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UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF PENNSYLVANIA

THE CHESTER COUNTY HOSPITAL

701 E. MARSHALL STREET

WEST CHESTER, PA 19380,

 PLAINTIFF

v.

INDEPENDENCE BLUE CROSS 

1901 MARKET STREET

PHILADELPHIA, PA 19103

QCC INSURANCE COMPANY

1901 MARKET STREET CIVIL ACTION NO.

PHILADELPHIA, PA 19103

KEYSTONE HEALTH PLAN EAST

1901 MARKET STREET

PHILADELPHIA, PA 19103

KEYSTONE MERCY HEALTH PLAN

200 STEVENS DRIVE

SUITE 350

PHILADELPHIA, PA 19113

DEFENDANTS

 COMPLAINT

 Introduction

Plaintiff The Chester County Hospital (hereinafter “The Hospital") files this Complaint against

Independence Blue Cross (hereinafter referred to as “IBC”) and its subsidiaries and/or affiliates QCC

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Insurance Company, Keystone Health Plan East and Keystone Mercy Health Plan (such subsidiaries

and affiliates, together with IBC, are collectively referred to herein as the “IBC Group”) for violation of

Sections 1 and 2 of the Sherman Act, common law restraint of trade, breach of contract, breach of the

covenant of good faith and fair dealing, unjust enrichment, and reformation/recission of unconscionable

contracts.

The Hospital has provided a charitable, independent community resource for health care

services to the citizens and neighbors of Chester County for over a century. This long-standing

institution remains the last hospital in Chester County to be owned and governed by the local

community. However, this essential community asset is at risk as a result of the defendants’ antitrust

violations.

As detailed herein, the defendants illegally have used anticompetitive tactics and agreements to

amass and secure monopoly and monopsony power in the sale of health benefits and in the purchase of

hospital services. The defendants unlawfully have acquired and maintained an exceedingly high market

share and market power in the relevant market(s) and now provide coverage or health insurance

benefits for three quarters of the population of the Philadelphia area and most of the commercially

insured patients of the Hospital. Rather than acting in the best interests of consumers and the community

that the Hospital serves, the defendants have abused their monopoly and monopsony power by

unconscionably suppressing reimbursement to the Hospital while at the same time forcing consumers

and employers to pay higher premiums. 

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Even though the Hospital has lower costs than many hospitals in Southeastern Pennsylvania, the

defendants have engaged in intimidation tactics and imposed unconscionable “take it or leave it” pricing

terms upon the Hospital that fall short of even covering the Hospital’s costs of providing services to the

defendants’ subscribers and members. These antitrust violations have enhanced and entrenched the

defendants’ market power, harmed competition in the relevant markets, and have caused and continue

to cause substantial damage to the Hospital and the community.

The Parties

1. The Hospital is a Pennsylvania Nonprofit Corporation that operates a charitable

community hospital principally serving patients residing in the borough of West Chester and the area

including and surrounding Chester County, Pennsylvania. The Hospital’s principal place of business is

located at 701 East Marshall Street, West Chester, Pennsylvania 19380.

2. IBC is a Pennsylvania Nonprofit Hospital Plan Corporation with a principal place of

business at 1901 Market Street, Philadelphia, Pennsylvania. It provides hospital benefits to subscribers

in combination with medical benefits provided by Highmark, Inc., doing business as Pennsylvania Blue

Shield. Its service area is Bucks, Chester, Delaware, Montgomery and Philadelphia counties in

Pennsylvania ("Southeastern Pennsylvania"). IBC has numerous subsidiaries and corporate affiliates that

also provide or administer health benefits.

3. QCC Insurance Company (“QCC”) is a subsidiary of IBC, incorporated in the

Commonwealth of Pennsylvania, with a principal place of business at 1333 Chestnut Street

Philadelphia, Pennsylvania 19107 and with a mailing address at 1901 Market Street, Philadelphia,

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Pennsylvania, 19103. QCC provides managed care health insurance and benefits products, including

the IBC Personal Choice preferred provider organization benefit product, in Southeastern Pennsylvania.

4. Keystone Health Plan East, Inc. (“KHPE”) is a subsidiary of IBC. KHPE is

incorporated in the Commonwealth of Pennsylvania with a principal place of business at 200 Stevens

Drive, Philadelphia, Pennsylvania 19113. KHPE is licensed as a health maintenance organization

("HMO") and markets traditional HMO benefit plans and HMO-based "point of service” benefit plans

in Southeastern Pennsylvania. Its programs include an HMO program for Medicare beneficiaries under

the Medicare + Choice program. Until 1997, KHPE was a joint venture of IBC and Delaware Valley

HMO, Inc., an affiliate of Pennsylvania Blue Shield (now Highmark, Inc.). In 1997, IBC acquired full

ownership of KHPE.

5. Keystone Mercy Health Plan (“Keystone Mercy”) is a Pennsylvania corporation that

operates a managed care health plan in Southeastern Pennsylvania. It serves approximately 240,000

Medicaid beneficiaries. Keystone Mercy is incorporated in the Commonwealth of Pennsylvania with a

principal place of business at 200 Stevens Drive, Philadelphia, Pennsylvania 19113. It operated as a

subsidiary of the Mercy Health System until a 1996 corporate restructuring. Its corporate parent

partners now are Mercy Health System and KHPE. As a result of the 1996 transaction, IBC, through

KHPE, has a 50% interest in Keystone Mercy.

Jurisdiction and Venue

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6. Jurisdiction is conferred upon this Court pursuant to 28 U.S.C. §§ 1331 and 1337(a) in

that the plaintiff’s claims arise under Sections 1 and 2 of the Sherman Act and Section 4 of the Clayton

Act.

7. Supplemental jurisdiction over plaintiff’s interrelated claims for money damages and

other relief under State law is conferred by 28 U.S.C. § 1367(a).

8. Venue is proper in the Eastern District by virtue of 28 U.S.C. § 1391(b)(1) and (2) in

that each defendant resides in the Eastern District of Pennsylvania within the meaning of 28 U.S.C. §

1391(c) and/or a substantial part of the events and omissions giving rise to the claim occurred in the

Eastern District of Pennsylvania.

Factual Background

9. Established in 1892, the Hospital has grown from a ten-bed dispensary to a 234-bed,

independently operated charitable acute care hospital governed by a local community board. It provides

inpatient services at its main hospital campus, and provides outpatient services at its central campus

location and a number of satellite locations. The Hospital's operating costs are lower than those of most

other hospitals in Southeastern Pennsylvania. It has a reputation for quality service and patient care. 

The Hospital’s primary service area is located wholly within Chester County, Pennsylvania.

10. The IBC Group is the self admitted dominant health insurer and managed care

enterprise in Southeastern Pennsylvania and in the service area of the Hospital. See www.ibx.com. On

information and belief, IBC and its affiliates provide coverage or health benefits services for between

70-85% of the commercially insured persons in Southeastern Pennsylvania. Overall, the IBC Group

serves approximately 75% of Southeastern Pennsylvania's population - more than 2.8 million of the 3.7

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million residents. Its two leading programs, the Personal Choice PPO and Keystone Health Plan East

HMO, each serve over 1 million residents in the relevant geographic market. The IBC Group dwarfs its

shrinking competition.

11. The IBC Group provides coverage or services to individuals, government entities,

Medicare and Medicaid beneficiaries, multiple employer trusts, self-funded employers and other group

purchasers of health care (collectively, “covered persons and entities”). 

12. The IBC Group contracts with the Hospital and other hospitals and physicians to render

care to covered persons and entities on agreed upon reimbursement terms. For inpatient services, this

reimbursement is usually a per diem or per case payment for all, or almost all, of the care a patient

receives during his or her hospital stay. For outpatient services, the reimbursement is pursuant to a fee

schedule or schedule of rates.

13. The IBC Group arranges for the provision of inpatient and outpatient services to

covered persons and entities through a series of programs or products provided, arranged and/or

administered by IBC or one of the other IBC Group members. The IBC Group provides coverage for

inpatient and outpatient services through both traditional indemnity plans and through managed care

plans operating under the names Keystone Health Plan East, QCC Insurance Company and others. 

The IBC Group offers inpatient and outpatient services to individuals eligible for Medicaid through

Keystone Mercy. 

14. The Hospital is heavily dependent for its financial viability on the IBC Group. Patients

with IBC Group coverage account for an increasingly high proportion of the patients served by the

Hospital. Overall, the IBC Group is the primary payor for 44.1% of the Hospital’s acute inpatient

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admissions and 50.2% of the Hospital's outpatient volume. In addition, through its Medicare

supplement (or Medigap) programs the IBC Group is the secondary payor for a large proportion of the

fee-for-service Medicare patients treated at the Hospital. Excluding government payors such as

Medicare and Medicaid, the IBC Group accounts for 61.6% of the Hospital’s commercial inpatient

admission volume and 60.5% of its outpatient volume. On information and belief, the proportion of

patients and hospital utilization represented by the IBC Group in Southeastern Pennsylvania is

significantly higher as compared to other markets in the country.

15. Because of the design of the health benefits provided by the IBC Group to its covered

persons, patients are unlikely to obtain services from a hospital that does not contract with the IBC

Group to be a participating provider. Except for emergencies, individuals with traditional HMO

coverage are not covered if they seek services from a non-participating provider. Individuals with PPO

or HMO "point of service" coverage face significant financial disincentives to use non-participating

providers. In addition, the IBC Group normally refuses to pay benefits directly to non-participating

providers, so that even where benefits are available to the patient for services of a non-participating

provider, the non-participating provider must seek to collect payment directly from patients or their

family members who must then await reimbursement from IBC. This is an additional obstacle to nonparticipating status. In addition, because IBC's share of the patient population in the relevant market(s)

is so high and patients will normally travel only a limited distance for hospital services, the Hospital faces

obstacles to attracting patients served by physicians who have not practiced at the Hospital or in the

communities surrounding the Hospital. Thus, it is not likely that the Hospital could replace IBC Group

covered persons with other patients in the event the Hospital were to lose significant utilization by IBC

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Group covered persons. Finally, while a manufacturer can stockpile unsold product for later sale to

other customers, a hospital cannot. For the foregoing reasons, the Hospital could not operate viably

without access to patients covered by the IBC Group. Other hospitals in Southeastern Pennsylvania

face similar obstacles to non-participation with the IBC Group.

16. To operate in a fiscally sound manner, the Hospital must cover its costs of providing

care. Apart from IBC Group patients, participants in government programs, such as Medicare and

Medical Assistance constitute the majority of the balance of patients serviced at the Hospital. The nonIBC Group patients, including government program participants, other commercially insured patients,

and charity patients, do not provide sufficient revenues to the Hospital to subsidize or offset the

significant operating losses incurred by the Hospital from providing services to IBC Group patients. The

amounts the Hospital can charge and collect for services to fee-for-service Medicare and Medicaid

patients are fixed by law. Revenues from services to non-IBC Group commercial patients are only a

small percentage of the Hospital’s revenues. 

17. Due to the market dominance of the IBC Group, providers, including, the Hospital are

required to accept reimbursement rates from the IBC Group for inpatient and outpatient services that

are less than the costs of providing those services. All of the IBC Group’s programs provide levels of

reimbursement to the Hospital that are less than the Hospital’s costs of providing the services. On

information and belief, the same is true for other hospitals in Southeastern Pennsylvania.

18. The IBC Group imposes financial and other terms that effectively require the Hospital

and most other hospitals in Southeastern Pennsylvania to contract for the provision of services under all

IBC Group products. Because of the market dominance of the IBC Group, the Hospital has had no

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choice but to accept the rates and terms demanded by the IBC Group. Not to accept the IBC Group

demands as to rates and terms would eventually result in the Hospital closing its doors and abandoning

its charitable mission to the community it serves.

19. Managed care companies establish provider networks in the areas where their enrollees

live and work. The relevant geographic markets in which health benefits and managed care plans

compete are generally no larger than the local areas within which plan enrollees seek access to

providers.

20. Until recently, a larger number of health insurers and managed care companies served

Southeastern Pennsylvania. In recent years the IBC Group has expanded market share, while

competitive choice for consumers and providers has diminished. IBC’s Personal Choice PPO

increased its enrollment by 80% in five years, to over 1.1 million subscribers in Southeastern

Pennsylvania. The enrollment of Aetna/U.S. Healthcare, IBC’s largest competitor, has fallen by over

100,000 subscribers. Other managed care competitors have left the market, restricted their operations

to small niche segments, or been liquidated. The IBC Group is by far the dominant provider of health

insurance and health benefits products in Southeastern Pennsylvania. The IBC Annual Statement for the

year ending December 31, 2001 reflects net premium income of $430,145,591. IBC maintains a

surplus of over $600,000,000, and it has generated funds which it has chosen to invest in for-profit

ventures outside of the community served by the Hospital and other providers from which those

surpluses were generated. Indeed, some of those ventures are outside of the Commonwealth. 

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21. In 1999, IBC effectively forced the Hospital to enter into a contract that was 20%

below its costs. The alternative of having no contract to provide services for IBC Group patients would

have been even more disastrous.

22. In July of 2000, IBC and the Hospital discussed the renewal of the Hospital’s IBC

Group provider contracts which were due to expire on October 31, 2000. The Hospital showed IBC

cost data demonstrating that the Hospital’s operating costs were below the median costs for hospitals in

Southeastern Pennsylvania in all categories. The Hospital also explained to IBC that the Hospital was

incurring significant operating losses on the services it provided to IBC Group patients. The Hospital’s

operating loss on services to IBC Group patients in fiscal year 1999 was determined at year end to be

$5.8 million. 

23. For the contract beginning November 1, 2000, the Hospital proposed new rates to IBC

that would have helped to stabilize the Hospital’s fiscal condition. IBC refused the proposed increase

and would only agree to a five year contract providing for an increase in inpatient and outpatient rates in

the first year of only about one third of what the Hospital requested, and increases for subsequent years

that were not tied to local market indices and were inadequate to address the costs incurred by the

Hospital for providing services to IBC subscribers. One set of rates was to apply for IBC’s traditional

indemnity health plan, and a separate set of rates to all IBC Group managed care plans, including

Keystone Health Plan East’s HMO programs, QCC’s Personal Choice PPO programs, and Keystone

Mercy. Facing the alternative of immediate financial disaster if the Hospital refused to contract with the

IBC Group, the Hospital had no choice but to accept the terms imposed by IBC. For fiscal year 2001

the Hospital received approximately $34 million in revenue from the IBC Group, but nevertheless

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sustained operating losses on IBC Group patients exceeding $8.5 million, forcing the Hospital into a

negative operating position. For fiscal year 2002, the Hospital is experiencing similar losses. On

information and belief, other hospitals in Southeastern Pennsylvania were similarly coerced into

accepting rates from the IBC Group that do not meet their operating costs.

24. The Hospital was forced to enter into the following three agreements, copies of which

are not attached to this Complaint since the originals are in the possession of IBC:

a. An IBC Member Hospital Agreement (the “Member Hospital Agreement”)

which provides for, inter alia, the terms and conditions for the provision of

defined inpatient and outpatient hospital services to subscribers covered under a

traditional benefit subscriber contract, i.e., subscribers not participating in an

IBC managed care program.

b. A Managed Care Participating Hospital Agreement (the “Managed Care

Agreement”) which provided for, inter alia, the terms and conditions for the

provision of defined inpatient and outpatient covered services to beneficiaries

enrolled in an IBC affiliated managed care program (e.g., a health maintenance

organization (HMO), a preferred provider organization (PPO), or a point of

service plan (POS)). Pursuant to Section 21.2 of the Managed Care

Agreement, the Payment Provisions set forth in Exhibit A to the Managed Care

Agreement apply to services provided to enrollees of Keystone Mercy if the

separate agreement between the Hospital and Keystone Mercy terminates. 

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c. A Managed Care Ancillary Facility Agreement for HMO Capitated Imaging

Services and HMO Capitated Physical Therapy Services Programs (hereinafter

the “Capitated Services Agreement”).

Hereinafter, the Member Hospital Agreement, the Managed Care Agreement and the Capitated

Services Agreement are collectively referred to as the “Agreements.”

25. In addition, IBC required that the rates under the Managed Care Agreement would also

be applicable to Keystone Mercy for the provision of services to Medicaid beneficiaries under the

Commonwealth of Pennsylvania’s HealthChoices program. 

26. Due to the IBC Group’s market dominance, beginning in at least 1999 the Hospital was

not able to negotiate at arms length its contracts with the IBC Group. The Hospital had no meaningful

or realistic choice as to the pricing terms of its agreements with the IBC Group in 1999 and 2000, and

no realistic opportunity to bargain. It would have been futile for the Hospital to reject IBC’s insufficient

reimbursement terms and seek to operate without participating status with the IBC Group. 

27. IBC squashed the Hospital’s freedom of choice by offering only “all products”

contracts with bundled pricing that left the Hospital with “take it or leave it” contracts for, not just one,

but the full range of IBC’s available products. For the Hospital, rejecting IBC’s terms altogether would

have meant closing its doors, first to IBC subscribers, and eventually to all patients entirely, and would

have forced the Hospital to abandon its mission of providing access to quality health care for patients in

the community. The Hospital was thus forced to acquiesce to IBC’s inadequate reimbursement terms.

28. The reimbursement provisions of the 1999 and 2000 Agreements were so one-sided as

to be oppressive to the Hospital and unreasonably favorable to the IBC Group. IBC dictated pricing

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terms that do not meet the Hospital’s costs of providing care, even though the Hospital is one of the

least expensive hospitals in the region. As the IBC Group enrollee population increases, the resultant

financial deficit to the Hospital increases and the risk to the Hospital’s charitable mission dramatically

increases.

Relevant Markets

29. For purposes of this action, a relevant geographic market is the greater Philadelphia

area, including Bucks, Chester, Delaware, Montgomery and Philadelphia counties in Pennsylvania. The

service area of the Hospital within Chester County or another area within the greater Philadelphia area is

also a relevant geographic market or submarket. 

30. For purposes of this action, relevant product markets are the provision of private health

care financing products for employers and other purchasers, or sub-markets thereof, and the purchase

of hospital health care services by private health care financing entities, or submarkets thereof.

31. In the relevant market(s), there are significant barriers to entry and/or expansion by new

or smaller managed care and health benefits companies that might seek to compete with the IBC Group.

 This is evidenced by the liquidation, exit from the market, or retrenchment of Oxford Health Plans,

Horizon Health Plan, Health Plans of Pennsylvania, HRM Health Plans of Pennsylvania, QualMed Plans

for Health and HIP Health Plans, the continued marginal status of other firms, and the reduced presence

of the IBC’s largest competitor, Aetna.

Interstate Commerce

32. IBC and the IBC Group are engaged in, and the acts and practices described herein,

are in and affect, interstate commerce, including payments to the Hospital and other hospitals across

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state lines, the purchase of health care items and services across state lines, and the payment of health

care claims and insurance premiums across state lines. 

The Anticompetitive Conduct

Most Favored Nation Clauses

33. In its contracts with most hospitals in the relevant geographic market(s), IBC on behalf

of the IBC Group employed over a period of years up to and including at least 1997 a “prudent buyer”

clause (also called “most favored nation” (“MFN”) clause) that required hospitals to extend to the

entire IBC Group the lowest price the hospital afforded to any payor. The effect of these clauses was

to discourage and deter hospitals in the relevant market(s) from entering into agreements with other

managed care companies on terms that would permit those companies to compete effectively with the

IBC Group. Under pressure from regulatory authorities, IBC temporarily retreated from expressly

imposing MFN clauses in its contracts. However, the harmful effects on competition from their prior

imposition are continuing. Moreover, IBC continues to demand from hospitals, including the Hospital,

assurances that they are not affording any other payors lower prices than the IBC Group, thereby

continuing its “most favored nation” pricing requirements on a de facto basis. On information and belief,

IBC may again be including MFN clauses in contracts with hospitals in the relevant market(s). 

34. The IBC Group’s leading product is the Personal Choice PPO product, which affords

access to a broad network of health care providers. Other payors’ HMO benefit packages, and some

preferred provider organizations (“PPOs”), generally tend to provide a narrower provider panel. The

tighter provider panel provides the participating provider with the prospect of additional incremental

volume or steerage from within the managed care companies' enrolled population, since the panel

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breadth is restricted. Some hospitals are therefore willing to provide greater discounts to an HMO or

other managed care network with a more limited panel. This phenomenon permits group purchasers

and individuals access to a product that may afford less choice of provider, but may have lower prices. 

Also, in a normally competitive market, hospitals will in some instances agree to afford lower prices to a

smaller payor so as to help prevent such an imbalance of enrollment arising in the marketplace that

providers will become unduly beholden to any single payor. In addition, some managed care

companies’ contracts with hospitals employ risk-sharing or incentive provisions that can foster increased

quality of care or cost accountability. Net compensation depends on the hospital meeting defined

quality or cost efficiency standards. Once net compensation is determined at the end of the year, these

contracts might in some instances appear to involve lower rates of payment per service rendered than

under the IBC Group contracts.

35. By requiring that hospitals not provide lower prices to other payors unless they provide

those same prices to the IBC Group, IBC has greatly magnified the impact of a provider offering a low

price to a competing plan with a smaller market share. Hospitals were and have thereby been deterred

from affording advantageous or innovative pricing arrangements to health plans competing with the IBC

Group where market forces would have justified a lower price. The effect, therefore, of these MFN

clauses and ongoing MFN requirements was and has been to distort the market, to obstruct and

hamper entry and expansion of competing health plans, and to undermine the ability of smaller payors to

compete with the IBC Group.

36. IBC Group hospital contracts exempted hospital contracts with Keystone Health Plan

East and IBC’s other HMO affiliates from the most favored nation requirements. In other words, a

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lower price afforded to Keystone Health Plan East did not have to be passed along to IBC for its

traditional indemnity plan. Thus, Keystone and other IBC HMO affiliates would be able to negotiate

rates even lower than those paid by IBC for its indemnity plan, while competing HMOs and other

managed care companies would not be able to, unless the hospital were prepared to extend the same

prices to IBC. If Keystone Health Plan East or Keystone Mercy obtained rates lower than IBC, it

would be virtually guaranteed that no competitor could secure provider services at comparable rates. 

This exclusionary practice gave and is giving Keystone Health Plan East unfair advantage over other

competitors, while the overall MFN clause initiative has insulated IBC itself from competition as well.

37. On information and belief, IBC has also employed coercion and threats of

nonparticipation or reduced compensation to deter hospital sponsorship of competing commercial

sector managed care programs in competition with the IBC Group.

All Products and Bundled Rate Requirements

38. IBC bundles its rate packages for the Hospital and other hospitals in Southeastern

Pennsylvania so that most hospitals face severe financial penalties if they do not agree to participate in all

IBC Group product lines. For example, IBC has insisted that the Hospital participate in and accept the

same rates for all IBC Group managed care programs, including commercial HMO, HMO point-ofservice, Medicare HMO, commercial PPO, and Keystone Mercy Medicaid HMO programs. This

requirement is reflected in the Managed Care Agreement. The Hospital is threatened with even lower

reimbursement rates, or no contract at all, if it declines to accept these bundled “all products”

arrangements. 

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39. When providers are forced by a dominant insurance or managed care company to

participate in all of the payor’s lines of business, or else either forfeit dealing with that payor altogether

or suffer additional rate erosion, providers, including the Hospital, becomes even more “captive” to its

relationship with the payor. For example, since the Hospital is highly dependent on IBC Group patients,

if the Hospital decided it did not want to contract to provide services for IBC's Medicare HMO

program, it would have to forfeit all IBC Group participation. This would have such a devastating

impact on the Hospital’s patient base that it would be forced – against its will – to contract with the IBC

Medicare HMO.

40. In addition, IBC is able to employ its bundled rate contracts and all managed care

products requirements to ensure that its Keystone Health Plan East and Keystone Mercy affiliates can

secure provider participation, pricing and other terms that they might not otherwise be able to secure in

an open competitive market. This has afforded these IBC Group companies an unfair, non-level playing

field advantage over any firm that might seek to compete with them. 

Coerced Minimum Participation Requirements

41. Many employers and other group purchasers of health care benefits believe it is

essential that they offer coverage from one or more IBC Group affiliates and/or subsidiaries as an option

for their employees because of the market dominance of the IBC Group. Many of these companies

desire to offer multiple benefit options to their plan participants. Examples are dual option programs,

offering the participant the choice of an HMO and a PPO program, or the choice of two different PPO

options. Such dual option programs create an opportunity for competition with the IBC Group by

managed care companies that some employers may be reluctant to use as a sole source of health

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benefits. However, to discourage this competition, and retard opportunities for less well established

managed care companies, IBC has coerced and intimidated employers to agree that they will enroll at

least 75% of their employees in IBC Group plans or else forfeit access to any IBC Group plans at all. 

The IBC Group has also coerced and intimidated purchaser groups by threatening to withhold, and

withholding, IBC Group coverage altogether unless the purchasing groups agree to purchase health

benefits from the IBC Group exclusively. On information and belief, the foregoing practices have left

many employer customers with no practical choice, and effectively suppressed competitive opportunities

for other health care companies that did not offer products with sufficient breadth or popularity that the

affected employers would rely upon them on a “full replacement” basis for their entire workforce. 

Employer/purchasers therefore are coerced or intimidated not to offer other plans to their employees,

for fear that they would not be able to meet these coercive minimum participation requirements, and

therefore would not be able to offer employees access to any IBC coverage or effectively recruit new

employees.

42. If an employer wants to offer IBC’s Preferred Choice PPO product, enrollment in

Keystone Health Plan East or another IBC affiliated HMO will count toward these coercive minimum

participation requirements, but enrollment in a competing HMO will not. This has further advantaged

Keystone Health Plan East and other IBC Group affiliates, while disadvantaging competitors.

Predatory Hospital Reimbursement

43. IBC has used the market power resulting from the above anticompetitive practices to

impose “take it or leave it” pricing terms in its agreements with hospitals, including the Hospital, thereby

affording compensation that is below fair market rates and below the hospitals’ costs, in some cases

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even their variable costs. Specifically, the IBC Group’s anticompetitive practices further expanded the

IBC Group’s power as a purchaser of hospital services and seller of health benefits products. As the

IBC Group depressed competition from alternative purchasers of hospital services and increased its

own market share and market power, it increased the dependence of the Hospital and other hospitals

on the IBC Group as a source of payment for patient care. This has undermined the ability of hospitals

to negotiate at arm’s length the terms and conditions of contracts with the IBC Group. In November,

2000, for example, the Hospital had no meaningful choice but to sign contracts with the IBC Group on

a “take it or leave it” basis on compensation terms that are oppressive. Because of the IBC Group’s

market dominance in the Hospital’s service area, there is simply not an adequate supply of non-IBC

patients to which the Hospital could turn in the event it terminated its contract with IBC.

44. Moreover, this exploitation of purchasing power by the IBC Group creates additional

barriers to competition from other insurers and managed care companies that are deterred and hindered

from competing since they are not likely to be able to secure comparable input costs. As a result of the

IBC Group paying the Hospital and other hospitals below their operating costs, hospitals, including

plaintiff, face pressure not to provide discounted rates to other purchasers to avoid further drains on

hospital funds. Other purchasers do not account for enough patients to permit expanded output by the

hospitals to their enrollees to offset operating losses from services to IBC Group patients. The use of

monopsonistic purchasing power by the IBC Group to force below cost reimbursement on hospitals has

enhanced and will enhance the IBC Group’s market power as a seller of health benefit services. It also

threatens to diminish the availability of services provided by the Hospital and other hospitals in the

relevant market(s), thereby reducing output to the detriment of patients and the community. This will

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result in less value to consumers and employers for their health care premium dollars, meaning higher

effective consumer costs for health benefits and services and a reduction in the value of their health

benefits.

 Acquisitions and Combinations with Health Plans

45. IBC engaged in the following acquisitions and combinations:

a. IBC entered into a partnership with an existing Philadelphia HMO, Mercy

Health Plan. IBC currently has a 50% controlling interest in the plan, now

known as Keystone Mercy Health Plan. Keystone Mercy Health Plan, while

not wholly controlled by IBC, does not compete with IBC either in dealings

with health care providers or in identifying market segments to which to expand.

This combination has prevented and continues to prevent Keystone Mercy

Health Plan from operating as a competitor of IBC and its wholly owned

subsidiaries in the Medicaid and other markets, enhancing the IBC Group’s

power as a purchaser of hospital services and in sales to purchasers of health

benefits programs in the relevant market(s).

b. IBC acquired a 50% interest in Intercounty Health Plan, which operated

competing managed care programs. Highmark, Inc., has the remaining 50%

interest.

c. IBC acquired total control of Keystone Health Plan East and the Personal

Choice PPO program. This acquisition eliminated actual and potential

competition in the relevant market(s), enhancing IBC’s power as a purchaser of

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hospital services and in sales to purchasers of health benefits programs.

d. IBC acquired Vista Health Plan, a health maintenance organization competitor

in the relevant market.

e. IBC continues to operate its indemnity hospital benefits program in combination

with medical benefits offerings of Highmark, Inc., operating as Pennsylvania

Blue Shield, notwithstanding the capability of IBC’s QCC Insurance Company

affiliate to provide medical benefits coverage. Maintenance of this joint

arrangement with Highmark discourages competition in Southeastern

Pennsylvania by Highmark, which is certified by the Commonwealth of

Pennsylvania to offer hospital as well as medical benefits under its health plan

licensure. 

Effect on Competition

46. The above practices, individually and in combination, have been intended to enhance

and entrench, and have had the effect of enhancing and entrenching, the power of the IBC Group in the

purchase of hospital and other health care services and in the sale of health benefits programs to

employers and other purchasers, and have extended the IBC Group’s power in the indemnity and PPO

benefits sector and the HMO portion of the industry. These practices have been adopted and pursued

with the intention, and with the tendency and effect, of lessening competition in the above-described

markets. IBC has been and is now employing this improperly acquired power to injure the Hospital and

to further increase and entrench its market power.

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47. As a result of the agreements and conduct described above and other acts and

practices not currently known, there has been a reduction in competition in the markets and submarkets described above. The impact of the IBC Group’s anticompetitive agreements and conduct

includes, but is not limited to the following:

a. Competitors of the IBC Group have been and will be hindered and obstructed in their

ability to compete in the relevant market(s), as the IBC Group activities have been intended

to increase and have had the effect of increasing rivals’ costs.

b. The pricing by hospitals and providers of health care to other managed care companies has

been artificially maintained so as to prevent competition with the IBC Group through

innovative or cost-effective managed care products. The Hospital, in turn, has fewer

alternative outlets for sale of its health care services, and employers and consumers have

fewer choices. 

c. Employers and other purchasers of managed health care have been and will be denied the

opportunity to select the programs that offer the most desirable health care products and to

select alternative pricing mechanisms.

d. The Hospital has been forced to service IBC Group patients to the exclusion of other

patients.

e. The Hospital has been and will be forced to provide its services to the IBC Group at rates

severely below the Hospital’s costs of operation and below fair market prices, as a direct

result of the market power secured by the IBC Group as a purchaser of hospital services

through anticompetitive conduct and agreements in restraint of trade. 

f. The IBC Group has been and will be able to exploit its unlawfully secured market power by

engaging in exploitative and unfair practices in its reimbursement to the Hospital and other

hospitals, because the hospitals cannot afford to terminate their IBC contracts.

g. The IBC Group, facing greatly reduced competition, has been and will be able to exercise

market power in its pricing and delivery of services to employers, individual consumers and

other customers.

h. The availability of health care services at the Hospital and other hospitals to IBC Group and

other patients will be diminished, resulting in reduced output of hospital services and higher

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effective costs of health benefits and health services for employers, government purchasers

and consumers.

Injury to the Hospital

48. The Hospital has suffered and is continuing to suffer financial losses as a direct and

proximate result of defendants’ anticompetitive conduct and agreements.

Abusive Reimbursement Practices

The Discharge Program

49. In its discussions with the Hospital, IBC stated that it had authority to represent and was

representing the IBC Group, including Keystone Mercy.

50. IBC provided to the Hospital a letter dated October 17, 2000 which attached an

October 16, 2000 fax describing a proposed Enhanced Discharge Planning Program (“the Discharge

Program”). A contract term related to these documents was subsequently provided for in Section 5.3

of the Managed Care Agreement.

51. That section provides as follows:

All Inpatient Days shall be subject to a concurrent review of Medical Necessity, and

Hospital shall comply with Independence’s or its designee’s concurrent review

procedures, including on-site review at Hospital’s facilities. Concurrent review shall be

performed in accordance with the Enhanced Discharge Planning Program description

furnished to Hospital and mutually agreed upon by the Hospital and Independence.

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52. The Discharge Program, if properly implemented, would avoid retrospective denials of

coverage for services by the Hospital with the associated expenditure of resources and loss of revenue

to the Hospital.

53. IBC agreed that the Discharge Program would be used for all managed care patients,

including Keystone Mercy enrollees. However, even though Keystone Mercy was part of the IBC

Group, it refused to comply with the Discharge Program.

Reimbursement for Emergency Room Care

54. Pursuant to the definition of the term Emergency as set forth in the Agreements, and as

mandated by state law, IBC is required to reimburse the Hospital for emergency services provided to its

subscribers and beneficiaries. The Agreements each similarly define the term “EMERGENCY” as

follows:

The sudden onset of a medical or psychiatric condition manifesting itself in acute

symptoms of sufficient severity or severe pain, such that a prudent layperson

who possesses an average knowledge of health and medicine, could reasonably

expect the absence of immediate medical attention to result in:

1. placing the Beneficiary’s health, or in the case of a pregnant Beneficiary,

the health of the Beneficiary or unborn child, in jeopardy:

2. serious impairment to bodily functions; or

3. serious dysfunction of any bodily organ or part.

(Emphasis added).

55. The IBC Group utilizes a proprietary software system that automatically pays the

Hospital for emergency room services based on the discharge diagnosis of the patient, as opposed to

the “prudent layperson” standard required by the contract. When enrollees, who as “prudent

laypersons” believe they need emergency room services, are unilaterally determined by the IBC Group

Case 2:02-cv-02746-JP Document 1 Filed 05/08/2002 Page 24 of 31
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to only need non-emergent care, the IBC Group provides reimbursement of only $38.00 to the Hospital

for the services rendered. This amount is substantially below the Hospital’s costs for appropriate

diagnostic evaluation.

56. In addition, as a result of the failure of Keystone Mercy to utilize the Discharge

Program, Keystone Mercy has denied or reduced payment for 14% of all Hospital patient claims

resulting in damages as of March 31, 2002 totaling $325,167.

57. In breach of the Agreements, IBC improperly reduces payments for emergency room

services to the Hospital utilizing its proprietary software system.

58. Further, as a result of the improper use of the IBC proprietary software system, the

IBC Group has reduced and continues to reduce payment for 14% of all emergency room claims

submitted by the Hospital to a triage rate of $38.00, amounting to date in wrongful underpayments in

excess of $119,000, which amount continues to increase as services are provided on a daily basis. Of

this amount, it has to date been determined that the IBC proprietary software system mischaracterized

60% of the emergency claims submitted by the Hospital and, in each of those cases, the original

classification of emergency services designated by the Hospital has been upheld, but only after a lengthy

and onerous appeal process conducted by IBC.

Violations Charged

First Claim for Relief – Monopolization vs. IBC Group

59. The Hospital hereby incorporates herein by reference Paragraphs 1 through 58,

inclusive, of the Complaint.

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60. The IBC Group has engaged in the previously described anticompetitive conduct, and

other acts and practices not currently known, to secure and maintain monopoly and monopsony power

in the relevant markets. As a result of the anticompetitive conduct, the IBC Group has achieved the

power to control prices and/or willfully to exclude competition within the relevant market(s) in violation

of Section 2 of the Sherman Act, resulting in injury to the market and to the Hospital as alleged herein. 

Second Claim for Relief – Attempted Monopolization v. IBC Group

61. The Hospital hereby incorporates herein by reference Paragraphs 1 through 60,

inclusive, of the Complaint. 

62. By engaging in the acts described above, and other acts and practices not currently

known, the IBC Group has engaged in predatory, anticompetitive conduct with the specific intent to

acquire monopoly power in the relevant market(s), in violation of Section 2 of the Sherman Act.

63. There is a dangerous probability that, if left unchecked, the IBC Group will further

achieve a monopoly position in the relevant market(s).

Third Claim for Relief --- Agreement in Restraint of Trade v. IBC Group

64. The Hospital hereby incorporates herein by reference Paragraphs 1 through 63,

inclusive, of the Complaint.

65. In violation of Section 1 of the Sherman Act, the IBC Group has entered into contracts,

combinations or conspiracies in restraint of trade including the following: “most favored nation” contract

requirements and “understandings” with hospitals; coerced “all products” participation and bundled rate

requirements; predatory compensation terms of hospital agreements; coerced agreements with

employers and other customers that require at least 75%, or exclusive, participation of the customers’

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employees in IBC Group products or access to all IBC Group products will be forfeited; and

combinations with and acquisitions of other health benefits and managed care companies. By engaging

in the aforementioned acts, and other acts and practices not currently known, the IBC Group has

caused injury to the Hospital, through, among other things, use of the resulting market power to insist on

pricing terms that do not cover plaintiff’s costs, that threaten its viability, that degrade the services

provided by the Hospital and reduce its output, and by engaging in abusive payment practices.

Fourth Claim for Relief – Common Law Restraint of Trade v. IBC Group

66. The Hospital hereby incorporates by reference Paragraphs 1 through 65, inclusive, of

the Complaint.

67. Through the foregoing conduct, the IBC Group has via contract, combination or

conspiracy, and via its own actions, illegally restrained trade in violation of Pennsylvania common law.

Fifth Claim for Relief - Breach of Contract v. IBC Group and Keystone Mercy

68. The Hospital hereby incorporates herein by reference Paragraphs 1 through 67,

inclusive, of the Complaint.

69. The Hospital has performed all conditions, covenants and promises it was required to

perform under the terms and conditions of the Agreements, except for those conditions, covenants and

promises the performance of which have been frustrated, hindered, excused or prevented by the

conduct of the IBC Group.

70. The IBC Group has breached the Agreements by refusing and/or failing to reimburse

properly the Hospital for emergency room care.

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71. As a result of the breaches of the Agreements by the IBC Group, the Hospital has

suffered damages in an amount to be determined at trial, but in excess of $75,000.00 plus interest. The

Hospital’s damages are ongoing. 

Sixth Claim for Relief: Breach of Contract v. IBC and Keystone Mercy

72. The Hospital incorporates by reference Paragraphs 1 through 71, inclusive, of the

Complaint.

73. Keystone Mercy and/or IBC have breached their contractual obligations by failing to

implement the contractually required Discharge Program for claims submitted to Keystone Mercy.

74. As a result of such breach, the Hospital has suffered damages in an amount to be

determined at trial, but in excess of $75,000 plus interest.

Seventh Claim for Relief: Breach of the Covenant

of Good Faith and Fair Dealing v. IBC Group

75. The Hospital incorporates herein by reference Paragraphs 1 through 74, inclusive, of the

Complaint.

76. There is implied in the Agreements a covenant of good faith and fair dealing wherein the

IBC Group would, in good faith and in the exercise of fair dealing, deal with the Hospital fairly and

honestly, and would do nothing to impair, interfere with, hinder or potentially injure the rights of the

Hospital to receive the benefits of the Agreements.

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77. The IBC Group has breached the covenant of good faith and fair dealing by

unreasonably interpreting and applying the Agreements in the manner described above, including but not

limited to:

a. refusing or delaying the implementation of the Discharge Program for Keystone

Mercy;

b. improperly denying or reducing reimbursement for emergency room care.

78. The IBC Group's breach of the covenant of good faith and fair dealing implied in the

Agreements has damaged the Hospital in an amount to be determined at trial, but in excess of

$75,000.00.

Eighth Claim for Relief: Unjust Enrichment v. IBC Group

79. The Hospital incorporates herein by reference Paragraphs 1 through 78, inclusive, of the

Complaint.

80. The IBC Group has financially benefited from the improper acts and practices

described above and has been unjustly enriched.

Ninth Claim for Relief – Reformation or Recission of Unconscionable Contract v. IBC

Group

81. The Hospital incorporates herein by reference Paragraphs 1 through 80, inclusive, of the

Complaint.

82. Insofar as the Hospital had no meaningful choice as to the pricing terms of the

Agreements, they are so one-sided as to be oppressive, and require diversion of the charitable assets of

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the Hospital to the IBC Group the Agreements are unconscionable and contrary to the public interest

and should be reformed or rescinded.

Demand for Relief

The Hospital demands the following relief:

1. Actual damages in excess of $20,000,000;

2. Treble damages;

3. Punitive damages;

4. Such other damages as are deemed appropriate;

5. Reform of the pricing terms of the Agreements, or rescission of the Agreements;

6. Divestitures and discontinuance of anticompetitive combinations so as to restore and

foster competition in the relevant market(s); and

7. Injunctive relief and such other relief as the Court deems just and appropriate.

Demand for Trial by Jury

The Hospital hereby demands a trial by jury.

_____________________________________

Lewis R. Olshin

Wayne A. Mack

J. Manly Parks

Duane Morris LLP

One Liberty Place

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Philadelphia, Pennsylvania 19103-7396

Arthur N. Lerner

Crowell & Moring, LLP

1001 Pennsylvania Avenue, N.W.

Washington, D.C. 20004-2595

Attorneys for

THE CHESTER COUNTY HOSPITAL

PH2\651767.1

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