49 F.3d 1460 (10th Cir. 1995), 93-3100, St. Francis Regional Medical Center v. Blue Cross and Blue Shield of Kansas, Inc.

Docket Nº:93-3100.
Citation:49 F.3d 1460
Case Date:March 06, 1995
Court:United States Courts of Appeals, Court of Appeals for the Tenth Circuit

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49 F.3d 1460 (10th Cir. 1995)




No. 93-3100.

United States Court of Appeals, Tenth Circuit

March 6, 1995

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Richard C. Hite (Arthur S. Chalmers, with him on the briefs) of Kahrs, Nelson, Fanning, Hite & Kellogg, Wichita, KS, for plaintiff-appellant.

Gary D. McCallister of Davis, Unrein, Hummer, McCallister & Buck, Topeka, KS (Mark A. Buck of Davis, Unrein, Hummer, McCallister & Buck, Topeka, KS; and Alan L. Rupe, Steven J. Rupp, and Thomas L. Steele of Rupe & Girard Law Offices, P.A., Wichita, KS, with him on the brief), for defendant-appellee.

Before EBEL, McKAY, and REAVLEY, [*] Circuit Judges.

McKAY, Circuit Judge.

Plaintiff-Appellant, St. Francis Regional Medical Center ("St. Francis"), challenges the use by Defendant-Appellee, Blue Cross Blue Shield of Kansas ("Blue Cross"), of clauses in its health care insurance policies that prohibit policyholders from assigning their right to receive insurance proceeds to health care providers who have not contracted with Blue Cross. Some of the challenged policies are covered by the Employee Retirement Income Security Act of 1974 ("ERISA"), as amended, 29 U.S.C. Secs. 1001-1461, and others are governed by Kansas state law. St. Francis claims that Blue Cross's restrictions on the assignability of health insurance benefits violate both ERISA and Kansas public policy. St. Francis further claims that a Kansas statute expressly

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authorizing Blue Cross to restrict assignability violates the Kansas Constitution's prohibition against special legislation. Kan. Const. art. 12, Sec. 1. The district court dismissed St. Francis's claims under Fed.R.Civ.P. 12(b)(6). We now AFFIRM the dismissal both as to the ERISA claims and as to the claims based on Kansas law.


Blue Cross was originally chartered as a nonprofit medical and hospital insurance corporation under Kan.Stat.Ann. Sec. 40-19c10(c). At that time, Blue Cross enjoyed a unique status as a nonprofit insurer and operated under a statutory mandate to control health care costs. Id. 1 Pursuant to that mandate, Blue Cross restricted the right of policyholders to assign their benefits as a way to encourage providers of medical services to contract with Blue Cross and to submit to its cost control policies. St. Francis and other providers prefer that patients assign their health insurance benefits to the providers so that the providers can collect their payment directly from Blue Cross and thereby avoid the risk of delayed payment or nonpayment that arises when providers must collect fees from the patients themselves. The patients also prefer to have the providers collect directly from the insurance company. Hence, Blue Cross's limitations on the assignability of benefits in its insurance policies provided a strong incentive for hospitals to contract with Blue Cross because only contracting providers could receive assignments of benefits under a Blue Cross policy. The Kansas Supreme Court in Augusta Medical Complex, Inc. v. Blue Cross, 230 Kan. 361, 634 P.2d 1123, 1126-27 (1981), upheld Blue Cross's restrictions on the assignability of benefits when Blue Cross was a nonprofit insurer. The Supreme Court noted that Blue Cross had a statutory directive to control costs and held that the restriction of assignability was a potentially effective method of cost containment.

More recently, Blue Cross, at the direction of the Kansas legislature, rechartered itself as a mutual life insurance company under Kan.Stat.Ann. Sec. 40-501 (effective July 1, 1992). 2 Blue Cross ceased to operate under a unique statutory mandate when it became a mutual life insurance company, but the Kansas legislature authorized Blue Cross to continue to limit the assignment of its insurance benefits to those providers entering into separate contracts with Blue Cross. Kan.Stat.Ann. Sec. 40-19c06(b) (as amended by Senate Bill No. 66, L.1992, Ch. 196) [hereinafter "Senate Bill 66"]. Senate Bill 66 as enacted provides that any corporation "currently or previously organized [as a nonprofit medical and hospital service corporation] may include provisions allowing for direct payment of benefits only to contracting health care providers." Kan.Stat.Ann. Sec. 40-19c06(b).

At about the same time that it changed its corporate status, Blue Cross implemented a new provider contracting strategy in the Wichita market. Departing from its long-time strategy of contracting with every willing health care provider, Blue Cross requested bids from the three largest acute care hospitals in Wichita and indicated that it intended to select only two of the bidders to form a Blue Cross preferred provider organization. St. Francis declined to bid for the contract under the belief that it could continue its existing contractual relationship with Blue Cross. 3 Blue Cross subsequently exercised its contractual right to terminate its relationship with St. Francis.

St. Francis then filed suit in Kansas state court seeking (1) an injunction to prevent

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Blue Cross from rejecting the assignments of benefits by Blue Cross policyholders to St. Francis and (2) a declaration that Senate Bill 66 is unconstitutional and that Blue Cross's provisions restricting assignability are void. St. Francis argued that Blue Cross no longer enjoyed a unique statutory position under Kansas law and could no longer justify its exemption from the general Kansas common law prohibition of restraints on assignability. St. Francis further maintained that Senate Bill 66 granted unique corporate powers to Blue Cross and thereby violated the Kansas Constitution's equal protection and special legislation provisions. Blue Cross, pleading the existence of ERISA claims, removed the action to the United States District Court for the District of Kansas pursuant to 28 U.S.C. Sec. 1441(b). Blue Cross then moved for a dismissal under Fed.R.Civ.P. 12(b)(6). 4

The district court granted Blue Cross's motion to dismiss the complaint. St. Francis Regional Medical Ctr. v. Blue Cross Blue Shield, 810 F.Supp. 1209, 1220 (D.Kan.1992). The court first held that ERISA preempts state law and that Congress intended the assignability of benefits to be left to the contractual provisions of individual plans without the constrictions of a mandatory rule for or against assignability. Id. at 1213-14. The court next ruled against St. Francis on its state law claims. The court held that St. Francis lacked standing to attack Senate Bill 66 because St. Francis had not been directly injured by its enactment. Id. at 1215-16. Alternatively, the court also rejected St. Francis's constitutional and public policy challenges on their merits. The court concluded that Kansas public policy supports restrictions on the assignability of benefits because the state's interests in the freedom to contract and in the containment of rising health care costs outweigh the importance of free assignability. Id. 1217-20. The court further held that Senate Bill 66 does not improperly create classifications within a similarly situated class of corporations in violation of the Kansas Constitution's prohibition against special legislation because it applies uniformly to all former nonprofit insurers. Id. at 1217. The court therefore found that Senate Bill 66 does not grant Blue Cross powers that other insurance companies lack.

St. Francis raises four arguments in its appeal of the district court's decision: (1) that Blue Cross's restrictions on assignability violate ERISA; (2) that Blue Cross's restrictions on assignability violate Kansas's public policy; (3) that St. Francis has standing to challenge Senate Bill 66's constitutionality under the Kansas Constitution; and (4) that under the Kansas Constitution Senate Bill 66 is unconstitutional because it is special legislation. St. Francis further argues that, contrary to the appropriate standard for ruling on a 12(b)(6) motion, the district court improperly relied on disputed facts outside of St. Francis's pleadings to dismiss its action. In particular, St. Francis contends that the court did not accept its allegations as true that Blue Cross's new contracting strategy in Wichita merely shifts costs from the participating to non-participating providers without producing a net decrease in overall health care costs.


The parties agree that some of the challenged insurance policies are covered by ERISA but that others are exempt from ERISA and, hence, governed by Kansas state law. We address those policies covered by ERISA first. We review de novo the district court's dismissal of St. Francis's action pursuant to Fed.R.Civ.P. 12(b)(6). Miller v. Glanz, 948 F.2d 1562, 1565 (10th Cir.1991). We also review the court's construction of ERISA de novo. National Elevator Indus., Inc. v. Calhoon, 957 F.2d 1555, 1557 (10th Cir.), cert. denied, --- U.S. ----, 113 S.Ct. 406, 121 L.Ed.2d 331 (1992). In assessing whether dismissal is appropriate, we presume the plaintiff's factual allegations are true and consider whether the plaintiff's complaint has stated a legally sufficient claim upon which relief may be granted. Miller, 948 F.2d at 1565.

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There is no dispute that ERISA preempts any Kansas law affecting the assignability of insurance benefits for those Blue Cross plans covered by ERISA. ERISA preempts any state laws which "relate to" plans covered by ERISA. 29 U.S.C. Sec. 1144(a). A state law " 'relates to' an employee benefit plan ... if it has a connection with or reference to such a plan." Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 96-97, 103 S.Ct. 2890, 2899-2900, 77 L.Ed.2d 490 (1983). We construe ERISA's preemptive scope broadly. Id. at 98, 103 S.Ct. at 2900; Settles v. Golden Rule...

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