## Facts

- Blue Cross & Blue Shield of Rhode Island was the largest health insurer in Rhode Island and contracted with providers to furnish care to its subscribers.
- Ocean State Physicians Health Plan, Inc. began operating in 1984 as a for-profit HMO largely owned by its participating physicians and paid participating physicians on a fee-for-service basis.
- Ocean State offered lower premiums and additional coverage, in part because participating physicians accepted fees about 20% lower than Blue Cross’s rates.
- In response to Ocean State’s growth, Blue Cross (1) created a competing HMO (HealthMate), (2) adopted a three-tier employer premium structure, and (3) added a “prudent buyer” clause to physician contracts.
- Under the tiered pricing, employers offering only Blue Cross paid the lowest rates; those offering Blue Cross, HealthMate, and another HMO paid intermediate rates; and those offering Blue Cross plus competing HMOs other than HealthMate paid the highest Blue Cross rates, justified by Blue Cross as reflecting adverse-selection risk.
- Under the prudent buyer (MFN-like) clause, if a physician accepted lower fees from another plan, the physician had to accept the same lower fees for services to Blue Cross subscribers.
- After the prudent buyer clause, many physicians left Ocean State’s network, which Ocean State attributed to physicians’ unwillingness to reduce Blue Cross reimbursements.
- Ocean State and a class of its participating physicians sued, alleging monopolization/attempted monopolization under Sherman Act § 2 and tortious interference with Ocean State’s physician contracts under Rhode Island law.
- A jury found liability on both claims, but the district court entered judgment notwithstanding the verdict for Blue Cross, concluding the conduct was legitimate competition; the plaintiffs appealed.

## Issues

1. Whether Blue Cross’s creation of HealthMate, tiered employer pricing, and prudent buyer/MFN clause constituted exclusionary or predatory conduct supporting monopolization or attempted monopolization under Sherman Act § 2.
2. Whether the same conduct was “improper” interference sufficient to establish tortious interference with contractual relations under Rhode Island law.

## Decision

- The First Circuit affirmed the district court’s JNOV for Blue Cross on the Sherman Act § 2 claim.
- The court held that the tiered pricing could be a legitimate response to different actuarial risks associated with adverse selection when employers offer competing HMOs.
- The court held that the prudent buyer/MFN clause was a plausible cost-containment measure aimed at obtaining the best available provider prices, not exclusionary conduct merely because it made participation in Ocean State less attractive to some physicians.
- The court concluded plaintiffs showed harm to Ocean State as a rival but did not sufficiently show harm to competition or predation (such as irrational profit sacrifice or below-cost pricing).
- The court also affirmed JNOV on the tortious interference claim because lawful competitive conduct was not “improper” interference under the governing tort standard.

## Legal Principles

- Sherman Act § 2 condemns monopoly maintenance through exclusionary or predatory conduct, not aggressive competition that has plausible efficiency justifications.
- A dominant firm may respond to entry by offering competing products and adjusting pricing, including in ways that disadvantage rivals, when the conduct is rational and related to legitimate business considerations such as risk and cost.
- Most-favored-nation-style clauses are not inherently unlawful; they may be lawful when used to control costs and obtain favorable prices, even if they change counterparties’ incentives and incidentally disadvantage competitors.
- Antitrust injury requires harm to the competitive process (e.g., reduced output, higher prices, diminished consumer choice), not merely harm to a competitor.
- Where challenged conduct is legitimate competition, it generally cannot satisfy the “improper” element required for tortious interference with contractual relations.

## Conclusion

The First Circuit upheld judgment for Blue Cross because the challenged strategies—including a competing HMO, risk-based tiered premiums, and an MFN-like physician clause—were treated as legitimate competition with plausible cost and risk justifications, insufficient to prove exclusionary conduct under Sherman Act § 2 or improper interference under Rhode Island tort law.


Ocean State Physicians Health Plan, Inc. v. Blue Cross & Blue Shield of R.I., 883 F.2d 1101 (1st Cir. 1989)