Court Opinion

ID: 9759626
Source: CourtListenerOpinion
Date Created: 2023-08-29 00:22:31.831322+00
Date Added: 2024-06-11T07:29:03.534540
License: Public Domain

LUONGO, District Judge
(dissenting).
I agree that this is a matter which affects the health and welfare of the citizens of Pennsylvania. I agree also that the aim of this legislation — to protect the ultimate consumers’ need for continued hospital plan protection — is commendable and is certainly within the police power of the state. In my view, however, the legislation misses the constitutional mark when it requires the *828hospitals to remain parties to the contract beyond the bargained for notice period without making some provision to compensate them for the losses they may incur during the period of enforced adherence to the terms of the last negotiated contract. Act 94 works an impermissible impairment of contractual obligations in violation of the Contract Clause of the Constitution, and amounts to a taking of property without just compensation in violation of the Fourteenth Amendment to the Constitution.
The constitutionally offensive aspect of Act 94 is its retrospective effect. The Act, passed August 2, 1975, applies to any contract then in effect between a member hospital and a hospital plan corporation, or any contract “under which subscribers received prepaid benefits on or after June 30, 1974 . . . . Such contracts, if terminated, shall be reinstated as of their original termination and may be terminated hereafter only pursuant to the provisions of this act.” Act 94, § 2(2). Since the contracts, entered into in 1971, and amended in 1972, contain run-out provisions requiring payment for hospital services rendered after the termination date to subscribers who had been admitted prior to termination, the Act covers contracts which had, in fact, terminated prior to June 30, 1974. Undoubtedly a state may constitutionally enact legislation imposing conditions on the termination of contracts entered into subsequent to the passage of the legislation, but the state oversteps the bounds when it imposes such conditions upon contracts entered into prior to the adoption of the legislation without providing some measure of protection against loss to the party affected.
Act 94 requires hospitals and the various hospital plan corporations, including Blue Cross, to continue to adhere to the terms of their last negotiated contract for approximately a year beyond the termination date provided in the contract. The effect of the Act is to force contracting hospitals to continue to provide care to subscriber patients at increasing current costs, while reimbursement from the hospital plan corporations is based on previously negotiated cost calculations and formulae which the hospitals claim is insufficient to reimburse them for their expenses.
The cost formulae adopted in the earlier negotiated contracts do not allow to the hospitals, as reimbursable expenses, most community service activities, including care provided to indigents, writing off uncollectible accounts of patients not insured under a contracting hospital plan corporation, providing charity allowances, and undertaking certain education and research activities. Private paying patients or patients with private insurers have, accordingly, always paid a disproportionate share of such expenses. In earlier years there apparently existed sufficient numbers of such patients, and the hospital plan corporation arrangement had sufficient advantages, to make it financially feasible for the hospitals to enter into such agreements. Under the present arrangement, more individuals will likely become subscriber patients because of the relatively lower premiums the hospital plan corporations can charge, since under Act 94 the hospital plan corporations will pay to the hospitals less than private insurers or self-paying patients will be required to pay. Thus an increasingly higher percentage of the hospitals’ patients will not be paying their share of the cost of the hospitals’ community service activities. Moreover, subscriber patients will be paying for hospital services, through the hospital plan corporation, rates which do not fully reflect the escalating costs caused by the inflationary spiral. The contracting hospitals have thus been forced by the state into furnishing services at charges lower than their actual expenses of furnishing such services. True, the Act does provide that if a new contract is negotiated during the extension period, “the terms and conditions of any new contract shall be retroactive to the date of expiration of the contract previously in effect between the parties.” If a new contract is negotiated between the parties, it would presumably make allowance, satisfactory to the hospitals, for *829the hospitals’ costs of operation. There is no assurance, however, that a new contract which will fairly compensate the hospitals for their costs, will be negotiated and entered into, and no provision is made to compensate the hospitals for their losses incurred in the interim period if no new contract is negotiated.
Act 94 clearly has the effect of modifying the contracts that existed between member hospitals and Blue Cross. The majority does not dispute the modifying effect, but finds that the public interest of preserving the health of Pennsylvania citizens justifies the measure. It is true that where the public welfare requires, the state may use its police power in a manner which, to some degree, impairs the obligations of existing contracts, but the states’ power to do so is limited. Here the effective excision of the termination clause from the contract is too substantial an impairment, I believe, to be constitutionally permissible. Both parties to the contract bargained for benefits and burdens they were willing to accept and assume for a certain period of time, subject to their right to terminate at the end of the stated period upon giving 90 days’ notice. The excision of that termination provision has the effect of forcing the hospitals to provide, beyond the agreed period, services at charges the hospitals now claim to be below operating cost level, and which are therefore confiscatory.1
No matter how great the public need, the state may not, without violating the Fourteenth Amendment, take property without just compensation. The due process and impairment of contract claims are not readily separable, and an impairment claim will usually give rise to a due process claim. See Fornaris v. Ridge Tool Co., 423 F.2d 563, 566-67 (1st Cir. 1970), rev’d on other grounds, 400 U.S. 41, 91 S.Ct. 156, 27 L.Ed.2d 174 (1971). In the present suit, there is concededly an impairment. I believe the impairment to be so substantial as to violate the Contract Clause, and in any case the impairment works a taking of property without due process of law. The case authority is not to the contrary.
In Home Building & Loan Association v. Blaisdell, 290 U.S. 398, 54 S.Ct. 231, 78 L.Ed. 413 (1934), the Supreme Court upheld a state statute which retroactively extended the period during which a defaulting mortgagor could redeem property which had been foreclosed. Although the contract rights of the parties were altered, the Court found the statute constitutionally sound because the substantive rights of the parties were not impaired:
“The statute does not impair the integrity of the mortgage indebtedness. The obligation for interest remains. The statute does not affect the validity of the sale or the right of a mortgagee-purchaser to title in fee, or his right to obtain a deficiency judgment, if the mortgagor fails to redeem within the prescribed period. Aside from the extension of time, the other conditions of redemption are unaltered. While the mortgagor remains in possession he must pay the rental value as that value has been determined, upon notice and hearing, by the court. The rental value so paid is devoted to the carrying of the property by the application of the required payments to taxes, insurance, and interest on the mortgage indebtedness. While the mortgagee-purchaser is debarred from actual possession, he has, so far as rental value is concerned, the equivalent of possession during the extended period.” (Emphasis supplied)
290 U.S. at 425, 54 S.Ct. at 235, 78 L.Ed. at 421.
Where legislation has been applied retroactively and has altered the substantive contractual rights of the parties, the Supreme Court has invalidated it. In Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 55 S.Ct. 854, 79 L.Ed. 1593 (1935), the Court struck down the *830Frazier-Lemke Act, a federal law which permitted mortgagors to redeem property at its appraised value, regardless of the amount of the outstanding debt. The Court held that the forced surrender of possession and title to property, so long as any part of the debt secured thereby remained unpaid, effected a taking of property without just compensation and could not be justified, however great the public need. The Court distinguished Blaisdell, supra, on the ground that in Blaisdell no substantive right had been abridged. Id. at 581, 55 S.Ct. at 859, 79 L.Ed. at 1599. W. B. Worthen Co. v. Kavanaugh, 295 U.S. 56, 55 S.Ct. 555, 79 L.Ed. 1298 (1935), reaches the same conclusion. In that case the Supreme Court struck down a state statute extending the period of redemption on grounds it violated the Contract Clause. Again the Court found that the substantive rights of the parties had been altered by the legislation in that the mortgagor was permitted to retain possession of the property without the payment of interest, taxes or rent. In the instant suit, the state has substantially extended the period of the contract and has thereby imposed terms on the hospitals which they claim make it impossible for them to meet their expenses without dipping into reserves. This clearly places the case in line with Radford and Worthen, and not Blaisdell.
Day-Brite Lighting, Inc. v. Missouri, 342 U.S. 421, 72 S.Ct. 405, 96 L.Ed. 469 (1952), is as readily distinguishable as Blaisdell. That case involved a state statute which permitted employees to absent themselves from work for several hours, without loss of pay, to vote. In upholding the constitutionality of such legislation, the Supreme Court spoke only of the permissibility of state regulations which impose financial burdens upon, and reduce “the net return” from business enterprises. That is a far cry from the plight of these nonprofit hospitals which contend they are being required to operate at inadequate and confiscatory levels of reimbursement.
Even if this were regarded as a “rate” case, which I think it clearly is not, “[a]s of right safeguarded by the due process clause of the Fifth Amendment, [the regulated entity] is entitled to rates, not per se excessive and extortionate, sufficient to yield a reasonable rate of return upon the value of property used, at the time it is being used, to render the services.” Denver Union Stock Yard Co. v. United States, 304 U.S. 470, 475, 58 S.Ct. 990, 994, 82 L.Ed. 1469, 1475 (1938). A fully regulated utility cannot be compelled to absorb its own costs and not pass them on to the consumer. Public Service Commission v. Federal Power Commission, 151 U.S.App.D.C. 307, 316, 467 F.2d 361, 370 (1972). Even temporary rates which are confiscatory are not permissible. Prendergast v. New York Telephone Co., 262 U.S. 43, 49, 43 S.Ct. 466, 468, 67 L.Ed. 853, 857 (1923). Cf. Beaver Valley Water Co. v. Driscoll, 28 F.Supp. 722 (W.D.Pa.1939).
In the case perhaps most nearly on point, the Court of Appeals for the First Circuit held unconstitutional, as applied to contracts entered into before its passage, a Puerto Rican law which prohibited a manufacturer from terminating a dealership contract unless justified by a substantial failure of performance by the dealer. Fornaris v. Ridge Tool Co., 423 F.2d 563 (1st Cir. 1970), rev’d on other grounds, 400 U.S. 41, 91 S.Ct. 156, 27 L.Ed.2d 174 (1971). Chief Judge Aldrich based the decision on the Fifth2 Amendment Due Process Clause, stating that it was unnecessary to deal with the impairment of contracts issue “because the due process clause of the federal constitution provides essentially the same restraint so far as retrospectivity is concerned.” He noted that “[i]n determining whether retroactive alteration of contractual provisions are sufficiently minor to be permissible a distinction is sometimes drawn between alteration of substantive rights and alteration of procedures or remedies,” and that “[n]o amount of research by parties or amici has discovered a case suggesting that . . . ” a statute con*831verting a contractual relationship from one terminable without cause to terminable only for just cause was not one that worked “a change of great magnitude.” Id. at 567 — 68 (footnotes omitted). A similar state statute modifying manufacturers’ termination rights under franchise agreements was held unconstitutional, this time on the basis of the Contract Clause, in Superior Motors, Inc. v. Winnebago Industries, Inc., 359 F.Supp. 773 (D.S.C.1973). In my view, the statute in the present case is more egregious than those in Fornaris and Superior Motors since it prohibits termination altogether during the period of extension.
The Contract Clause is not an absolute barrier to state legislative enactments which have the effect of modifying existing contracts, and there is no question but that a state may regulate enterprises affecting the public interest, but the Constitution sets limits to the manner and degree in which the state may exercise its police power. In the present instance, the failure of the contracting parties to come to an agreement has resulted in an unfortunately hasty reaction by the Pennsylvania legislature which, I believe, exceeds those limits by failing to make provision to protect the hospitals against loss during the period of extension.
Accordingly, I respectfully dissent.

. The affidavits of Messrs. Armstrong, Guest and Williamson may not be sufficient to establish that the imposed rates are confiscatory, but at the very least they raise a material issue of fact for trial.

. The Fifth, rather than the Fourteenth, Amendment because Puerto Rico is not a state. See generally, discussion in footnotes 7 and 8, id at 566-67.