealthMate were charged the highest prices for Blue Cross subscriptions. Blue Cross justified the tiered pricing on the basis of adverse selection, claiming that Blue Cross was left to cover a more expensive pool of a company’s old, sick employees any time HMO options skimmed off that company’s young, healthy employees. Blue Cross’s third action was enacting a prudent-buyer policy. This policy operated like a most-favored-nation clause, forcing doctors to offer Blue Cross the same rate that they offered to anyone else. This meant that doctors who wanted to keep working for Blue Cross, the largest insurer in the state, had to quit working with Ocean State or else cut their Blue Cross fees by 20 percent to match the lower Ocean State rates. Approximately 350 of the 1200 doctors in Ocean State’s network stopped working with Ocean State. Ocean State sued, arguing that Blue Cross’ three actions violated § 2 of the Sherman Act. The district court dismissed the case, and Ocean State appealed.

Rule of Law


Holding and Reasoning (Campbell, C.J.)

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