IN THE DISTRICT COURT OF SHAWNEE COUNTY, KANSAS
DIVISION 6
BLUE CROSS AND BLUE SHIELD )
OF KANSAS, INC., )
)
Petitioner, )
)
v. ) Case No. 02-C-340
)
KATHLEEN SEBELIUS, in her official )
capacity as Commissioner of Insurance )
for the State of Kansas, )
)
Respondent. )
__________________________________________) Consolidated
)
ANTHEM INSURANCE COMPANIES, )
INC., )
)
Petitioner, )
)
v. ) Case No. 02-C-341
)
KATHLEEN SEBELIUS, in her official )
capacity as Commissioner of Insurance )
for the State of Kansas, )
)
Respondent. )
__________________________________________)
MEMORANDUM DECISION AND ORDER
This matter comes before the Court on separate, but consolidated, Petitions of Blue Cross and Blue Shield of Kansas, Inc. (“BCBS”) and Anthem Insurance Companies, Inc. (“Anthem”)
for Judicial Review, pursuant to K.S.A. 77-601 et seq., of the final order of the Honorable Kathleen Sebelius, the Commissioner of Insurance for the State of Kansas (“the Commissioner”). After careful consideration of the briefs filed by the parties and by the amici curiae, the Court finds and concludes as follows:
Statement of Facts1
Historical Background
Blue Cross and Blue Shield of Kansas, Inc. has its roots in two companies that began operations in the 1940’s. Blue Cross of Kansas was organized in 1941, and Blue Shield of Kansas was established in 1946. Both companies were organized by the people of Kansas as nonprofit service corporations and were granted charitable tax status by the Legislature. Many citizens assisted as volunteers in the enrollment of Kansans in this early effort to assure the availability of affordable health care for all Kansans. In 1983, the two companies were consolidated into Blue Cross and Blue Shield of Kansas, Inc. The company operated in a nonprofit manner quite successfully for many years. As a result, a substantial surplus was accumulated. During the 1991 legislative session, the Kansas Legislature enacted legislation which permitted BCBS to convert from a charitable mutual insurance provider to a for-profit insurance company. K.S.A. 40-19c12. On July 1, 1992, BCBS elected to exercise this option and ceased being a nonprofit organization and became a mutual life insurance company pursuant to K.S.A. 40-501 et seq.
During its many years of operation, BCBS invested its surplus wisely in the stock market and elsewhere and earned substantial sums from these investments. These investment earnings were used in recent years, to offset rises in health care costs, thus postponing increases in premiums to policyholders. In this manner, the insureds of BCBS have enjoyed expanded coverage at bargain prices (whether they knew it or not) for some time.2
Unfortunately, during the past few years, the U.S. financial markets have turned south and earnings from investments have slowed. Meanwhile, health care costs have continued to increase. BCBS operates only in the State of Kansas, minus Johnson County and Wyandotte County. In the territory in which it operates, BCBS has virtually saturated the market.3 Furthermore, again unfortunately for BCBS, the portion of Kansas served by BCBS has not experienced any significant population growth in relevant times.
Accordingly, with investment income drying up; with costs continuing to rise; and with essentially zero population growth in its territory, the management of BCBS has concluded the company is now faced with a stark “Hobson’s” choice:
1) Raise premiums to a level which will not be competitive in the market place; or
2) Merge with or be acquired by a larger health insurance entity, which can arguably spread the rising health care costs among a substantially greater number of subscribers and/or effect other economies of scale and thus keep premiums competitive.
Having reached this conclusion, the management of BCBS explored a merger with BCBS of Kansas City in 1996. Although a tentative agreement was reached, the Kansas Attorney General had concerns about the merger (arguing that some or all of the surplus of BCBS should be set aside in a charitable trust for Kansans in consideration of the early treatment of BCBS as a charity).
In 1997, BCBS filed a lawsuit in this court (97-CV-608) to determine whether the assets of BCBS were impressed with a charitable trust and, if so, how much of its surplus had to be set aside for that purpose. In August 2000, BCBS settled that case and placed $75 million in a public trust, the Sunflower Foundation: Health Care for Kansans. The significance of this litigation to the present appeal is that the concerns of the Attorney General and the subsequent lawsuit chilled the ardor of the management of BCBS of Kansas City and the proposed merger failed.
After the merger with BCBS of Kansas City failed to materialize and believing they still faced the financial dilemma aforementioned, the managers of BCBS determined that the company could no longer operate successfully as a “stand alone” entity. Rather than see the company gradually dissipate its assets and fail (with the attendant chaos that would cause to both insureds and health care providers), the management of BCBS cast about for suitors who might wish to acquire the company.
Facts Critical For This Judicial Review
In due course, Anthem emerged as a candidate for acquisition and a proposed acquisition agreement was agreed to and approved by the respective boards of directors and their stockholders. BCBS then elected to convert to a stock company from a mutual insurance company, pursuant to K.S.A. 40-4004, as a part of the acquisition, and Anthem filed an application with the Kansas Insurance Commissioner seeking approval of (1) the conversion of BCBS to a stock company and (2) the acquisition of BCBS by Anthem.4
After taking three days of testimony and after receiving numerous documents and exhibits, the Commissioner elected to (1) approve the conversion of BCBS to a stock company, but to (2) disapprove the merger with Anthem. In fact, her approval of the conversion was elusive inasmuch as it was conditioned on the $190 million Anthem was to contribute to the acquisition transaction (which, because of her disapproval, did not occur, and thus, the conversion also did not and could not take place).
In “approving” the conversion portion of the transaction, however, the Commissioner found that the plan of conversion was fair and equitable to policyholders, that the plan complied with the provisions of the conversion statutes, that the plan did not unjustly enrich any director, officer, agent, or employee of BCBS, and that the new stock insurer would meet the requirements necessary to be issued a certificate of authority. The Commissioner also found on the record then before her that the consideration paid for the acquisition was fair and reasonable and that the allocation of proceeds among the policyholders met the requirements of Kansas law.
Parenthetically, it should also be noted that there is no serious overt contention here that it is possible for BCBS to continue indefinitely into the future as a “stand-alone” entity. The findings of the Commissioner reflect that the company has lost money for some time and that its best short-term business plan reflects only a break-even bottom line. Thus, even if the disapproval of this acquisition stands there can be no real long-term continuation of the status quo.
In reaching the decision disapproving the acquisition, the Commissioner made only two relevant findings/conclusions:
1) That Anthem would raise premium rates significantly more than BCBS would without the acquisition (on two lines of insurance, i.e., small groups and individuals), which would be “hazardous or prejudicial” and/or “unfair and unreasonable” under K.S.A. 40-3304(d)(1)(C) and (E); and
2) That Anthem would severely deplete the surplus of BCBS which would be “hazardous or prejudicial” and/or “unfair and unreasonable” under K.S.A. 40-3304(d)(1)(C) and (E).
Both BCBS and Anthem have appealed this ruling of the Commissioner, pursuant to K.S.A. 77-601 et seq., the Kansas Act for Judicial Review and Civil Enforcement of Agency Actions. All parties have submitted briefs and replies, the Court has received briefs amicus curiae and the matter is now submitted for decision.
Issue
There is only one real question in this appeal: Are the legal reasons expressed by the Commissioner in support of her disapproval of the acquisition legally sound and thus sufficient to justify her decision? This is solely a question of law.
Standard of Review
K.S.A. 77-621(c)(4) provides that a party is entitled to judicial relief if the agency erroneously interpreted or applied the law. Interpretations of statutory and regulatory provisions are questions of law over which a court has unlimited review. Schmidt v. Kansas State Board of Technical Professions, 271 Kan. 201 (2001); Hartford Casualty Insurance Co. v. Credit Union 1 of Kansas, 268 Kan. 121 (1999) (citing Hamilton v. State Farm Fire & Cas. Co., 263 Kan. 875 (1998)).
The fundamental rule to be applied when interpreting a statute is that the Legislature’s intent governs, where that intent can be ascertained. Legislative Coordinating Council v. Stanley, 264 Kan. 875 (1998). “In order to ascertain the legislative intent, courts are not permitted to consider only a certain isolated part or parts of an act, but are required to consider and construe together all parts thereof in pari material.” Landry v. Graphic Technology, Inc., 268 Kan. 359 (2000). Under this principle, “the legislative intention is to be determined from a general consideration of the entire act. Effect must be given, if possible, to the entire act and every part thereof. To this end, it is the duty of the court, as far as practicable, to reconcile the different provisions so as to make them consistent, harmonious, and sensible.” KPERS v. Reimer & Kroger Assocs., Inc., 262 Kan. 635 (1997).
Conclusions of Law
When interpreting K.S.A. 40-4004(a) and K.S.A. 40-3304(d)(1) regarding the proposed acquisition or “sponsored demutualization,” it is important to construe the entire Kansas Insurance Holding Companies Act, the controlling statutory scheme, with the aim to reconcile its various provisions. State v. Bolin, 266 Kan. 18 (1998). To that end, consideration should first be given to K.S.A. 44-3301(a) and (b), which sets forth established public policy considerations to be applied when foreign insurers seek to acquire a domestic insurance company. K.S.A. 40-3301 states:
(a) It is hereby found and declared that it may not be inconsistent with the public interest and the interest of policyholders to permit insurers to:
(1)Engage in activities which would enable them to make better use of management skills and facilities;
(2) Diversify into new lines of business through acquisition or organization subsidiaries;
(3) Have free access to capital markets which could provide funds for insurers to use in diversification programs;
(4) Implement sound tax planning conclusions; and
(5) Serve the changing needs of the public and adapt to changing conditions of the social, economic and political environment, so that insurers are able to compete effectively and to meet the growing public demand for
institutions capable of providing a comprehensive range of financial services.
(b) It is further found and declared that the public interest and the interests of the policyholders are or may be adversely affected when:
(1) Control of an insurer is sought by persons who would utilize such control adversely to the interests of policyholders;
(2) acquisition of control of an insurer would substantially lessen competition or create a monopoly in the insurance business of the state;
(3) an insurer which is part of a holding company system is caused to enter into transactions or relationships with affiliated companies on terms which are not fair or reasonable; or
(4) an insurer pays dividends which jeopardize the financial condition of such insurer.
In K.S.A. 40-4004(a), the Legislature has further mandated, with respect to insurance company mutual-stock conversions, that the Commissioner shall approve the plan of conversion if the Commissioner finds that:
(1) The plan of conversion is fair and equitable to policyholders; (2) The plan of conversion complies with the provisions of this Act; (3) The plan of conversion does not unjustly enrich any director, officer, agent, or employee of the insurer; and (4) The new stock insurer would meet minimum requirements to be issued a certificate of authority by the Commission to transact business in this state, and the continued operations of the new stock insurer would not be hazardous to existing or future policyholders or the public.
In accordance with K.S.A. 40-4004, the Commissioner found that the plan of conversion was fair and equitable to policyholders; that the plan complied in all respects with the provisions of the conversion statutes; that the plan would not unjustly enrich any director, officer, agent or employee of BCBS; and that the new stock insurer would meet the requirements necessary to be issued a certificate of authority; and that the operations of the new stock insurer would not be hazardous to existing or future policyholders or the public. The Commissioner found that BCBS satisfied its burden of proof under the provisions of K.S.A. 40-4004. However, the
Commissioner’s findings were based on the condition that Anthem contribute $190 million to the transaction.
In K.S.A. 40-3304(d)(1), the Legislature has further mandated, with respect to insurance company acquisitions, that the Commissioner shall approve the acquisition unless the Commissioner affirmatively finds:
(A) After the change of control the domestic insurer referred to in subsection (a) of this section would not be able to satisfy the requirements for the issuance of a license to write the line or lines of insurance for which it is presently licensed; (B) the financial condition of any acquiring party is such as might jeopardize the financial stability of the insurer or prejudice the interest of its policyholders; (C) the plans or proposals which the acquiring party has to liquidate the insurer, sell its assets or consolidate or merge it with any person, or to make any other material changes in its business or corporate structure or management, are unfair and unreasonable to policyholders of the insurer and not in the public interest; or (D) the competence, experience and integrity of those persons who would control the operation of the insurer are such that it would not be in the interest of policyholders of the insurer and of the public to permit the merger or other acquisition of control; or (E) the acquisition is likely to be hazardous or prejudicial to the insurance-buying public.
In applying these statutes to the case at bar, the Commissioner, in denying the acquisition, found that the proposed sponsored demutualization would (1) result in an expert-predicted reduction in the insurer’s surplus that would be “unfair and unreasonable” to policyholders and not in the public interest and that (2) the transaction would be “hazardous or prejudicial” to the insurance-buying public because it was predicted that Anthem would raise premiums on two unprofitable lines of insurance (small groups and individuals) sooner than BCBS would without the sponsored demutualization (citing K.S.A. 40-3304(d)(1)(C) and (E)).
The Commissioner made no other finding or conclusion which either she or anyone else contends would justify denial of the otherwise statutorily mandated acquisition.
In reaching her decision, the record reflects that the Commissioner received extensive evidence in this case. Nothing in the record suggests that the Commissioner disregarded any evidence or entered her decision based upon information not presented at the public hearing. However, the Commissioner’s findings regarding the feared invasion of the surplus and suspected increased rates on the two lines of insurance were based solely on the “estimates” of the Commissioner’s experts. Although for future reference it is important to note that findings based on speculation and suspicions, which are not supported by substantial evidence, are arbitrary and capricious as a matter of law (Southwestern Bell Telephone Co. v. State Corp. Comm’n, 192 Kan. 34, 47 (1963)), in the instant case, the Court need not determine whether the Commissioner’s findings were arbitrary and capricious, because even assuming her findings were substantially supported by credible evidence, the Court’s decision would remain the same as a matter of law.
Let us separately examine each of the two findings of the Commissioner which she contends gives rise to the exercise of her discretion to deny the acquisition (or “sponsored demutualization,” to use her term).
1. Feared increases in premiums.
The Commissioner concluded, based upon the “projections” of her expert, that Anthem, being a for-profit company with a track record of profitability, would bring the two unprofitable BCBS lines of insurance (small groups and individuals) to profitability perhaps as early as 2005. The existing BCBS business plan calls for similar results, but with a goal date of 2007. The Commissioner also found that Anthem would achieve profitability in these two lines of insurance solely by raising premiums (although there are a variety of ways that could be accomplished, e.g., reduction of medical costs, closer attention to claims, new benefit designs, lower administrative costs, and membership growth). Thus, the Commissioner found that two classes of Kansas policyholders would pay higher premiums sooner (perhaps as much as two years) under Anthem. This she declared to be “hazardous or prejudicial” and/or “unfair and unreasonable” to Kansas insureds and grounds for denial under K.S.A. 40-3304(d)(1)(C) and (E).
The difficulty with the Commissioner’s position, even assuming the double and triple inferences are factually supported, is that the Kansas Supreme Court has previously held that “one risk group should not be subsidized at the expense of others.” Blue Cross & Blue Shield v. Bell, 227 Kan. 426 (1980). Thus, it is contrary to the law of Kansas for an insurance company to use the proceeds from one line of insurance to subsidize another, each line being required to “stand alone.” When reduced to its simplest terms, the Commissioner has denied this acquisition in the first instance because she fears Anthem will bring the two unprofitable BCBS insurance lines to profitability (and thus within the law) sooner than BCBS itself would do. Obviously, the mere statement of such a proposition reveals its irrationality. To deny an acquisition so that two classes of BCBS insureds (small groups and individuals) can continue to reap unlawful benefits at the expense of other BCBS insureds (the elderly and infirm in Medicare plans) is a proposition so indefensible as a matter of law as to require no further refutation.
2. Feared future surplus reductions.
As with her first justification for denial of the subject acquisition, the Commissioner’s second ground likewise runs flatly counter to established Kansas law. With respect to the BCBS surplus, the Commissioner found: (a) some will be distributed to policyholders under the acquisition agreement (with which she took no exception) and (b) based upon her expert’s further “projection,” an additional part of the surplus would likely be reduced by Anthem after the acquisition. In fact, the expert predicted that the further reduction would lower the BCBS surplus to the range of $90 to $112.5 million. This prediction of the expert was based on the“projections” of what Anthem and other for profit companies “usually do.”
Once again, even if one assumes the double and triple inferences of the expert to be factually supported, the argument fails as a matter of law. In K.S.A. 40-2c01 et seq., the Legislature has prescribed the required minimum levels of surplus for insurance companies doing business in Kansas. Even if the Commissioner’s worst fears are realized (i.e., if surplus levels are actually reduced to the lowest levels of the projected range), the surplus will still be above the level declared legally sufficient by our Legislature. Again, the Commissioner has denied this acquisition because she fears Anthem will comply with Kansas law. K.S.A. 40-401, K.S.A. 40-402, and K.S.A. 40-2c01.
Although the Commissioner is granted power to supervise insurers and to enforce the Kansas Insurance Code (K.S.A. 40-103), she is not authorized to add or change established legal requirements or take regulatory action based upon anticipated premium rates or levels of surplus that would be either required by or consistent with the law under the aforementioned statutory guidelines and case precedents. See e.g., Mitchell v. Liberty Mutual Insurance Co., 271 Kan. 684 (2001); Olathe Community Hospital v. Kansas Corp. Comm’n, 232 Kan. 161 (1982); Kansans for Fair Taxation, Inc., v. Miller, 20 Kan. App. 2d 470 (1995).
Finally, if more be needed, it is important to observe that all insurance rate increases and all insurance company surplus distributions are required to be first approved by the Commissioner. (K.S.A. 40-2215 sets forth the public policy the Commissioner must enforce regarding insurance rates. K.S.A. 40-3306 governs dividends that may be distributed from insurance company surpluses.) Accordingly, before the future predicted “hazardous or prejudicial” and/or “unfair and unreasonable” rate hikes and surplus reductions could occur, each would first have to be approved and authorized by the Commissioner herself. The Court is unwilling to presume, as a matter of law, that this or any subsequent Commissioner would approve “hazardous or prejudicial” and/or “unfair and unreasonable” rates or dividend distributions. Thus, it is not possible for these “projections” to ever be realized and it is therefore illogical, if not arbitrary and capricious, for the Commissioner to base her denial solely on these “projections.”
Related Matters
It was once said by a wise man “that even the Supreme Court of the United States reads the newspaper.” So do state trial judges. Thus, the Court is, in a general way, aware of many related circumstances, which have been reported in the media both before and after the Commissioner issued her order, that are not in the record before the Court. For example, it is reported that Anthem has agreed to pay approximately $4 billion in cash and stock for Trigon Healthcare, Inc. of Virginia (another former Blue Cross and Blue Shield company). Michael Buettner, Anthem Blue Cross to buy Virginia health care provider for $4 billion, The Topeka Capital-Journal, April 29, 2002. A comparison of this reported acquisition price with the $190 million Anthem has agreed to pay for BCBS could conceivably raise questions concerning the adequacy of the price agreed to in the case at bar. Michael Hooper, Critics say Anthem bid for BCBS not enough, The Topeka Capital-Journal, June 6, 2002. Because these events occurred after the hearing herein, the record before the Court is devoid of evidence on this point and thus this matter was not before the Commissioner and is not before the Court at this time. Likewise, news accounts would have the public believe that Anthem pays what the average working Kansan might believe to be obscene bonuses to its executives who have assisted the company in realizing great profits by denying arguably valid claims by the elderly and infirm, and by making slow or reduced payments to deserving health care providers, at least in the opinion of two amici before the Court (Kansas Hospital Association and Kansas Medical Society). Anthem execs reap millions in bonuses, The Topeka Capital-Journal, April 12, 2002. Again, there is no record before the Court legally establishing these public assertions and claims of amici and the Commissioner has made no findings thereon. Thus, all questions concerning adequacy of price, executive compensation, claims payment, provider compensation, and the like are not yet (and may never be) before the Court.
The Role of the Court
In the amicus brief of the Kansas Hospital Association and Kansas Medical Society, the Court was implored not to “take the bait” by favorably considering technical legal arguments which amici feared Anthem and BCBS would make in this case. This reasoning of amici misperceives the role of the Court. In fact, the sole reason for the Court’s existence is to interpret, apply, and enforce the sometimes technical requirements of the law. In our constitutional scheme of government, it is for the Legislative and Executive Branches to establish public policy and to write the law for our state. It is the role of the Judicial Branch to interpret and apply that law and to see to it that persons generally, and public officials in particular, in carrying out their duties, obey it.
In short, it is not the role of the Court to decide if the proposed, or any other, acquisition or merger is a good or a bad idea, either for the companies involved or for the policyholders and/or their health care providers. It is not for the Court to approve or disapprove the acquisition in question or to order it with or without conditions. Nor is it for the Court to order the Commissioner to do any of those things. These are policy decisions reserved under the law to the Commissioner. However, these policy decisions of the Commissioner are required to be made according to certain legal standards and criteria established by our Legislature and our Supreme Court. Further, all such decisions must be based upon factual findings supported by a record containing substantial competent evidence supporting those findings.
Finally, and most importantly to the case under consideration, the reasons given to support any action taken by the Commissioner must conspicuously comply with and never be
contrary to existing law (which only the Legislature, as interpreted by the Supreme Court, is constitutionally authorized to enact).
Other arguments were made in the Petitions for Judicial Review (such as the applicable burden of proof, the amount or quantity of evidence required to support findings, and the like). All of these issues were examined by the Court, but because its decision is based solely on issues of law, the Court did not reach those issues and need not now address them. Finally, at the telephonic case management conference held in these consolidated cases, it was decided that the only proper parties before the Court were the Commissioner, BCBS, and Anthem. It was also decided the Court would receive briefs amicus curiae from all other interested groups and persons, some of which had been allowed limited participation in the hearings below. All, including amici, agreed to this arrangement, which was concurred in by the Court. Subsequently, several amici moved to intervene as parties. The Court has determined the original arrangement was correct and has elected to honor that unanimous agreement. Accordingly, all motions to intervene are denied and all briefs amicus have been received and carefully considered.
Order
For the reasons given, the Order of the Commissioner disapproving the acquisition (“sponsored demutualization”) is vacated in its entirety and this matter is remanded to the Commissioner for further proceedings not inconsistent with this opinion. The Commissioner is now free to proceed as she sees fit, consistent with this opinion and other provisions of the law
which are or may become applicable. The foregoing memorandum decision and order shall serve as the Court's final entry of judgment, no further journal entry being required.
Dated this 7th day of June 2002.
_________________________________
Terry L. Bullock5
1 The facts utilized by the Court were obtained from the agency record of In the Matter of the Conversion and Acquisition of Blue Cross and Blue Shield of Kansas, Inc. and from Shawnee County District Court Case No. 97-CV-608 (Blue Cross and Blue Shield of Kansas, Inc., v. Carla Stovall, Kansas Attorney General), which case the Court has judicially noticed.
2 The Commissioner found that “[i]n 2000, [BCBS] had premiums of $873.0 million, surplus of $328.5 million, net income of $5.8 million and assets of $730.8 million. For the six months ended June 30, 2001, [BCBS] had premiums of $484.1 million, surplus of $310.4 million, net loss of $14.4 million, and assets of $698.1 million.” Commissioner’s Final Order, page 3.
3 The Commissioner found that “[BCBS] is currently the largest health insurer in Kansas. More than 715,000 Kansas residents in all Kansas counties, except Johnson and Wyandotte, the two Kansas counties incorporated into the Kansas City Metropolitan area, have private health care coverage insured or administered by [BCBS]. Through administration of government programs, Medicare and Medicaid, [BCBS] administers health care coverage for 640,000 additional Kansans, some of whom also carry the Medicare Supplemental coverage. In all, more than one million Kansas residents rely on [BCBS] to administer their health care coverage.” Commissioner’s Final Order, page 3.
4 As to the financial condition of Anthem, the Commissioner found that “[i]n 2000, Anthem had revenues of $8.7 billion, surplus of more than $1.9 billion, net income of $226.0 million and assets of $5.7 billion. For the six months ended June 30, 2001, Anthem had revenues of $5.1 billion, surplus of more than $2.0 billion, net income of $143.0 million and assets of $5.8 billion.” Commissioner’s Final Order, page 4.
5 For purposes of full disclosure, the record should reflect that the Court, in proper persona, is itself an insured of BCBS, and has been for many years, probably from the time of the organization of BCBS. In fact, within recent years, the Court had occasion to access this coverage during its recovery from a near-fatal illness. To be perfectly frank, the Court was most satisfied with the service it received from BCBS. For this reason, the Court initially considered recusing from this case. Upon further reflection, however, it became obvious that all other judges in Kansas would have the same problem (as BCBS insures the entire Kansas judiciary) and accordingly the Court has journeyed forth under the doctrine of necessity and has proceeded to do its duty, as Providence has given it the light to see that duty.