Unfair Trade Practice Concerns

Some may wonder if MESSA's contract for underwriting services from Blue Cross is less of an operating agreement and more of an agreement to restrain trade. After all, the most noticeable consequence of the joint operations is that MESSA and Blue Cross now control the dominant share of the market for administration of health insurance benefits to public school employees. Questions about restraint of trade are also justified when considering the non-standard aspects of the operating agreement. For example, according to testimony provided by the Michigan Association of School Boards:

Another problem with the MESSA/BCBS relationship is that BCBS gives MESSA access to discounts with hospitals and other health care providers, negotiated by BCBS, based on the massive amount of total business it controls. There would be no objection to accessing this discount except BCBS apparently is unwilling to offer other health insurance companies, which compete with MESSA, the same access to its buying power. When another insurance company recently sought the same arrangement MESSA had, BCBS offered only a different, less desirable agreement.60

There are several factors that suggest possible improprieties in the relationship between MESSA and Blue Cross which would adversely affect competing firms within their market.

Interlocking directorates are sometimes referred to as "per se" violations of antitrust law-their mere existence is intrinsically offensive.61 Interlocking directorates occur when a person serves as a director in two or more competing corporations. As this definition applies to the arrangement between MESSA and Blue Cross, an interlocking directorate is now present. Charles Neumann, the President of the MESSA Board of Trustees since 1976, is also a member of the Board of Directors for Blue Cross/ Blue Shield of Michigan. MESSA cannot argue that it does not fit the definition of a "competing corporation" with Blue Cross, because MESSA has denied previous unfair trade practice allegations by contending that it competes vigorously with Blue Cross.

The problem is clear: federal antitrust laws grant exemptions to the business of insurance, and Michigan's antitrust laws provide additional exemptions to insurance related businesses which are already subject to other state regulations.62 It is not readily apparent that there is any legal offense to the MESSA/Blue Cross interlocking directorate, because, their operations are exempt from antitrust laws. Moreover, it is not uncommon for Blue Cross to have its larger corporate customers participate on its Board of Directors. At the same time, it is not common for Blue Cross to have its corporate competitors represented on its Board. Nevertheless, there is speculation that MESSA exercises undue influence over Blue Cross through the interlocking directorate involving Mr. Neumann.

A most recent example of this speculation involves a conflict between Blue Cross and one of MESSA's fiercest competitors-the School Employees Trust ("SET"). In 1992, as part of a strategy to expand benefit programs while reducing costs, SET petitioned Blue Cross for "sponsored organization" status-the same status given to MESSA-but the request was denied. As a "sponsored organization," MESSA receives certain privileges from Blue Cross that are not available to MESSA's competitors such as SET. For example, MESSA obtains preferential rates from Blue Cross because its experience ratings are based upon its own claims history. SET's ratings, however, are based upon the claims history of the entire education industry grouping. Without the similar consideration given to MESSA, competitors cannot offer similar coverage to their members. When the attorneys for SET demanded that Blue Cross provide an explanation of this denial, Blue Cross said the decision was in the interest of 6 1 maintaining fiscal and underwriting stability:"

SET has coverage available to its members. While the specific coverages available through MESSA are not offered, BCBSM is not required to offer all programs to all groups.63

In a letter to the Insurance Commissioner, the attorneys for SET noted their skepticism about Blue Cross's arrangement with MESSA by stating: "This denial... constitutes a restraint of trade by competitors of SET represented on the Board of BCBSM."64

One extension of the argument claiming that MESSA maintains inappropriate control over Blue Cross is the common allegation that both corporations actively collude. Charges of collusion are serious, and if they can be proven, they would most likely constitute a restraint of trade. While third party administrators are common in the insurance industry, it is not common for a third party administrator to be underwritten by a major competitor. Ever since MESSA and Blue Cross began cooperating pursuant to their operating agreement, other competitors in their market have essentially been squeezed out. And given the experiences of those who deal directly with MESSA and Blue Cross, the speculation about collusion is understandable.

The Assistant Superintendent of the Clawson School District, for example, analyzed the trends of premium differentials between Blue Cross and MESSA coverage.65 He observed that MESSA coverage was historically more expensive than Blue Cross, but MESSA's rates abruptly became less expensive during which time MESSA claimed that it was having problems with a disproportionate number of claims and while Blue Cross rates jettisoned upwards. He suspects that MESSA colluded with Blue Cross to raise Blue Cross premiums so school districts could no longer argue that Blue Cross was cheaper than MESSA. Whether MESSA is the plan name or Blue Cross is the plan name, the business of underwriting still goes to Blue Cross.

A similar situation occurred during the Troy School District's 1990 contract negotiations (discussed with details in Appendix III). A Blue Cross representative provided the District with quotes for health insurance rates. Although the District reviewed the quotes on many occasions with the Blue Cross representative, the quotes were never documented in writing. One week before the start of school, a MESSA representative informed the District that the Blue Cross quotes were wrong. After further consultation with Blue Cross, the District confirmed the accuracy of the quotes. Several days later, Blue Cross informed the District that an error was committed and that the quoted rates would apply only to a select number of teachers, rather than the entire school district.

The original quoted rates from Blue Cross would have saved the District an estimated $700,000. The revised rates would have cost $95,000 more than MESSA coverage. With this sort of behavior, what else can a school district suspect but evident collusion?

But even if MESSA is not colluding with Blue Cross in order to procure a steady market share, MESSA's attorneys remind us, ". . . MEA representatives are good enough bargainers that Blue Cross representatives are aware that schools may choose MESSA over Blue Cross when only one of the two may be selected."66