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Kansas Supreme Court reverses lower court's decision allowing Anthem acquisition of Kansas Blue

In an unanimous decision, the Kansas Supreme Court has reversed a Shawnee County District Court decision which would have allowed the Anthem Insurance Companies (Anthem) to acquire Blue Cross and Blue Shield of Kansas (BCBSKS).

The Commissioner said the merger would drain Blue Cross and Blue Shield of Kansas' financial surplus and raise premium rates for the small group and individual market by $248 million over five years.

As a result, the Supreme Court affirmed the Kansas Insurance Department's order of February 11, 2002, which disapproved Anthem's bid for acquisition of Kansas' largest health insurer. Today's decision arose from an appeal by then-Insurance Commissioner Kathleen Sebelius. Sandy Praeger, the current insurance commissioner, was substituted as a party in the lawsuit in February.

Reviewing the district court's opinion under the Kansas Act for Judicial Review and Civil Enforcement of Actions (KJRA), the Supreme Court held the Insurance Commissioner properly interpreted the Kansas Insurance Holding Companies Act and determined the Commissioner's decision was adequately supported by evidence, as required by statute.

Citing the broad authority granted the Insurance Commissioner by the legislature Anthem/Blue Cross under the Insurance Holding Companies Act, the Court determined that while operating within this discretionary authority, the Commissioner is regarded as an expert in the field of regulation of the insurance industry. As a result, the Court was required to pay substantial deference to her interpretations and decisions, when they have a rational basis.

Following a public hearing and the receipt of voluminous evidence, the Commissioner had determined that the $131 million reduction of BCBSKS's surplus during its conversion from a mutual insurance company to a stock company, combined with Anthem's likely additional surplus reductions and premium rate increases after it acquired BCBSKS, constituted changes to management strategies which were not fair and reasonable to policyholders nor in the public interest.

The Commissioner also found the likely increases in premium rates and reductions in surplus would ultimately weaken the financial standing of the state's dominant health insurer and place a substantial financial burden on the insurance-buying public. A part of her findings of fact, the Commissioner said the merger would drain Blue Cross and Blue Shield of Kansas' financial surplus and raise premium rates for the small group and individual market by $248 million over five years.

In appealing the Insurance Commissioner's ruling through the courts, David Frick, Anthem's Executive Vice President, stated that, "Anthem did not agree with the (insurance) department's conjecture that small group rates would rise faster under Anthem BCBS than they would if this acquisition does not go forward." "But we felt that the issue of premiums for Kansas small businesses was of concern and we could address it proactively, Frick continued."

The proposal by anthem included a Small Business Rate Stabilization Fund would begin with a balance of $25 million. At the discretion of the Commissioner, the fund could be accessed on a sliding scale for five years, with 40 percent, or $10 million, available for use in the first year.

Anthem felt that the fund, "provide(d) a safety net for small businesses facing increases in health insurance premiums," Frick said. "Anthem Blue Cross and Blue Shield's track record demonstrates that our premiums have remained consistent with general market levels wherever we operate.

In addition to holding the reasons stated for the Commissioner's disapproval were valid and the evidence cited by the Commissioner adequately supported her decision, the Supreme Court also held the Commissioner did not act in an arbitrary and capricious manner nor exceeded the authority properly granted by the legislature. Answering a related challenge to the constitutionality of the Kansas Insurance Holding Companies Act, the Court determined that statutory plan permissible under the Kansas Constitution.

In the absence of further motions, the release of the Court's decision completes the case, and no further action is required of the parties or the district court.

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