IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF

PENNSYLVANIA

THE CHESTER COUNTY HOSPITAL : CIVIL ACTION

 : NO. 02-2746

 v. :

 :

INDEPENDENCE BLUE CROSS, :

QCC INSURANCE COMPANY, :

KEYSTONE HEALTH PLAN EAST, and :

KEYSTONE MERCY HEALTH PLAN :

PLAINTIFF’S MEMORANDUM OF LAW IN 

OPPOSITION TO DEFENDANTS’ MOTION FOR SANCTIONS

Plaintiff The Chester County Hospital (“the Hospital”), by its undersigned attorneys,

submits this memorandum in opposition to Defendants Independence Blue Cross (“IBC”), QCC

Insurance Company, Keystone Health Plan East and Keystone Mercy Health Plans’ (collectively 

the “Defendants”) Motion For Sanctions Pursuant To Rule 11 (hereinafter the “Motion”). 

I. INTRODUCTION

In its Complaint, the Hospital details in 82 paragraphs and nearly 30 pages serious

substantive allegations arising out of Defendants’ violation of the federal antitrust laws. These

allegations arise from the Defendants’ illegal acquisition, maintenance and exercise of monopoly

and monopsony power in Chester County and Southeastern Pennsylvania. Among other things,

the Complaint alleges that the defendants have engaged in predatory and anticompetitive conduct

by: 1) their anti-competitive use of “most favored nations” (or “prudent buyer”) contract

provisions; 2) their anticompetitive use of all products and bundled rate requirements; 3) their

anti-competitive use of minimum participation requirements; 4) their forcing the Hospital and

other hospitals to accept reimbursement contracts which they knew would not cover the costs for

Case 2:02-cv-02746-JP Document 22 Filed 07/24/2002 Page 1 of 21
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providing service to IBC subscribers; and 5) illegal acquisitions and combinations. Defendants

have chosen not to challenge the legal sufficiency of these allegations through a motion to

dismiss the Complaint. Instead, they filed Defendants’ Answer, Affirmative Defenses, and

Counterclaim, and brought the present Motion.

Though this litigation is at an early stage - mandatory disclosure under Rule 26 has not

even taken place - it is plain that all of the Hospital’s allegations have substantial evidentiary

support. 

First, Defendants publicly admit that they are the dominant health insurer and managed

care enterprise in Southeastern Pennsylvania and in the service area of the Hospital. See

www.ibx.com; Complaint ¶ 10. 

Second, in their Answer, Defendants admit that they bundled the rate packages offered to

the Hospital in 2000, including “one set of rates that applied to all of the managed care products

and a separate set of rates applicable to the traditional indemnity products.” Answer ¶ 38.

Third, correspondence between IBC and the Hospital confirms that IBC insists on “most

favored nation” provisions. See Letter of John C. Zamzow to H.L. Perry Pepper, dated August 3,

1999, attached to the affidavit of Lewis R. Olshin (the “Olshin Affidavit”) as Exhibit A. 

Pursuant to these provisions, the Hospital has been required to certify to IBC that it is not

contracting with any managed care company to receive a lower rate of reimbursements than it

receives from the Defendants. See Letter of H.L. Perry Pepper to John C. Zamzow, dated August

16, 1999, attached to the Olshin Affidavit as Exhibit B.

Fourth, IBC’s own Application For Group Insurance requires that an employer must agree

that it will enroll at least 75% of its employees in Defendants’ plans. See Olshin Affidavit,

Case 2:02-cv-02746-JP Document 22 Filed 07/24/2002 Page 2 of 21
1Defendants’ lack of good faith is also demonstrated by their behavior during the 21 day

“safe harbor” period, during which a party against whom a Rule 11 motion is contemplated is

(continued...)

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Exhibit C. This practice is anti-competitive because many employers and other group purchasers

of health care benefits often wish to offer multiple benefit options to their plan participants, but it

is not economical for other providers to compete for 25% or less of a workforce.

Fifth, as detailed more fully below, ample correspondence between the parties shows that

IBC has forced the hospital to accept contracts which IBC knew would not cover the Hospital’s

costs for providing service to IBC’s subscribers.

Sixth, in their Answer, Defendants admit many of the acquisitions challenged in the

Complaint, including the acquisition of Keystone Health Plan East, Personal Choice, Vista

Health Plan and arrangements with Highmark. Answer ¶ 45.

Instead of challenging the legal sufficiency of the Complaint, which they cannot do, the

Defendants have filed their present Motion based on excerpts of just four of the Complaint’s 82

paragraphs. These excerpts together total less than seven sentences and pertain to just one of the

five anti-competitive practices detailed in the Complaint, namely the allegations with respect to

IBC’s forcing the Hospital to accept below-cost reimbursement contracts. Despite this limited

scope, Defendants represent to the Court that on the basis of the alleged contradiction of these

selected excerpts to a document that is not relevant to the substance of this litigation, the

Hospital’s entire lawsuit is sanctionably “frivolous.” Motion at 7. Defendants’ contesting at this

preliminary stage a few selected factual allegations is a blatant misuse of Rule 11 and constitutes

further evidence of the bad faith and simple intimidation with which they have conducted

themselves in their dealings with the Hospital.1 

Case 2:02-cv-02746-JP Document 22 Filed 07/24/2002 Page 3 of 21
1

(...continued)

allowed to consider the merits of the proposed motion and the sufficiency of the complaint

against which sanctions are contemplated, with an eye to withdrawing or correcting the

complaint if such a course seems necessary. It is inconsistent with the spirit of this “cooling off”

period, to say the least, to make statements to the press regarding the possibility of sanctions, as

Defendants did. See Josh Goldstein, Blue Cross: Hospital Suit Is Cash Grab, Philadelphia

Inquirer, June 18, 2002, at D1, attached to the Olshin Affidavit as Exhibit D. 

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The crux of Defendants’ Motion is that a few factual assertions in the Complaint are

allegedly contradicted by statements contained in disclosure material provided in conjunction

with the Chester County Health and Education Facilities Authority Hospital Revenue Bond

offering of January, 2001 (the “Bond Document”). Defendants do not contend that the Bond

Document or the bond offering itself are in any way related to this litigation. Rather, they

maintain that the Hospital’s allegations that IBC refused to agree to rates which would cover the

Hospital’s costs, and that IBC forced the Hospital to accept contracts which IBC knew would not

cover the Hospital’s costs for providing service to IBC’s subscribers, are contradicted in the

Bond Document. Motion at 4-5. In particular, Defendants argue that the excerpts of the

following four paragraphs of the Complaint are contradicted by statements made in the Bond

Document:

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. . . . Facing the alternative of immediate financial disaster if the

Hospital refused to contract with the [Defendants], the Hospital had no choice but to

accept the terms imposed by IBC.

43. IBC has used . . . [its] market power . . . to impose ‘take it or leave it’ pricing terms

in its agreements with . . . the Hospital, thereby affording compensation that is below fair

market rates and below the Hospital’s costs, in some cases even their variable costs. . . .

In November 2000, for example, the Hospital had no meaningful choice but to sign

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contracts with the IBC Group on a ‘take it or leave it’ basis on compensation terms that

are oppressive.

65. [T]he [Defendants have] 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, [and] that threaten its viability. . . .

82. [T]he Hospital had no meaningful choice as to the pricing terms of the Agreements,

they are so one-sided as to be oppressive, and . . . the Agreements are unconscionable and

contrary to the public interest and should be reformed or rescinded.

Motion at 4.

The three statements from the Bond Document that Defendants claim contradict the

above excerpts - three statements from a document that runs well over 130 pages with appendices

- are the following:

Over the past two years, the Hospital has successfully negotiated significant increases

in its two largest managed care contracts. In November 1999, the Hospital signed a

renegotiated six-year agreement with Aetna. In October 2000, the Hospital entered into a

new five-year contract with Blue Cross. . . . Based on the contracts renegotiated to

date, management expects that managed care reimbursement will be slightly at or

above current costs for care.

Downward pressure on reimbursement rates as the result of competition among providers

for managed care contracts has decreased substantially in recent years.

In recent years the Hospital has experienced slight increases in inpatient utilization, more

significant growth in outpatient and ancillary services and a small reduction in its average

length of stay (“ALOS”). Pressure on third-party rates of reimbursement, particularly for

inpatient services, has constrained revenue growth from higher patient volumes. These

pressures emanate from the Balanced Budget Act of 1997 (“BBA”) and its impact on

Medicare reimbursement and from efforts by managed care organizations, who

principally reimburse the Hospital for inpatient services to subscribers on a per diem

basis, to limit admissions and reduce the length of stay through concurrent utilization

review and other measures.

Motion at 5 (emphasis supplied by Defendants). 

Case 2:02-cv-02746-JP Document 22 Filed 07/24/2002 Page 5 of 21
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What Defendants neglect to consider is that the statement in the Bond Document

pertaining to all managed care contracts is not inconsistent with the Hospital’s claim regarding

only the IBC contract. Further, the Defendants fail to point out that the Bond Document, taken as

a whole, does not contradict the Complaint since it also contains other information which must

be considered in order to obtain a true assessment of the Hospital’s financial condition at the time

of the Bond Document. For instance, as set forth more fully below, the Bond Document

specifically warns that “no assurance can be given as to whether revenues received by the

Hospital under existing or future contractual arrangements will be sufficient to cover its patient

costs,” and further states that “in recent years, the Hospital has recorded deficiencies of revenues

over expenses and decreases in unrestricted assets.” Bond Document at 27, 29. Defendants fail

to bring these and other statements in the Bond Document to the Court’s attention. 

As demonstrated below, Defendants’ Motion is without merit. First, the excerpts

Defendants cite from the Complaint and the Bond Document simply are not in contradiction as

Defendants contend, a fact which alone requires the denial of their Motion. Notwithstanding

Defendants’ selective quotation, mischaracterization, and distortion of the contents of the Bond

Document, a proper reading of the statements made in that document demonstrates that it does

not contradict the Complaint. Moreover, even were Defendants’ characterization of the Bond

Document somehow accurate, Rule 11 sanctions would still be inappropriate because Defendants

have not even tried to show that there is insufficient evidentiary support for the claims that are

actually made in the Complaint, a necessary finding for sanctions under Rule 11. For these

reasons, Defendants’ Motion must be denied in its entirety, and this Court should award the

Hospital its fees and costs incurred in responding to the Motion pursuant to Rule 11(c)(1)(A).

Case 2:02-cv-02746-JP Document 22 Filed 07/24/2002 Page 6 of 21
2Defendants’ assertion that an attorney makes different representations to a court when

signing a document is explained by the fact that they rely on cases which analyze an obsolete

version of Rule 11. See Motion at 2 (citing Garr v. U.S. Healthcare, 22 F.3d 1274 (3d Cir. 1994)

(analyzing Rule 11 prior to the 1993 amendments)). This defect applies to the majority of the

authorities cited in Defendants’ memorandum. 

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II. ARGUMENT

Federal Rule of Civil Procedure 11(c) permits a court to sanction an attorney or a party

for a violation of representations made in Rule 11(b), namely representations “that pleadings: (1)

are not presented for an improper purpose; (2) do not contain legally frivolous and unsupportable

claims; and (3) do not contain unsupportable factual allegations.” Robert S. v. City of

Philadelphia, Civ. No. 97-6710, 2001 U.S. Dist. Lexis 13485 at *15 (E.D.Pa. August 28, 2001).2

“Courts rarely use Rule 11,” imposing sanctions only in “sufficiently extraordinary

circumstances.” In re: Arthur O. Armstrong, Civ. No. 2001MC130, 2001 U.S. Dist. Lexis 9769

at *10-11 (E.D.Pa. July 10, 2001). Sanctions are proper only where “a claim or motion is

patently unmeritorious or frivolous,” Gress v. PNC Bank, et al., Civ. No. 99-2028, 2001 U.S.

Dist. Lexis 5540 (E.D.Pa. March 12, 2001), (citing Doering v. Union County Bd. of Chosen

Freeholders, 857 F.2d 191, 194 (3d Cir. 1988)), and “are appropriate ‘only if the filing of a

complaint constitutes abusive litigation or misuse of the Court’s process.’” Furman & Halpern v.

Nexgen Software Corp., Civ. No. 93-2788, 1994 U.S. Dist. Lexis 8686 (E.D.Pa. June 28, 1994),

(citing CTC Imports and Exports v. Nigerian Petroleum Corp., 951 F.2d 573, 579 (3d Cir. 1991),

cert. denied sub nom., Aham-Neze v. Sohio Supply Co., 118 L. Ed. 2d 554, 112 S. Ct. 1950

(1992)). Defendants’ contention that the Complaint meets the foregoing standards cannot be

maintained in good faith, and their Motion must therefore be denied.

Case 2:02-cv-02746-JP Document 22 Filed 07/24/2002 Page 7 of 21
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A. The Excerpts Cited By Defendants Refute The Argument

That The Bond Document And The Complaint Are Contradictory

Defendants’ contention that the Bond Document and the Complaint are in contradiction

does not bear even the mildest scrutiny. For instance, the Motion obviously misrepresents a plain

statement in the Bond Document regarding Hospital management’s expectations for

reimbursement under all contracts as being a statement about management’s expectations

regarding reimbursement under the IBC contract alone. As quoted above, the first excerpt from

the Bond Document concludes with the sentence “Based upon the contracts renegotiated to date,

management expects that managed care reimbursement will be slightly at or above current costs

for care.” Motion at 5. 

In their Motion, Defendants inexcusably attempt to portray the Hospital’s statement

regarding total reimbursement under all contracts as being a statement regarding reimbursements

under the IBC contract alone. Coming as it does at the end of a paragraph that discusses all of the

Hospital’s contracts with its managed care organizations, this summary sentence obviously refers

to management’s expectations under all such contracts. The paragraph reads in its entirety:

The Hospital has contracted broadly with substantially all of the managed care

organizations that enroll individuals who live and/or are employed in the Hospital’s

service area. Downward pressure on reimbursement rates as the result of competition

among providers for managed care contracts has decreased substantially in recent years. 

Over the past two years, the Hospital has successfully negotiated significant increases in

its two largest managed care contracts. In November 1999, the Hospital signed a

renegotiated six-year agreement with Aetna. In October 2000, the Hospital entered into a

new five-year contract with Blue Cross. The Hospital expects to renegotiate its third

largest contract, with Cigna Healthcare of Pennsylvania (“Cigna”), prior to March, 2001. 

Blue Cross (including all affiliates), Aetna, and Cigna accounted for approximately 40%,

18% and 2%, respectively, of the Hospital’s gross patient service revenue in 2000. Based

on the contracts renegotiated to date, management expects that managed care

reimbursement will be slightly at or above current costs for care.

Case 2:02-cv-02746-JP Document 22 Filed 07/24/2002 Page 8 of 21
3Defendants also appear to suggest that the statement that “the Hospital has successfully

negotiated significant increases in its two largest managed care contracts” contradicts statements

made in the Complaint, though they do not specify what those statements may be. Motion at 5. 

However, even the implication that this contradicts the Complaint is refuted by paragraph 23 of

the Complaint, which Defendants quote in their Motion. As quoted by the Defendants, paragraph

23 states in part:

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

(continued...)

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Bond Document at 26.

Given this context, Defendants’ attempt to argue that the last sentence relates only to

management’s expectations with regard to the IBC contract is inexcusable and inconsistent with

the obligations placed on them pursuant to Rule 11. The statement that “management expects

that managed care reimbursement will be slightly at or above current costs for care” clearly does

not refer to the actual experience of the Hospital under the IBC contract, but to the Hospital’s

expectations for total revenues to be generated from all managed care reimbursement at the

Hospital. The fact that management may have projected that total managed care reimbursement

received from all payers would be at or above cost in a particular year is not in any way

inconsistent with the Hospital’s contention that IBC reimbursement was actually below cost. 

The Hospital made absolutely no representation in the Bond Document that it projected that the

IBC contract would cover its costs for providing services to IBC subscribers. In fact, quite the

opposite was true. The only statement in the Bond Document regarding management’s

expectations with respect to IBC stated that the Hospital had contracted to provide care to certain

Medicaid patients “at Blue Cross HMO rates, which are at or slightly below the Hospital’s per

diem costs required to provide the service.” Bond Document at 27.3

Case 2:02-cv-02746-JP Document 22 Filed 07/24/2002 Page 9 of 21
3

(...continued)

Hospital requested. . . . Facing the alternative of immediate financial disaster if the

Hospital refused to contract with the [Defendants], the Hospital had no choice but to

accept the terms imposed by IBC.

Motion at 4. As this makes clear, the Hospital does not dispute that there was an increase in the

reimbursement rate under the contract signed with IBC in the fall of 2000. But, as paragraph 23

also makes clear, the increase was only about a third of what the Hospital required. There is no

contradiction between the statement in the Bond Document that there was an increase in the

reimbursement rate in the November 2000 IBC contract and the assertion in the Complaint that

that reimbursement rate was nonetheless inadequate.

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Defendants’ mischaracterization of the Bond Document’s statements with respect to

various pressures on reimbursement rates is, if anything, even more blatant. The Motion states

that the Bond Document “told investors” that the downward pressure on reimbursement rates

was “largely statutory.” Motion at 5. However, the paragraph from the Bond Document cited as

support for this statement, which Defendants quote in their Motion, makes plain that statutory

pressure impacted only the rate the United States government paid for Medicare reimbursements,

and that the downward pressure exerted by managed care organizations was due to entirely

different causes:

Pressure on third-party rates of reimbursement, particularly for inpatient services, has

constrained revenue growth from higher patient volumes. These pressures emanate from

the Balanced Budget Act of 1997 (“BBA”) and its impact on Medicare reimbursement

and from efforts by managed care organizations, who principally reimburse the Hospital

for inpatient services to subscribers on a per diem basis, to limit admissions and reduce

the length of stay through concurrent utilization review and other measures. 

Motion at 5; Bond Document at 20. It could not be more plain from this passage that the Bond

Document cites two separate causes for “pressure on third-party rates of reimbursement”: one

statutory, which applies to the government’s Medicare reimbursements alone, and one resulting

from business decisions made by managed care organizations such as Defendants. Defendants

have persisted with their obvious misreading of the Bond Document even after counsel for the

Case 2:02-cv-02746-JP Document 22 Filed 07/24/2002 Page 10 of 21
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Hospital brought it to their attention. See Letter of Lewis R. Olshin to Thomas A. Leonard dated

June 26, 2002, attached to the Olshin Affidavit as Exhibit E, at 4.

B. Defendants Have Omitted Significant 

Information Contained In The Bond Document

Beyond misinterpreting the sections of the Bond Document they cite in their Motion,

Defendants further distort that document by omitting many passages which, when taken together,

give a more complete picture of the nature of the information provided in the Bond Document. 

For instance, Defendants claim that in the Bond Document the Hospital “described itself as a

successful, thriving, solvent institution.” Motion at 5. No citation to the Bond Document is

given to support this assertion. However, contrary to the Defendants’ assertion, the Bond

Document clearly states that “there is no assurance that the revenues of the Hospital can be

increased sufficiently to match increased costs that may be incurred. In recent years, the Hospital

has recorded deficiencies of revenues over expenses and decreases in unrestricted net assets.” 

Bond Document at 29 (emphasis added). Likewise, with respect to the issue of whether the

pricing granted by IBC covered the Hospital’s costs, the Motion totally omits the critical

concluding statement at the end of the section Defendants cite. The Bond Document specifically

warned that “no assurance can be given as to whether revenues received by the Hospital under

existing or future contractual arrangements will be sufficient to cover its patient costs.” Bond

Document at 27 (emphasis added).

Furthermore, with respect to Defendants’ assertion that the Bond Document states that

the Hospital was under “less pressure than before” to agree to contracts with lower

reimbursement rates, Defendants omit the following statements:

Case 2:02-cv-02746-JP Document 22 Filed 07/24/2002 Page 11 of 21
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The health care industry has been in the process of rapid and fundamental change,

triggered in part by the growing national strength of managed care plans. . . . In

Pennsylvania, consolidation among provider organizations and the development of

integrated delivery systems has been observed in response to pressures to achieve

additional cost savings. This may further increase competitive pressure on acute care

hospitals, including the Hospital. (Bond Document at 29-30)

Enrollment in managed care programs has increased, and managed care programs are

expected to have a greater influence on the manner in which health care services are

delivered and paid for in the future. Managed care programs are expected to continue

efforts to reduce significantly the utilization of health care services, and in-patient service

in particular. In addition, some managed care organizations have been delaying

reimbursements to hospitals, thereby affecting the Hospital’s cash flows. The Hospital’s

financial condition may be adversely affected by these trends. (Bond Document at 30)

(emphasis added)

In short, the selective references to the Bond Document contained in Defendants’ Motion

seriously distort the description of the Hospital and its financial condition set forth in the Bond

Document. A full assessment of the Bond Document makes plain that it does not contradict the

allegations of the Complaint.

C. Defendants Have Produced No Evidence On The 

Only Issue Presented By Their Rule 11 Motion, Namely Whether

There Is Evidentiary Support For The Allegations In The Complaint

As made plain by the text of Rule 11 itself, in signing a pleading, “[t]he certification is

that there is (or likely will be) “evidentiary support” for the allegation, not that the party will

prevail with respect to its contention regarding the fact.” Fed. R. Civ. P. 11 advisory

committee’s note;see also Rule 11(b)(3). The only issue relevant to a motion for sanctions

pursuant to Rule 11 is whether the allegations in the complaint can be supported by evidence. 

Case 2:02-cv-02746-JP Document 22 Filed 07/24/2002 Page 12 of 21
4

In a properly conducted litigation, Defendants’ argument that there is evidence tending to

contradict factual assertions in the Complaint is an argument to be presented, if at all, on a

motion for summary judgment after full discovery has been taken.

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Despite this basic point, in their Motion Defendants make no suggestion - nor could they - that

any allegations in the Complaint lack evidentiary support. This is fatal to their Rule 11 Motion.4

Defendants are fully aware that there is significant evidentiary support behind the

Hospital’s allegations that IBC refused to agree to rates which would cover the Hospital’s costs,

and that IBC forced the Hospital to accept contracts which IBC knew would not cover the

Hospital’s costs for providing service to IBC’s subscribers. Defendants were aware of much of

this evidence well before they contemplated their current Motion, as it is contained in

correspondence between the Hospital and IBC. Moreover, portions of the evidence sufficient to

show that a Rule 11 motion was meritless were reiterated in the Olshin letter of June 26, in an

attempt to illustrate to Defendants the baselessness of their proposed Motion. See Exhibit E at 4-

5. The Olshin letter also specifically offered “to share this exchange of letters between our

clients . . . at this time, rather than await a formal discovery request, so we can put this matter

behind us and move forward with the litigation.” Id. at 5. Despite this offer, Defendants chose

to proceed with their present Motion. 

Since Defendants have filed their Motion well before the beginning, let alone the close, of

discovery, the Hospital at this stage merely highlights some of the evidence of which Defendants

are undisputedly aware that supports the allegations of the Complaint. Discovery will develop

further evidence for these allegations. However, the information set out below is more than

sufficient to defeat a Rule 11 motion.

Case 2:02-cv-02746-JP Document 22 Filed 07/24/2002 Page 13 of 21
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The inadequacy of the reimbursement rates provided by IBC existed prior to the current

contract, and further explains the financial effect of IBC’s market dominance. On March 25, 1999,

the Hospital wrote IBC, plainly stating that IBC’s reimbursement was not sufficient to cover the

Hospital’s costs:

Over the course of the last three years, the average cost per day of treating IBC

subscribers has increased at a consistently higher rate than our annual adjustment

despite the fact that our FTE’s per occupied bed have declined. . . . As a result,

existing IBC reimbursement is significantly below our costs for providing care.

See Letter from Kenneth E. Flickinger to Robert A. McKeown, dated March 25, 1999, attached to

the Olshin Affidavit as Exhibit F.

Likewise, on June 24, 1999, H.L. Perry Pepper, president of the Hospital, wrote John

Zamzow of IBC advising that the Hospital was being reimbursed by IBC “at a rate that

approximates only 70% of our cost.” In that Letter, the Hospital requested a 20% increase in rates

just to cover its costs, but IBC refused to grant the necessary increase. In order to continue to

provide service to a very substantial number of IBC subscribers in the community, the Hospital

was forced to accept IBC’s proposal of 8%, which was some 60% less than the Hospital indicated

was necessary to cover its costs. See Letter from H.L. Perry Pepper to John C. Zamzow, dated

June 24, 1999, attached to the Olshin Affidavit as Exhibit G. 

On August 16, 1999, Perry Pepper again wrote John Zamzow advising IBC that the

Hospital was being forced into accepting the take-it-or-leave-it offer:

Given the global statements you made in your last letter, it seems quite clear that

Blue Cross has taken a regional approach to the market and is unwilling to move

further in the direction of meeting the specific needs of our Hospital than when we

met with Mr. DiBona. While our Board feels this is short sighted as it overlooks

the strategic importance of this marketplace for you, it leaves us with no choice but

to take or leave your last offer.

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Unfortunately, this offer places our Hospital in the position of losing several

hundred dollars on every Blue Cross patient or no longer being a Blue Cross

participating provider. Because of Blue Cross’ dominance in the market, the latter

option would quickly result in the closur e of this low cost charitable Hospital, while

the former option only guarantees a slightly slower demise as we discontinue

services and erode community assets. Frankly, if we took our mission to our

community less seriously, this would be a letter of termination, for what you have

propos ed is surely a very bad business proposition for the people of our county.

See Exhibit B.

Furthermore, on July 27, 2000, the Hospital sent a letter to IBC reiterating that “the rates

provided for in the 1999 contract present serious problems for the hospital, and they are not

sufficient even to cover the costs we incur in providing treatment to subscribers of IBC and its

affiliated companies.” As a result, the Hospital requested a 17% rate increase in the first year “to

close a gap that continues to exist between our costs for care and current rates.” See Letter from R.

Evan Fox to Robert A. McKeown, da ted July 27, 2000, attached to the Olshin Affidavit as Exhibit

H. On August 17, 2000, IBC responded to the Hospital’s letter by indicating that the Hospital’s

request for a 17% increase was “unreasonable.” See Letter from Robe rt A. McKeown to Kenne th

E. Flickinger, dated August 17, 2000, attached to the Olshin Affidavit as Exhibit I. On September

5, 2000, the Hospital provided IBC with detailed information supporting its position that the

requested rate increas e was necessary to address the shortfall the Hospital was experiencing in

treating IBC’s subscribers. On September 25, 2000, IBC sent a letter to the Hospital in which it

acknowledged the Hospital’s revenue shortfall. However, IBC stated that it could not “eliminate

your revenue shortfall immediately” and offered an increase that was about 33% of what the

Hospital had indicated was necessary. See Letter of Robert A. McKeown to H.L. Perry Pepper,

dated September 25, 2000, attached to the Olshin Affidavit as Exhibit J. Given IBC’s market

dominance, the Hospital had no choice but to accept the below-cost rates dictated by IBC. 

Case 2:02-cv-02746-JP Document 22 Filed 07/24/2002 Page 15 of 21
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Due to the preliminary stage of this litigation and the fact that discovery has not even

begun, the foregoing is just a portion of the evidence that the Hospital anticipates will be

developed to support the allegations which are the subject of this Motion. However, even this

brief survey is more than sufficient to defeat Defendants’ Rule 11 Motion, as it details evidence

of which both parties are plainly aware that supports the Hospital’s allegations. Defendants’

Motion must therefore be denied.

D. The Hospital Should Be Awarded Its Reasonable Attorney’s

Fees And Expenses Incurred In Opposing Defendants’ Motion

Rule 11(c)(1)(A) provides that “[i]f warranted, the court may award to the party

prevailing on the motion the reasonable expenses and attorney’s fees incurred in presenting or

opposing the motion.” Because, as demonstrated above, Defendants’ Rule 11 Motion is baseless,

because Defendants knew before they filed their Motion that it was baseless, because Defendants

have improperly filed their Rule 11 Motion as a substitute for a motion under Rule 12(b)(6) or

Rule 56, and because Defendants have made no showing on the one question put in issue by their

Motion - whether there is evidence to support the Hospital’s allegations regarding IBC’s refusal

to provide rates sufficient to cover the Hospital’s costs - this Court should grant to the Hospital

its reasonable attorney’s fees and expenses pursuant to Rule 11(c)(1)(A). 

Defendants’ Motion is precisely the sort of misuse of Rule 11 that the Advisory

Committee warned against:

Rule 11 motions should not be . . . employed as a discovery device or to test the legal

sufficiency of allegations in the pleadings. . . . Nor should Rule 11 motions be prepared to

emphasize the merits of a party’s position, to exact an unjust settlement, [or] to intimidate

an adversary into withdrawing contentions that are fairly debatable . . . .

Fed. R. Civ. P. 11 advisory committee’s note.

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By proceeding in their procedurally inappropriate fashion, the Defendants have attempted

to use Rule 11 to short-circuit the summary judgment process and prejudice the Court against the

Hospital’s claims before discovery is commenced, by presenting an inaccurate, incomplete and

misleading description of one document (the Bond Document) out of hundreds, if not thousands,

that may someday become evidence in this case. The Motion violates the very rule that Defendants

have accused the Hospital of violating, and therefore the Hospital should be awarded its costs and

fees incurred in responding.

III. CONCLUSION 

For the foregoing reasons, Defendants’ Motion For Sanctions Pursuant To Rule 11 should

be denied, and reasonable costs and attorney’s fees incurred in opposing the Motion should be

awarded to the Hospital.

Respectfully Submitted,

DUANE MORRIS LLP

Dated: July 24, 2002 By:_________________________________

Lewis R. Olshin, Esq.

Wayne A. Mack, Esq.

J. Manly Parks, Esq.

One Liberty Place

Philadelphia, PA 19103

Richard A. Feinstein

Daniel A. Kotchen

Boies, Schiller & Flexner LLP

5301 Wisconsin Avenue, N.W.

Washington, D.C. 20015

Attorneys for Plaintiff The Chester County

Hospital

Case 2:02-cv-02746-JP Document 22 Filed 07/24/2002 Page 17 of 21
IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF

PENNSYLVANIA

THE CHESTER COUNTY HOSPITAL : CIVIL ACTION

 : NO. 02-2746

 v. :

 :

INDEPENDENCE BLUE CROSS, :

QCC INSURANCE COMPANY, :

KEYSTONE HEALTH PLAN EAST, and :

KEYSTONE MERCY HEALTH PLAN :

Commonwealth of Pennsylvania )

)

County of Philadelphia )

LEWIS R. OLSHIN, being duly sworn, deposes and says:

1. I am an attorney admitted to practice in the courts of the Commonwealth of

Pennsylvania and am a partner with the firm of Duane Morris, LLP, counsel for plaintiff The

Chester County Hospital (the “Hospital”). This affidavit is made in support of the Hospital’s

Opposition to Defendants’ Motion For Sanctions Pursuant to Rule 11.

2. Attached hereto as Exhibit A is a true and correct copy of a letter from John C.

Zamzow to H.L. Perry Pepper, dated August 3, 1999.

3. Attached hereto as Exhibit B is a true and correct copy of a letter from H.L. Perry

Pepper to John C. Zamzow, dated August 16, 1999.

4. Attached hereto as Exhibit C is a true and correct copy of Independence Blue Cross’s

Application For Group Insurance. 

5. Attached hereto as Exhibit D is a true and correct copy of an article from the

Philadelphia Inquirer, dated June 18, 2002. 

Case 2:02-cv-02746-JP Document 22 Filed 07/24/2002 Page 18 of 21
-2-

5. Attached hereto as Exhibit E is a true and correct copy of a letter from Lewis R.

Olshin to Thomas A. Leonard, dated June 26, 2002.

6. Attached hereto as Exhibit F is a true and correct copy of a letter from Kenneth E.

Flickinger to Robert A. McKeown, dated March 25, 1999.

7. Attached hereto as Exhibit G is a true and correct copy of a letter from H.L. Perry

Pepper to John C. Zamzow, dated June 24, 1999.

8. Attached hereto as Exhibit H is a true and correct copy of a letter from R. Evan Fox to

Robert A. McKeown, dated July 27, 2000.

9. Attached hereto as Exhibit I is a true and correct copy of a letter from Robert A.

McKeown to Kenneth E. Flickinger, dated August 17, 2000.

10. Attached hereto as Exhibit J is a true and correct copy of a letter from Robert A.

McKeown to H.L. Perry Pepper, dated September 25, 2000. 

____________________________

Lewis R. Olshin

Sworn to before me this

____ day of July, 2002.

Case 2:02-cv-02746-JP Document 22 Filed 07/24/2002 Page 19 of 21
CERTIFICATE OF SERVICE

I hereby certify that I caused to be served a true and correct copy of the attached

Plaintiff’s Memorandum in Opposition to Defendants’ Motion for Sanctions Pursuant to Rule 11

and the Affidavit of Lewis R. Olshin by over-night courier on the 24th day of July, 2002.

Thomas A. Leonard, Esq.

Obermayer Rebmann Maxwell & Hippel LLP

One Penn Center, 19th Floor

1617 John F. Kennedy Boulevard

Philadelphia, PA 19103

John DeQ. Briggs, Esq.

Howrey Simon Arnold & White LLP

1299 Pennsylvania Avenue, N.W.

Washington, D.C. 20004

DUANE MORRIS LLP

By: 

 Lewis R. Olshin

Attorney for Plaintiff The Chester

County Hospital

PH2\666368.1

Case 2:02-cv-02746-JP Document 22 Filed 07/24/2002 Page 20 of 21
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Case 2:02-cv-02746-JP Document 22 Filed 07/24/2002 Page 21 of 21