Group Life & Health Insurance v. Royal Drug Co.

440 U.S. 205, 99 S. Ct. 1067, 59 L. Ed. 2d 261, 1979 U.S. LEXIS 29

• Court: Supreme Court of the United States
• Decided: February 28, 1979
• Docket: 77-952
• Status: Published

Opinions

Mr. Justice Stewart

delivered the opinion of the Court.

The respondents, 18 owners of independent pharmacies in San Antonio, Tex., brought an antitrust action in a Federal District Court against the petitioners, Group Life and Health Insurance Co., known as Blue Shield of Texas (Blue Shield), and three pharmacies also doing business in San Antonio. The complaint alleged that the petitioners had violated § 1 of the Sherman Act, 15 U. S. C. § 1, by entering agreements to fix the retail prices of drugs and pharmaceuticals, and that the activities of the petitioners had caused Blue Shield’s policyholders not to deal with certain of the respondents, thereby constituting an unlawful group boycott. The trial court granted summary judgment to the petitioners on the ground that the challenged agreements are exempt from the antitrust laws under § 2 (b) of the McCarran-Ferguson Act, 59 Stat. 34, as amended, 61 Stat. 448, 15 U. S. C. § 1012 (b), because the agreements are the “business of insurance,” are “regulated by [Texas] law,” and are not “boycotts” within the meaning of § 3 (b) of the Act, 59 Stat. 34, 15 U. S. C. (b).¹ 415 F. Supp. 343 (WD Tex.). The Court of Appeals for the Fifth Circuit reversed the judgment. Holding that the agreements in question are not the “business of insurance” within the meaning of §2 (b), the appellate court did not reach the other questions decided by the trial court. 556 F. 2d 1375. We granted certiorari because of intercircuit conflicts as to the meaning of the phrase “business of insurance” in § 2 (b) of the Act.² 435 U. S. 903.

I

Blue Shield offers insurance policies which entitle the policyholders to obtain prescription drugs. If the pharmacy selected by the insured has entered into a “Pharmacy Agreement” with Blue Shield, and is therefore a participating pharmacy, the insured is required to pay only $2 for every prescription drug. The remainder of the cost is paid directly by Blue Shield to the participating pharmacy. If, on the other hand, the insured selects a pharmacy which has not entered into a Pharmacy Agreement, and is therefore a nonparticipating pharmacy, he is required to pay the full price charged by the pharmacy. The insured may then obtain reimbursement from Blue Shield for 75% of the difference between that price and $2.

Blue Shield offered to enter into a Pharmacy Agreement with each licensed pharmacy in Texas. Under the Agreement, a participating pharmacy agrees to furnish prescription drugs to Blue Shield’s policyholders at $2 for each prescription, and Blue Shield agrees to reimburse the pharmacy for the pharmacy’s cost of acquiring the amount of the drug prescribed. Thus, only pharmacies that can afford to distribute prescription drugs for less than this $2 markup can profitably participate in the plan.³

The only issue before us is whether the Court of Appeals was correct in concluding that these Pharmacy Agreements are not the “business of insurance” within the meaning of § 2 (b) of the McCarran-Ferguson Act. If that conclusion is correct, then the Agreements are not exempt from examination under the antitrust laws.⁴ Whether the Agreements are illegal under the antitrust laws is an entirely separate question, not now before us.⁵

II

A

As the Court stated last Term in St. Paul Fire & Marine Ins. Co. v. Barry, 438 U. S. 531, 541,⁶ the starting point in a case involving construction of the McCarran-Ferguson Act, like the starting point in any case involving the meaning of a statute, is the language of the statute itself. See also Blue Chip Stamps v. Manor Drug Stores, 421 U. S. 723, 756 (Powell, J., concurring). It is important, therefore, to observe at the outset that the statutory language in question here does not exempt the business of insurance companies from the scope of the antitrust laws. The exemption is for the “business of insurance,” not the “business of insurers”:

“The statute did not purport to make the States supreme in regulating all the activities of insurance companies; its language refers not to the persons or companies who are subject to state regulation, but to laws 'regulating the business of insurance.’ Insurance companies may do many things which are subject to paramount federal regulation; only when they are engaged in the ‘business of insurance’ does the statute apply.” SEC v. National Securities, Inc., 393 U. S. 453, 459-460. (Emphasis in original.)

Since the law does not define the “business of insurance,” the question for decision is whether the Pharmacy Agreements fall within the ordinary understanding of that phrase, illumined by any light to be found in the structure of the Act and its legislative history. Cf. Ernst & Ernst v. Hochfelder, 425 U.S. 185,199, and n. 19.

B

The primary elements of an insurance contract are the spreading and underwriting of a policyholder’s risk. “It is characteristic of insurance that a number of risks are accepted, some of which involve losses, and that such losses are spread over all the risks so as to enable the insurer to accept each risk at a slight fraction of the possible liability upon it.” 1 G. Couch, Cyclopedia of Insurance Law § 1:3 (2d ed. 1959). See also R. Keeton, Insurance Law § 1.2 (a) (1971) (“Insurance is an arrangement for transferring and distributing risk”); 1 G. Richards, The Law of Insurance § 2 (W. Freedman 5th ed. 1952).⁷

The significance of underwriting or spreading of risk as an indispensable characteristic of insurance was recognized by this Court in SEC v. Variable Annuity Lije Ins, Co., 359 U. S. 65. That case involved several corporations, representing themselves as “life insurance” companies, that offered variable annuity contracts for sale in interstate commerce. The companies were regulated by the insurance commissioners of several States. Purchasers of the contracts were not entitled to any fixed return, but only to a pro rata participation in the investment portfolios of the companies. Thus a policyholder could receive substantial sums if investment decisions were successful, but very little if they were not. One of the questions presented was whether these variable annuity contracts were the “business of insurance” under § 2 (b) of the McCarran-Ferguson Act.⁸ The Court held that the annuity contracts were not insurance, even though they were regulated as such under state law and involved actuarial prognostications of mortality. Central to the Court's holding was the premise that “the concept of 'insurance' involves some investment risk-taking on the part of the company.” 359 U. S., at 71. Since the variable annuity contracts offered no guarantee of fixed income, they placed all the investment risk on the annuitant and none on the company. Ibid. The Court concluded, therefore, that the annuities involved “no true underwriting of risks, the one earmark of insurance as it has commonly been conceived of in popular understanding and usage.” Id., at 73 (footnote omitted). Cf. German Alliance Ins, Co. v. Lewis, 233 U. S. 389, 412 (“The effect of insurance — indeed it has been said to be its fundamental object — is to distribute the loss over as wide an area as possible”).

The petitioners do not really dispute that the underwriting or spreading of risk is a critical determinant in identifying insurance. Rather they argue that the Pharmacy Agreements do involve the underwriting of risks. As they state in their brief:

“In Securities and Exchange Commission v. Variable Annuity Lije Insurance Co., 359 U. S. 65, 73 (1959), the 'earmark’ of insurance was described as the 'underwriting of risks’ in exchange for a premium. Here the risk insured against is the possibility that, during the term of the policy, the insured may suffer a financial loss arising from the purchase of prescription drugs, or that he may be financially unable to purchase such drugs. In consideration of the premium, Blue Shield assumes this risk by agreeing with its insureds to contract with Participating Pharmacies to furnish the needed drugs and to reimburse the Pharmacies for each prescription filled for the insured. In short, each of the fundamental elements of insurance is present here — the payment of a premium in exchange for a promise to indemnify the insured against losses upon the happening of a specified contingency.”

The fallacy of the petitioners’ position is that they confuse the obligations of Blue Shield under its insurance policies, which insure against the risk that policyholders will be unable to pay for prescription drugs during the period of coverage, and the agreements between Blue Shield and the participating pharmacies, which serve only to minimize the costs Blue Shield incurs in fulfilling its underwriting obligations.⁹ The benefit promised to Blue Shield policyholders is that their premiums will cover the cost of prescription drugs except for a $2 charge for each prescription.¹⁰ So long as that promise is kept, policyholders are basically unconcerned with arrangements made between Blue Shield and participating pharmacies.¹¹

The Pharmacy Agreements thus do not involve any underwriting or spreading of risk, but are merely arrangements for the purchase of goods and services by Blue Shield. By agreeing with pharmacies on the maximum prices it will pay for drugs, Blue Shield effectively reduces the total amount it must pay to its policyholders. The Agreements thus enable Blue Shield to minimize costs and maximize profits. Such cost-savings arrangements may well be sound business practice, and may well inure ultimately to the benefit of policyholders in the form of lower premiums, but they are not the “business of insurance.”¹²

The Pharmacy Agreements are thus legally indistinguishable from countless other business arrangements that may be made by insurance companies to keep their costs low and thereby also keep low the level of premiums charged to their policyholders. Suppose, for example, that an insurance company entered into a contract with a large retail drug chain whereby its policyholders could obtain drugs under their policies only from stores operated by this chain. The justification for such an agreement would be administrative and bulk-purchase savings resulting from obtaining all of the company's drug needs from a single dealer. Even though these cost savings might ultimately be reflected in lower premiums to policyholders, would such a contract be the “business of insurance”? Or suppose that the insurance company should decide to acquire the chain of drug stores in order to lower still further its costs of meeting its obligations to its policyholders. Such an acquisition would surely not be the “business of insurance.” SEC v. National Securities, Inc., 393 U. S. 453.¹³

C

Another commonly understood aspect of the business of insurance relates to the contract between the insurer and the insured. In enacting the McCarran-Ferguson Act Congress was concerned with:

“The relationship between insurer and insured, the type of policy which could be issued, its reliability, interpretation, and enforcement — these were the core of the ‘business of insurance.’ Undoubtedly, other activities of insurance companies relate so closely to their status as reliable insurers that they too must be placed in the same class. But whatever the exact scope of the statutory term, it is clear where the focus was — it was on the relationship between the insurance company and the policyholder.” SEC v. National Securities, Inc., supra, at 460.

The Pharmacy Agreements are not “between insurer and insured.” They are separate contractual arrangements between Blue Shield and pharmacies engaged in the sale and distribution of goods and services other than insurance.

The petitioners argue that nonetheless the Pharmacy Agreements so closely affect the “reliability, interpretation, and enforcement” of the insurance contract and “relate so closely to their status as reliable insurers” as to fall within the exempted area.¹⁴ This argument, however, proves too much.

At the most, the petitioners have demonstrated that the Pharmacy Agreements result in cost savings to Blue Shield which may be reflected in lower premiums if the cost savings are passed on to policyholders. But, in that sense, every business decision made by an insurance company has some impact on its reliability, its ratemaking, and its status as a reliable insurer. The manager of an insurance company is no different from the manager of any enterprise with the responsibility to minimize costs and maximize profits. If terms such as “reliability” and “status as a reliable insurer” were to be interpreted in the broad sense urged by the petitioners, almost every business decision of an insurance company could be included in the “business of insurance.” Such a result would be plainly contrary to the statutory language, which exempts the “business of insurance” and not the “business of insurance companies.”

Ill

The conclusion that the Pharmacy Agreements are not the “business of insurance” is fully confirmed by the legislative history of the McCarran-Ferguson Act. The law was enacted in 1945 in response to this Court’s decision in United States v. South-Eastern Underwriters Assn., 322 U. S. 533. The indictment in that case charged that the defendants had conspired to fix insurance rates and commissions, and had conspired to boycott and coerce noncooperating insurers, agents, and insureds. In the District Court the defendants had successfully demurred to the indictment on the ground that the insurance industry was not a part of interstate commerce subject to regulation under the Commerce Clause.¹⁵ On direct appeal, this Court reversed the judgment, holding that the business of insurance is interstate commerce, and that the Congress which enacted the Sherman Act had not intended to exempt the insurance industry from its coverage.

The primary concern of Congress in the wake of that decision was in enacting legislation that would ensure that the States would continue to have the ability to tax and regulate the business of insurance.¹⁶ This concern is reflected in §§ 1 and 2 (a) of the Act,¹⁷ neither of which is involved in this case. A secondary concern was the applicability of the antitrust laws to the insurance industry.¹⁸ Months before this Court’s decision in South-Eastern Underwriters was announced, proposed legislation to totally exempt the insurance industry from the Sherman and Clayton Acts had been introduced in Congress.¹⁹ Less than three weeks after the actual decision, the House of Representatives passed a bill which would also have provided the insurance industry with a blanket exemption from the antitrust laws, thus restoring the state of law that had existed before the decision in SouthEastern Underwriters.20

Congress, however, rejected this approach.²¹ Instead of a total exemption, Congress provided in § 2 (b) that the antitrust laws “shall be applicable” unless the activities of insurance companies are the business of insurance and regulated by state law. Moreover, under § 3 (b) the Sherman Act was made applicable in any event to acts of boycott, coercion, or intimidation. To allow the States time to adjust to the applicability of the antitrust laws to the insurance industry, Congress imposed a 3-year moratorium.²² After the expiration of the moratorium on July 1, 1948, however, Congress clearly provided that the antitrust laws would be applicable to the business of insurance “to the extent that such business is not regulated by State law.” ²³

By making the antitrust laws applicable to the insurance industry except as to conduct that is the business of insurance, regulated by state law, and not a boycott, Congress did not intend to and did not overrule the South-Eastern Underwriters case.²⁴ While the power of the States to tax and regulate insurance companies was reaffirmed, the McCarran-Ferguson Act also established that the insurance industry would no longer have a blanket exemption from the antitrust laws. It is true that § 2 (b) of the Act does create a partial exemption from those laws. Perhaps more significantly, however, that section, and the Act as a whole, embody a legislative rejection of the concept that the insurance industry is outside the scope of the antitrust laws — a concept that had prevailed before the South-Eastern Underwriters decision.

References to the meaning of the “business of insurance” in the legislative history of the McCarran-Ferguson Act strongly suggest that Congress understood the business of insurance to be the underwriting and spreading of risk. Thus, one of the early House Reports stated: “The theory of insurance is the distribution of risk according to hazard, experience, and the laws of averages. These factors are not within the control of insuring companies in the sense that the producer or manufacturer may control cost factors.” H. R. Rep. No. 873, 78th Cong., 1st Sess., 8-9 (1943).²⁵ See also S. Rep. No. 1112, 78th Cong., 2d Sess., 6 (1944); 90 Cong. Rec. 6526 (1944) (remarks of Rep. Hancock).

Because of the widespread view that it is very difficult to underwrite risks in an informed and responsible way without intra-industry cooperation, the primary concern of both representatives of the insurance industry and the Congress was that cooperative ratemaking efforts be exempt from the antitrust laws. The passage of the McCarran-Ferguson Act was preceded by the introduction in the Senate Committee of a report and a bill submitted by the National Association of Insurance Commissioners on November 16, 1944.²⁶ The views of the NAIC are particularly significant, because the Act ultimately passed was based in large part on the NAIC bill.²⁷ The report emphasized that the concern of the insurance commissioners was that smaller enterprises and insurers other than life insurance companies were unable to underwrite risks accurately, and it therefore concluded:

“For these and other reasons this subcommittee believes it would be a mistake to permit or require the unrestricted competition contemplated by the antitrust laws to apply to the insurance business. To prohibit oom-bined efforts for statistical and rate-making purposes would be a backward step in the development of a progressive business. We do not regard it as necessary to labor this point any further because Congress itself recently recognized the necessity for concert of action in the collection of statistical data and rate making when it enacted the District of Columbia Fire Insurance Rating Act.” Id., at A4405 (emphasis added).

The bill proposed by the NAIC enumerated seven specific practices to which the Sherman Act was not to apply.²⁸ Each of the specific practices involved intra-industry cooperative or concerted activities. None involved contractual arrangements that insurance companies might make with providers of goods or services to reduce the costs to the companies of meeting their underwriting obligations to their policyholders.²⁹

The floor debates also focused simply on whether cooperative ratemaking should be exempt. Thus, Senator Ferguson, in explaining the purpose of the bill, stated:

“This bill would permit — and I think it is fair to say that it is intended to permit — rating bureaus, because in the last session we passed a bill for the District of Columbia allowing rating. What we saw as wrong was the fixing of rates without statutory authority in the States; but we believe that State rights should permit a State to say that it believes in a rating bureau. I think the insurance companies have convinced many members of the legislature that we cannot have open competition in fixing rates on insurance. If we do, we shall have chaos. There will be failures, and failures always follow losses.” 91 Cong. Rec. 1481 (1945).

The consistent theme of the remarks of other Senators also indicated a primary concern that cooperative ratemaking would be protected from the antitrust laws. Id., at 1444 and 1485 (remarks of Sen. O’Mahoney); 485 (remarks of Sen. Taft).³⁰ President Roosevelt, in signing the bill, also emphasized that the bill would allow cooperative rate regulation. He stated that “Congress did not intend to permit private rate fixing, which the Antitrust Act forbids, but was willing to permit actual regulation of rates by affirmative action of the States.” S. Rosenman, The Public Papers and Addresses of Franklin D. Roosevelt, 1944-1945 Vol., p. 587 (1950).³¹ There is not the slightest suggestion in the legislative history that Congress in any way contemplated that arrangements such as the Pharmacy Agreements in this case, which involve the mass purchase of goods and services from entities outside the insurance industry, are the “business of insurance.” ³²

D

At the time of the enactment of the McCarran-Ferguson Act, corporations organized for the purpose of providing their members with medical services and hospitalization were not considered to be engaged in the insurance business at all, and thus were not subject to state insurance laws. E. g., Jordan v. Group Health Assn., 71 App. D. C. 38, 107 F. 2d 239 (1939); California Physicians’ Service v. Garrison, 155 P. 2d 885 (Cal. App. 1945). affd, 28 Cal. 2d 790, 172 P. 2d 4 (1946); Commissioner of Banking & Insurance v. Community Health Service, 129 N. J. L. 427, 30 A. 2d 44 (1943); State ex rel. Fishback v. Universal Service Agency, 87 Wash. 413, 151 P. 768 (1915).³³ Similarly, States which regulated prepaid health-service plans at the time the Act was enacted either exempted them from the requirements of the state insurance code or provided that they “shall not be construed as being engaged in the business of insurance” under state law. Rorem, Enabling Legislation for Non-Profit Hospital Service Plans, 6 Law & Contemp. Prob. 528, 534 (1939).³⁴ Since the legislative history makes clear that Congress certainly did not intend the definition of the “business of insurance” to be broader than its commonly understood meaning, the contemporary perception that health-care organizations were not engaged in providing insurance is highly significant in ascertaining congressional intent.

The Jordan v. Group Health hLssn. case, supra, is illustrative of the contemporary view of health-care plans. Group Health was organized as a nonprofit corporation to provide various medical services and supplies to members who paid a fixed annual premium. To implement the plan, Group Health contracted with physicians, hospitals, and others, to provide medical services. These groups were compensated exclusively by Group Health. By contracting with the various medical groups directly, Group Health was able to obtain services at a lower cost than if each member contracted separately. The plan, therefore, was somewhat similar to the Pharmacy Agreements in this case. The court in Group Health held that this type of arrangement was not insurance:

“Whether the contract is one of insurance or of indemnity there must be a risk of loss to which one party may be subjected by contingent or future events and an assumption of it by legally binding arrangement by another. Even the most loosely stated conceptions of insurance . . . require these elements. Hazard is essential and equally so a shifting of its incidence.

“Although Group Health’s activities may be considered in one aspect as creating security against loss from illness or accident, more truly they constitute the quantity purchase of well-rounded, continuous medical service by its members. Group Health is in fact and in function a consumer cooperative. The functions of such an organization are not identical with those of insurance or indemnity companies. The latter are concerned primarily, if not exclusively, with risk .... On the other hand, the cooperative is concerned principally with getting service rendered to its members and doing so at lower prices made possible by quantity purchasing and economies in operation.” 71 App. D. C., at 44, 46, 107 F. 2d, at 245, 247. (Emphasis supplied in part; footnotes omitted.) ³⁵

Indeed, Blue Cross and Blue Shield organizations themselves have historically taken the position that they are not insurance companies in seeking to avoid state regulation and taxation.³⁶ It is thus difficult to assume that contrary to this historical position and a majority of court decisions, Congress in 1945 understood that advance-payment medical-benefits plans are the “business of insurance.” ³⁷ It is next to impossible to assume that Congress could have thought that agreements (even by insurance companies) which provide for the purchase of goods and services from third parties at a set price are within the meaning of that phrase.³⁸

IV

It is well settled that exemptions from the antitrust laws are to be narrowly construed. E. g., Abbott Laboratories v. Portland Retail Druggists Assn., Inc., 425 U. S. 1; Connell Construction Co. v. Plumbers Steamfitters, 421 U. S. 616; FMC v. Seatrain Lines, Inc., 411 U. S. 726; United States v. McKesson & Robbins, Inc., 351 U. S. 305. This doctrine is not limited to implicit exemptions from the antitrust laws, but applies with equal force to express statutory exemptions. E. g., Abbott Laboratories v. Portland Retail Druggists Assn., Inc., supra, at 11-12 (the Nonprofit Institutions Act); FMC v. Seatrain Lines, Inc., supra, at 733 (§15 of the Shipping Act); United States v. McKesson Robbins, supra,'at 316 (the Miller-Tydings and McGuire Acts).

Application of this principle is particularly appropriate in this case because the Pharmacy Agreements involve parties wholly outside the insurance industry. In analogous contexts, the Court has held that an exempt entity forfeits antitrust exemption by acting in concert with nonexempt parties. The Court has held, for example, that an exempt agricultural cooperative under the Capper-Yolstead Act loses its exemption if it conspires with nonexempt parties. Case-Swayne Co. v. Sunkist Growers, Inc., 389 U. S. 384; United States v. Borden Co., 308 U. S. 188. Similarly, the Court has consistently stated that a union forfeits its exemption from the antitrust laws if it agrees with one set of employers to impose a wage scale on other bargaining units. Ramsey v. Mine Workers, 401 U. S. 302, 313; Mine Workers v. Pennington, 381 U. S. 657, 665-666.³⁹

If agreements between an insurer and retail pharmacists are the “business of insurance” because they reduce the insurer’s costs, then so are all other agreements insurers may make to keep their costs under control — whether with automobile body repair shops or landlords.⁴⁰ Such agreements would be exempt from the antitrust laws if Congress had extended the coverage of the McCarran-Ferguson Act to the "business of insurance companies.”⁴¹ But that is precisely what Congress did not do.

For all these reasons, the judgment of the Court of Appeals is

Affirmed.

1 The Act provides in relevant part:

“Congress hereby declares that the continued regulation and taxation by the several States of the business of insurance is in the public interest, and that silence on the part of the Congress shall not be construed to impose any barrier to the regulation or taxation of such business by the several States.

“Sec. 2. (a) The business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation or taxation of such business.

“(b) No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance: Provided, That after June 30, 1948, the Act of July 2, 1890, as amended, known as the Sherman Act, and the Act of October 15, 1914, as amended, known as the Clayton Act, and the Act of September 26, 1914, known as the Federal Trade Commission Act, as amended, shall be applicable to the business of insurance to the extent that such business is not regulated by State law.

“Sec. 3. (a) Until June 30, 1948, the Act of July 2, 1890, as amended, known as the Sherman Act, and the Act of October 15, 1914, as amended, known as the Clayton Act, and the Act of September 26, 1914, known as the Federal Trade Commission Act, . . . and the Act of June 19, 1936, known as the Robinson-Patman Anti-discrimination Act, shall not apply to the business of insurance or to acts in the conduct thereof.

“(b) Nothing contained in this Act shall ^render the said Sherman Act inapplicable to any agreement to boycott, coerce, or intimidate, or act of boycott, coercion, or intimidation.” 59 Stat. 33-34, as amended, 61 Stat. 448.

2 The position of the Fifth Circuit is in conflict with that of the Third, Fourth, and District of Columbia Circuits. See Frankford Hospital v. Blue Cross of Greater Philadelphia, 554 F. 2d 1253 (CA3 1977); Anderson v. Medical Service of District of Columbia, 551 F. 2d 304 (CA4 1977); Proctor v. State Farm Mutual Automobile Ins. Co., 182 U. S. App. D. C. 264, 561 F. 2d 262 (1977).

3 The amicus curiae brief of the United States provides a useful illustration of the operation of the Pharmacy Agreement:

“Suppose the usual and customary retail price for a quantity of Drug X charged both by 'participating’ Pharmacy A and ‘non-participating’ Pharmacy B is $10.00, and the wholesale price (or acquisition cost) to both is $8.00. If an insured buys Drug X from Pharmacy A, the insured pays $2.00. Pharmacy A receives $2.00 from the insured and $8.00 from Blue Shield, or $10.00 total. If an insured buys Drug X from Pharmacy B, the insured pays Pharmacy B $10.00, and receives $6.00 (75 percent of the difference between the retail price and $2.00) from Blue Shield. While Pharmacy B receives the same as Pharmacy A, the insured must pay $4.00 for the drug and also must take steps to obtain reimbursement.

“If the pharmacy’s acquisition cost for the drug is $5.00 rather than $8.00, the situations of Pharmacy B and the insured are unchanged. But now Pharmacy A will receive only $5.00 from Blue Shield, for a total of $7.00.”

4 Even if they are the “business of insurance,” the Agreements are exempt from the antitrust laws only if they are also “regulated by State law” within the meaning of § 2 (b) and not “boycotts” or other conduct described by § 3 (b). See n. 1, supra. See also St. Paul Fire & Marine Ins. Co. v. Barry, 438 U. S. 531.

5 It is axiomatic that conduct which is not exempt from the antitrust laws may nevertheless be perfectly legal. The United States in its amicus brief urging affirmance has taken the position that the Pharmacy Agreements probably do not violate the antitrust laws, though recognizing that that issue is not presented here.

6 The issue in that case was the meaning of the "boycott” exception in § 3 (b) of the Act. The issue here, the meaning of the “business of insurance” exemption in § 2 (b) of the Act, was not before the Court.

7 Webster’s New International Dictionary of the English Language 1289 (unabr. 2d ed. 1958) defines insurance as:

“Act of insuring, or assuring, against loss or damage by a contingent event; a contract whereby, for a stipulated consideration, called a 'premium, one party undertakes to indemnify or guarantee another against loss by a certain specified contingency or peril, called a risk, the contract being set forth in a document called the policy ....''

8 The issue in SEC v. Variable Annuity Lije Ins. Co. was whether the variable annuity contracts were subject to regulation under the Securities Act of 1933 and the Investment Company Act of 1940. The Court held that the contracts were subject to such regulation as securities since they were not “insurance” or “annuity” policies specifically exempt from the Securities Act, and because they were not the “business of insurance” within the meaning of the McCarran-Ferguson Act.

9 It is true that some type of provider agreement is necessary for a service benefit plan to exist. But it does not follow that because an agreement is necessary to provide insurance, it is also the “business of insurance.” Assume, for example, that an indemnity insurer must have a line of credit or other commercial arrangement with a bank in order to pay off monetary claims. Despite the fact that the line of credit is “necessary” for the insurer to fulfill its obligations, it is nevertheless not the “business of insurance.”

10 Thus, the benefit promised to Blue Shield policyholders under the policy is that they “shall be required to pay no more than the drug deductible for each of such covered drugs.”

11 As the Court of Appeals stated:

“Blue Shield’s policyholders are basically unconcerned with the contract between the insurer and the Participating Pharmacy. They are obligated to pay a Participating Pharmacy two dollars ($2.00) for a prescription regardless of the presence or absence of a price fixing arrangement. Thus, by minimizing costs and maximizing profits, the Participating Pharmacy Agreements inure principally to the benefit of Blue Shield.” 556 F. 2d 1375, 1381.

12 As the United States points out in its amicus brief, there is an important distinction between risk underwriting and risk reduction. By reducing the total amount it must pay to policyholders, an insurer reduces os liability and therefore its risk. But unless there is some element of spreading risk more widely, there is no underwriting of risk.

13 In National Securities, the Arizona Director of Insurance approved, pursuant to statute, a merger between two insurance companies. This Court held, however, that the Arizona statute was not enacted for the purpose of regulating the “business of insurance.” 393 U. S., at 460. If a merger between two insurance companies is not the “business of insurance,” then an acquisition by an insurer of a manufacturer or a retail chain, although conceptually indistinguishable from the Pharmacy Agreements in this case, is also not the “business of insurance.”

14 The petitioners argue that the absence of the Pharmacy Agreements "which permit the insured to obtain drugs on the terms and for the amounts stated in the policies would constitute a breach of the contract of insurance.” But the benefit Blue Shield provides its policyholders is the assurance that they can obtain drugs in return for a direct maximum payment of $2 for each prescription. The Pharmacy Agreements are separate contractual arrangements between Blue Shield and certain pharmacists fixing the cost Blue Shield will pay for drugs. The wholly separate nature of the two categories of agreements is in no way affected by the fact that the Pharmacy Agreements are indirectly referred to in the insurance policies.

15 Since the leading case of Paul v. Virginia, 8 Wall. 168, 183, it had been understood that “[ijssuing a policy of insurance is not a transaction of commerce.”

16 S. Rep. No. 20, 79th Cong., 1st Sess., 2 (1945); H. R. Rep. No. 143, 79th Cong., 1st Sess., 2-3 (1945). The problem was that if insurance was interstate commerce, then the constitutionality of state regulation and taxation would be questionable. As the House Report stated:

“Inevitable uncertainties . . . followed the handing down of the decision in the Southeastern Underwriters Association case ....

“[Y]our committee believes there is urgent need for an immediate expression of policy by the Congress with respect to the continued regulation of the business of insurance by the respective States. Already many insurance companies have refused, while others have threatened refusal to comply with State tax laws, as well as with other State regulations, on the ground that to do so, when such laws may subsequently be held unconstitutional in keeping with the precedent-smashing decision in the Southeastern Underwriters case, will subject insurance executives to both civil and criminal actions for misappropriation of company funds.” Ibid. (Emphasis added.)

17 See text of statute at n. 1, supra.

18 There is no question that the primary purpose of the McCarran-Ferguson Act was to preserve state regulation of the activities of insurance companies, as it existed before the South-Eastern Underwriters case. The power of the States to regulate and tax insurance companies was threatened after that ease, because of its holding that insurance companies are in interstate commerce. The McCarran-Ferguson Act operates to assure that the States are free to regulate insurance companies without fear of Commerce Clause attack. The question in the present case, however, is one under the quite different secondary purpose of the McCarran-Ferguson Act — to give insurance companies only a limited exemption from the antitrust laws.

The repeated insistence in the dissenting opinion that the McCarran-Ferguson Act should be read as protecting the right of the States to regulate what they traditionally regulated is thus entirely correct — and entirely irrevelant to the issue now before the Court. See n. 38, infra. For the question here is not whether the McCarran-Ferguson Act made state regulation of these Pharmacy Agreements exempt from attack under the Commerce Clause. It is the quite different question whether the Pharmacy Agreements are exempt from the antitrust laws.

In short, the McCarran-Ferguson Act freed the States to continue to regulate and tax the business of insurance companies, in spite of the Commerce Clause. It did not, however, exempt the business of insurance companies from the antitrust laws. It exempted only “the business of insurance.” See SEC v. National Securities, Inc., 393 U. S. 453.

19 H. R. 3270, 78th Cong., 1st Sess. (1943); S. 1362, 78th Cong., 1st Sess. (1943). These bills would have provided that nothing in the Sherman or Clayton Acts “shall be construed to apply to the business of insurance or to acts in the conduct of that business or in any wise to impair the regulation of that business by the several States.”

20 90 Cong. Rec. 6565 (1944).

21 The total exemption bill failed in the Conference Committee because of a fear that it could not pass in the Senate and in any event would be vetoed by the President. 91 Cong. Rec. 1087 (1945) (remarks of Rep. Hancock). Also important was the opposition of the National Association of Insurance Commissioners to a blanket antitrust exemption. 90 Cong. Rec. 8482 (1944).

22 See n. 1, supra. The purpose of the moratorium was to allow the States three years to take steps to regulate the business of insurance. 91 Cong. Rec. 1443 (1945) (remarks of Sen. McCarran).

23 Ibid, (remarks of Sen. Ferguson); McCarran, Federal Control of Insurance: Moratorium Under Public Law 15 Expired July 1, 34 A. B. A. J. 539, 540 (1948).

24 That Congress did not intend to restore the law to what it had been before South-Eastern Underwriters is made dramatically clear in the following exchange between Senator McKellar and Senator Ferguson:

"Mr. McKELLAR. As I understand the bill its purpose and effect will be to .establish the law as it was supposed to be prior to the rendering of the recent opinion of the Supreme Court of the United States. Is that correct?

“Mr. FERGUSON. No.” 91 Cong. Rec. 478 (1945).

See also id., at 1444 (exchange between Sens. Pepper and McCarran).

25 The recognition by Congress that the ability to control costs was not within the ability of insurance companies is further evidence that the Pharmacy Agreements, which are solely designed to minimize costs, are not insurance.

26 90 Cong. Rec. A4403-4408 (1944).

27 91 Cong. Rec. 483 (1945) (remarks of Sen. O’Mahoney).

28 90 Cong. Rec. A4406 (1944). This specific list of exempted activities was not included in the law ultimately enacted.

29 The dissenting opinion makes the argument that because Congress rejected bills that would have limited the “business of insurance” to a specific list of insurance company practices, Congress intended that the exemption it finally enacted be interpreted “broadly.” Precisely the opposite is true.

At the time Congress was considering one of the early versions of the Act, EL R. 3270, 78th Cong., 1st Sess. (1943), which would have wholly exempted from the antitrust laws “the business of insurance or . . . acts in the conduct of that business,” an amendment was introduced which would have exempted specific activities. 90 Cong. Rec. 6561 (1944). The proponent of the amendment, Representative Anderson, explained that its purpose was to provide broader protection than provided by H.' R. 3270: “But I say to this House that some legislation should be passed which asserts the right of the States to control the questions of risks, rates, premiums, commissions, policies, investments, reinsurance, capital requirements, and items of that nature. It is for that purpose I have insisted upon bringing this at this time to the attention of the House. If you pass H. R. 3270 as it now stands and go back home and any of your insurance friends ask you what you did to safeguard the protection of insurance by the State, you must answer them in all truth that all you did was to pass a bill which provided antitrust protection for companies now under indictment.”

The amendment was defeated. 90 Cong. Rec. 6562 (1944).

Thus, Congress rejected an amendment which exempted specific activities of insurance companies (not including anything remotely resembling the Pharmacy Agreements in this case) which was perceived to be broader than H. R. 3270. Since H. R. 3270 was itself broader than the Act as eventually enacted, it necessarily follows that the exemption of the Act is narrower than the bills which would have exempted specific practices. This pattern is consistent with the entire legislative history of the MeCarran-Ferguson Act, which was characterized by a continual narrowing of the original blanket exemption.

30 The dissenting opinion states that the “compelling explanation” for the lack of discussion of provider agreements in the legislative history was the congressional concern about fire insurance companies. Post, at 234 n. 2. However, input from all types of insurance companies was sought through the Insurance Commissioners of the various States “because the Commissioners were aware of the chaotic condition which exists at the present time.” 91 Cong. Rec. 484 (1945) (remarks of Sen. Ferguson). Moreover, the National Association of Insurance Commissioners, whose concern was surely not limited to fire insurance, was certainly aware of provider agreements since it drafted model state enabling legislation to govern service-benefit health plans. But this Association, which played a major role in the drafting of the McCarran-Ferguson Act, did not include provider agreements in its proposed bill exempting specific practices of insurance companies from the scope of the antitrust laws. 90 Cong. Rec. A4406 (1944). Given this background, the failure of Congress to mention provider agreements, or anything in any way resembling them, suggests that Congress did not intend that provider agreements were to be exempt.

31 The dissenting opinion states that the National Securities case recognized that the legislative history of the Act “sheds little light” on the meaning of the “business of insurance.” Post, at 234. In National Securities, however, the Court went on to state that the legislative history indicated that “Congress was mainly concerned with the relationship between insurance ratemaking and the antitrust laws, and with the power of the States to tax insurance companies.” 393 U. S., at 458-459.

32 One question not resolved by this legislative history is which of the various practices alleged in the South-Eastern Underwriters indictment Congress intended to be covered by the phrase “business of insurance.” The indictment in that case had charged, for example, that the defendants had fixed their agents' commissions as well as premium rates. It is clear from the legislative history that the fixing of rates is the “business of insurance.” The same conclusion does not so clearly emerge with respect to the fixing of agents’ commissions.

The bills introduced before the South-Eastern Underwriters decision which would have totally exempted the insurance industry from the antitrust laws specifically included agreements regarding agents’ commissions as an exempt practice. E. g., H. R. 4444, 78th Cong., 2d Sess. (1944). Similarly, the bill proposed by the National Association of Insurance Commissioners two months after the South-Eastern Underwriters case was decided would have also exempted agents’ commissions. 90 Cong. Rec. A4406 (1944). The subsequent bill that followed the approach of the NAIC and exempted specific activities, however, was limited to traditional underwriting activities and made no mention of agreements with insurance agents:

§4(b). "On and after March 1, 1946, the provisions of said Sherman Act shall not apply to any agreement or concerted or cooperative action between two or more insurance companies for making, establishing, or using rates for insurance, rating methods, premiums, insurance policy or bond forms, or underwriting rules . . . .” S. 12, 79th Cong., 1st Sess. (1945).

One inference that can be drawn from this pattern is that Congress was aware of the existence of agreements regarding agents’ commissions, and chose not to include them within the exemption for the “business of insurance.” On the other hand, the fact that the indictment in SouthEastern Underwriters had included a charge that insurance companies did boycott agents who insisted on selling other fines of insurance, together with the fact that § 3 (b) presumably removes an exemption that, but for its absence, would be conferred by § 2, suggests that the “business of insurance” may have been intended to include dealings within the insurance industry between insurers and agents.

Even if it be assumed, however, that transactions between an insurer and its agents, including independent agents, are the “business of insurance,” it still does not follow that the Pharmacy Agreements also fall within the definition. Transactions between an insurer and an agent, unlike the Pharmacy Agreements, are wholly intra-industry; an insurance agent sells insurance while a pharmacy sells goods and services. Moreover, there are historical reasons why the Pharmacy Agreements should not be considered the “business of insurance,” whatever may be the status of agreements between an insurer and its agents. See Part III-D, infra.

33 The only case to the contrary was Cleveland Hospital Service Assn. v. Ebright, 142 Ohio St. 51, 49 N. E. 2d 929 (1943). There have been few cases dealing with the issue since the enactment of the McCarran-Ferguson Act; most of them have also held that Blue Cross and Blue Shield plans are not insurance. See, e. g., Michigan Hospital Service v. Sharpe, 339 Mich. 357, 63 N. W. 2d 638 (1954); Hospital Service Corp. v. Pennsylvania Ins. Co., 101 R. I. 708, 227 A. 2d 105 (1967).

34 The dissenting opinion argues that “regulation of the service-benefit plans was a part of the system of state regulation of insurance that the McCarran-Ferguson Act was designed to preserve.” Post, at 240. It is not at all clear that States that passed enabling statutes regarded the plans as insurance. These statutes typically authorized the plans to operate but did not specify whether or not they were insurance. E. g., 1935 Ill. Laws, p. 621 (“An Act to provide for the Incorporation and Regulation of nonprofit Hospital Service Corporations”); 1939 Mich. Pub. Acts No. 109 (“An Act to provide for and to regulate the incorporation of non-profit hospital service corporations”); 1938 N. J. Laws, ch. 336 (“An Act concerning hospital service corporations and regulating the establishment, maintenance and operation of hospital service plans”); ch. 698, 53 Stat. 1412 (1939) (“Providing for the incorporation of certain persons as Group Hospitalization, Inc.”). This latter statute enacted by Congress also provided in § 7: “This corporation shall not be subject to the provisions of statutes regulating the business of insurance in the District of Columbia, but shall be exempt therefrom unless specifically designated therein.” The Senate Report stated: “This bill does not change existing law but merely creates a private corporation which did not heretofore exist in the District of Columbia.” S. Rep. No. 1012, 76th Cong., 1st Sess., 2 (1939). At the time this statute was passed in 1939, the group health services plan in the District of Columbia had been construed not to be engaged in the business of insurance. Group Health Assn. v.'Moor, 24 F. Supp 445 (DC 1938).

Indeed, courts have continued to hold that Blue Shield plans are not insurance even in States that have enacted enabling statutes. E. g., Michigan Hospital Service v. Sharpe, supra. In that case, the court specifically rejected the proposition that the existence of the enabling statute was sufficient to demonstrate that the plan was insurance.

But even if certain aspects of a Blue Shield plan are the “business of insurance,” the Pharmacy Agreements in this case are not — for all the reasons set out in this opinion. It is to be emphasized that the question whether provider agreements like the Pharmacy Agreements in this case, or other aspects of insurance companies, were in 1945 or are now regulated by state law is irrelevant to the issue before the Court in the present case. See n. 38, infra.

35 Despite the fact that courts did not view plans like Blue Cross and Blue Shield as insurance at the time of the passage of the McCarran-Eerguson Act, the petitioners argue that Attorney General Biddle’s remarks when testifying in the Joint Hearing before the Subcommittees of the Committees on the Judiciary on S. 1362, H. R. 3269, and H. R. 3270, 78th Cong., 1st Sess., 41-42 (1943), indicate a congressional understanding that such plans were indeed insurance.

The thrust of Attorney General Biddle’s remarks was that this Court’s decision in Americmi Medical Assn. v. United States, 317 U. S. 519, justified the indictment in the South-Eastern Underwriters case. In the AMA case, the Court had held that a health-maintenance organization was engaged in “trade” within the meaning of the Sherman Act. Based on this decision, Attorney General Biddle expressed the view that the plan was insurance and that therefore the Court had already held that insurance was commerce. Thus, he argued that the indictment in South-Eastern Underwriters was proper.

It seems clear, however, why this testimony does not demonstrate that Congress believed that Blue Cross or Blue Shield plans are insurance. First, the statement of the Attorney General that the plan in the AMA case was insurance was not accepted by Congress. Senator Bailey rejected the characterization, pointing out that the Court had not referred to the plan as insurance. To Senator Bailey, the plan was not insurance but a “group cooperative movement.” (Indeed, the precise plan at issue was held not to be insurance in Jordan v. Growp Health Assn., 71 App. D. C. 38, 107 F. 2d 239 (1939).) But even if it can nonetheless be inferred that some Members of Congress may have agreed with the Attorney General that prepaid health plans are insurance, his testimony did not remotely suggest that agreements between an insurer and a third party fixing the cost at which goods and services will be purchased is also insurance.

Similarly, the fact that a few years later some witnesses at a Senate Committee hearing referred to Blue Cross as insurance in discussing alternatives to national health insurance, e. g., Hearings before the Senate Committee on Education and Labor on S. 1606, 79th Cong., 2d Sess., pt. 1, pp. 172-176 (1946), does not establish that Congress shared this view, let alone that provider agreements like the Pharmacy Agreements in this case are insurance.

36 Weller, The McCarran-Ferguson Act’s Antitrust Exemption for Insurance: Language, History and Policy, 1978 Duke L. J. 587, 624 n. 174. As one commentator has stated about the effectiveness of the traditional opposition of these organizations to being characterized as insurance:

“[IJnsurance experts are fond of expressing amazement at Blue Cross and Blue Shield opinion that the Blues are not insurance but something else, such as 'pre-payment plans.’ The insurance experts should control their incredulity of this view, or at least save some for the courts. For the fact is that the majority of cases have in effect upheld these so-called ‘outrageous’ opinions of Blue Cross adherents.” Denenberg, The Legal Definition of Insurance, 30 J. Ins. 319, 322 (1963).

37 This is not to say that the contracts offered by Blue Shield to its policyholders, as distinguished from its provider agreements with participating pharmacies, may not be the “business of insurance” within the meaning of the Act.

38 This conclusion is in no way affected by the existence of state enabling statutes regulating advance-payment medical-benefits plans at the time the McCarran-Ferguson Act was enacted. E. g., 1937 Cal. Stats., ch. 882, as amended by 1941 Cal. Stats., ch. 311; 1939 Conn. Pub. Acts, ch. 150; 1935 Ill. Laws, p. 621; 1936 Miss. Gen. Laws, ch. 177; 1939 Mich. Pub. Acts, No. 109; 1938 N. J. Laws, ch. 719. These statutes generally provided that the plans were not insurance. See supra, at 226-227, and n. 34. Even if it is assumed that some state legislatures believed that these plans are insurance, however, it still does not follow that provider agreements like the Pharmacy Agreements in this case were considered by Congress to be the “business of insurance.”

Many aspects of insurance companies are regulated by state law, but are not the “business of insurance.” Similarly, the enabling statutes in existence at the time the Act was enacted typically regulated such diverse aspects of the plans as the composition of their boards of directors, when their books and records could be inspected, how they could invest their funds, when they could liquidate or merge, as well as how they could purchase goods and services by entering into provider agreements.

Provider agreements are no more the “business of insurance” because they were regulated by state law at the time of the McCarran-Ferguson Act than are these other facets of the plans which were similarly regulated. If Congress had exempted the “business of insurance companies,” then these aspects of the plans which are not themselves insurance as that term is commonly understood would nevertheless be arguably exempt. But since Congress explicitly rejected this approach, they are not within the exemption even though they are the subject of state regulation.

This Court has implicitly recognized that state regulation of a practice of an insurance company does not mean that the practice is the “business of insurance” within the meaning of the McCarran-Ferguson Act. In both cases, SEC v. Variable Annuity Life Ins. Co., 359 U. S. 65, and SEC v. National Securities, Inc., 393 U. S. 453, the challenged conduct was regulated by the State Insurance Commissioner, but this Court held that the practices were not the “business of insurance.”

39 As the Court stated in Pennington, 381 U. S., at 665-666 (footnote omitted):

“[A] union may make wage agreements with a multi-employer bargaining unit and may in pursuance of its own union interests seek to obtain the same terms from other employers. No case under the antitrust laws could be made out on evidence limited to such union behavior. But we think a union forfeits its exemption from the antitrust laws when it is clearly shown that it had agreed with one set of employers to impose a certain wage scale on other bargaining units. One group of employers may not conspire to eliminate competitors from the industry and the union is liable with the employers if it becomes a party to the conspiracy.”

40 There is no principled basis upon which a line could rationally be drawn that would extend the McCarran-Ferguson Act exemption only to an insurer’s agreement with providers of goods and services to be furnished to its policyholders — such as agreements with hospitals, doctors, lawyers, and the like. But assuming that such a line could rationally be drawn, to hold that even such provider agreements are the “business of insurance” is to ignore the language and purpose of the Act not to exempt the insurance industry as such from the antitrust laws.

Moreover, exempting provider agreements from the antitrust laws would be likely in at least some cases to have serious anticompetitive consequences. Recent studies have concluded that physicians and other healthcare providers typically dominate the boards of directors of Blue Shield plans. Thus, there is little incentive on the part of Blue Shield to minimize costs, since it is in the interest of the providers to set fee schedules at the highest possible level. This domination of Blue Shield by providers is said to have resulted in rapid escalation of health-care costs to the detriment of consumers generally. See Skyrocketing Health Care Costs: The Role of Blue Shield, Hearings before the Subcommittee on Oversight and Investigations of the House Committee on Interstate and Foreign Commerce, 95th Cong., 2d Sess., 4^34 (1978) (remarks of Michael Pertschuk, Chairman, Federal Trade Commission).

41 It might be argued that some such agreements are exempt from the antitrust laws under the state-action exemption of Parker v. Brown, 317 U. S. 341. But that exemption would exist because of the extent of state regulation and not because the agreements are the “business of insurance.”