In re VT Health Service Corp

NOTICE:  This opinion is subject to motions for reargument under V.R.A.P. 40
as well as formal revision before publication in the Vermont Reports.
Readers are requested to notify the Reporter of Decisions, Vermont Supreme
Court, 111 State Street, Montpelier, Vermont 05602 of any errors in order
that corrections may be made before this opinion goes to press.


                                No. 88-040


In re Vermont Health Service                 Supreme Court
Corporation d/b/a/ Blue Cross
& Blue Shield of Vermont                     On Appeal From
Medicomp Rate Increase Application           Banking & Insurance

                                             April Term, 1989


Gretchen Babcock, Commissioner

James M. Vitt of Paterson & Walke, P.C., Montpelier, for plaintiff-
  appellant

Jeffrey L. Amestoy, Attorney General, William E. Griffin, Chief Assistant
  Attorney General, and Elizabeth R. Costle, General Counsel, Department
  of Banking and Insurance, Montpelier, for defendant-appellee


PRESENT:  Allen, C.J., Peck, Gibson, Dooley and Morse, JJ.


     ALLEN, C.J.   The Vermont Health Service Corporation (VHSC), doing
business as Blue Cross and Blue Shield of Vermont, appeals from three
supplemental orders of the Commissioner of Banking and Insurance issued in
conjunction with her decision on VHSC's request for permission to increase
rates.  We affirm.
     On May 28, 1987, VHSC filed a request for permission to increase its
rates for Medicomp hospital and medical benefits coverage as required by 8
V.S.A. {{ 4513(b) and 4584(a).  On November 19, 1987, the commissioner
issued a decision and five supplemental orders as authorized by 8 V.S.A. {
4513(c). (FN1)
     Before this Court is VHSC's appeal of three of those supplemental
orders, requiring VHSC to conduct a study of administrative expense
reduction and to report to the commissioner, to obtain the commissioner's
prior approval for capital expenditures in excess of $250,000, and to
properly credit subscribers for investment income in future rate filings.
                                    I.
     VHSC first argues that all three supplemental orders violated 3 V.S.A.
{ 809 (FN2) because it did not receive adequate notice or opportunity to prepare
and respond to the subject matter of any of these orders, which it describes
as "hidden issues."  The proceeding before the commissioner was a "contested
case" within the meaning of the Administrative Procedure Act, and required
notice consistent with { 809.  That provision is coterminous with the
minimum standards of due process necessary for a fair proceeding.  See In re
Hot Spot, Inc., 149 Vt. 538, 540-41, 546 A.2d 799, 801 (1988) (interpreting
{ 809(b)(4) as embodying general due process principles).  For notice to be
adequate, it is enough "that the parties be sufficiently apprised of the
nature of the proceedings so that there is no unfair surprise."  North State
Telephone Co. v. Alaska Public Utilities Commission, 522 P.2d 711, 714
(Alaska 1974); see also Savina Home Industries, Inc. v. Secretary of Labor,
594 F.2d 1358, 1365 (10th Cir. 1979) ("As long as a party to an
administrative proceeding is reasonably apprised of the issues in
controversy, and is not misled, the notice is sufficient.").
     VHSC initiated the present proceeding and by its filing defined the
"matters at issue" within the meaning of 3 V.S.A. { 809(b)(4).  Further,
consideration of those issues necessarily assumed the possible imposition of
{ 4513(c) conditions and limitations.  It is true that the agency notice
only specified the time and place for the hearing and did not purport to
explore the rate filing or to identify all possible issues it raised.  Yet
such a notice would not be feasible in a matter where objections to the
filing, if any, would necessarily arise out of the testimony before the
hearing officer.  The original notice could not have anticipated the content
of the supplemental orders, and consequently we do not find it inadequate
for failure to do so.  As we stated in In re Hot Spot, Inc., 149 Vt. at 540,
546 A.2d  at 801, "notice in an administrative proceeding need only be
reasonable."  See 3 V.S.A. { 809(a).  It would be unreasonable to require
the original notice to be as prescient as VHSC demands.
     VHSC raises a parallel argument under { 4(g) of Department of Banking
and Insurance Regulation No. 82-1, which requires that "requests for
findings of fact and conclusions of law, if any, shall be filed within 20
days after hearing or . . . within 20 days after the date originally set
for the hearing."  VHSC contends that because of lack of notice, it was
unable to request findings on the supplemental orders as provided by { 4(g).
The argument would limit remedies fashioned by the commissioner to those
specified in hearing notices -- an argument that would strip the
commissioner of all flexibility to tailor her remedies to the evidence.
Moreover, VHSC was given, and exercised, the right to object to the
commissioner's proposed orders in writing.  Its views were considered by the
commissioner prior to issuing her supplemental findings and order on
November 25, 1987.  In sum, { 4(g) was not violated.
     What remains to be explored, however, is whether each order was in fact
based on issues fairly raised on the record and whether each is otherwise
valid.  As we recognized in Petition of Green Mountain Power Corp., 131 Vt.
284, 293, 305 A.2d 571, 577 (1973), adequacy of an original notice does not
end the inquiry.  The fairness of the whole procedure must be in accord with
due process principles.  Crucial to the determination "is whether or not the
parties were given an adequate opportunity to prepare and respond to the
issues raised in the proceeding."  Id.; see also 3 V.S.A. { 809(c).  Even if
the subject matter of the collateral orders issued by the commissioner was
not a required part of the notice of proceedings, we must examine whether
the subject matter of each supplemental order was practically and
effectively communicated to VHSC, giving it a fair opportunity to respond
and offer objections.

                                  II.
     VHSC attacks the lack of due notice of, and opportunity to address, the
subject matter contained in Supplemental Order 1, which states
	BC/BS shall study ways to reduce or limit its
	administrative expense load for medicomp subscribers.
	BC/BS shall report its findings to the Commissioner
	within sixty (60) days.

     The record of the proceedings reflects a continuing focus on the
administrative expense load.  VHSC itself introduced evidence that its
administrative expenses had increased 49 percent in three years.  It could
not have been surprised that the board issued a supplemental order directing
it to study ways of reducing or limiting these expenses.  As VHSC itself
admits, administrative expenses were among six "component parts" forming the
commissioner's decision criteria.  On September 17, 1987, the hearing
officer submitted a proposed decision and order for the commissioner's
consideration, which included a proposal that VHSC study and report on ways
to reduce its administrative expenses.  VHSC did not argue that the record
before the hearing officer was devoid of evidence bearing on administrative
expenses, but it filed exceptions to the proposal on other grounds, and on
November 19, 1987, the commissioner issued supplemental findings to the
effect that administrative expenses had "increased dramatically in a
relatively short period of time" and that a study of ways to reduce these
expenses was needed.  Having filed written exceptions, VHSC did not request
further oral argument on the subject of administrative expenses.
     By the date of the issuance of Supplemental Order 1, VHSC had ample
warning that the commissioner might act to require at least a consideration
of means to reduce administrative costs.  Further, VHSC had ample
opportunity not only to defend its record on administrative costs, but also
to negate the basis on which the commissioner might order the investigation
of further efforts in that direction.  Consequently, VHSC's contention that
it did not have an opportunity to address the subject matter of Supplemental
Order 1 is not persuasive.
     VHSC also argues that the supplemental order improperly stepped on
management prerogatives.  The order sought to effect a reduction in VHSC's
administrative expense burden -- a burden that directly affects the
profitability of operations and is integral to the goal set forth in 8
V.S.A. { 4513(c) of "efficient and economical management."  Such an
intrusion upon management is authorized.  See infra p. 7.
     The order was proper and shall stand.
                                   III.
     VHSC next challenges the validity of Supplemental Order 2, which
states
	The financial condition of BC/BS dictates that it shall
	not undertake any capital expenditure over $250,000
	without the prior written approval of the Commissioner.

VHSC essentially argues that no evidence supported issuance of the order and
that, in any case, it invaded the prerogatives of management.
     We do not agree.  There was undisputed evidence before the commissioner
that VHSC had a negative reserve position of $5 million and was technically
insolvent, that it had lost $9.6 million in the past two years, and that
another loss would ensue for 1987.  In light of such a fragile debt
position, large capital expenditures were very likely to have a major impact
on VHSC's financial condition, and would ultimately affect the plan's
subscribers.  Thus, this supplemental order was reasonable and necessary to
"insure that benefits and services are provided at minimum cost under
efficient and economical management."  8 V.S.A. { 4513(c).
     VHSC claims that the evidence does not support this particular response
to the financial weakness of VHSC.  This objection misperceives our role.
Once we establish that the commissioner's action is supported by the
evidence, we do not second-guess the method she chooses while acting within
her area of expertise.  See Consumer Credit Ins. Assoc. v. State, 149 Vt.
305, 308, 544 A.2d 1159, 1161 (1988).  Deference will be given to an
agency's fashioning of a remedy to address the underlying problem and
policy.  In re Handy, 144 Vt. 610, 613, 481 A.2d 1051, 1053 (1984).  The
consequences of fiscal insolvency on claims payments and on the maintenance
of VHSC's subscribers' health could be major.  The commissioner had the
authority to address those dangers in the manner that she did.
     VHSC argues that "it is for management to decide whether or not to make
a capital expenditure," citing New Hampshire-Vermont Physician Service v.
Commissioner, 132 Vt. 592, 596-97, 326 A.2d 163, 166 (1974).  The
legislature enacted 8 V.S.A. {{ 4513(c) and 4584(c) to overrule New
Hampshire-Vermont Physician Service.  In re Vermont Health Service Corp.,
144 Vt. 617, 625, 482 A.2d 294, 298 (1984).  The fact is that {{4513(c) and
4584(c) now specifically authorize, if not require, the commissioner to
interpose her regulatory authority into the "place of management" and to
intervene in order to insure that benefits and services are provided at
minimum costs under "efficient and economical management of the
corporation."  Without the authority to issue supplemental orders, she would
clearly "not have the means actively to bring this about." Id. at 625-26,
482 A.2d  at 298.
     Finally, this order is simply an approval requirement.  There is no
reason to believe that the commissioner will disapprove reasonable capital
expenditures.  Until such time as the commissioner disapproves a capital
expenditure, an attack on the order is premature.
                                     IV.
     Finally, VHSC attacks the commissioner's authority to issue
Supplemental Order 5, which states
         In all future rate filings, BC/BS shall properly credit
         subscribers for investment income.

     In addition to claiming lack of notice, VHSC's attack on Supplemental
Order 5 is based on the purported ambiguity of the order, which is said to
contain "absolutely no guidelines . . . as to the manner in which
subscribers are to [be] credited for investment income in future filings."
VHSC also contends that if the supplemental order is meant to apply to all
future rate filings, rather than future Medicomp filings, then the order is
beyond the scope of the proceeding and "is a de facto rule."
     Both arguments are based on the assumption that Supplemental Order 5
sets new policy or establishes new regulatory norms.  Neither assumption is
true.  The commissioner believed as a result of the evidence before her
that VHSC has not properly credited subscribers with investment income.  We
agree with VHSC that the scope of the commissioner's concern is not clear
from the order, nor are particulars offered as to how to implement proper
crediting.  But neither omission is fatal.  Supplemental Order 5 is little
more than an exhortation to VHSC to do a better job on a specific aspect of
its duty of assessing all income and expenses in order to avoid rates that
are "excessive, inadequate or unfairly discriminatory" within the meaning of
8 V.S.A. { 4513(b) and to promote the "efficient and economical management
of the corporation" under 8 V.S.A. { 4513(c).
     The requirement of including investment income in future rate filings
is little more than a reminder to VHSC of the broad and general accounting
principles that already apply to VHSC's rate filings.  Should VHSC have
specific questions about the nature of the accounting procedures required to
place its current practices in conformity with the norm suggested by the
supplemental order, those questions would be best addressed in the context
of specific future filings rather than in the present action.  The order in
its current form invades no protected interest of VHSC and will stand.
     Affirmed.

                                        FOR THE COURT:




                                        Chief Justice



FN1.   8 V.S.A. { 4513(c) states in part:
	   In connection with a rate decision, the commissioner
	may also make reasonable supplemental orders to the
	corporation and may attach reasonable conditions and
	limitations to such orders as he [or she] finds, on the
	basis of competent and substantial evidence, necessary
	to insure that benefits and services are provided at
	minimum cost under efficient and economical management
	of the corporation.

FN2.   3 V.S.A. { 809 states in part:
	  (a) In a contested case, all parties shall be given
	an opportunity for hearing after reasonable notice.
	  (b) The notice shall include:
	  . . . .
	      (4) a short and plain statement of the matters at
	issue.  If the agency or other party is unable to state
	the matters in detail at the time the notice is served,
	the initial notice may be limited to a statement of the
	issues involved.  Thereafter upon application a  more
	definite and detailed statement shall be furnished.
	  (c) Opportunity shall be given all parties to respond
	and present evidence and argument on all issues
	involved.