Opinion ID: 1664239
Heading Depth: 2
Heading Rank: 3

Heading: Application of Standard to Challenged Statutory Schemata of the Act

Text: As we apply the aforementioned balancing test to the legislation at hand, we begin by analyzing the individual sections of 1980 PA 350 which BCBSM challenges. Once we analyze the sections individually, we can then determine whether collectively they fundamentally alter BCBSM'S existing contract with the state. The features of the act relevant here to BCBSM'S impairment of public contract challenge follow. [23] (1) §§ 202(1)(d) and 401(1)  Corporate Duties In its attack on 1980 PA 350, BCBSM alleges that §§ 202(1)(d) and 401(1) of the act thrust upon it [p]ublic welfare responsibilities ..., as corporate duties, without its consent: i.e., the duty to supply health care coverage to all residents of the State of Michigan and the duty to assure all subscribers access to quality health care services at a reasonable cost. (Emphasis in original.) BCBSM argues that 1980 PA 350, by imposing what are essentially governmental purposes on a private corporation, fundamentally alters its contract with the state, as embodied in 1939 PA 108 and 109 and its restated articles of incorporation. We disagree. Section 202(1)(d) states, in pertinent part, that a nonprofit health care corporation shall include among its corporate purposes: (ii) To secure for all of the people of this state who apply for a certificate, the opportunity for access to coverage for health care services at a fair and reasonable price. (iii) To assure for nongroup and group subscribers, reasonable access to, and reasonable cost and quality of, health care services. [Emphasis added.] Section 401 provides, in relevant part: (1) A health care corporation established, maintained, or operating in this state shall offer health care benefits to all residents of this state .... [Emphasis added.] We point out that BCBSM bases its argument that 1980 PA 350 imposes governmental purposes on a private corporation on its misinterpretation of the statutory language. Specifically, BCBSM misconstrues the above provisions by stating that it forces upon BCBSM the duty to supply health care services to all people of this state. A careful reading of the provisions leads us to a far different construction. Contrary to BCBSM'S contention, only those state residents who apply for a certificate, i.e., its own customers, need be given the opportunity for access to health care services at a fair and reasonable price. The goal of assuring reasonable access to, and reasonable cost and quality of, health care services is limited to subscribers of the corporation. BCBSM is required only to offer, not to supply, health care benefits to all residents of this state. The act goes on to expressly provide that BCBSM is not prevented from denying coverage to an individual [who] does not meet requirements for coverage contained in a certificate. § 401(4)(c). We fail to see how these provisions thrust upon BCBSM public welfare responsibilities. Rather, they place upon BCBSM nothing more than duties which BCBSM already owed to its own customers and to the public. Although under the former enabling acts, 1939 PA 108 and 109, BCBSM was not required to include legislated corporate purposes in its articles of incorporation, see 1939 PA 108, § 3, 1939 PA 109, § 4, it was subject to carry out the declared policy of 1939 PA 108, § 1, which was to promote a wider distribution of medical care ... in this state. We find that the provisions of 1980 PA 350 here in question are not so dissimilar to the expressed legislative policy of the former enabling acts as to constitute a substantial impairment of BCBSM'S existing contract with the state. Because we find that (1) the impairment, if any, is minimal, and (2) BCBSM has been regulated in the past, we need not further inquire as to whether the state has a legitimate purpose and has employed means both reasonable and of a character appropriate to that purpose. See Part II(B). (2) § 203  Power to Amend Articles of Incorporation BCBSM further argues that § 203 operates to impair its contract with the state as embodied in Article VIII of its restated articles of incorporation, § 4 of 1939 PA 108 and § 5 of 1939 PA 109. Article VIII of the restated articles of incorporation, § 4 of 1939 PA 108, and § 5 of 1939 PA 109 empower the corporate membership of BCBSM to amend the restated articles of incorporation subject to the approval of the Attorney General and the Commissioner of Insurance. Section 203 of 1980 PA 350 places the power to amend and integrate the articles in the board of directors, subject to the approval of the Attorney General. BCBSM contends that this shifting of authority from the corporate membership to the board of directors impairs its contract with the state. We disagree. In analyzing a Contract Clause claim, we must first ascertain whether the challenged legislative enactment works a substantial impairment of an existing contractual relationship. While we find that the provision in question transfers the power to amend BCBSM'S articles of incorporation from the members to the directors, we fail to see how this is a substantial impairment of BCBSM'S contract with the state where the industry has been subject to extensive state regulation in this area. Under 1939 PA 108 and 109, the initial filing of BCBSM'S articles of incorporation and any alteration of said articles thereafter was always subject to the regulatory authority of the commissioner and the Attorney General. See 1939 PA 108, §§ 3 and 4; 1939 PA 109, §§ 4 and 5. In light of this past extensive state regulation over BCBSM'S articles, we deem the impairment, if any, under Act 350 to be unsubstantial. Even had we found that § 203 is a substantial impairment of BCBSM'S contract with the state, we still would have upheld its constitutionality under 4(a) and 4(b) of the balancing test. See Part II(B). To the extent § 203 impairs BCBSM'S contractual interests, that section rests upon and is prompted by significant and legitimate state interests. In recent years BCBSM has been the subject of considerable controversy. The evidence indicates that BCBSM has been unresponsive to consumers' interest. Additionally, critics have charged that BCBSM has not been vigorous in its cost containment efforts. The main reason alleged for these deficiencies is that BCBSM has been subject to undue and excessive provider and management influence. It is alleged that the providers and management have gained control of the corporate membership. Because the power to elect tha corporate members and the directors is derived from the restated articles of incorporation and articles I and IV of the bylaws, which the corporate members have the sole authority to amend, the providers and management have been able to perpetuate their positions. Section 203 seeks to ensure the equitable control of BCBSM by all interested parties. To accomplish this purpose, the Legislature eliminated the corporate membership's sole power to amend the articles and has thereby reduced the possibility that any one group will dominate and control BCBSM. We believe that the means chosen to implement the legitimate public purpose are reasonable ... and ... of a character appropriate to [that] purpose.... Thus, we reject BCBSM'S contention that by virtue of § 203 its contract with the state has been impaired within the meaning of the state or federal Contract Clause. (3) §§ 205(5), (10), 607, and 608  Power of the Commissioner Over Lines of Business and Risk Factors, Contingency Reserves, Issuance of New Certificates and Rates BCBSM next contends that §§ 205(5) and (10), 607, and 608 (which basically give the Commissioner of Insurance approval power over BCBSM'S lines of business, the risk factors assigned to those lines of business, contingency reserves, issuance of new certificates, rates, and rating methods) impair BCBSM'S contract with the state as embodied in 1939 PA 108 and 109, the restated articles of incorporation and the bylaws. BCBSM asserts that under these new sections the Commissioner of Insurance is now vested with dictatorial powers over virtually every meaningful aspect of BCBSM'S business. BCBSM, however, fails to cite any section or provision of its existing contract with the state that has purportedly been impaired by these new sections. Nor is it clear from a review of the relevant sources which provisions BCBSM is relying upon. In this light, we disagree with BCBSM'S argument. Again, the threshold question is whether the challenged provisions substantially impair BCBSM'S existing contract with the state. Under BCBSM'S existing contract with the state, the commissioner is given extensive approval power over contingency reserves, 1939 PA 108, § 11, 1939 PA 109, § 9, issuance of certificates, 1939 PA 108, § 5, 1939 PA 109, § 6, and rates, 1939 PA 109, § 3. See generally Blue Cross & Blue Shield of Michigan v Ins Comm'r, supra . Moreover, supervisory power is also exercised over risk factors and lines of business. [24] The authority exercised over BCBSM under the above provisions of 1980 PA 350 will be for all intents and purposes coextensive with that exercised under this existing system. [25] Consequently, (1) we are unable to find a substantial impairment, and (2) we recognize that health care corporations have always been subject to extensive regulation. We deem this conclusion so manifest that we need not address the question whether the state has a legitimate purpose and has employed means both reasonable and of a character appropriate to that purpose. See Part II(B). We reject BCBSM'S claim. (4) §§ 301(1)-(5), (7) and 305(1)  Corporate Board and Membership Structure Section 301(1)-(5) establishes the size of the board of directors and the composition thereof which includes four appointees of the Governor. Section 301(7) restricts the right of the corporate body, the incumbent board, the management, and members of each, to participate as such in the selection of the board, allowing participation only to the extent that the individual is a subscriber or to the extent that participation does not involve nomination, endorsement, approval, or confirmation of a candidate or director. Section 301(7) additionally provides that the method of selection of subscriber representatives on the board shall maximize subscriber participation to the extent reasonably practicable. Section 305(1) declares that the non-public corporate membership shall be selected in the same fashion as the non-public members of the board as set forth in § 301. That section also states that there shall be two non-public members for each non-public director. As to the public members, the four appointed directors are public members, and the Governor is authorized to appoint four additional public members, making a total of eight gubernatorially appointed public members. As to all of the above sections, BCBSM argues that its contract with the state, consisting of 1939 PA 108 and 109, the restated articles of incorporation, and the bylaws, has been substantially impaired. Again, BCBSM makes a broad statement that PA 350 deprives BCBSM of the right to select its own directors and corporate members and thereby deprives BCBSM of the fundamental right to select its own management ... [and that] [t]hese changes substantially impair the object of BCBSM'S charter and deprive BCBSM ... of vested rights thereunder. Again, however, BCBSM fails to cite to this Court the provisions of its contract with the state that have been purportedly impaired. Nonetheless, for purposes of the discussion that follows, we will assume that BCBSM is referring to: Article V of the restated articles of incorporation, which states that directors shall be chosen in accordance with the bylaws; Article IV of the restated articles of incorporation which states that the members shall be chosen in accordance with the bylaws; and the relevant articles and sections of the bylaws pertaining to the selection of the board of directors and corporate membership. See Articles I and IV of BCBSM'S bylaws. In any event, we disagree with BCBSM'S contentions. Although to a certain extent the provisions in question impair BCBSM'S right to select its own corporate management, we do not find this impairment to be substantial. Under the existing contract with the state, the method of selection of BCBSM'S directors and members were specified in the bylaws, the establishment of which was in the corporate members' exclusive domain, subject, however, to the approval of the commissioner and the Attorney General. Sections 301(6) and 305(1) of PA 350 state that the authority to establish the method of selection of the non-public directors and members shall be specified in the bylaws, which, in turn, has been placed in the control of the board of directors, subject as before to the Attorney General's approval. See § 302. While it is conceivable that under the new act the newly constituted board of directors could again vest the members with the power to select the non-public corporate members and directors, it is also conceivable that the members could be dispossessed of such power by the board of directors. What 1980 PA 350 has in effect done is divest the members of the sole authority they previously possessed to determine the method of selection of BCBSM'S corporate management by transferring the locus of control over the bylaws from the members to the directors. We do not perceive this change to be substantial especially given the fact that BCBSM'S bylaws have always been subject to extensive state regulation. The members took their position with knowledge of the regulatory powers of the state over the corporation's bylaws. BCBSM further contends that 1980 PA 350's legislatively mandated structure of the board of directors and corporate members has impaired BCBSM'S contractual right to control its own corporate structure ... and to thereby control its own corporate destiny. We assume that by this BCBSM means that it does not have the right to control its destiny because to a significant extent it does not have the right to determine the composition and size of its board and corporate body. While we agree that BCBSM'S right to determine the size and composition of its board and corporate body has been limited, we do not think that such limitation substantially impairs any existing contractual right. Section 301(1) states that the board shall have thirty-five directors. Article IV of BCBSM'S bylaws provides that the board shall consist of forty-seven members. We fail to see how this substantially impairs the state's contract with BCBSM. Significantly, the health care industry is and always has been subject to heavy regulation. See Blue Cross & Blue Shield of Michigan v Ins Comm'r, supra . See also Energy Reserves Group, Inc v Kansas Power & Light Co, supra . Supervision of the industry has been extensive and intrusive. Moreover, the provision in question does not divest BCBSM of any previously possessed power, nor does it impede BCBSM'S ability to conduct its affairs. Nor, by the same token, has the basic structure of BCBSM or its board of directors been unreasonably altered. In this light, the mere reduction in the size of the board of directors can hardly be considered a substantial impairment. A similar analysis is applicable to § 301(2), which authorizes the Governor to appoint four directors, and § 301(3)-(5), which requires that a certain number of directors be chosen from various enumerated groups. Again, it is significant that the health care industry has been heavily regulated. Additionally, § 301(2)-(5) is substantially the same as Article IV of BCBSM'S bylaws. See also 1939 PA 108, § 8; 1939 PA 109, § 2. That article specifies a board composition much the same as that required by § 301(2)-(5). The only real differences are that under § 301 the state is given four appointees as opposed to two under Article IV, and that § 301 mandates a slightly higher percentage of consumer representation on the board than is required under Article IV. We do not perceive either of these differences as crucial. Four appointees on a thirty-five member board as opposed to two on a forty-seven member board cannot substantially change BCBSM'S ability to operate. There are still thirty-one non-public board members, who can, needless to say, override any opposition from the four public members. Hence, we find it difficult to say that BCBSM'S corporate structure has been substantially altered or that the ability of the board to independently manage BCBSM has to any significant degree been impaired. With respect to the increase in consumer representation, we again perceive the difference as insignificant. On the old board twenty-seven of forty-seven directors represented consumers. On the board established under 1980 PA 350, consumers must occupy approximately twenty-six of the thirty-five positions. While consumer representation has been increased accordingly (in the boards under both laws, consumers are a majority), we are unable to see how this change would substantially impede BCBSM'S ability to manage its affairs. By the same token, we are unable to see how such an increase substantially impairs the corporate structure of BCBSM. Although the composition of the board has been changed, the basic operation thereof has not been substantially impeded. Section 305(1) is no more intrusive than the sections previously discussed. That section merely requires that the corporate body be twice the size of the board, that the members be selected in the same manner as the directors, and that there be eight government appointees, four of whom must be the appointed directors. Again, we must keep in mind the fact that this industry has been subject to broad and intrusive regulation. While the size of the corporate body was set at ninety-three under Article I of the bylaws, twice the size of the board established under those same bylaws, we do not perceive the reduction in corporate body size to seventy to be significant for the reasons discussed in connection with the board size. Finally, we note that the state's authority to appoint eight members to the corporate body rather than the four it was empowered to appoint under Article I of the bylaws does not significantly affect the corporation's power to govern itself and that, for the reasons discussed in connection with board appointees, we are unable to find any substantial impairment. Even had we found that §§ 301(1)-(5), (7), and 305(1) substantially impaired BCBSM'S contract with the state, we still would have upheld their constitutionality under the latter part of the balancing test. See Part II(B). To the extent that it can be argued that §§ 301(1)-(5), (7), and 305(1) impair BCBSM'S contractual interests, those sections rest upon and are prompted by significant and legitimate state interests. See Energy Reserves Group, Inc v Kansas Power & Light Co, supra . As noted in the preceding section, in recent years BCBSM has been the subject of considerable controversy. There is evidence that BCBSM has been unresponsive to consumers' interests. Moreover, critics have charged that BCBSM has not been vigorous in its cost containment efforts. [26] The primary reason for these deficiencies is alleged to be that BCBSM has been subject to undue and excessive provider and management influence. [27] Sections 301(1)-(5), (7), and 305(1) were designed to ensure a responsive and accountable corporate membership and board, and to prevent the undue influence of certain groups. We find these interests both legitimate and significant. BCBSM has an enormous effect on the lives of the people of this state and on the operation of the state's business, by virtue of its dominant share of the health care market. [28] Hence, its commitment, accountability, and responsiveness to the people it serves should be unwavering. In this light, we hold that the state has demonstrated both a legitimate and significant interest in securing a membership and board selection and composition that is more representative of the interests to be served. Finally, we believe that the means chosen to implement these purposes were reasonable and of a character appropriate to the legitimate public purpose noted above. See Energy Reserves Group, Inc v Kansas Power & Light Co, supra ; see also Van Slooten v Larsen, supra ; Metropolitan Funeral System Ass'n v Ins Comm'r, supra . The Legislature has sought to reduce the ability of providers and management to dominate BCBSM and perpetuate their position by requiring broad-based representation and limiting incumbent members' right to participate in elections. In addition, the Legislature has sought to set the framework for a more responsive BCBSM by increasing the representation of the individuals BCBSM was designed to serve, the consumers. In seeking these objectives, the Legislature has moved to provide all interested parties with an equitable opportunity to influence the selection process and subsequent managerial policies by providing for the participation of all component groups. While the predominance of management and provider groups in the corporation was the source of the perceived problem, their participation has not been eliminated, but rather reduced and more closely regulated. Thus, the state has sought to control the root of the problem and, without excluding individuals with an interest in BCBSM'S operations, devise a system to ensure the representation of all interests BCBSM was designed to serve. We thus determine that with respect to the above provisions there is not an unconstitutional impairment of the public contract as claimed by BCBSM. (5) §§ 504(1), 505-513  Power of the Commissioner Over Provider Reimbursement Contracts BCBSM finally asserts that §§ 504(1) and 505-513 of 1980 PA 350, pertaining to regulation of provider reimbursement contracts, unconstitutionally impair its contract with the state as embodied in 1939 PA 108 and 109 by giving the Commissioner of Insurance dictatorial power over BCBSM'S provider contracts and methods of provider reimbursement and by imposing vague [29] and unachievable goals upon BCBSM. With the passage of 1980 PA 350, the Legislature sought to remedy the crisis of spiraling health care costs by establishing the following goals: Sec. 504. (1) A health care corporation shall, with respect to providers, contract with or enter into a reimbursement arrangement to assure subscribers reasonable access to, and reasonable cost and quality of, health care services, in accordance with the following goals: (a) There will be an appropriate number of providers throughout this state to assure the availability of certificate-covered health care services to each subscriber. (b) Providers will meet and abide by reasonable standards of health care quality. (c) Providers will be subject to reimbursement arrangements that will assure a rate of change in the total corporation payment per member to each provider class that is not higher than the compound rate of inflation and real economic growth. Pursuant to 1980 PA 350, a health care corporation, such as BCBSM, negotiates and enters into provider class plans which must at a minimum address the access, quality, and cost goals of § 504(1). The plan is allowed to operate free of government interference for the first two years (three years, forty-five days, if the provider is reimbursed on a prospective basis, i.e., hospitals), §§ 506, 509(1). If after this period of time the commissioner determines that the goals have been substantially met or that failure to satisfy any one of the goals is reasonably excused, BCBSM is permitted to negotiate new plans or continue existing plans for another two years without government involvement, §§ 509, 510. If, however, the commissioner determines the goals have not been satisfied, the commissioner's power to review and correct any deficiencies in the plan is triggered, §§ 510-513. BCBSM then has the right to appeal the commissioner's ruling to an independent hearing officer, § 515. The act provides for greater input and participation by providers and subscribers from the negotiation to the review stages of the provider class plan, §§ 505, 507, 508, 511, and 515. [30] Under the former enabling acts, 1939 PA 108 and 109, the commissioner's continuing regulatory authority over BCBSM was limited to approving or disapproving rates for hospital services, not for physician services, according to a fair and reasonable standard. See Blue Cross & Blue Shield of Michigan, supra, pp 431-432. By contrast, 1980 PA 350 expands the commissioner's statutory authority to review rates of physician as well as hospital services and expressly delineates the factors and criteria to guide the commissioner in exercising this power. Additionally, the new act not only empowers the commissioner to approve or disapprove BCBSM'S provider class plans, but also to prepare a provider class plan which meets the § 504(1) goals where the corporation fails to overcome the plan's deficiencies within a specified time. The commissioner's proposed plan will then be placed in effect unless BCBSM invokes its right to appeal the commissioner's ruling to an independent hearing officer. See § 513(2)(a). The statute further provides for judicial review of the hearing officer's decision. See §§ 501(2), 502(7), and 518. Although 1980 PA 350 broadens and clarifies the commissioner's statutory powers from those possessed under 1939 PA 108 and 109 in the above respects, it limits the commissioner's powers in other respects. For instance, the commissioner cannot exercise these regulatory powers for two years (three years, forty-five days, for hospitals), and, if BCBSM in that time sets up a satisfactory provider reimbursement system, the commissioner has no occasion to exercise these powers at all. This is far short of the BCBSM alleged dictatorial powers of the commissioner. In light of the above and especially given the fact that BCBSM'S provider reimbursement arrangements at least as to hospital charges have always been subject to the commissioner's continuing statutory authority, we find that 1980 PA 350's broadening of the commissioner's scope of authority over provider class plans does not substantially impair BCBSM'S contract with the state. Even had we found a substantial impairment, we would nevertheless uphold these sections because they are prompted by a significant and legitimate public purpose and the means chosen are reasonably tailored to achieve the legitimate public purpose. See Part II(B). As previously indicated, the provider reimbursement sections of 1980 PA 350 were implemented for the primary purpose of ensuring all subscribers reasonable access to, and reasonable cost and quality of, health care services. The promotion of the health and general welfare of citizens is a matter of unquestionable state concern. See Const 1963, art 4, § 51; W A Foote Memorial Hospital, Inc v City of Jackson Hospital Authority, 390 Mich 193, 209-210; 211 NW2d 649 (1973), quoting from Ecorse v Peoples Community Hospital Authority, 336 Mich 490, 501; 58 NW2d 159 (1953); Birth Control Centers, Inc v Reizen, 508 F Supp 1366, 1386 (ED Mich, 1981). Hence, the purpose behind these provisions of 1980 PA 350 is both a significant and legitimate one. Further, we believe that the means chosen to implement this public purpose are reasonable and of a character appropriate to that purpose. To support this conclusion, the circuit court found that an estimated $137 million would have been saved, a saving of approximately eight percent, if over the past four years the rate of health care costs had been capped at the rate of real economic growth multiplied by the rate of inflation as provided for in 1980 PA 350. [31] Both parties acknowledge the fact that one of the principal causes of skyrocketing health care costs is over-utilization of services. Although BCBSM does not have control over some of the factors which drive up health care costs, it does have the ability, at least in part, to reduce utilization. [32] It is widely recognized that the health care system does not, and has not, operated as a competitive market. The lack of a competitive market results in less incentive to reduce costs. [33] What 1980 PA 350 attempts to do is provide greater incentives for BCBSM to use its dominant market position to engage in more effective cost containment programs. As noted earlier, the regulatory structure of 1980 PA 350 is far short of a totally government-controlled system. Rather, it employs means which combine both free market and government intervention systems. Pursuant to 1980 PA 350, BCBSM is given the opportunity to formulate its own cost containment programs in accordance with the goals of the act. Only if BCBSM is unsuccessful in its efforts will the government step in. We find these means to be reasonable and necessary to accomplish the valid public purpose of the act. For these reasons, we sustain 1980 PA 350's provider reimbursement regulatory scheme against the challenge on impairment of contract grounds.