The parties appearing were: the Minnesota Department of Commerce, represented by Gregory Gisvold and Stephen K. Warch, Assistant Attorneys General, 1200 NCL Tower, 445 Minnesota Street, St. Paul, MN 55101; Respondent BCBSM, Inc. d/b/a Blue Cross and Blue Shield of Minnesota, represented by John Hottinger, Esq, Suite 714, 300 East Fourth Street, St. Paul, MN 55101, and by David W. Beehler, Esq. and Joel A. Mintzer, Esq., ROBINS, KAPLAN, MILLER & CIRESI, L.L.P., 2800 LaSalle Plaza, 800 LaSalle Avenue, Minneapolis, MN 55402, and by Robert J. Milis, General Counsel, Blue Cross and Blue Shield of Minnesota, 3535 Blue Cross Road, P.O. Box 64560, St. Paul, MN 55164; and Scott W. Johnson, represented by John J. McDonald, Esq. MEAGHER & GEER, P.L.L.P., 4200 Multifoods Tower, 33 South Sixth Street, Minneapolis, MN 55402. Appearing on behalf of HealthPartners, Inc. to withdraw from the hearing was Keith J. Halleland, Esq. and David T. Schultz, Esq., HALLELAND, LEWIS, NILAN, SIPKINS, & JOHNSON, P.A., 600 Pillsbury Center South, 220 South Sixth Street, Minneapolis, MN 55402. Pursuant to the Order Following Motion for Reconsideration, TCF Bank, fsb submitted a written brief. TCF Bank was also represented by John J. McDonald, Esq.

NOTICE

This report is a recommendation, not a final decision. The Commissioner of Commerce will make the final decision after reviewing the hearing record. The Commissioner may adopt, reject or modify the Findings of Fact, Conclusions of Law and Recommendation. Under Minn. Stat. § 14.61, the Commissioner may not make his final decision until after the parties have had access to this Report for at least ten (10) days. During that time, the Commissioner must give each party affected by the Report an opportunity to file exceptions to the report and to present argument. In this matter, the Commissioner has delegated the authority to decide this matter to Deputy Commissioner Gary A. LaVasseur under Minn. Stat. § 45.024, subd. 2. Parties should contact the Deputy Commissioner, c/o David Aafedt, Assistant Attorney General, 1200 NCL Tower, 445 Minnesota Street, St. Paul, MN 55101 regarding how and when to file exceptions and request argument.

STATEMENT OF THE ISSUES

Whether the Commissioner should approve or disapprove the Plan of Action, including its Additional Supplement, filed by Respondent BCBSM, Inc., d/b/a Blue Cross and Blue Shield of Minnesota, under Minn. Stat. § 62C.09, subd. 4; does the Plan adjust the operations of Blue Cross and Blue Shield to correct its excess surplus status and achieve compliance with Minn. Stat. § 62C.09 within a reasonable time? Is the Plan fair and equitable to subscribers? What is the Plan’s impact on the regulation and orderly operation of the insurance and health industries in Minnesota? Is the Plan in the public interest?

Based upon the record in this matter, including the briefs, motions, prehearing conferences, argument, and submissions, the Administrative Law Judge makes the following:

FINDINGS OF FACT

I. Procedural History

1. In early May 1998, then-Commissioner of Commerce David B. Gruenes had a conversation with Blue Cross Legal Counsel Robert Milis, Esq. regarding the tobacco litigation settlement.[1]

2. On May 7, 1998, Blue Cross Senior Vice President Richard M. Niemiec wrote to Commissioner Gruenes to follow up on that conversation, noting that Blue Cross believed it would receive approximately $460 million in a settlement of the tobacco litigation against several cigarette manufacturers and briefly describing how it planned to use the funds.[2]

3. On May 12, 1998, Commissioner Gruenes wrote to Andrew P. Czajkowski, the Chief Executive Officer of Blue Cross, regarding Blue Cross’s settlement of its lawsuit. Commissioner Gruenes stated that the Department of Commerce had jurisdiction in this matter. [3]

4. On August 6, 1998, the Commissioner and Blue Cross entered into a Consent Cease and Desist Order. In that Order, Blue Cross agreed to conserve the entire settlement proceeds and not to dispose of them until the Commissioner approved Blue Cross’s plan for adjustment of its operations to correct the excess surplus created by the settlement proceeds. The Order permitted Blue Cross to invest the settlement proceeds, to use the proceeds to satisfy any tax liability it might incur as a result of the settlement, and to make a payment to a charitable organization upon consultation with and the consent of the Commissioner. [4]

5. Blue Cross filed a Plan of Action (“Plan”) with the Commissioner on September 23, 1998, pursuant to Minn. Stat. 62C.09 subd. 4. The Plan had been adopted by Blue Cross’s Board of Trustees on September 10, 1998. [5]

6. On September 28, 1998, the Commissioner began this administrative hearing process by issuing and serving upon Blue Cross a Notice of and Order for Hearing and Order for Prehearing Conference by U.S. First Class Mail to Blue Cross’s current business address and to its attorneys. [6]

7. On October 7, 1998, Commissioner Gruenes issued an Amended Notice of And Order For Hearing And Order for Prehearing Conference. In it, Commissioner Gruenes ordered Blue Cross to attend a hearing to be held beginning on November 16, 1998, before Administrative Law Judge George A. Beck (“the ALJ”). Commissioner Gruenes determined that the hearing would be conducted pursuant to the contested case procedures of the Minnesota Administrative Procedure Act.

8. Commissioner Gruenes designated Deputy Commissioner Gary A. LaVasseur (“Deputy Commissioner”) the authority to approve or disapprove Blue Cross’s Plan. After Commissioner Gruenes left office, the Deputy Commissioner was reappointed.[7]

9. On October 8, 1998, the ALJ held a prehearing conference. Attending the hearing were representatives of the Department of Commerce and of Blue Cross. Also present were Samuel D. Heins, Esq. and Karl L. Cambronne, Esq. on behalf of plaintiffs in a lawsuit filed in Dakota County against Blue Cross, Court File No. 19-C3-98-7780.[8] At the hearing, Mr. Heins stated that the administrative proceedings should not go forward, and that the Commissioner should defer to the judicial proceedings arising from the Dakota County action.[9]

10. In a letter dated October 8, 1998, Mr. Heins wrote the ALJ and, on behalf of the plaintiffs in the Dakota County litigation, reiterated their request that the administrative proceedings be postponed. By letter, the ALJ certified this request to the Commissioner that same day.

11. On October 12, 1998, the deadline established by the Deputy Commissioner, TCF Bank Minnesota fsb (“TCF”) and Scott W. Johnson (“Johnson”) petitioned to intervene in this action. No other parties sought to intervene. Blue Cross objected to the intervention of TCF on October 14, 1998, asserting that TCF lacked an interest in the proceedings.

12. The Deputy Commissioner held the second prehearing conference on October 16, 1998. The hearing was attended by representatives of the Department of Commerce and of Blue Cross. Also present were Stacey Mills, Esq. on behalf of the Dakota County plaintiffs, and counsel for petitioner intervenors TCF and Johnson. The Deputy Commissioner heard oral argument regarding the Dakota County plaintiffs’ motion for a stay and on the petition for intervention.

13. On October 19, 1998, the Deputy Commissioner issued an Order Following Second Prehearing Conference. He denied the Motion to Stay the Administrative Proceedings. He granted TCF and Johnson’s petition to intervene, but limited the scope of their intervention, as provided by rule,[10] to filing a written brief without acquiring the status of a party. The Deputy Commissioner directed the ALJ to determine the scope of the intervenors’ written submissions.

14. The ALJ held a third prehearing conference on October 20, 1998. The ALJ requested the parties to submit in writing their views on the extent of the intervenors’ participation granted by the Deputy Commissioner’s October 19th Order.

15. On October 22, 1998, TCF and Johnson requested the Deputy Commissioner to reconsider his intervention order of October 19, 1998. The request was supported by the Department. That same day, the Deputy Commissioner agreed to reconsider his intervention order, by written submissions only.

16. On October 27, 1998, intervenors TCF and Johnson submitted a letter to the ALJ regarding the extent of their participation through written submissions in the event that the Deputy Commissioner denied reconsideration of his October 19, 1998 Order. They argued that they should be permitted to submit written memorandum with affidavits and exhibits, and to conduct discovery necessary to develop their evidence.

17. On October 28, 1998, the Deputy Commissioner issued an Order Following Motion for Reconsideration. He ruled that Johnson would be allowed to intervene with party status.[11] He limited TCF’s intervention to filing a written brief but without party status.

18. The Order also reopened the time for parties to intervene in the proceedings until November 4, 1998. This Order was sent to plaintiffs’ counsel in the Dakota County action as well as to the parties in this administrative proceeding.

19. Blue Cross submitted an Additional Supplement to its Plan of Action on October 28, 1998. The Additional Supplement provides additional detail to the original Plan, submitted on September 23, 1998.[12]

20. On October 30, 1998, the Department of Commerce and TCF and Johnson submitted written objections to Blue Cross’s Plan, as supplemented. The Department’s objection was largely concerned with the oversight, financial reporting, and the need for structure and detail in the Plan.

21. First, the Department contended that it must regulate Blue Cross so as to ensure its continued sound operation, confirm that such operations result in direct and tangible benefits to Blue Cross’s subscribers, and monitor the extent to which efforts are being made to contain health care costs. The Department asserted it must maintain viable and reasonable supervisory authority over Blue Cross’s ongoing disbursement of the settlement proceeds, including the ability to track every dollar received and spent from the settlement proceeds, and including periodic reporting requirements. It also sought enforcement and disciplinary authority, in the event Blue Cross’s reporting or conduct fail to meet the standards of the Plan, and the public purpose of non-profit health service plan corporations such as Blue Cross, as determined by the Commissioner and Minnesota law. The Department further contended that such filings and reports should be public.[13]

22. Second, the Department asserted that it should be able to require periodic study of the impact of the Plan’s tobacco cessation and general wellness programs, including estimations of cost savings to subscribers and to Blue Cross itself, of improvements to subscriber health and well-being, and other associated data. The Department asserted these estimates should be made and submitted to the Commissioner according to the usual manner in which Blue Cross now submits data to the Commissioner and should be subject to the Commissioner’s approval. [14]

23. Third, the Department objected to Blue Cross’s allocation of approximately $49 million in excess of its expected tax liability for payment of the tax liability, which was estimated to be approximately $75 million. Recognizing that Blue Cross will be able to deduct amounts spent in the future on health-related expenses and, thereby, assuming future taxable income, recover much of the amounts it pays in taxes, the Department objected to this division of the settlement proceeds. The Department contended that the $49 million should be reallocated to be spent as part of the “Tobacco Cessation and Other Health Risk Behavior Program” spending. [15]

24. Fourth, the Department objected to the lack of definition to Blue Cross’s proposed spending of approximately $99 million for what the Proposed Plan describes as Tobacco Cessation and Other Health Risk Behavior Programs. The Department contended that the Proposed Plan failed to specify how moneys will be spent in the future and that substantial monitoring and approval of Blue Cross’s future spending, left undetermined by the Proposed Plan, would be necessary. The Department noted it would expect Blue Cross to determine within a reasonable amount of time how it intends to spend this $99 million and submit the details of such spending and that the Commissioner would maintain approval authority over such spending plans. [16]

25. Fifth, the Department objected to the lack of detail with respect to the proposed spending of $80 million for the Member Awareness Program. Blue Cross indicated the program would begin in 1999 and continue for 10 quarters, but offered details on only five (5) quarters and those details were only “offered for the purpose of example.” [17] The Department contended that, in addition to regular monitoring of the spending of the settlement proceeds, a method for obtaining, and the Department approving, commitments to specific spending was necessary. [18]

26. Johnson’s and TCF’s objections asserted that Blue Cross does not have a surplus under the statute because the settlement proceeds belong to Blue Cross members and not Blue Cross, and urged that Blue Cross should rebate premiums to its subscribers. As Blue Cross subscribers, they presented three claims:

a. The settlement proceeds are not “surplus” as defined by Minnesota Statutes § 62C.09. Rather Blue Cross has merely received the funds in trust on behalf of its members. Those funds may only be used to reduce their Blue Cross premiums and other charges, or as a rebate.

b. To the extent the proposed plan seeks to serve the public at large, it exceeds Blue Cross’s mandate and is void.

c. Not only is a rebate equitable, but it is practical, as well. In light of this largesse, Blue Cross’s only means of complying with Section 62C.15, that Blue Cross’s charges be reasonable, and insuring that its rates are reasonable, is to either issue a rebate or to freeze rates in the future.[19]

27. On November 3, 1998, the ALJ ruled that TCF’s intervention was limited to the filing of a written brief. TCF was not permitted to submit affidavits or exhibits. Also on November 3, 1998, TCF and Johnson filed a Motion for Continuance with the Deputy Commissioner, seeking an extension of all deadlines by 60 days.

28. On November 4, 1998, HealthPartners, Inc., Banker’s System, Inc., and the Acrometal Family of Companies petitioned to intervene in the proceedings. Blue Cross filed objections to these interventions on November 5, 1998. On November 6, 1998, the Deputy Commissioner denied the petitions for intervention of Banker’s System and Acrometal, and granted the petition of HealthPartners to intervene.[20]

29. On November 17, 1998, HealthPartners moved to continue the hearing for 90 days. The Deputy Commissioner partially granted the request on November 20, 1998, and set the commencement of the hearing for January 25, 1999. The Deputy Commissioner also required HealthPartners to publish the Amended Notice of Public Hearing and Solicitation of Public Comment in the State Register and in a newspaper of general circulation in each county of the State. HealthPartners subsequently caused this Amended Notice of Public Hearing to be published in accordance with the Deputy Commissioner’s directive.

26. The Amended Notice of Public Hearing states that the purpose of the hearing is to determine whether the Commissioner should approve or disapprove Blue Cross’s Plan. The hearing will consider the issues of “whether the Proposed Plan meets the requirements of Minn. Stat. ' 62C.09, subd. 4, whether the Proposed Plan is fair and equitable to the subscribers of Blue Cross, what impact the Proposed Plan will have on the regulation and orderly operation of the insurance and health industries in this state, and whether the Proposed Plan is in the public interest of the citizens of Minnesota.”

31. The Notice also invited public comment. It requested any person wishing to appear at the hearing to give oral comment or testimony, to complete a Notice of Appearance and to mail or deliver it to the ALJ on or before January 22, 1999. Persons who did not file a Notice of Appearance could nonetheless present verbal or written statements at the hearing, subject to available time. Persons wishing to submit written comments were invited to do so by January 25, 1999.

32. As contemplated by the August 5, 1998 Consent Order, Blue Cross requested the Commissioner to approve a gift of $21 million from the tobacco settlement proceeds to the BCBSM Foundation. The Commissioner granted this request by a letter dated December 8, 1998.[21]

33. On December 11, 1998, HealthPartners submitted written objections to Blue Cross’s Plan, as supplemented. These objections focused on concerns relating to the market impact of the proposed Plan of Action.

34. Staff of the Department and Blue Cross held numerous discussions relating to Blue Cross’s disposition of the settlement proceeds since Commissioner Gruenes’ initial contact with Blue Cross in May 1998.[22] On the basis of these discussions, Blue Cross took action in October to amend its Proposed Plan.[23]

35. On December 31, 1998, Blue Cross and the Department entered into a Consent Order that substantially resolved the Department’s objections to the Plan of Action. HealthPartners and Mr. Johnson objected to the Consent Order.[24]

36. During January 1999, the Department initiated discussions with all parties regarding settlement. As a result of these discussions, Blue Cross and HealthPartners agreed to a settlement of HealthPartners’ objections. [25]

37. On January 22, 1999, Blue Cross and the Department entered into an Amended Consent Order, pursuant to which HealthPartners withdrew its objections to the Plan of Action. The Amended Consent Order establishes the Department’s authority over Blue Cross’s entire settlement proceeds - not just the amount exceeding Blue Cross’s statutory surplus maximum.[26]

38. The Amended Consent Order contains all of the requirements of the previous December 31 Consent Order, but also imposes additional restrictions on Blue Cross.[27] First, the new provisions of the Amended Order prescribes certain accounting practices and fiscal reporting for the settlement proceeds, separating the proceeds from Blue Cross’s operational funds.[28] Second, the Amended Consent Order prohibits Blue Cross from engaging in certain marketing and competitive practices and places restrictions on Blue Cross’s ability to realize premium reductions from its health-related spending.[29] The Amended Consent Order also adds new enforcement authority and makes mandatory two independent analyses of Blue Cross’s spending of the tobacco settlement proceeds in the four years following final approval of the Proposed Plan. [30]

39. HealthPartners withdrew its Objections to the December 31, 1998 Consent Order, to the Proposed Plan, and its prefiled testimony when it withdrew from participation in the hearing. HealthPartners did so on the basis of the entry of the Amended Consent Order, which addressed its concerns regarding the Proposed Plan.[31]

40. The Amended Consent Order does not purport to resolve any other party’s objections to Blue Cross’s proposed plan and the terms of the Amended Consent Order are not binding on the final decisionmaker, Deputy Commissioner LaVasseur.[32]

41. Hearing before the undersigned commenced on January 25, 1999. Following opening statements, the Administrative Law Judge received testimony from Andrew Czajkowski, Blue Cross’s Chief Executive Officer. The ALJ then heard public comment. Twenty persons shared their views, of which 19 were supportive of Blue Cross’s Plan. These individuals were Jeanne Weigum, of the Association for Non-Smokers; Dr. Paul Pentel, the director of smoking cessation programs at the Hennepin County Medical Center; Dr. Terrence Clark of the Duluth Clinic, Dr. Ann Joseph of the Veterans Administration Hospital in Minneapolis and President of the Smoke Free Coalition; Jim Taylor, Chairman of the Board of the American Lung Association, Minnesota; Michael Chapman, the administration director for the accounting firm Wolf, Etter and Co. in Mankato; Sally Phillips, the Board Vice Chair of The Health Fund Minnesota; Joe Griffith, a high school senior in Maplewood and with Smoke Free Coalition’s Kick Butts Program; Ron Phillippo, CEO of the Boy Scouts Indianhead Council; Shawna Meliza, an insurance broker with Benefit Design Associates in Bloomington, Andrew Mackenzie, principal in the firm Mackenzie Marketing; Boyd Stofer, president of the real estate firm United Properties; Dr. Russell Luepker with the American Heart Association; Don Blaeser, superintendent of the Tri-County Schools, Karlstad; Sharon Eichten, Principal of the Como Park Senior High School; Matthew Bostrom, a sergeant with the St. Paul Police Department and head of the Department’s D.A.R.E. program; Nila Gouldin of the Urban Coalition in St. Paul; Dr. Stuart Hanson, President of the Institute for Research and Education, HealthSystems Minnesota, and former President of the Minnesota Medical Association; and David Feinwachs of the Minnesota Hospital and Health Care Partnership. Commenting against the Plan was Joseph Green on behalf of TCF Bank.[33] Following the public comments, Dr. William Gold, Blue Cross’s Chief Medical Officer, began his testimony.

42. On January 26, 1999, the ALJ heard the continued testimony of Dr. Gold. Blue Cross then called Dr. Michael Fiore to testify. Dr. Fiore is the Director, Center for Tobacco Research and Intervention, and Associate Professor in the Department of Medicine, University of Wisconsin Medical School.[34] Blue Cross presented the written testimony of Daniel Johnson who is the Executive Director of the BCBSM Foundation,[35] the written testimony of Nancy F. Nelson, Blue Cross’s Chief Actuary, and Jennifer L. Gillispie, Blue Cross’s Director of the Group Health Actuarial Department, [36] and the written testimony of Timothy M. Peterson, Blue Cross’s chief financial officer.[37] Also testifying was Patrick L. Nelson, the Deputy Commissioner of Commerce for the Insurance and Registration Division. Deputy Commissioner Nelson is the person within the Department of Commerce primarily responsible for the regulation of Blue Cross.[38]

43. On January 27, 1999, the Administrative Law Judge heard the testimony of Dr. James Fries, a Professor of Medicine at the Stanford University School of Medicine. Dr. Fries’s research in recent years has focused on health policy issues and the development of health policies which reduce the need for medical services and the demand for medical services.[39] Blue Cross next called Dr. Timothy Wyant as a witness. Dr. Wyant received a Ph.D. in biostatistics in 1979, and was retained by Blue Cross in its cigarette litigation to testify regarding damages in that lawsuit.[40] The final witness of the hearing was Scott W. Johnson, the intervenor in the proceedings. Following Mr. Johnson’s testimony, the parties presented closing statements. The Administrative Law Judge then directed the parties to submit proposed Findings of Fact and Conclusions of Law, as well as a legal memorandum, on or before February 10, 1999.

44. The Administrative Law Judge received 93 written comments concerning Blue Cross’s Plan of Action. Of these written comments, 76 supported the Plan. Among the supporters were C. Everett Koop, the former Surgeon General of the United States, many physicians, business owners and managers, local government officials, medical clinic officials, school superintendents and principals, insurance brokers, community health activists, and a variety of other Minnesotans. Also supporting the Plan was Allina Health System, a major Blue Cross competitor. The 17 comments opposing the plan were submitted by various Minnesotans, Attorney General Mike Hatch, and the Minnesota Chamber of Commerce.[41]

II. Description and History of Blue Cross

45. Blue Cross is a nonprofit health service plan organized under Chapter 62C of the Minnesota Statutes. Its articles of incorporation and by-laws are subject to the approval of the Commissioner of Commerce. The articles of incorporation expressly authorize Blue Cross to “exercise any and all powers and authorities granted to, or permitted to be exercised” under Chapter 62C “or under the provisions of the Minnesota Nonprofit Corporations Act ....” [42]

46. Blue Cross has a statutory mandate “to promote a wide, more economical and timely availability of hospital, medical-surgical, dental and other health services for the people of Minnesota ... and thereby advance public health and the art and science of medical and health care within the state ....” This statute gives Blue Cross a blended responsibility: to make prepaid healthcare available to Minnesotans, to advance the art of medicine and science, and to improve the public health.[43]

47. Blue Cross’s interest in the public health was one of the reasons it went forward with its lawsuit against cigarette manufacturers. Blue Cross has also been involved in the community in a variety of areas relating to tobacco consumption. [44]

48. Unlike other health insurers, Blue Cross is a direct purchaser of health care because it has direct and distinct contractual relations with both (1) its group subscribers and (2) with the hospitals, clinics and doctors who provide health care services. With its member groups, Blue Cross contracts to provide prepaid health services. With health care providers, Blue Cross enters into service agreements under which providers agree in advance to furnish health care services for a fee to be paid by Blue Cross. [45]

49. Blue Cross contracts with its fully-insured groups. These contracts constitute the entire contract between Blue Cross and its fully-insured groups and the subscribers of those groups. The Commissioner has the power to disapprove Blue Cross’s contracts with its subscribers. [46]

50. Blue Cross is contractually obligated to pay the covered health care claims of its subscribers, including claims that may have been caused by cigarette smoking.[47] Blue Cross is not contractually required to pursue litigation for its fully-insured groups. The contracts do not require Blue Cross to retroactively adjust its subscription charges or otherwise reimburse its subscribers in the event that health care claims cost Blue Cross less than anticipated. The contracts do not subrogate Blue Cross subscribers to any recovery Blue Cross might obtain against others.

51. Blue Cross’s charges are required to “be reasonable, and not unfairly discriminatory, in relation to the benefits, considering actuarial projection of the cost of providing or paying for the health services, considering costs of administration, and in relation to reserves and surplus required by law.” [48] The Commissioner of Commerce has statutory authority to disapprove Blue Cross’s charges.[49]

52. There is no allegation in these proceedings that Blue Cross did not properly rate its premiums over the past 20 years.[50] There is no evidence that Blue Cross’s charges to its insured group subscribers, before it received the cigarette settlement proceeds, were unreasonable or unfairly discriminatory, in relation to the benefits, considering actuarial projection of the cost of providing or paying for the health services, considering costs of administration, and in relation to reserves and surplus required by law.

III. The Tobacco Litigation

53. In 1994, Blue Cross, with co-plaintiff the State of Minnesota, initiated a lawsuit against the cigarette industry. At that time, no one had won a victory against the tobacco industry. Blue Cross was the only health plan in the country to sue the tobacco industry until 1998.[51]

54. Blue Cross brought the lawsuit for several reasons. It felt that the cigarette industry members needed to be held accountable financially for their conduct. Blue Cross also felt that it needed to do something to change the pattern of young people becoming addicted to smoking with its attendant costs, as tobacco is the number-one preventable cause of illness in the country. Thus the lawsuit had three goals, to hold the industry accountable, to get all the information out regarding the industry’s decades’-long deceit regarding their product, and to promote the public interest. [52]

55. Blue Cross asserted nine causes of action: (1) undertaking of special duty; (2) conspiracy to unreasonably restrain trade and commerce in violation of Minnesota’s antitrust law; (3) monopolization of the cigarette market in Minnesota in violation of Minnesota’s antitrust law; (4) consumer fraud; (5) unlawful trade practices; (6) deceptive trade practices; (7) false advertising; (8) restitution arising from Blue Cross’s performance of defendants’ duty to the public; and (9) restitution arising from unjust enrichment. Blue Cross did not bring the lawsuit as a class-action or in any other formal representative capacity.[53]

56. Blue Cross did assert that the tobacco companies’ misconduct required it to pay more for health services than it otherwise would have paid. Blue Cross declared that it was suing on its own behalf as a purchaser of health care services and on behalf of its fully insured groups who were “required to pay increased premiums for health insurance, and who will “benefit from any recovery in this action.” [54]

57. In the course of the litigation, the cigarette defendants asserted that Blue Cross lacked standing “because Blue Cross had passed through its increased expenditures for health care to its subscriber groups as premium increases, and therefore had suffered no compensable injury.” [55] They also argued that Blue Cross’s “remedy, if any, lies in its statutory and common law right to subrogation.” [56]

58. Blue Cross responded by arguing that, as a purchaser of health care, it suffered its own injury-in-fact by incurring the expenses of paying for health care services for smoking-attributable diseases caused by the unlawful conduct of the defendants. Blue Cross specifically disclaimed bringing any action in subrogation. Blue Cross also argued that the “pass on” defense has been rejected as a matter of law and that Blue Cross was not limited to pursuing its claim in subrogation. Blue Cross brought the lawsuit for its own damages. [57]

59. The district court held that Blue Cross had standing, stating that it was:

the natural plaintiff best able to pursue the claim. It properly represents the many individual group subscribers in seeking recovery under applicable antitrust law and, pursuant to such law, if [Blue Cross] prevails, any recovery would inure directly to the group subscribers [that Blue Cross] represents via a pass through of the recovery. [58]

60. The Minnesota Supreme Court agreed that Blue Cross, itself, had been injured. Although it held that Blue Cross’s injury was too remote for its tort claim (Count One), the Court held that Blue Cross had standing to assert its other claims.[59]

61. After remand, in a “meet and confer” conference related to proof of damages, counsel for Blue Cross counsel asserted the following:

Blue Cross is a non-profit entity. By law its premiums must fully cover its costs. There can be by law no damage, if you will, to Blue Cross as an entity because it’s non-profit. * * * We are not – that is, Blue Cross – seeking to recover in this case any damage that Blue Cross as an entity itself may have sustained for the reasons I just stated, and that is the time value of money. The Supreme Court has ruled that Blue Cross has standing to pursue this direct action on behalf of its subscribers, and that is the exclusive – when I say “exclusive,” we have other damages such as equitable relief and restitution and the like – but in terms of health-care cost damages, our exclusive claim for damages will arise on behalf of our subscribers. And because that is the limitation of our damages, there is simply no relevance to this case in the pricing of premiums because the premiums cover costs, and the point is to determine the tobacco-attributable portion of the cost so that all of the Blue Cross damages in turn may be passed through to those subscribers who incurred increased premiums due to those costs. [60]

62. However, Blue Cross contends that at no time did it assert to a Minnesota court that it intended to use any cigarette recovery to benefit its subscribers by the specific means of distributing money to them. Blue Cross’s CEO does not subscribe to the statement made by one of his attorneys in the confidential meet-and-confer to the extent it is interpreted as saying that Blue Cross would return money to subscribers.[61]

63. During trial, Blue Cross presented evidence calculating its losses through a statistical model. One of the principals who created the refined model was Dr. Timothy S. Wyant, a statistical consultant. [62]

64. The damages model analyzed 60 million Blue Cross health claims records.[63] These records did not include the health claim records of persons with individual policies and it did not include the records of self-insured groups -- whether or not the self-insured groups also had purchased stop-loss insurance. The model did not include the health care claims records of Blue Plus members. The model also did not include all fully-insured rated groups. It excluded, for example, some trust funds where Blue Cross was the insurer but the health plans were administered elsewhere. Even within the groups that the model examined, the model did not include health care records of persons 18 years of age or younger, or claims arising from nursing homes. [64]

65. At the cigarette trial, Dr. Wyant had referred to trial exhibit 30205, which suggests that Blue Cross’s damages were 15% of its health care costs. This 15% referred to the 60 million records examined and not all health care claim costs incurred by Blue Cross. If it included all Blue Cross health care claims, the percentage would be lower. The percentage is also an aggregate over several years and cannot be applied to any single year. [65]

66. The percentage of health care costs caused by smoking-related illnesses changes every year. This is because smoking rates change over time, the disease mix changes over time, the relative costs of treating disease change over time, and the demographics of Blue Cross subscriber and member populations change over time. The model cannot calculate the smoking-attributable expenditures made on behalf of a particular individual or fully-insured group. [66]

67. The premiums paid to Blue Cross by the fully-insured groups were not used in Blue Cross’s damages model. The damages model cannot be “reverse engineered” to identify particular costs of particular subscribers for which Blue Cross sought damages. It would be a misuse of the information in BC Ex. 8 (trial exhibit 30205) to indicate a percent of premium that is due to tobacco-related illnesses because premiums are not the same as costs and factors other than costs affect premiums. [67]

68. On May 8, 1998, Blue Cross settled its claims against the cigarette defendants. Blue Cross believes that the settlement accomplished the goals of the litigation. First, Blue Cross held the industry financially accountable. Second, a depository was established with all the documents that had been extracted from the tobacco industry files. And third, there were a number of public health agreements relating to advertising, billboards, and other things. [68]

69. In the Settlement Agreement, the cigarette defendants agreed to pay Blue Cross $469 million over five years, as follows:

September 4, 1998 $160,000,000

January 4, 1999 $79,200,000

January 3, 2000 $57,450,000

January 2, 2001 $57,450,000

January 2, 2002 $57,450,000

January 2, 2003 $57,450,000

The payments due on and after January 3, 2000, are subject to adjustment by the greater of 3 percent or the percentage increase in the Consumer Price Index over the previous year. In addition, the payments beginning in the year 2000 are subject to volume adjustments based on the aggregate number of tobacco products sold by the tobacco companies, which could increase or decrease the amount of annual payments. [69]

70. The settlement agreement releases Blue Cross’s past and future claims. It releases Blue Cross’s right to assert such claims “whether directly, indirectly, representatively, derivatively or in any other capacity.” [70] The Supreme Court recognized that Blue Cross sought relief for future damages.[71]

71. The settlement agreement defines “Blue Cross”. The definition does not include Blue Cross’s members or groups. The settlement agreement expressly states that it does not “bind any non-party or determine, limit or prejudice the rights of any such person or entity.” [72]

72. Following the settlement, Blue Cross’s CEO was quoted in a press release as stating that the settlement “covers past and future liabilities for Blue Cross fully insured members.” He understood this to mean that it covered Blue Cross’s own liabilities, and not claims that Blue Cross members have against cigarette manufacturers. [73]

IV. The Dakota County Litigation

73. In June 1998, several individuals and companies purporting to represent a class of group and individual subscribers previously covered under health insurance contracts with Blue Cross filed a class action lawsuit against Blue Cross, seeking to recover from Blue Cross, on a variety of legal theories, the proceeds of the tobacco litigation settlement. The suits were consolidated in Dakota County before the Honorable Edward Lynch. [74]

74 On July 2, 1998, the Commissioner of Commerce intervened in the Dakota County litigation to protect his regulatory obligations under Minn. Stat. Ch. 62C, which he contended were endangered by the Dakota County litigation.[75]

75. The Commissioner moved to dismiss the Dakota County litigation on July 10, 1998, contending that the suit should be dismissed because the Commissioner has primary jurisdiction and that the plaintiffs had failed to exhaust their available administrative remedies. [76]

76. On September 9, 1998, the Dakota County District Court granted Blue Cross’s and the Commissioner’s separate motions to dismiss, concluding as a matter of law that the settlement proceeds were subject to the primary jurisdiction of the Commissioner.[77] The Court also stated that:

Plaintiffs’ allegations, if proven, could result in findings that Blue Cross voluntarily undertook to recover excess premiums paid by subscribers for increased health care costs related to smoking, actually recovered excess premiums on behalf of subscribers, and retains the excess premiums in violation of subscribers’ rights.[78]

The class-action plaintiffs filed a Notice of Appeal on October 6, 1998.

77. The first prehearing conference in this administrative proceeding was held on October 8, 1998, at which the Department of Commerce and Blue Cross appeared. Samuel D. Heins, Esq., and Karl Cambronne, Esq., appeared representing the purported plaintiffs’ class of the Dakota County litigation. [79] Messrs. Heins and Cambronne argued that the administrative proceedings should not go forward until the appeal of the dismissal of the Dakota County litigation had been heard and decided.

78. In a subsequent letter, dated October 8, 1998, Mr. Heins reiterated the Dakota County plaintiffs’ request to the Administrative Law Judge to stay this administrative proceeding pending the outcome of their appeal. [80]

80. The Administrative Law Judge certified the question of staying the proceedings to the Deputy Commissioner designated to exercise the authority of the Commissioner to decide the matter. [81]

81. On October 8, 1998, Commissioner Gruenes wrote to the Administrative Law Judge and counsel to announce his appointment of, and delegation of authority pursuant to Minn. Stat. § 45.024 to, Deputy Commissioner Gary A. LaVasseur to decide this matter. [82]

82. A prehearing conference was held before Deputy Commissioner LaVasseur on October 16, 1998. [83]

83. After briefing and oral argument, the Deputy Commissioner denied the stay motion on October 19, 1998. [84]

V. Development of Blue Cross’s Plan of Action

84. Minnesota law [85] requires that Blue Cross maintain reserves for claims in process, incomplete and unreported claims, retroactive cost adjustments to providers, allowances for subscription charges received from subscribers but not earned and all other accrued liabilities in accordance with Minn. Stat. § 60A.12, as it relates to accident and health insurance companies.

85. While traditional insurance companies have no upper limit on the amount of money they may have on hand, Blue Cross must observe a maximum, as well as the usual minimum limit (which is a hedge against insolvency).[86] In addition to reserves, Minnesota law [87] requires that Blue Cross annually calculate the sum of all health care service claims incurred and its administrative expenses. Of this amount, Blue Cross is required to maintain between 16 2/3 and 33 1/3 percent as a surplus. The statute[88] provides that the surplus corridor is increased to the extent that Blue Cross invests in corporations whose business is the arrangement for, management of, or provision of health care services, including dental and related managed care and administrative services.

86. Excluding receipt of the cigarette settlement proceeds, Blue Cross projects that it will fall within the surplus corridor of § 62C.09 subd. 3. With the addition of the tobacco settlement proceeds and without Blue Cross’s Plan of Action, Blue Cross would show a surplus amount in excess of the statutory maximum beginning in 1998 and continuing until approximately 2013.[89]

87. When the Department of Commerce became aware of the settlement, it understood that the amount of money was substantial, that Blue Cross would have a corridor problem, and that Minn. Stat. Ch. 62C would be implicated. [90]

88. The Commissioner wrote to Blue Cross on May 12, 1998. The letter highlighted four things the Commissioner wanted further discussions to entail. The Commissioner wanted an answer to the four items and ongoing discussions regarding the use of the money.[91]

89. Blue Cross responded on May 15, 1998. The letter’s purpose was to try to answer the items mentioned in the Commissioner’s May 12 letter, but its specificity did not meet the level required by Minn. St. Ch. 62C. It started a dialogue between the Department and Blue Cross.[92]

90. Blue Cross developed its Plan with several purposes in mind. The Plan needed to address the surplus corridor and satisfy the Department of Commerce. The Plan also had to take into account Blue Cross’s blended responsibilities to the health of its members, to future healthcare costs, and to public health issues. Blue Cross’s development of the Plan was guided by its enabling legislation and by the objectives of the cigarette litigation. [93]

91. The health components of the Plan have three broad goals: to establish a comprehensive approach to improve the health and quality of life of Blue Cross members and to decrease tobacco use by 30%; to invest in community wide efforts for the prevention and treatment of tobacco use and other health risk behaviors for the benefit of Blue Cross members and the community; and to create a new wealth of knowledge that will serve to benefit the health of Blue Cross members and all Minnesotans well into the future.[94]

92. In support of these goals, the Plan was intended to give ongoing direction and communicate with others. It thus developed a series of principles to guide future programs. The programs are to be evidenced-based, broad reaching, comprehensive and systems-based, involve stakeholders, and be measurable. This approach is consistent with sound scientific modeling. [95]

93. During Blue Cross’s development of the Plan, it entered into a Consent Cease and Desist Order with the Commissioner. In it, Blue Cross promised not to spend the settlement proceeds until the conclusion of the administrative proceedings. The Order also permitted Blue Cross to make a $21 million donation to the BCBSM Foundation, upon obtaining approval of the Commissioner. [96]

94. Blue Cross submitted its original Plan of Action on September 23, 1998. The Plan had four components: (1) payment of taxes and the creation of a tax liability reserve, totaling $129 million; (2) the creation of a reserve to pay for tobacco cessation pharmaceutical benefits over 20 years, totaling $109.9 million; (3) development and funding of Tobacco Cessation and Other Health Risk Behavior Program that will research and develop methods of dealing with addictive behaviors such as tobacco, totaling $179.1 million; and (4) a gift to the BCBSM Foundation of $21 million. These total $434 million, the present value of the tobacco settlement proceeds.[97]

95. Under Minnesota law, [98] the Commissioner of Commerce has the power to approve or disapprove a Plan of Action to correct an excess surplus situation. The Commissioner does not have the power to write the Plan of Action on behalf of Blue Cross.[99]

96. After the submission of the Plan, discussions between Blue Cross and the Department continued. Commissioner Gruenes wanted Blue Cross’s Plan to contain a more immediate benefit to its members, and the Department suggested the Member Health Awareness Program in an amount of $80 million. [100]

97. In response to the Department’s suggestions, Blue Cross then submitted an Additional Supplement to its Plan of Action on October 28, 1998. This Additional Supplement established the Member Health Awareness Program which is a direct-to-member component of the Plan intended to increase awareness of health improvement activities and empower individuals to be in charge of all aspects of their health by providing one or more tangible benefits to as many as possible fully insured members. Consistent with the Department’s recommendation, the program spends $80 million, of the $179.1 million earmarked for the tobacco and other health risk behavior program, over two and one-half years. [101]

98. After the submission of the Additional Supplement, discussions between Blue Cross and the Department continued. The Department was concerned about the oversight, financial reporting, and the need for structure and detail in the Plan. The Department also expressed concern regarding Blue Cross’s tax reserve -- that Blue Cross had not committed to its use of that money in the event it was not needed for taxes. And the Department obtained assurances from Blue Cross that it did not intend to use the settlement proceeds to buy market share. [102]

99. The Department resolved its objections to Blue Cross’s Plan in a December 31, 1998, Consent Order. [103]

100. The December 31, 1998, Consent Order contains several components. It adds a reporting framework; it moves $49 million from the tax reserve component to the Tobacco Cessation and Other Health Risk Behavior Program (with the agreement that any additional taxes can be paid from that program); and it calls for an independent analysis of Blue Cross’s Plan at least every three years, the scope of which may include a review of the impact of the spending of the tobacco proceeds on Blue Cross, its subscribers, and possible marketplace competitive advantages that might accrue to Blue Cross. The Consent Order also establishes a regulatory framework regarding the settlement proceeds. Blue Cross is required to outline to the Commissioner its spending plan for the funds allotted to the Tobacco Cessation and Other Health Risk Behavior Programs as well as the Member Health Awareness Program. The Commissioner has the authority to approve or disapprove these plans, from which Blue Cross cannot appeal. [104]

101. Although the Department had resolved its own objections, in January 1999 it facilitated discussions between Blue Cross and the intervenors to resolve their objections. In particular, the Department felt that there was common ground between Blue Cross and HealthPartners in that HealthPartners had expressed a competitive concern and Blue Cross had assured the Department that it did not intend to seek a competitive advantage. [105]

102. The discussions between Blue Cross, HealthPartners, and the Department were successful. On January 22, 1999, the Department issued an Amended Consent Order that more clearly delineates the fiscal and accounting segmentation of the tobacco settlement proceeds. The segregation of funds also eases the Department’s regulatory monitoring of the funds established in the earlier Consent Order. [106]

84. The Amended Consent Order supersedes the Consent Order of December 31, 1998, and includes the Department’s determination that the Plan of Action, together with its Additional Supplement and as modified by the terms of the Amended Consent Order is “in the public interest, adequately meets the applicable statutory obligations and mandates, including compliance with the statutory limits of Minn. Stat. ' 62C.09 (1998) within a reasonable time, and is fair and equitable to subscribers.” The Amended Consent Order also recognizes that it is dispositive of the objections of HealthPartners. [107]

104. HealthPartners stated at the hearing that the Amended Consent Order resolves its objections, and it formally withdrew those objections. [108]

VI. Detailed Description of Blue Cross’s Plan

105. Following the January 22, 1999, Amended Consent Order, Blue Cross’s Plan has the following components:

Tax liabilities $75.0 million

Tobacco Cessation Pharmacy Reserve 109.9 million

Member Health Awareness Program 80.0 million

Tobacco Cessation and Other Risk

Behavior Programs 148.1 million

BCBSM Foundation 21.0 million

Total Present Value Expenditures $434.0 million[109]

A. Taxes

106. Initially, the Plan accounts for taxes that Blue Cross owes as a result of the tobacco settlement. For tax purposes, Blue Cross must declare as income in 1998 the present value of the cigarette settlement proceeds. Absent any deductions or exclusions, Blue Cross would record taxable income, related to the cigarette settlement, of $444 million. [110]

107. This calculation discounts the future payments from the cigarette industry. Although the future payments are subject to a 3% increase in future years, the amounts may also decrease as a result of declining cigarette sales. In general, about $469 will be paid to Blue Cross. [111]

108. Blue Cross believes the tax liability from the tobacco settlement approximates $75 million. Blue Cross actually expects to pay federal and state income taxes of approximately $60 million in 1998 attributable to the tobacco settlement. This amount is a result of minimizing the tax liability through various tax-planning strategies, including the use of federal net operating loss deductions and state tax credits as applicable. Additionally, the tobacco settlements are utilizing Blue Cross benefits (net operating losses and tax credits) and special provisions that will now be unavailable for Blue Cross in the future, the cost of which is estimated to be $15 million. [112]

109. Due in part to the corporation’s ongoing examination by the Internal Revenue Service, Blue Cross believes it necessary to reserve additional tax amounts to account for uncertainties in the positions taken relating to open years as well as those taken in the tobacco settlement. However, the Department of Commerce required such amounts to not be reserved for potential payment of tax liability in connection with the tobacco settlement. The Department of Commerce required the funds to remain in the Tobacco Cessation and other Health Risk Behavior program with the proviso that should the tax liability arise, then the liability could be met with funds remaining in that program.[113]

110. As Blue Cross spends the after-tax proceeds of the cigarette settlement, it obtains a tax deduction and a resulting tax benefit. Blue Cross’s Plan incorporates these tax benefits into the programs described in the Plan. The net effect of income taxes may actually result in more money being available to the Plan’s programs because Blue Cross was exempt from income tax prior to 1987. [114]

B. Tobacco Cessation Pharmacy Reserve

111. The Plan proposes the creation of a reserve to cover Blue Cross’s expense of adding a pharmaceutical benefit for tobacco cessation programs to subscribers of Blue Cross insured products (excluding public programs) for the next twenty years. Subscribers will become eligible for coverage of nicotine patches, nicotine gum and other smoking cessation drugs prescribed by a physician on the same basis as any other prescription drug. [115]

112. To estimate the present value of the cost of this program, Blue Cross developed a model with the following assumptions:

a. Benefit: The tobacco cessation program will include adding nicotine replacement therapies and other tobacco cessation drugs to the pharmaceutical benefit plans. Blue Cross filed contract language with the Commissioner that specifies the following benefit: “With a written physician’s prescription, we will cover prescription and over-the-counter nicotine replacement therapies (limited to nicotine patch and nicotine gum) and Sustained Release Bupropion sold under the brand name Zyban or other trade name designating use only for smoking cessation.” Because of potential co-pays and deductibles, Blue Cross assumes that it will pay for approximately ninety percent of the costs of these nicotine replacement therapies.

b. Covered Populations: The populations for which this benefit will be provided include: Blue Cross Individual members, Small Group members, Fully Insured Large Group members, and Medicare Supplemental members for Blue Cross and its affiliated companies. The benefit will not be provided to members of self insured employer groups, to enrollees of the Minnesota Comprehensive Health Association, or to members covered under contract with the Minnesota Department of Human Services (DHS). Members covered under the DHS include those in the Prepaid Medical Assistance Program (PMAP), the General Assistance Medical Care Program (GAMC), and the MinnesotaCare Program for low income Minnesotans.

c. Membership Growth: Blue Cross estimates it will experience an average annual net membership growth of three percent. This is established in consideration of Blue Cross’s historical growth of the covered populations and expected future population growth in Minnesota. The model also assumes that 10 percent of the covered population will not renew with Blue Cross in the following year.

d. Demographics: Based upon Blue Cross’s current membership, Blue Cross assumes that eighty percent of insured members are over age fifteen, and that twenty-two percent of members over age fifteen are smokers. Blue Cross assumes that the proportion of its new members who smoke will decrease over time, the decrease being an average of two scenarios: (1) that twenty-two percent of new Blue Cross members will be smokers; and (2) the percentage of new members who smoke will equal the percentage of current members who smoke.

e. Quitting and Success Rates: Blue Cross assumes that forty-five percent of smokers will attempt to quit in a given year. Within this forty-five percent, Blue Cross assumes that forty percent will attempt to quit by using tobacco cessation interventions and sixty percent will do so without any intervention. Of those that try to quit, on average twelve percent will successfully eliminate tobacco use for one year. Blue Cross assumes that even of those that successfully eliminate tobacco use for more than one year, thirty-three percent will relapse.

f. Treatment Methods: The percent of prospective quitters who choose each tobacco cessation method is based upon studies before Zyban was available. The model adjusts for Zyban based on the early indications for groups currently receiving benefits including Zyban. The tobacco cessation methods included in the model are Zyban alone; Zyban with group counseling; Zyban with phone counseling; prescription strength nicotine patch alone; over the counter nicotine patch alone; nicotine patch with group counseling; nicotine patch with phone counseling, nicotine gum alone; nicotine gum with group counseling; and nicotine gum with phone counseling.

g. Cost Per Successful Attempt: The costs vary by method of treatment. The cost per successful attempt is calculated as the weighted average of the cost per successful attempt for each method of treatment. The model calculates the cost per successful attempt to be $834 as of January 1, 1999.

h. Cessation Claims Cost Trend: The model assumes that tobacco cessation program costs per successful attempt will increase at five percent per year. This trend rate represents increases in cost only.

i. Discount Rate: The future claims are discounted at a rate of four percent per year.[116]

113. Based on these assumptions, the present value of maintaining this program for 20 years is $109.9 million. Blue Cross intends to use the duration of the benefits (starting at 20 years) as the variable to manage the reserve. It will adjust the amount in reserve each year by subtracting costs of benefits and by adding the credited interest. If the reserve decreases faster than projected in the model, the expected duration of the benefits will decrease. If the reserve decreases slower than projected in the model, the expected duration of the benefits will increase.[117]

C. Member Health Awareness Program

114. The Member Health Awareness Program contained in the Additional Supplement at the Department’s suggestion is intended to provide group and individual insured subscribers with a menu of options to improve their health and safety. A new menu will be offered for 10 consecutive quarters beginning 180 days after final approval of Blue Cross’s Plan. In that time, Blue Cross can develop the specifics for improved programs. [118]

115. The program is designed to provide more immediate tangible health-related benefits to Blue Cross fully-insured members. For example, in one quarter the program may focus on home safety. Blue Cross will mail its insured subscribers a booklet on preventing the leading causes of home injury; a brochure regarding the subscriber’s access to a Member Assistance Line that will provide additional information, professional counseling and referral services; a child window decal for fire emergencies; and an offer menu for items such as smoke or carbon monoxide detectors, gun locks, or gun cabinet locks to prevent access by children. Other examples may include programs on Youth, Family and Senior Safety; Lifelong Fitness; Nutrition; and Emotional Health. [119]

116. This program is part of a comprehensive program. One of the links in the continuum of change is the awareness by Blue Cross members of the link between how they choose to live and the health impacts. This program is designed to get their attention and to empower individuals to take control of their own health. [120]

117. Blue Cross intends to monitor response rates, membership feedback and program costs. Based on this information, Blue Cross may choose to repeat a program or theme with similar or revised offerings. [121]

D. Tobacco Cessation and Other Risk Behavior Program

118. The Plan proposes to use the remainder of the cigarette settlement funds (including any tax benefit derived from the various programs and any gain derived from its investment of the funds, less the gift to the BCBSM Foundation outlined below) within its Tobacco Cessation and Other Risk Behavior Program. Tobacco cessation is the initial focus of the Program. [122]

119. Various studies demonstrate significant health benefits for individuals not to smoke, to be immunized, to be physically active, to eat a balanced diet, to wear seat belts, and to follow safety precautions; for pregnant women to receive prenatal care; and for specific risk groups to receive screening for early detection of cancer. The health risk behavior initiative will follow a model for intervention with multiple dimensions:

a. The programs are directed at prevention and treatment or both.

b. The programs are directed toward individuals and community populations or both.

c. Programs will be delivered in a variety of settings and locations. The settings may be health clinics or hospitals, schools, public places, work sites, or other arenas.

d. Blue Cross will measure the programs for effectiveness.

e. This model will require enhanced technical capacity to support the programs.[123]

120. By necessity, these initiatives will evolve over time. Blue Cross has identified a number of high-risk lifestyles in addition to tobacco use that are likely to become a part of the program. Risk factors that will be targeted by the program include poor eating habits, weight problems, high alcohol intake, drug use, high blood pressure, high coronary and cancer risk, among a number of other health risks. Some of the key chronic diseases that will be analyzed include ischemic heart disease, congestive heart failure, stroke, chronic lung disease, asthma, cancer, diabetes, and other diseases. [124]

121. One aspect of this program is to work with health care providers. This is because 70% of smokers see a primary care physician every year.[125]

122. The approach in the Plan is based on well-accepted scientific theory, is supported by research, and is a comprehensive approach that will likely provide a basis for additional growth in the science of smoking cessation. [126]

123. Blue Cross’s program is a scientific model that provides for maximum flexibility in order to address clinical needs, evaluation of programs, to build on successes, and provide opportunities for improvements. The flexibility will be overseen by both a Scientific Council and by the Department of Commerce. [127]

124. The Scientific Council organized by Blue Cross will be comprised of nationally recognized experts to provide advice on appropriate expenditures and specific programs. The Scientific Council is charged with assuring links to state-of-the-art health behavior change programs; validating measurement strategies, providing input and advice on program identification, design, and implementation, and overseeing and championing dissemination strategies. Former Surgeon General C. Everett Koop has agreed to serve as co-chairman of the Scientific Council. [128]

125. In addition to reporting its planned spending under this program to the Department of Commerce, as required by the Amended Consent Order, Blue Cross will also be reporting its successes and failures. The Department has an opportunity to do its own independent analysis of both the financial accounting and the effectiveness of the programs. [129]

126. Blue Cross has either in place or created several other avenues to ensure the appropriate use of the tobacco settlement proceeds. It has created the Center for Tobacco Reduction and Health Improvement, which reports directly to the Blue Cross Chief Medical Officer, Dr. William Gold. The Center is responsible for carrying out and managing the Plan of Action. Blue Cross also has financial and accounting policy and procedures in place to ensure that the tobacco proceeds are appropriately accounted for and managed. [130]

127. Blue Cross will coordinate its programs with those administered by the State of Minnesota. For example, Dr. Koop, who will chair Blue Cross’s Scientific Council, is also an honorary co-chair of the Minnesota Partnership for Action Against Tobacco (MPAAT) and the Chair of MPAAT, Dr. Richard Hurt, worked closely with Blue Cross during the cigarette trial. Furthermore, Blue Cross staff members are serving on MPAAT subcommittees and Blue Cross is already coordinating programs with MPAAT. Thus, there will be constant communication between Blue Cross and the State programs. Blue Cross has agreed to share information with the State programs in order to gain a synergistic effect. Blue Cross will seek to avoid unnecessary duplication. [131]

E. BCBSM Foundation

128. The Foundation component of the Plan gives Blue Cross an opportunity to build on work that the Foundation is already doing. Blue Cross believes that this gift is appropriate because the Foundation’s objectives are in line with Blue Cross’s goal of tobacco cessation and to improve the health of Minnesotans. And because of tax advantages, the dollars can be used in a more effective way. [132]

129. Under the Consent Cease and Desist Order of August 6, 1998,[133] on December 7, 1998, Blue Cross requested the Commissioner’s approval of a $21 million gift to the Foundation, to be debited from the tobacco settlement proceeds. The next day, the Commissioner approved that request. [134]

130. Blue Cross established the Foundation in 1986 to further its commitment to improving the health of Minnesota communities. The Foundation’s mission supports Blue Cross communities: the Foundation seeks to advance public health and the art of science of health care through its grant making to support and enhance programs and activities that benefit people living and working in the areas served by Blue Cross.[135]

131. The Foundation’s articles of incorporation call for it to have one member: Blue Cross and Blue Shield of Minnesota, which has all voting and other authorized rights. The Foundation serves as Blue Cross’s philanthropic arm, in support of its strategic community involvement plan. The Foundation allows Blue Cross to serve a population broader than Blue Cross members. Foundation grants are primarily directed to Minnesota nonprofit organizations and government agencies to support private and public health organizations, health care providers, schools, and research institutions. The goal of any Foundation grant is to produce a tangible health benefit for Minnesotans, and this benefits Blue Cross’s subscribers as well. [136]

132. The Foundation’s giving priorities, which are identical to Blue Cross’s community involvement priorities, reveal a strong bent toward prevention and health risk reduction. These priorities were established to guide the company’s community involvement and Foundation grant making. These priorities are:

· Reduce tobacco use

· Reduce risk behaviors by promoting individual fitness, nutrition and safety

· Expand preventive care by increasing early childhood immunizations

· 0Increase access to care by helping chronically ill and culturally diverse populations navigate the care system[137]

133. Charitable contributions to the Foundation are deductible due to the Foundation’s status as a § 501(c)(3) organization. Blue Cross’s contribution of $21 million may be claimed as a deduction in 1998 by Blue Cross even though the Foundation may choose to expend the funds over more than one year on specific community health programs. Thus, the payment to the Foundation accelerates the tax deduction in comparison to the deduction available if Blue Cross itself were to establish additional programs over the next several years. [138]

134. In addition, the investment earnings on Foundation funds are taxed at a preferential rate of 2 percent, as established in § 4940(a). Additionally, the Foundation is exempt from state income taxes. If held by Blue Cross, the investment earnings would be taxed at a 41 percent rate. This allows the Foundation to ultimately contribute more dollars for the benefit of Minnesota communities. [139]

135. Following the Commissioner’s approval of the $21 million contribution, Blue Cross and the Foundation entered into a formal agreement that governs the use of the contribution. The agreement directs that the Foundation use this specific contribution for the purpose of supporting tobacco reduction and education programs and other health initiatives through grants to qualified organizations and other acceptable activities. This agreement is written in accordance with Minnesota statutes, IRS regulations and tax laws. [140]

VII. Issues Specified in the Amended Notice of and Order for Hearing

136. The Amended Notice of and Order for Hearing identified four issues to be considered in determining whether Blue Cross’s Plan should be approved or disapproved. The issues are whether the Plan meets the requirements of Minn. Stat. § 62C.09 subd. 4; whether the Plan is fair and equitable to the subscribers of Blue Cross; the impact of the Plan on the regulation and orderly operation of the insurance and health industries in Minnesota; and whether the Plan is in the public interest of the citizens of Minnesota.

A. The Requirements of Minn. Stat. § 62C.09 subd. 4

137. Minn. Stat. § 62C.09 establishes a corridor in which Blue Cross is to maintain a surplus in excess of Blue Cross reserves. The corridor is a minimum and maximum percentage of the “sum of all health service claims incurred, and administrative expenses in connection therewith, during the most recent calendar year”. [141] The minimum is 16 2/3 percent and the maximum is 33 1/3 percent. [142] Added to the corridor minimum and maximum are all amounts invested pursuant to Minn. Stat. § 62C.10. [143]

138. Chapter 62C was passed by the legislature following a report from the House Insurance Committee, Subcommittee on Non-Profit Insurance Organizations in 1970. The House Subcommittee was responding to a financial crisis experienced by the then-separate Blue Shield organization and the ensuing takeover by Blue Cross. Insurance Commissioner Thomas Hunt had made eight recommendation to the Subcommittee to help prevent the reoccurrence of the difficulties experienced by Blue Shield. [144]

139. Commissioner Hunt’s seventh recommendation was to give the Insurance Division new authority to review rates of non-profit associations whenever their surplus goes above or below a specified percentage of annual premiums. It stated:

7. That the Insurance Division should have the authority to review the rates of non-profit associations whenever their surplus fluctuates, either above or below a specified percentage of annual premiums. Such a proposal would provide for rate review by the Insurance Division whenever the surplus percent to annual premiums indicates that the association is issuing contracts at rates which do not adequately reflect the financial needs of the association and its policy-holders.

In testimony, Commissioner Hunt stated:

. . . Any time a surplus is between 25% and 50% of annualize [sic] premium, it seems to me that the company is either so poor that it ought to have a need for getting prior approval of its rates to be sure that they are not selling the product below cost as Blue Shield was in many instances, and it also seems that they are not so rich or that they are likely to be gouging the public.

. . . And if they get above 50% then lets [sic] approve them to be sure that they are not simply building up a huge surplus which is unnecessary for the conduct of a business of this type and certainly not necessary for a non-profit association.[145]

140. The surplus corridor is different than reserves. It is intended to be a volatility cushion. Although a surplus is an outcome of premiums, it is related to a lot of things, including investment returns. The tobacco settlement presents a unique situation. [146]

141. Under the Plan as originally filed in September 1998, Blue Cross would have a surplus starting in 2001 and disappearing by the year 2005. Under the October 1998 Additional Supplemental to the Plan of Action, in which Blue Cross accelerates $80 million of spending, Blue Cross eliminates any potential excess surplus. As modified by the January 1999 Consent Order, however, Blue Cross is anticipated to have an excess surplus. This excess would be eliminated if Blue Cross incurs an additional tax liability of $49 million. [147]

142. Minn. Stat. § 62C.09 requires that Blue Cross submit a plan to correct its excess surplus “within a reasonable time.” [148] Blue Cross’s Plan corrects this excess within a reasonable time. [149]

143. The Department agrees that Blue Cross’s Plan resolves its excess surplus in a reasonable time. In making this determination, the Department relied on its internal staff, including Chuck Nettle, who is an assistant commissioner for insurance and also a certified public accountant, and Julia Phillips, a health profession actuary. [150]

B. Effect on Blue Cross Subscribers

144. Tobacco usage is the number one preventable cause of illness in the United States. Smoking-related illnesses account for nearly 1 in 5 deaths in the United States. Smoking is an addiction. It is a chronic disease and should be approached as such. [151]

145. The rate of adult smoking in Minnesota is currently stable, and the rate of youth smoking is increasing. A study by Dr. Fiore reported that 90% of smokers quit on their own, but their success rate is abysmal -- less than five percent. [152]

146. Recent studies have indicated that a multi-faceted approach that includes drugs and counseling is likely to succeed in reducing smoking. A comprehensive program, like Blue Cross’s Plan, is necessary to in order to achieve significant success rates. Combining the two pillars of pharmacotherapy and counseling has benefits greater than providing either program alone. With these programs, the success rate for quitting goes from five percent to over twenty percent. Blue Cross’s goal of reducing smoking by 30% appears to be achievable based on present knowledge. [153]

147. The foregoing analysis is based on the most recent and current thinking in medicine. The efficacy of certain smoking cessation aids were not the same in 1993 as they are today. Because future techniques in smoking cessation may be different from today’s, Blue Cross’s Plan has incorporated flexibility over its 20-year time span. [154]

148. Blue Cross’s Plan provides immediate benefits to its fully-insured members, including the pharmaceutical benefit for which there is no charge. The Member Health Assistance Program accelerates benefits and helps both smokers and non-smokers. [155]

149. Better health is also an immediate benefit of quitting smoking. The likelihood of having an upper respiratory tract infection, a sinus infection, and pneumonia declines dramatically beginning virtually the day a person quits smoking. The risk of a heart attack for a person who quits smoking declines by 50 percent within one year of quitting. [156]

150. Blue Cross’s Plan also provides long-term benefits to its fully-insured members. Most significantly, it will improve the health of its members, allowing them to live longer and healthier lives. Helping parents to quit will reduce the incidence of youth smoking. [157]

151. The Plan also benefits Blue Cross members in the long term by achieving health care savings. The Pharmacy Reserve Program will reduce the use of tobacco programs among Blue Cross members, which will reduce future health care costs. Based on the assumptions behind the Pharmacy Reserve Program, Blue Cross anticipates achieving a cumulative reduction in health care costs, at the end of twenty years, of approximately $770 million. At twenty-two years (thereby recapturing a two year time lag built into the model), the cumulative savings approximates $1.0 billion. The present value of these savings approximates $434 million. [158]

152. Studies indicate that programs such as the Tobacco Cessation and Other Risk Behavior Programs will also result in the reduction of health care costs in direct proportion to the amount spent on such programs. For every dollar spent, approximately $2 to $5 will be saved in health care costs. The Plan assumes a savings rate of $3 for every dollar spent. The total savings from the Plan approximates $3.40 for every dollar spent. [159]

153. Based on this savings rate, the Tobacco Cessation and Other Risk Behavior Programs will achieve a cumulative reduction in health care costs, at the end of twenty years, approximating $1.1 billion. At twenty-two years, the cumulative savings will approximate $1.25 billion. The present value of this amount approximates $722 million. The Plan does not assume any savings from the $80 million that it intends to spend on its Member Health Awareness Program. [160]

154. The combined anticipated savings from the Plan approximates $1.9 billion at the end of twenty years, and $2.3 billion at the end of twenty-two years. The present value of this amount approximates $1.16 billion. [161]

155. These savings will ultimately be passed on to future Blue Cross subscribers. Blue Cross calculates its insured rates based on the claims experience of each block of business. As the health care costs decline, premiums will reflect this savings. Blue Cross anticipates that these savings will result in a reduced rate of claims growth from 7.8% annually to 7.6% annually. This corresponds to an approximately 2.3% reduction in the rate of anticipated premium growth over the next 20 years. [162]

156. Blue Cross’s model assumes that 10% of its members do not renew with Blue Cross every year. To the extent that some of these non-renewing members have quit smoking because of Blue Cross’s programs and they have joined non-Blue Cross health plans, the claims experience of other health plans will be lower than otherwise. [163]

157. The Department is satisfied that Blue Cross’s Plan of Action is fair and equitable to its subscribers. [164]

C. Impact on the Regulation and Orderly Operation of the Insurance and Health Industries in Minnesota

158. Blue Cross did not develop its Plan of Action with the intention of improving its market share. It developed the Plan with the input of its medical and actuarial staff, and did not seek advice from its marketing personnel. [165]

159. The Amended Consent Order provides assurance that the Plan’s impact on the marketplace will be limited. Blue Cross funds are segregated and cannot be used for purposes other than that outlined by the Plan. The Order prohibits Blue Cross from using the funds “to attract, entice or otherwise target providers for commercial benefit.” And the Commissioner’s triennial independent analysis may include a review of the market impact of Blue Cross’s Plan. But the Amended Consent Order does not guarantee that there will be no market impact. [166]

160. Blue Cross’s primary competitors are Allina Health System and HealthPartners. HealthPartners has withdrawn its objections because it no longer has a marketplace concern, and Allina submitted a written comment in support of Blue Cross’s Plan. [167]

161. The Department and HealthPartners are satisfied that their objections relating to market impact have been appropriately addressed in Blue Cross’s Plan. [168]

D. The Public Interest

162. In keeping with Blue Cross’s blended responsibilities, its Plan of Action benefits the public as well as its members. [169]

163. The Plan benefits the public in several ways. Its programs include research to look at ways to deal with addictive behaviors, of which tobacco is one, and to share that information with the public. As Blue Cross learns about program effectiveness, it will share this information with other organizations, which can then use the information in developing their own programs. [170]

164. Blue Cross’s programs will also be working through physician groups, and the physicians will be able to treat not only Blue Cross members but members of other health plans as well. Blue Cross currently contracts with 97 percent of physicians in the State of Minnesota and 100 percent of the hospitals. Thus, as Blue Cross works with its providers to implement best practices, it will touch practically every citizen in the state. [171]

165. The BCBSM Foundation’s programs are also directed to the larger community. [172]

166. Because the improved health and lower claims inure to the benefit of individuals, all health insurers will also benefit in the long term. For example, when groups experience lower claims costs, other insurers, like HealthPartners, can offer lower premiums to the groups. [173]

167. The Department is satisfied that Blue Cross’s Plan is in the public interest.[174]

VIII. Intervenor Johnson and The Premium Refund Option

168. One other option has been suggested with respect to the use of the settlement proceeds. Intervenor Johnson suggests a premium rebate to previous subscribers. [175]

169. Scott W. Johnson subscribed to Blue Cross between 1987 and 1997 (when he worked at Faegre & Benson, a Minneapolis law firm). Mr. Johnson paid Blue Cross $36,962.14 in premiums during that time span. Mr. Johnson was a subscriber under the Aware Gold Family Coverage Plan from 1987 through 1991. From 1992-1997, Mr. Johnson was a subscriber under the High Deductible Family Coverage Plan. Under these plans, Mr. Johnson paid the following premiums for family coverage:

YEAR	PREMIUMS PAID
1987	$3,000.00
1988	$3,000.00
1989	$3,776.16
1990	$4,611.60
1991	$5,897.52
1992	$2,618.88
1993	$2,741.40
1994	$2,741.40
1995	$2,968.92
1996	$3,057.96
1997	$2,548.30
Total	$36,962.14

[176]

170. Mr. Johnson agrees that Blue Cross’s Complaint in the tobacco lawsuit as well as other pleadings allow Blue Cross to spend at least some of the settlement proceeds in furtherance of its Plan. Mr. Johnson does not have the specifics of any alternative plan in mind. [177]

171. One Blue Cross consideration in not rebating premiums was that it recovered for its own losses in the cigarette litigation, and not its subscribers’ losses. [178] Mr. Johnson acknowledges that if Blue Cross’s lawsuit was exclusively brought as a direct action, he would agree with Blue Cross’s position. [179]

172. Mr. Johnson suggests that Blue Cross be required to refund premiums to its subscribers because of references in cigarette litigation documents that any Blue Cross recovery would benefit its subscribers. Mr. Johnson acknowledges that benefits can take many forms and that Blue Cross’s Plan might be such a benefit. Mr. Johnson does not quarrel with the programs that Blue Cross proposes in its Plan of Action. [180]

173. If Blue Cross were to rebate all of the proceeds, there would be little additional health benefit or long-term health improvement for Blue Cross subscribers. Rebating premiums would advance the public health only to the extent that people would spend the rebate on health benefits. [181]

174. Without the long-term health improvement planned by Blue Cross, Blue Cross subscribers will face higher premium costs in the future.[182] Therefore, Blue Cross’s Plan effectuates a premium reduction for future subscribers. The present value of the future premium savings is likely greater than the value of rebating premiums today.[183]

175. If Blue Cross were to rebate premiums, it would be difficult to do so in an equitable manner. This difficulty could open the door to additional litigation, which would ultimately dissipate the available money through attorneys’ fees. [184]

176. One difficulty is the complexity of identifying members from throughout the 20 year time frame covered by the cigarette litigation. For instance, approximately 66 percent of Blue Cross groups from 1988, only 10 years ago, are not current Blue Cross groups and Blue Cross does not have current address information for these former members. And as to those insured groups, Blue Cross may not be able to locate approximately one-quarter of the insured groups with Blue Cross coverage in 1988 and one-third of the insured groups with Blue Cross coverage in 1978. [185]

177. A further difficulty is that Blue Cross does not have information regarding how much of a subscriber’s premium is paid by the subscriber and not the subscriber’s employer. [186] Some employers pay the entire premium while others share the premium with their employees. In presenting his own premium history, Mr. Johnson had to obtain the information from his former employer because Blue Cross did not have it. [187]

178. The damages model used by Blue Cross in its cigarette lawsuit was premised on health care claims costs incurred by Blue Cross. A number of factors other than health care costs affect premiums. The model does not give any information regarding premiums or the amount of premiums that are related to smoking-related illnesses. [188] Mr. Johnson likewise acknowledged that health care costs are only indirectly related to premiums. [189]

179. Data from a preliminary estimate by Blue Cross indicates that Blue Cross could spend $20 to $25 million in administrative costs on a complete refund to subscribers.[190]

180. If Blue Cross were to rebate premiums, it could conceivably deduct that expense from its income taxes. But there is no tax advantage to rebating the amounts immediately. Blue Cross declared the present value of the tobacco settlement as income in 1998. Because Blue Cross has not yet received all of the funds from the tobacco companies, it cannot actually disburse a rebate to obtain a deduction to offset this income. And if Blue Cross pays any such rebates as it gets the money, it may not obtain the full value of the deduction because it may not have the income to offset it against. The deductions would create a significant tax loss for Blue Cross and therefore Blue Cross might not get the tax benefit of the deduction. [191]

IX. Public Comments

A. Prehearing Comments Submitted in Support of the Blue Cross Plan

181. Prior to the hearing, numerous persons (Blue Cross subscribers included), businesses, healthcare practitioners, government and educational agencies, and religious organizations submitted comments in support of the proposed Blue Cross Plan. In general, these commentators were in favor of spending the settlement money on helping teenagers and adults quit smoking. Most saw the tobacco settlement proceeds as presenting a unique opportunity to improve the health of Minnesotans and to reduce smoking-related health care costs in the future. [192]

182. Larry Mahoney and Meri Hauge of the American Cancer Society wrote in support of the Blue Cross Plan. They stated that they approved of the plan’s design to assist tobacco users who want to break their addiction and to help prevent a new generation of smokers. [193]

183. Robert Wotherspoon of Bloomington, Minnesota wrote in support of the Blue Cross Plan. Although he has been a policyholder with BCBSM for many years and has paid thousands of dollars in premiums, Mr. Wotherspoon stated that the goals of the proposed plan are more important than any one-time rebate.[194]

184. Former Surgeon General C. Everett Koop wrote in support of the Blue Cross Plan. According to Dr. Koop, comprehensive approaches to changing health risk behaviors are the most successful. And Dr. Koop believes that the Blue Cross Plan, which uses both treatment and prevention approaches to address health behavior changes at both the individual and community level, is in Dr. Koop’s opinion, a comprehensive well thought-out plan. Dr. Koop maintains that the Blue Cross Plan will yield far greater benefits to its members and the general public than cash rebates or other financial redistribution. Dr. Koop wholeheartedly recommends adoption of the Blue Cross Plan because it has the greatest potential to address, for the long haul, reduction of preventable health care costs. [195]

185. Michael Eriksen, Director of the Centers for Disease Control and Prevention’s (CDC) Office on Smoking and Health, wrote in support of the Blue Cross Plan Mr. Eriksen stated that: “The interventions proposed in the plan address both individual-focused and population-based programs, and are based on well-researched public health theories.” [196]

186. Seven physicians who are presidents or chairs of various healthcare clinics or affiliations urged the approval of the Blue Cross Plan. In their opinion, the Blue Cross Plan represents a unique opportunity to invest in long term initiatives that will improve Minnesotans’ health and control health care costs. [197]

187. In separate letters in support of the Blue Cross Plan, both Randy R. Johnson, Executive Director of the Southeastern Minnesota Private Industry Council and Lauri A. Ebel, a Social Worker with Anoka County Community Action Program, expressed the opinion that part of the settlement proceeds should be targeted to low-income persons and the chronically unemployed. According to these commentators, these populations have a much higher percentage of smokers and a greater need for the proposed plan’s health improvement initiatives. [198]

B. Prehearing Comments Submitted in Opposition to the Blue Cross Plan

188. Several written comments in opposition to the proposed plan were received from persons who have Medicare supplemental insurance policies with BCBSM. These persons, most of who are on a fixed income, have seen their premium costs increase over the years. For example, Gene and Lois Frank of Winona wrote that their premium costs for 1999 have increased approximately $700 over 1998 costs. And Helen Hollingsworth of Benson wrote that her 1999 premium costs have increased $504 over 1998 costs. All of these persons wrote to request that the settlement proceeds be returned to the policyholders. [199]

189. Likewise, other BCBSM policyholders wrote in opposition to the proposed plan and in favor of a reduction in their insurance premiums or a rebate. [200]

190. Renville County, as a BCBSM subscriber for several years, stated that it would like to see a portion of the surplus used to lower subscribers’ premiums. [201]

191. On behalf of its 3,600 members, the Minnesota Chamber of Commerce criticized the plan’s failure to provide a rebate to the subscribers who overpaid premiums as a result of the tobacco companies’ actions. The Chamber of Commerce maintains that a rebate is not “unworkable” and should not have been so easily rejected by Blue Cross. In addition, the Chamber of Commerce questions the effectiveness of tobacco cessation and other “wellness” programs and the propriety of investing millions into such programs. Finally, the Chamber of Commerce expressed concern that Blue Cross will be able to use the settlement proceeds to gain an unfair advantage in the marketplace that would have a destabilizing effect on health care costs in Minnesota. The Chamber of Commerce believes that there are not enough safeguards and reporting requirements built in to the proposed Plan to prevent BCBSM from channeling the proceeds to fund other operations and gain market strength. Given all these concerns, the Chamber of Commerce recommends that the surplus be returned to the subscribers who paid the higher premiums. [202]

192. On January 25, 1999, the Administrative Law Judge also received a written comment from Attorney General Mike Hatch. Attorney General Mike Hatch is opposed to the Blue Cross Plan for several reasons. First, Mr. Hatch argues that in virtually every situation where a mutual insurer or nonprofit corporation has received excess funds resulting in an unreasonably high surplus, the company is required to issue the excess funds as a dividend back to the policyholders or subscribers. Mr. Hatch also argues that the plan’s proposal to allow BCBSM to retain proceeds in reserves for future obligations (e.g., the pharmaceutical reserve), will result in BCBSM continuing to be in excess of the maximum surplus capacity allowed under Minn. Stat. § 62C.09, subd. 4. Moreover, Mr. Hatch contends that if the Commissioner approves the Blue Cross Plan he will create a precedent where virtually every insurer will be able to create current reserves for future obligations which are neither contracted or required by law. Mr. Hatch also believes that the Blue Cross Plan does not correct the surplus within a reasonable period of time as the expenditures take place over a 20-year period. In addition, the surplus could potentially be subject to repeated taxation in future years to the detriment of the subscribers.

193. Attorney General Hatch is also critical of the Plan’s failure to target benefits to past subscribers. Mr. Hatch points out that the Blue Cross Plan essentially pays a dividend to future subscribers in form of anti-smoking programs, bicycle helmets and smoke detectors. And Mr. Hatch believes that BCBSM is without statutory authority to offer disbursements to the general public with “subscriber money”. Mr. Hatch also maintains that the Blue Cross Plan will have a negative impact on the insurance and health industries in Minnesota. Mr. Hatch argues that BCBSM’s plan to give future disbursements of prescriptions and products to future subscribers, rather than a dividend to the past subscribers who bore the cost, is inequitable and an attempt by BCBSM to gain future business and eliminate competition. Mr. Hatch contends that the Commissioner should not enable such marketing activity on the part of BCBSM by approving their Plan.

194. Finally, Attorney General Hatch argues that the Blue Cross Plan is not in the public interest. Mr. Hatch points out that approximately 20 percent of the premiums paid to BCBSM over the past five years came from City, County, School District and State government. Consequently, Mr. Hatch maintains that it is in the state’s public interest that BCBSM issue a refund of the tobacco settlement proceeds to its subscribers. According to Mr. Hatch, approximately 15 percent of the settlement proceeds would be refunded to the school districts, which would result in the state school districts receiving approximately $60 million. Local governments would receive approximately $10 to $15 million, according to Attorney General Hatch’s calculations.

C. Public Comment at the Hearing in Support of the Blue Cross Plan

195. At the hearing, Paul Pentell, an internist and clinical pharmacologist at Hennepin County Medical Center spoke in support of the Blue Cross Plan. Dr. Pentell has been the director of HCMC’s smoking cessation programs for the past 12 years. Dr. Pentell stated that he believes the Blue Cross Plan makes good medical, financial and public health sense. According to Dr. Pentell, the most important feature of the Plan is the outreach programs. Dr. Pentell explained that such programs, when available at convenient times and in convenient locations, can effectively motivate and encourage people to quit smoking. Dr. Pentell commented that these services are particularly needed in the less advantaged and underserved communities where use of tobacco is high and members bear a disproportionate burden of tobacco-related disease. Dr. Pentell maintains that the Blue Cross Plan is well conceived and targeted to some of the neediest, most difficult to reach, at-risk populations of Minnesota. If given a chance, Dr. Pentell believes that the Blue Cross Plan will substantially improve the health of the disadvantaged community served by HCMC.

196. Dr. Terrence Clark, a physician and lung disease specialist at the Duluth Clinic, also spoke in favor of the Blue Cross Plan. Dr. Clark stated that he thought the tobacco settlement represents a once in a lifetime opportunity to change the course of two modern day epidemics: lung cancer and heart disease. Likewise, Dr. Ann Joseph, an general internist at the VA Hospital in Minneapolis, spoke in support of the Blue Cross Plan. Dr. Joseph believes the proposed plan is sound and that it addresses many of the preventative health measures that are necessary to improve the health of Minnesotans. Dr. Joseph also praised the work of the Blue Cross Foundation in funding several projects and making accessible the tobacco document depository for research. Dr. Joseph believes that the Plan’s proposed distribution to the Blue Cross Foundation will make an important contribution to tobacco control research.

197. Nila Gouldin, Health Program Officer for the Urban Coalition, also spoke at the hearing in support of the Blue Cross Plan. Ms. Gouldin pointed to studies documenting widespread use of tobacco among Minnesota’s young people and adolescents of color. Given these alarming statistics, Ms. Gouldin praised the prevention strategies targeted to children that are incorporated in the Blue Cross Plan. (Pub. Ex. 83, 92, 102).

198. Jim Taylor, President of the Board of the American Lung Association, also supports the Blue Cross Plan. Mr. Taylor especially praised the Plan’s proposed education programs targeted to preventing teenagers from smoking. Other persons speaking at the hearing in favor of the Blue Cross Plan’s to invest proceeds in long-term health education, research, and tobacco use prevention and cessation programs included: Mike Chapman, director of administration of the Wolf Kettering Company; Jeanne Weigum, a volunteer for the Association for Nonsmokers – Minnesota; Joe Griffith, a senior at Mounds Park Academy and youth member of the Smoke Free Coalition’s Kick Butts program; Ron Phillippo, executive director of the Indianhead Council, Boy Scouts of America; Andrew MacKenzie, owner of MacKenzie Marketing; Boyd Stofer, president of United Properties; Sally Phillips, vice chair of the Health Fund, an alliance of 19 health-related nonprofit agencies; Dr. Russell Luepker, American Heart Association volunteer and professor of medicine, epidemiology at the University of Minnesota; Sharon Eichten, principal at Como Park Senior High School; Matt Bostrom, a sergeant with the St. Paul Police Department; and Dr. Stuart Hanson, an internist at the Park Nicollet Clinic and a board member of the Minnesota Action for Partnership Against Tobacco.

D. Public Comment at the Hearing in Opposition to the Blue Cross Plan

199. At the hearing, Joseph Green, General Counsel of TCF National Bank of Minnesota, spoke in opposition to the Blue Cross Plan. Mr. Green contends that the Blue Cross insureds who paid premiums that were higher than they needed to be because of the effects of smoking-related illnesses should be given those premiums back. Mr. Green is especially critical of the Blue Cross Plan’s proposed “wellness” initiatives such as: giving away smoke detectors, providing bicycle helmets, vegetable steamers, and discounts on walking shoes. Mr. Green maintains that Blue Cross represented in its litigation with Big Tobacco that it had passed its costs associated with tobacco to its subscribers in the form of higher premiums. According to Mr. Green, the only appropriate use of the settlement proceeds is to rebate the excessive premiums – not to hand out “cheap trinkets”. [203]

David Feinwachs, general counsel for the Minnesota Hospital and Healthcare Partnership, expressed a “relatively minor concern” about the amount of the proceeds that will be used on “special benefits” for existing Blue Cross subscribers instead of programs targeted to tobacco prevention, cessation or the enhancement of public health. He generally supported the plan, however.

E. Late Filings of Comments

200. Finally, the Administrative Law Judge received 11 written comments that were filed after the January 25^th deadline. The Judge did not consider these comments.

Based upon the foregoing Findings of Fact, the Administrative Law Judge makes the following:

CONCLUSIONS OF LAW

1. The Commissioner of Commerce and the Administrative Law Judge have jurisdiction in this matter under Minnesota law. [204]

2. The Department of Commerce has fulfilled all relevant substantive and procedural requirements of statute and rule in the course of this proceeding.

3. Blue Cross, as the party proposing that certain action be taken, must prove the facts at issue in this proceeding by a preponderance of the evidence. [205]

4. The Commissioner is charged with the enforcement of the laws pertaining to insurance in the State of Minnesota. [206]

5. The Commissioner must ensure that the laws of Minnesota relating to insurance are enforced in a manner consistent with the public interest. [207]

6. The Commissioner has the responsibility to regulate the affairs and operations of nonprofit health service plan corporations such as Blue Cross. [208]

7. The Commissioner must approve Blue Cross’s articles of incorporation and by-laws and the Commissioner is responsible for issuing Blue Cross’s certificate of authority to enter into contracts with subscribers.[209]

8. Blue Cross is obligated by statute to promote “a wider, more economical and timely availability of hospital, medical-surgical, dental, and other health services for the people of Minnesota, through nonprofit, prepaid health service plans . . . while reasonably regulating the formation, continuation, operation, and termination of such service plans by establishment and enforcement of reasonable and practical standards of administration, investments, surplus and reserves.” [210]

9. Blue Cross must, in the course of its operations, establish and adjust the subscription charges to be paid by or on behalf of its subscribers. These charges must be reasonable “in relation to the benefits, considering actuarial projection of the cost of providing or paying for the health services, considering costs of administration, and in relation to reserves and surplus required by law.” [211]

10. Blue Cross must submit its subscription charges and contracts to the Commissioner for approval. [212]

11. Unlike health insurers, Blue Cross is a direct purchaser of health care because it has direct and distinct contractual relations with both (1) its group and individual subscribers and (2) with the hospitals, clinics and doctors who provide health care services. With its member groups and individual subscribers, Blue Cross contracts to provide prepaid health services.[213] With health care providers, Blue Cross enters into service agreements under which providers agree in advance to furnish health care services for a fee to be paid by Blue Cross.[214] A participating health care provider is required to look to Blue Cross for payment and may not directly bill a subscriber.[215]

12. The Commissioner has the regulatory obligation, to “monitor[s] health plan company reserves and net worth as established under chapters 60A [and] 62C” with respect to health plan companies that the Commissioner regulates “to assess the degree to which savings resulting from the establishment of cost containment goals are passed on to consumers in the form of lower premium rates.” [216]

13. The Commissioner has the power to determine if Blue Cross’s “reserves are not properly computed.” [217] In doing so, he must follow reasonable and practical standards with respect to Blue Cross’s surplus and reserves.[218] Because Blue Cross’s surplus is an amount “in addition to all reserves established,” the Commissioner’s authority to measure Blue Cross’s reserves also means that the Commissioner determines whether Blue Cross has an excess surplus and if so, the extent of the excess surplus. In the event that the Commissioner decides that Blue Cross has an excess surplus, the Commissioner can approve a plan for Blue Cross’s use of those proceeds. [219]

14. Blue Cross must maintain a financial surplus, in addition to all reserves established, of not less than 16 2/3 % and not more than 33 1/3 % of the sum of all health service claims incurred, and administrative expenses in connection therewith, during the most recent calendar year. [220]

15. Receipt of the tobacco settlement funds will cause Blue Cross to have excess surplus above the upper limit of 33 1/3 % of the previous calendar year’s claims and expenses.

16. Upon determination that Blue Cross could exceed the surplus limits, the jurisdiction of the Commissioner is invoked.

17. In the Consent Cease and Desist Order, Blue Cross affirmatively waived any contest to the Commissioner’s jurisdiction with respect to its excess surplus status and effectively admitted that it would indeed incur an excess surplus. [221]

18. Blue Cross is obligated to submit a plan for the Commissioner’s approval or disapproval to correct the excess surplus status within a reasonable time.

19. The legislative history shows that the Insurance Commissioner recommendation that led to the enactment of § 62C.09 merely suggested that the regulatory agency be given authority to approve future rates as a mechanism to deal with inadequate or excess surplus conditions. Nothing in the legislative history suggests a retroactive recalculation of premiums is the most appropriate remedy.

20. A rebate option was considered and rejected by Blue Cross.

21. Blue Cross has demonstrated that its Proposed Plan as amended adjusts its operations to correct its excess surplus condition within a reasonable time.

22. Blue Cross’s Proposed Plan, as modified by the terms of the Amended Consent Order, is consistent with the public purposes of nonprofit health service plan corporations and the public interest.

23. Blue Cross Plan provides immediate benefits to its subscribers.

24. Reasonable reporting and accounting procedures are in place to assure the tobacco settlement proceedings will be used in the manner identified in the Plan.

25. The Plan of Action submitted by Blue Cross, together with its Additional Supplement and as modified by the terms of the Amended Consent Order of January 22, 1999, is in the public interest, adequately meets the applicable statutory obligations and mandates, including compliance with the statutory limits of Minn. Stat. § 62C.09 within a reasonable time, and is fair and equitable to subscribers, after additionally considering the Plan’s impact on the regulation and orderly operation of the insurance and health industries in this State.

26. The Commissioner has acted in the public interest in this matter by convening this hearing and establishing an open contested process, and by delegating his decisionmaking authority to a neutral decisionmaker.

27. The Department has acted in this case in its advocacy role and has maintained the proper separation between itself and its counsel, and the decisionmaker exercising the power and authority of the Commissioner in this matter and his counsel.

28. Settlement carries a different connotation in administrative law and practice from the meaning usually ascribed to settlement of civil actions in a court. [222] The courts have determined that they will not discourage regulatory agencies from engaging in administrative settlement procedures by prohibiting summary settlement on terms the agency finds appropriate and provided the agency observes necessary procedural requirements. [223]

29. The Department was legally entitled to settle any part or all of its case against Blue Cross, which it did by issuing the December 31, 1998 Consent Order and the January 22, 1999 Amended Consent Order. [224]

30. The ALJ adopts as Conclusions any Findings of Fact that are more appropriately adopted as Conclusions and adopts as Findings any Conclusions more appropriately adopted as Findings.

31. Citation to exhibits or testimony in the foregoing Findings of Fact does not mean that all testimony or exhibits that support the Finding have been cited.

32. Mr. Johnson’s motion to strike from the record any reference to Brown v. State of Minnesota is denied.

33. Mr. Johnson’s motion to strike from the record any reference to his conduct being sanctionable is granted.

Based on the record, the above Findings of Fact and Conclusions of Law, and for the reasons set out in the following Memorandum, the Administrative Law Judge makes the following:

RECOMMENDATION

It is recommended that the Proposed Plan, as modified by the Amended Consent Order, be approved.

Dated this

10^th

Day of

March

1999.

GEORGE A. BECK

Administrative Law Judge

Reported by: Kirby A. Kennedy & Associates

(612) 922-1955

Transcript prepared

MEMORANDUM

The main issue in this contested case proceeding is whether or not the Commissioner should approve the written plan submitted by Blue Cross and Blue Shield, that is intended to correct its excess surplus situation. Under Minn. Stat. § 62C.09, subd. 3, the surplus of a service plan corporation such as Blue Cross must not exceed 33 1/3 percent of the sum of all health service claims incurred, and the administrative expenses in connection therewith, during the most current calendar year. Blue Cross and the Department have agreed that the $469 million settlement with the tobacco company by Blue Cross will create an excess surplus condition within the meaning of the statute. Early in this proceeding, Intervenor Johnson, a former Blue Cross insured, argued that there was no surplus because the settlement proceeds did not belong to Blue Cross. Mr. Johnson did not pursue this argument in his final brief. However, it seems clear that Blue Cross is the current owner of the settlement funds whether or not there is a legitimate claim to the money by Blue Cross subscribers.

Statutory Interpretation

Minn. Stat. § 62C.09, subd. 4, provides, in part, as follows:

If the surplus is less than the required minimum or more than the required maximum, or if a service plan corporation does not have the required reserves or its reserves are not properly computed, operations shall be adjusted to correct the condition, according to a written plan proposed by the corporation and approved by the commissioner. . . .

Blue Cross and Intervenor Johnson have sharply differing views of the proper interpretation of this statutory language. Blue Cross asserts that the statute should be read in a straightforward fashion to require it to adjust its operations to correct the surplus within a reasonable amount of time. It believes that the Commissioner must also consider the statutory purposes of Chapter 62C, such as to advance the public health in the art and science of health care. Blue Cross suggests that the general language in the statute implies that deference should be given to its business judgment in the actual details of the plan. It argues that the term “operations” is used broadly by the legislature to indicate all of Blue Cross’s powers and functions. It therefore believes that it may correct the surplus by any appropriate adjustment in its operations and not, for example, by merely rebating premiums. The Department generally agrees with this interpretation.

Mr. Johnson argues that the language of the statute is so broad that the legislative history must be incorporated into the statute to save it from being unconstitutional.[225] The history indicates that Commissioner Hunt’s 1970 comments to a legislative committee indicate that one reason for enactment of the statute was to provide for a rate review whenever “the surplus percent to annual premiums indicates that the association is issuing contracts at rates which do not adequately reflect the financial needs of the association and its policy-holders.” Commissioner Hunt observed that a large surplus may mean “that they are likely to be gouging the public.” [226] Based upon these statements, Mr. Johnson argues that the test for the plan must be whether or not it confers a direct immediate financial benefit on those subscribers who paid excessive premiums. He suggests that Blue Cross’s business judgment is not relevant to the statutory language. Mr. Johnson argues that the Commissioner must make his own independent determination of whether or not the plan provides a direct financial benefit to past subscribers.

Blue Cross correctly notes, however, that the legislative history does not indicate that a plan to correct an excess surplus must do so by rebating premiums. The history suggests that the former commissioner believed that a rate review should be conducted in the event of an excess surplus. This suggests that future rates might be adjusted to address an excess surplus, but not that past rates would necessarily be recalculated. Mr. Johnson seeks to read his preferred solution into the statute by reference to statements by the former Commissioner of Insurance. However, the language actually adopted by the legislature provides more discretion to Blue Cross and to the Commissioner in arriving at a remedy. The language is not so vague as to constitutionally require importing a possible interpretation from the legislative history. Blue Cross is required to “adjust its operations” and is not mandated to rebate the surplus to past subscribers. If the legislature intended a rebate, it presumably would have stated that. Additionally, the statute seems to contemplate a situation in which excess premiums were charged to subscribers based upon a faulty calculation. The premiums in this case were accurately calculated. The extraordinary situation of a very large settlement in a lawsuit was obviously not contemplated when the statute was drafted. Nonetheless, the legislative determination clearly was to allow some discretion in how Blue Cross’s operations were to be adjusted.[227] Its proposed plan will not result in its being so rich that “they are likely to be gouging the public.”

Rebates and Direct Benefits to Subscribers

There is, of course, some appeal to the argument that the tobacco settlement should be returned to those who paid premiums during the relevant time period. Some public commenters on fixed incomes saw a need to reduce premium costs. [228] Attorney General Hatch characterizes the settlement as “subscriber money” and argues that it is inequitable to provide benefits to present and future subscribers rather than a dividend to past members. [229] This argument must be considered in the context of the relevant issues in this contested case proceeding, however. As Mr. Johnson points out, it is doubtful that the Commissioner has jurisdiction to adjudicate common law claims advanced by past subscribers, such as restitution or unjust enrichment. These claims must be pursued in court. The main issues in this proceeding are whether Blue Cross is appropriately adjusting its operations, and whether the plan is fair and equitable to subscribers, not in the narrow legal sense of the phase, but in the context of the Commissioner’s overall authority to supervise the industry.

Mr. Johnson also argues that Blue Cross, which considered and rejected rebates, has not demonstrated that its plan will confer any direct immediate financial benefit upon its subscribers. It suggests that this is required by Commissioner Hunt’s statement that Blue Cross’s operations must “adequately reflect the financial needs of . . . its policy holders.” While Mr. Johnson concedes that the tobacco cessation initiatives do have some benefit for subscribers, he argues that only a minor share of the resources are devoted to this and that the tobacco cessation initiatives won’t save subscribers as much money as Blue Cross claims. He points to the past ineffectiveness of cessation efforts as evidence that this plan will not have great effect.

Blue Cross points out that among the direct benefits to subscribers is $109.9 million provided for the tobacco cessation pharmaceutical benefit, which is provided to subscribers without charge. Additionally, the plan calls for $80 million to be spent in three months as part of the member health systems program, which increases benefits for smokers and nonsmokers. Beyond this, the plan will improve the health of members who quit smoking. For example, the risk of a heart attack for a person to quit smoking declines by 50 percent within one year of quitting. Blue Cross also believes that the plan will eventually achieve health care savings in an approximate present value of $1.16 billion, which will reduce premiums that Blue Cross subscribers would otherwise pay in the future. [230] The record clearly indicates that the proposed plan will have a direct benefit to members, one that may eventually exceed the short-term effect of immediate rebates.

Blue Cross asserts that rebates as a solution to the surplus problem would be neither practical nor equitable. It suggests that there would be substantial administrative problems in identifying members from throughout the 20-year time frame covered by the cigarette litigation. For example, about 2/3 of Blue Cross member groups from 1988 are not current Blue Cross member groups. Blue Cross believes that it would be unable to locate 1/3 of the groups with Blue Cross coverage in 1978. It also asserts that the cost of finding members in groups who are no longer with Blue Cross would be expensive and diminish the value of the rebate. Blue Cross also points out that no equitable model for calculating a rebate has been advanced and suggests that arriving at one would result in a legal challenge which could dissipate the settlement.

Mr. Johnson suggests that Blue Cross should simply be required to make reasonable efforts to locate as many of its former subscribers as possible and rebate them a reasonable portion of the proceedings. He points out that Blue Cross concedes that it could likely locate 2/3 of the groups to whom rebates would be issued. Mr. Johnson also argues that Blue Cross has issued rebates in the past as part of the breast implant litigation and in returning discounts received from pharmaceutical companies to its subscribers. Blue Cross points out, however, that in those cases the refund involved claims, for which Blue Cross has records.

The record indicates that a rebate proposal raises practical and equitable problems. Nonetheless, it does appear that Blue Cross would be able to locate a large number of past subscribers were it required to do so. Presumably, locating only those past subscribers who are readily ascertained, would reduce the cost of a rebate program. It seems clear that a rebate program could be proposed by Blue Cross and could be approved by the Commissioner. However, in Blue Cross’s opinion, a rebate is not the most appropriate way to adjust its operations. The Department agrees. The record supports that conclusion. It should also be noted that Mr. Johnson’s acknowledgement that a partial rebate would be a satisfactory result, would seem to imply that Blue Cross and the Commissioner have authority to dispose of a portion of the proceeds in some other fashion. If the Commissioner has this authority as to a portion of the proceeds, it would seem logical that he would have the same authority as to all of the proceeds.

To buttress his interpretation of the statute, Mr. Johnson argues that Blue Cross asserted in the tobacco litigation that it would return its recovery to subscribers. There are a few points in the voluminous record when the concept of subscribers having paid increased premiums due to tobacco was mentioned.[231] The District Court also stated at one point that it saw any recovery inuring directly to the benefit of the subscribers via a pass through of the recovery.[232] However, the record as a whole demonstrates that the tobacco lawsuit was brought as a direct action by Blue Cross with respect to damages. Blue Cross did not assert any claims in a representative capacity because the tobacco industry had success in resisting individual claims through an assumption of risk defense. When the defendants then challenged its standing, the Minnesota Supreme Court found that Blue Cross had standing to assert a direct action for its own claims without standing in the shoes of its subscribers. [233] As Blue Cross points out, Mr. Johnson is still free to sue the tobacco companies on his own behalf since the settlement agreement did not bind any non-party. [234]

Johnson argues that the Commissioner is without authority to adjudicate his or other subscribers’ equitable or legal claims to the settlement proceeds. Johnson has asserted two theories in support of subscriber claims: (1) that Blue Cross breached a special duty to its members by allegedly settling or diminishing their claims against the tobacco companies; and (2) that subscribers have equitable claims to the settlement proceeds. While Johnson concedes that the Commissioner has the exclusive authority to accept or reject Blue Cross’s Proposed Plan, Johnson maintains that the Commissioner has no authority to sit as a judge of the subscribers’ common law claims or to determine which of two litigants has the legal and/or equitable right to a disputed sum of money.

The Department maintains that Minn. Stat. § 62C.09 vests the Commissioner with the exclusive jurisdiction to determine whether Blue Cross has an excess surplus and, if it does, to reduce the surplus by evaluating and approving or disapproving a proposed plan. And the Department contends that where the Legislature has conferred upon an agency the powers to regulate certain issues, the agency obtains exclusive jurisdiction over all questions relating to those issues.[235] Accordingly, the Department asserts that, having been given exclusive regulatory authority over Blue Cross’s excess surplus status, the Commissioner has the authority to determine the claims raised by Johnson.

Blue Cross likewise maintains that Minn. Stat. ch. 62C confers upon the Commissioner the authority to resolve Johnson’s claims against Blue Cross. Blue Cross points out that Minn. Stat. ch. 62C vests the Commissioner with the exclusive jurisdiction to ascertain its financial condition and to approve or disapprove its Proposed Plan. According to Blue Cross, Johnson’s claims to the proceeds go to the very heart of the Commissioner’s jurisdiction over the Blue Cross Plan. Johnson is seeking a refund of premiums that he and other subscribers have paid Blue Cross and, Blue Cross argues, the setting of premiums is within the Commissioner’s exclusive jurisdiction. [236]

The extent of jurisdiction or authority bestowed upon an administrative agency is measured by the statute from which it derives its authority.[237] In Peoples Natural Gas Co., a Div. Of Inter-North, Inc., v. Minnesota Public Utilities Com’n[238], the supreme court held that the Commission lacked statutory authority, either expressed or implied, to require a public utility to refund revenues collected from its customers in violation of a commission order, despite repeated references in the Public Utilities Act to the Commission’s responsibility in assuring that rates are “just and reasonable”[239]. The supreme court explained that it “is elementary that the Commission, being a creature of statute, has only those powers given to it by the legislature.”[240] The court further stated that “[w]hile express statutory authority need not be given a cramped reading, any enlargement of express powers by implication must be fairly drawn and fairly evident from the agency objectives and powers expressly given by the legislature.”[241] In determining whether a power is implied from an agency’s express powers, the court “must look at the necessity and logic of the situation.”[242] Historically, courts have been reluctant to find implied statutory authority and have held that any reasonable doubt of the existence of any particular power should be resolved against the exercise of such power .[243]

The Department of Commerce, being a creature of statute, has only those powers given to it by the legislature. There is no express statutory authority under Minn. Stat. ch. 62C for the Commissioner to determine Johnson’s legal or equitable claims against Blue Cross. Unless implied authority can be “fairly drawn” and is “fairly evident” from the objectives and powers expressly given the Commissioner by the legislature, the Commissioner is without the authority to address Johnson’s claims. Although the Commissioner has exclusive jurisdiction to oversee nonprofit health service plan corporations like Blue Cross, and specifically has the authority to resolve a corporation’s excess surplus status by evaluating and approving a plan, nothing in these chapters gives the Commissioner the authority to resolve equitable and legal claims between such corporations and its subscribers. The Administrative Law Judge finds that the Commissioner’s general authority to set premiums and evaluate financial reserves does not confer on the Commissioner the authority to resolve Johnson’s legal or equitable claims against Blue Cross. Nor can such authority be fairly drawn from the regulatory power expressly given the Commissioner.[244] It is not necessary for the Commissioner to determine Johnson’s equitable and common law claims against Blue Cross in order to carry out his duties of monitoring Blue Cross’s reserves and resolving Blue Cross’s excess surplus condition. And the power to act as a court of equity is not the kind of agency authority that should be implied in the absence of more explicit legislative action.

In addition, the doctrine of “primary jurisdiction”, which allows a court to defer to an agency with concurrent jurisdiction when resolution of an issue requires the agency’s special competence, is not applicable here. In this matter, Johnson’s claims against Blue Cross do not raise issues of policy that require deference to the Department’s expertise for an initial decision. Nor is it necessary for the Commissioner to determine Johnson’s claims against Blue Cross in order to better effectuate the statutory purposes of Minn. Stat. ch. 62C and to ensure uniform results. Rather, Johnson’s common law and equitable claims are within the conventional experience of the judiciary and do not require the exercise of administrative discretion. Accordingly, the ALJ finds that it is doubtful that the Commissioner has jurisdiction to determine Johnson’s common law claims against Blue Cross.

Ultra Vires

Mr. Johnson also argues that because the plan devotes a significant amount of available funds to be used to benefit Minnesotans as a whole as opposed to Blue Cross subscribers, it is an ultra vires act. He asserts that Blue Cross’s Articles of Incorporation limit its authority to act on behalf of Blue Cross and “its subscribers or other covered persons”. Blue Cross points out that an ultra vires act is one which is beyond the power of a corporation as set out in its charter. In this case, specific statutory authority exists granting the power to make donations for religious, scientific, education or charitable purposes. [245] The Blue Cross Articles of Incorporation specifically permit the exercise of the statutory powers.

The Proposed Plan and Other Issues

There was relatively little argument among the parties as to the validity or quality of the plan proposed by Blue Cross.[246] The record provides strong support for the plan through detailed science-based testimony. It will be supervised not only by the Department of Commerce, but also by a Scientific Council of nationally recognized experts co-chaired by former Surgeon General C. Everett Koop. The efforts under the proposed plan will be coordinated with any programs administered by the State of Minnesota to avoid duplication. Although Mr. Johnson suggested that smoking cessation programs have not been effective in the past, expert testimony indicates that recent improvements, especially combining pharmaceutical benefits with counseling, have changed this dynamic. The proposed plan also received strong support in the public testimony. For example, former Surgeon General Koop found the plan to be comprehensive and well thought out in its use of treatment and prevention approaches to address health behavior changes. Many commentors saw the plan as presenting a unique opportunity to improve the health of Minnesotans and to reduce smoking-related health care costs in the future. They pointed out that the Plan was based on well-researched public health theories, that outreach programs are effective, and that it would target and help teenagers.[247]

The record in this proceeding also supports a conclusion that the proposed plan is fair and equitable to subscribers, has a benign impact on the regulation and operation of the insurance and health industries and is in the public interest. The Findings set out the effect of the Plan on subscribers of Blue Cross.[248] They will have access to no-cost smoking cessation aids, including pharmaceuticals and counseling. The Plan will also achieve savings in health care costs for members by reducing future tobacco related health care expenses.

HealthPartners raised a challenge relevant to the impact of the proposed plan on the regulation and orderly operation of the insurance and health care industries in Minnesota. It initially argued that the Plan would allow Blue Cross to improve its market share and would have an adverse effect on the health care marketplace. The Amended Consent Order prohibits Blue Cross from using the proceeds to attract providers for its commercial benefit and allows the Commissioner oversight of the market impact of the Plan. As a result of these modifications, HealthPartners withdrew its objection to the Plan and withdrew as a party. Allina Health System, another major competitor, also supports the Plan.[249] The record supports the conclusion that the Plan will have a positive impact on the regulation and operation of the insurance and health industries.

The public interest is served by the proposed Plan through the research it will provide to deal with addictive behaviors, and through improved health through programs that benefit the public as a whole. The public interest is also demonstrated by the large number of public comments in support of the Plan. Additionally, an important factor in the determination of this matter is the position of the Department of Commerce. The Department is charged with enforcement of insurance regulatory statutes and is responsible for determining and representing the public interest.[250] The record demonstrates a careful effort by the Department to ensure that the proposed plan is consistent with law and the public interest. That effort produced substantial revisions in the proposed plan to the benefit of the public and Blue Cross subscribers. The Department’s action supports the conclusion that the Plan is in the public interest.

Twin City Federal

Twin City Federal National Bank was permitted by the Deputy Commissioner to file a post-hearing brief in this matter. It was denied full-party status. It was therefore unable to present evidence or cross-examine witnesses at the hearing. In the main, the brief filed by TCF repeats and supports the arguments made by Intervenor Johnson. Those arguments are discussed above.

TCF also raises an issue unique to itself, however. It argues that it should be entitled to a rebate if one is granted in this proceeding because it is a “stop loss” insured of Blue Cross. Blue Cross and TCF entered into a servicing plan agreement under which Blue Cross agreed to act as “managed care and claims administrator” for TCF and Blue Cross assumed liability for certain excess claims pursuant to a “stop loss” agreement.

Blue Cross argues that its damage model in the tobacco litigation did not include self-insureds, even those with stop loss coverage or claims administration agreements. Accordingly, Blue Cross concluded that it has no obligation to benefit self-insured groups in its proposed plan and asserts that such groups are still free to bring any valid claim they have against the tobacco company for damages they incurred.

Although it appears unlikely that TCF’s interest was included in the tobacco litigation settlement, the question of its appropriate participation in this proceeding was settled by the decision of the Deputy Commissioner to limit its participation. TCF was permitted to file a written brief without acquiring the status of a party as opposed to being granted intervention as a party with all the rights of a party or being granted intervention as a party with the rights of a party, but limited to specific issues. Accordingly, TCF was not permitted to submit evidence on its own behalf at the hearing. Under the OAH intervention rule, [251] TCF’s participation is appropriately limited to presenting argument on the issues raised by the parties. Generally, intervenors are only allowed to argue issues that had been raised by the principal parties and not expand the scope of the case. [252] Limited intervention has been found to be appropriate in administrative proceedings. [253] It should be noted that TCF also participated in the public comment portion of this proceeding and was able to advance its position in that way.[254]

G.A.B.

[6] Notice of and Order for Hearing and Order for Prehearing Conference; Aff. Of Service of Sue Oesterreich (dated Sept. 29, 1998).

[9] See Findings of Fact Nos. 74 to 83, infra, as to the Dakota County litigation.

[22] BC Exs. 10, 11, and 12; Consent Order, 4.

[24] Consent Order, BC Ex. 52. See Finding of Fact No. 100, infra.

[33] The public comments are summarized at Findings of Fact Nos. 195 to 199, infra.

[41] The comments are summarized at Findings of Fact Nos. 181 to 194, infra.

[42] T. 19, Minn. Stat. §§ 62C.06, 62C.08, BC Ex. 47.

[46] Minn. Stat. §§ 62C.14, subds. 1, 6, 9; T. 357-58.

[55] State by Humphrey v. Philip Morris Inc., 551 N.W.2d 490, 492 (Minn. 1996)).

[57] Johnson Ex. 18 at BL92, BL100, BL187; Johnson Ex. 22 at BL35-38, BL42-44; 14-17, 21-23; Johnson Ex. 94 at 18-22, 25-34, BC Ex. 92 at 2-3; BC Ex. 93 at 12-15.

[58] Johnson Ex. No. 5 (see also T. 103-105).

[59] State by Humphrey v. Philip Morris Inc., 551 N.W.2d 490.

[60] Johnson Ex. No. 5; see also T. 75-76, 79.

[69] T.at 27-29; BC Ex. 51a; Johnson Ex. 26).

[71] State by Humphrey v. Philip Morris Inc., 551 N.W.2d 490, 492. (“Blue Cross alleges damages resulting from that fact that it has paid and will pay substantially higher amounts to its contracted health care providers ....”).

[72] T. 495; Johnson Ex. 26 at ¶¶ C(2), L).

[79] Order Following Prehearing Conference (dated October 9, 1998).

[80] Letter of Sam Heins, Esq. to Administrative Law Judge Beck, dated October 8, 1998.

[81] Letter of Administrative Law Judge Beck to Commissioner David B. Gruenes, dated October 8, 1998.

[82] Letter of David B. Gruenes to Administrative Law Judge Beck, et al., dated October 8, 1998.

[83] Order Following Second Prehearing Conference, dated October 19, 1998.

[95] T. 194-96, 205; 436; BC Ex. 16 at 25.

[101] T. 371; T. 37-38; BC Ex. 20 at 1-2.

[104] T. 379-82, 405; T. 39, 46; BC Ex. 52.

[128] T. 225-26, 237-38; 328; 439; BC Ex. 16 at 46-47, Johnson Ex. 32 at BC336.

[131] T. 239-40; Johnson Ex. 32 at BC335-36.

[144] Johnson Ex. 21 at BL831-36, BL882-93, BL903-906.

[145] Johnson Ex. 21 at BL835, BL887-889.

[150] T. 355-56, 376, 388-89; BC Ex. 127 at p. 6 ¶ 19.

[166] T. 388, 403, 405-08; BC Ex. 127 pp. 13-14 ¶¶ 17, 22.

[170] T. 34, 49; 220, 224, 245-46, 332-33, 437-38.

[177] T. 475-76, 499. There is no evidence in the record regarding any methodology to determine how the settlement proceeds would be split between Blue Cross and Blue Cross subscribers.

[182] BC Ex. 16 at 16-17; BC Ex. 131 at pp. 10-11.

[185] T. 52; BC Ex. 16 at 17, Johnson Ex. 32 at BC339-40.

[192] Public Exs. 3, 7-13, 15, 19, 21, 23, 25-30, 36, 38, 40, 41, 43, 45-52, 54, 55-74, 76-82, 84-90, 94, 96-101, 103-104, 107-115.

[199] Public Exs. 1, 4, 5, 16, 22, 24, 32, 33.

[204] Minn. Stat. §§ 45.027, 62A.03, 60B, 60C.09 and Amended Notice of and Order for Hearing.

[207] Minn. Stat. §§ 45.027, subd. 7(1), 60A.052, subd. 1, 62C.01, and 62C.08.

[209] Minn. Stat. §§ 62C.06, subd. 1, 62C.08, subd. 2.

[212] Minn. Stat. § 62C.15, subds. 2 and 4.

[222] Pennsylvania Gas & Water Co. v. Federal Power Comm’n., 463 F.2d 1242, 1246 (D.C. Cir. 1972).

[224] Minn. Stat. § 14.59, Minn R. 1400.5900.

[225] See e.g. In Re Risk Level Determination of C.M., 578 N.W.2d 391, 396 (Minn. Ct. App. 1998).

[227] Authority does exist for regulators having considerable discretion in fashioning a remedy in similar situations. Blue Shield of Md., Inc. v. Ward Machinery Co., 431 A.2d 727, 733 (Md. Ct. Spec. App. 1981) appeal dismissed 440A.2d 386 (Md. 1986); Appeal of Bolden, 848 F.2d 201 (DC. Cir. 1988).

[233] State v. Philip Morris, 551 N.W.2d 490, 495 (Minn. 1996). See also, Brown v. State, No. 98-11152 (Henn. Ct. Dist. Ct. December 15, 1998).

[235]See, e.g., Olson v. Chicago, Great Western Ry. Co., 259 N.W. 70, 72-73 (1935) (statute prescribing uniform system of warning signs at railroad crossings indicates legislative intent to confer upon Railroad and Warehouse Commission exclusive jurisdiction over all questions relating to railroad crossings).

[236]St. Paul Area Chamber of Commerce v. Minnesota Public Serv. Comm’n, 251 N.W.2d 350, 353 (1977) (rate determination “is an inherently legislative function not to be exercised by the courts.”).

[237] Frost-Benco Elec. Ass’n v. Minnesota Public Utilities Com’n, 358 N.W.2d 639, 642 (Minn. 1984) (quoting McKee v. County of Ramsey, 310 Minn. 192, 195, 245 N.W.2d 460, 462 (1976)).

[240] 369 N.W.2d at 534 (quoting Great Northern Railway Co. v. Public Service Commission, 284 Minn. 217, 220, 169 N.W.2d 732, 735 (1969)).

[243] In re Petition of Northern States Power Co., 414 N.W.2d 383, 387 (Minn. 1987) (quoting Great Northern Railway Co. v. Public Service Commission, 284 Minn. 217, 220, 169 N.W.2d 732, 735 (1969)).

[244] See, Minnegasco, a Div. Of NorAm Energy Corp. v. Minnesota Public Utilities Com’n, 549 N.W.2d 904 (Minn. 1996).

[246] The Plan is described in detail at Findings of Fact Nos. 105-135.

[247] Findings of Fact Nos. 185, 195, 197 and 198.

[250] Reserve Life Ins. Co. v. Commissioner of Commerce, 402 N.W.2d 631, 634 (Minn. Ct. App. 1987).

[252] National Association of Regulatory Utility Commissioners v. ICC, 41 F.3d 721, 729 (D.C. Cir. 1994); Twin City Milk Producers Association v. Helger, 271 N.W. 253 (Minn. 1937).

[253] Minnesota Loan & Thrift Company v. Commerce Commission, 278 N.W.2d 522 (Minn. 1979).

OFFICE OF ADMINISTRATIVE HEARINGS