STATE OF MICHIGAN

FRANK J. KELLEY, ATTORNEY GENERAL

Opinion No. 5761

August 21, 1980

BLUE CROSS-BLUE SHIELD:

Authority to establish or operate malpractice insurance business

Blue Cross-Blue Shield of Michigan is without legal authority to establish or operate, directly or indirectly, a malpractice insurance business.

E. C. Mackey

Acting Commissioner of Insurance

Michigan Insurance Bureau

Department of Commerce

1048 Pierpont

Lansing, Michigan

You have requested my opinion on the following question:

Blue Cross and Blue Shield of Michigan (BCBSM) proposes to organize a wholly-owned, non-profit stock corporation (Company) to act as attorney-in-fact for a reciprocal insurance exchange (Exchange) which will be established to acquire the business and assets of the Brown-McNeely Insurance Fund (Fund) which insures physicians against malpractice. BCBSM proposes to have at least three pelrsons as their agents incorporate such Company with initial capitalization of fifty to one hundred thousand dollars to be furnished by BCBSM for the purpose of providing administrative services to the Exchange. BCBSM will be the sole shareholder of the Company and will elect its ten member board. Additional capital will be obtained through the issuance of stock to BCBSM in return for certain services performed by BCBSM to the Company on a cost basis so as to organize and qualify the Exchange as an insurer. These costs will be reimbursed to the Company by the Exchange from assets transferred to it by the Fund.

BCBSM proposes, through the Company, to induce the policyholder physicians to transfer from the Fund at its termination of business on June 30, 1980 by entering into subscriber agreements with the Company acting as attorney-in-fact. These subscriber agreements will be irrevocable, which means that the only attorney-in-fact which the wholly owned Exchange may have will be that created by BCBSM. The effect of all of the above is that, initially, BCBSM will incorporate a non-profit attorney-in-fact. This attorney-in-fact will then create the Exchange by soliciting subscriber agreements among the policyholder physicians, which will irrevocably tie the Company acting as attorney-in-fact and the Exchange together.

The predecessors to BCBSM were organized as two non-profit corporations for the purposes of 1939 PA 108, MCLA 550.301 et seq; MSA 24.591 et seq, and 1939 PA 109, MCLA 550.501 et seq; MSA 24.621 et seq. It should be noted that the incorporation of Michigan Hospital Service, one of the predecessors of BCBSM, for purposes of 1939 PA 109, supra, was accomplished pursuant to 1931 PA 327, Sec. 117; MCLA 450.117; MSA 21.118. The two health care companies were consolidated in accordance with 1978 PA 331, which added Section 9A to 1939 PA 108, supra, and 1978 PA 332, which added Section 3B to 1939 PA 109, supra.

The Michigan Supreme Court, in Blue Cross & Blue Shield of Michigan v Insurance Commissioner, 403 Mich 399; 270 NW2d 845 (1978), considered the nature of BCBSM and stated:

Relying upon its decision in Michigan Hospital Service [Blue Cross] v Sharpe, 339 Mich 357; 63 NW2d 638 (1954), the Court stated, at 418:

The necessity for and the purpose of the statute authorizing the creation of BCBSM was reviewed and explicated by the Supreme Court at 420:

A plain reading of 1939 PA 108 and 109, supra, indicates that the legislature recognized the 'unique' nature of the companies it was authorizing by providing that such companies would not be subject to the provisions of the general corporations act (1931 PA 32) as they affected profit corporations and that such companies would not be subject to the Insurance Code of 1956, 1956 PA 218; MCLA 500.100 et seq; MSA 24.1100 et seq, and its extensive regulatory requirements. 1939 PA 108, supra, Sec. 2, contains the following language:

1939 PA 109, supra, Sec. 1, contains the following language:

There is no statutory basis in either 1939 PA 108, supra, or 1939 PA 109, supra, for BCBSM to operate a commercial insurance company through a wholly owned subsidiary. But, assuming arguendo, a statutory basis for such activity, such grant of authority would be unconstitutional. In Associated Hospital Service of Maine v Mahoney, 213 A2d 712 (1965), the Blue Cross organization within the State of Maine, a health services provider, was granted, by separate statute, the authority to provide an extended benefit program. The Maine Supreme Court concluded that this was a form of commercial insurance and that because of the advantages which Blue Cross of Maine enjoyed, including its tax free status, the commercial companies would be denied the equal protection of the law.

The legislature would not have conferred statutory preferential status upon BCBSM if it had intended to authorize BCBSM to engage in commercial insurance. The purposes of BCBSM are set forth in the enabling status as described by the Michigan Supreme Court in Blue Cross & Blue Shield of Michigan v Insurance Commissioner, supra. Had the legislature intended medical care and hospital service corporations to be able to engage in the full range of insurance activities not reasonably related to BCBSM's statutorily described purposes, 1939 PA 108, supra, and 1939 PA 109, supra, would have contained provision therefor. Because there is no specific authorization by the legislature authorizing BCBSM to engage in commercial insurance as a casualty insurer doing malpractice business, it is my opinion that BCBSM may not engage in commercial insurance activities.

Nor is it possible to imply that it is reasonable for BCBSM to engage in medical malpractice insurance in order to fulfill its medical care and hospital service purposes. BCBSM or its predecessors have existed for forty years without engaging in such activities and the commercial market fully services this area of insurance at this time.

Moreover, if the legislature intended to authorize, by implication, BCBSM to engage in commercial insurance business, then such grant of authority would be outside the scope of the titles to 1939 PA 108, supra, and 1939 PA 109, supra. Const 1963, art 4, Sec. 24 provides:

The title of 1939 PA 108, supra, reads:

The title of 1939 PA 109, supra, reads:

The Michigan Supreme Court has stated that under Const 1963, art 4, Sec. 24, an act may include matters germane to its object and all provisions which directly relate to, carry out and implement the principal object. Advisory Opinion Re Constitutionality of 1972 PA 294, 389 Mich 441; 208 NW2d 469 (1973). Clearly, the object of 1939 PA 108, supra, and of 1939 PA 109, supra, respectively, was to provide for the creation of non-profit health care companies. The creation of commercial insurance companies is not germane to that object.

Nor may the creation of a malpractice insurer be considered a proper exercise of BCBSM's investment powers. It is not an investment because the generally accepted meaning of investment is:

Indeed, BCBSM has made it very clear in its proposal to you that the creation of a malpractice insurer is not intended to be an income-producing venture.

The creation of the subsidiary corporation to operate the Fund as a reciprocal exchange may not be analogized to the recent authorization by this office for BCBSM to wholly own Health Central, Inc., a non-profit Health Maintenance Organization (HMO) stock subsidiary because, as pointed out in the letter opinion addressed to Insurance Commissioner Thomas C. Jones, dated September 29, 1976, BCBSM is authorized to operate an HMO. It is important to note that prior to January 1, 1975, all HMOs in the State of Michigan were incorporated under 1939 PA 108, supra, and 1939 PA 109, supra, because those statutes required that all non-profit medical care corporations and all non-profit hospital care corporations be incorporated thereunder.

The health maintenance organization act, 1974 PA 264, as amended; MCLA 325.901 et seq; MSA 14.1280 et seq, effective January 1, 1975, requires, in sections 12 and 46, that any HMO incorporated under 1939 PA 108, supra, and 1939 PA 109, supra, file articles of incorporation as a non-profit corporation within twelve months of the effective date of the act, which was January 1, 1975. If the HMO failed to do so, the act authorized the Commissioner of Insurance to suspend the operation of the HMO until appropriately licensed. Further recognition that corporations organized under 1939 PA 109, supra, were authorized to operate HMOs is evident from the amendment made to 1939 PA 109, supra, Sec. 3, by 1973 PA 75; MCLA 550.503; MSA 24.623, a portion of which reads as follows:

The September 26, 1976 opinion concluded on the basis of the language of 1939 PA 109, supra, and the language of the health maintenance organization act, supra, that BCBSM may operate an HMO. It was not necessary for BCBSM to incorporate such an HMO except for the fact that the subsequent health maintenance organization act, supra, required such incorporation to be made.

On July 27, 1979, an Assistant of this office advised Mr. Joseph A. Murphy, General Counsel for BCBSM, that there was no legal prohibition against BCBSM wholly owning a non-profit HMO stock subsidiary (Health Central, Inc.). That advice relied upon the September 29, 1976 letter opinion to Insurance Commissioner Thomas C. Jones. By contrast to the HMO situation, there is no statutory language, in either 1939 PA 108, supra, or 1939 PA 109, supra, which would even remotely authorize BCBSM to operate a malpractice insurance company.

It is, therefore, my opinion that BCBSM may not establish or operate, directly or indirectly, a malpractice insurance business.

Frank J. Kelley