Reilly v. Blue Cross and Blue Shield United of Wisconsin
| Citation | 846 F.2d 416 |
| Decision Date | 05 May 1988 |
| Docket Number | No. 87-2281,87-2281 |
| Parties | , 9 Employee Benefits Ca 2182 Kathryn REILLY and Joseph Reilly, Plaintiffs-Appellants, v. BLUE CROSS AND BLUE SHIELD UNITED OF WISCONSIN, a corporation, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Marjan R. Kmiec, Kmiec Law Offices, Milwaukee, Wis., for plaintiffs-appellants.
W. Charles Jackson, Michael, Best & Friedrich, Milwaukee, Wis., for defendant-appellee.
Before BAUER, Chief Judge, POSNER, Circuit Judge, and WILL, Senior District Judge. *
Kathryn and Joseph Reilly, plaintiffs-appellants, Wisconsin residents, brought this action against Blue Cross and Blue Shield United of Wisconsin ("Blue "), defendant-appellee, a Wisconsin non-profit corporation, alleging that Blue Cross arbitrarily and capriciously denied their insurance claim for Mrs. Reilly's in vitro fertilization ("IVF"). The plaintiffs' original complaint claims that Blue Cross breached the insurance contract, acted in bad faith, intentionally inflicted emotional distress and caused a loss of consortium. The plaintiffs seek compensatory and punitive damages.
Mr. Reilly is a Milwaukee public school teacher. He and his wife were covered under a self-insured group health plan which is part of the collective bargaining agreement between the Milwaukee Teachers Education Association ("MTEA") and the Milwaukee Public Schools ("MPS"). The plan was administered by Blue Cross for a fee "based, subject to certain limitations, on the dollar volume of covered charges approved for payment," Defendant-Appellee's Brief at 5. Blue Cross is not at risk for any health care costs.
Pursuant to Blue Cross' motion, the case was removed from the Waukesha County Circuit Court to the Eastern District of Wisconsin because it raises questions governed by the federal Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. Sec. 1001, et seq. Federal subject matter jurisdiction is based on 29 U.S.C. Sec. 1132(e).
Judge Curran ordered that nonexpert discovery be completed by January 1, 1987 and expert discovery by May 1, 1987. All dispositive motions were to be filed by June 1, 1987 and the trial was set for August 17, 1987. On June 1, 1987, Blue Cross moved for summary judgment against the plaintiffs' (1) ERISA claim, arguing that its decision to deny coverage was not arbitrary, capricious or motivated by bad faith, and (2) state law claims, arguing that these claims are preempted by ERISA. On June 30, 1987, the plaintiffs moved for leave to amend their complaint. They sought to add allegations of a conspiracy, fraud and breach of fiduciary duty based on newly discovered evidence allegedly concealed from them by Blue Cross.
Judge Curran granted Blue Cross' motion for summary judgment and denied the plaintiffs' motion to amend their complaint. He concluded that (1) the defendant's decision was not arbitrary, capricious or motivated by bad faith; (2) ERISA preempted the plaintiffs' state law claims; and (3) even if state law claims were not preempted, he would not take pendent jurisdiction over them. The plaintiffs appeal both the decisions on the parties' motions and the preemption conclusion as to the claims for punitive damages and of bad faith.
We find that material issues of fact exist as to whether Blue Cross' decision was arbitrary, capricious or motivated by bad faith and we therefore reverse the district court's order granting Blue Cross' motion for summary judgment with respect to the plaintiffs' ERISA claim. Because the plaintiffs did not appeal the district court's order that their claims of intentional infliction of emotional distress and loss of consortium are preempted under ERISA, we do not review this decision and the district court's order dismissing these claims is affirmed solely on the ground that they are preempted. We find that the plaintiffs' demand for punitive damages and claim of bad faith are preempted under ERISA because the health plan at issue is self-insured and state laws arguably "regulating insurance" are preempted by ERISA as to self-insured plans. We therefore affirm the district court's order dismissing those claims. Finally, we find that amending the plaintiffs' complaint with claims of conspiracy, fraud, bad faith and breach of fiduciary duty would be futile because such claims are not separate federal causes of action but simply further evidence relevant to whether Blue Cross' action was arbitrary, capricious or motivated by bad faith in violation of ERISA. In addition, if considered as state claims, they are also preempted. We therefore affirm the district court's order denying the plaintiffs leave to file an amended complaint.
By 1978, Kathryn Reilly had received treatment for infertility. In 1982, she was diagnosed as having an independently treatable condition called endometriosis, which affects a woman's ability to conceive. Blue Cross paid for her initial treatments. Thereafter she was treated with artificial insemination, among other things, which was unsuccessful. On October 15, 1984, Mrs. Reilly underwent a successful IVF procedure at Waukesha Memorial Hospital in Wisconsin. On May 22, 1985, she gave birth to a baby girl, Nora.
The plaintiffs' insurance policy is outlined in two documents. One is a booklet distributed to plan members in January, 1981. It describes the benefits and exclusions. The other document is a group master contract which memorialized the agreement between the MPS and Blue Cross. This contract was renewed annually and, during the year following each renewal, a copy was forwarded to the MTEA. Individual group members did not receive a copy of this contract.
Blue Cross denied coverage for the expenses incurred by Kathryn Reilly's IVF procedure on the grounds that: (1) IVF was an experimental procedure, which was excludable under the master contract's general provision excluding experimental procedures; and (2) the contract specifically excluded coverage for an IVF procedure. Blue Cross claimed that the IVF was experimental under the general exclusion because it had a success rate of less than 50%. Blue Cross accepted the Reilly's claim for expenses incurred in the delivery of Nora, including intensive care.
The contract at issue was effective from July 1, 1984 to June 30, 1985. At the time of Mrs. Reilly's IVF, October 15, 1984, MTEA had not received the renewed contract for that period. According to the plaintiffs, as of October 1984, the MTEA was unaware of any exclusion under the master contract for IVF, either under the general provision excluding experimental procedures or as a specific exclusion.
Also, according to the plaintiffs, the MTEA first received notice that IVF procedures were excluded on September 19, 1985, long after the baby's birth in May and nearly one year after Mrs. Reilly's IVF. Notice was sent by Rhonda Koprowski, a Blue Cross supervisor, in a letter stating that Marjan R. Kmiec Affidavit, June 16, 1987, Exhibit D. Blue Cross did not make an exception.
The district court assumed, for the purpose of its decision, that at the time of Kathryn Reilly's IVF, the parties were bound by the previous (1983-84) agreement which did not specifically list IVF either as being experimental or an excludable procedure. Accordingly, the district court assumed that the general provision in the 1983-84 contract excluding expenses for experimental and investigative procedures was the only provision under which Blue Cross could defend its decision. Our review is necessarily based on these same assumptions.
The 1983-84 contract's general provision excluding expenses for experimental and investigative procedures reads as follows:
Services and procedures which are experimental/investigative in nature. Experimental/investigative means the use of any treatment, procedure, facility, equipment, drugs, devices or supplies not yet recognized as accepted medical practice by Blue Cross & Blue Shield United and any of such items requiring federal or other governmental agency approval and for which approval has not been granted at the time services were rendered.
Blue Cross claims that at the time of Kathryn Reilly's IVF, October, 1984, IVF was deemed experimental. The plaintiffs allege that IVF was not deemed experimental by the general expert medical community at the time of Kathryn Reilly's IVF and Blue Cross' formula employed to determine whether IVF is experimental leads to an arbitrary and capricious conclusion.
We must decide (1) if viewing the evidence in a light most favorable to the plaintiffs, there is a material issue of fact as to whether Blue Cross' decision was arbitrary, capricious or motivated by bad faith and violated ERISA; Rodeo v. Gillman, 787 F.2d 1175, 1177 (7th Cir.1986); Fed.R.Civ.P. 56(c); (2) if the district court abused its discretion under Fed.R.Civ.P. 15(a) by denying the plaintiffs' motion for leave to amend their complaint; and (3) whether the plaintiffs' state law claims for bad faith and punitive damages are preempted under ERISA.
The plaintiffs' health plan is governed by ERISA. 29 U.S.C. Secs. 1002(1) and 1003(a)(3). They may bring a civil action to recover benefits allegedly due under the plan. 29 U.S.C. Sec. 1132(a)(1)(B). As the administrator of the employee benefit plan, Blue Cross is a fiduciary for ERISA purposes. 29 U.S.C. Sec. 1002(21)(B); Chicago Board Options Exchange, Inc. v. Connecticut General Life Insurance Company, 713 F.2d 254, 258-60 (7th Cir.1983). Accordingly, Blue Cross' duties and responsibilities for managing and administering the plaintiffs' plan are defined as follows:
(1) ... a fiduciary...
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