Appeal of Bolden

Citation848 F.2d 201
Decision Date17 May 1988
Docket NumberNo. 87-5012,87-5012
PartiesAppeal of Ethel BOLDEN, et al. Mary DYER v. BLUE CROSS & BLUE SHIELD ASSOCIATION, INC., et al.
CourtUnited States Courts of Appeals. United States Court of Appeals (District of Columbia)

Michael D. Hausfeld, with whom, John Ellsworth Stein and Jennifer Crowe, Washington, D.C., were on the brief for appellants.

Robert C. Chestnut, Atty., Dept. of Justice, with whom Richard K. Willard, Asst. Atty. Gen., Joseph E. diGenova, U.S. Atty., and John Cordes, Atty., Dept. of Justice, were on the brief for appellees Constance Horner, Office of Personnel Management and U.S.

Philip S. Neal, with whom, Terry Bancroft Dowd and Kevin C. Dwyer, Washington, D.C., were on the brief for appellee Blue Cross and Blue Shield Ass'n.

Before BUCKLEY and WILLIAMS, Circuit Judges, and MacKINNON, Senior Circuit Judge.

Opinion for the Court filed by Senior Circuit Judge MacKINNON.

MacKINNON, Senior Circuit Judge:

Two classes of former enrollees in the Blue Cross and Blue Shield Association ("Blue Cross") Government-Wide Service Benefit Plan, who withdrew from the Plan or changed plans prior to May 1, 1985, bring this action to compel their inclusion in a $784 million refund by Blue Cross of excess contingency reserve funds, which refund is presently limited to enrollees who were subscribers in a Blue Cross plan as of May 1, 1985. Plaintiffs contend that the decision of the Office of Personnel Management ("OPM") to approve the refund proposal was "arbitrary, capricious and an abuse of discretion or otherwise not in accordance with law." 5 U.S.C. Sec. 706(2)(A). The district court upheld the decision by OPM, concluding that limiting the refund to those enrolled in Blue Cross as of May 1, 1985 was rational and supported by the record. Bolden v. Blue Cross and Blue Shield Association, 669 F.Supp. 1096, 1106 (D.D.C.1986). We affirm.

I. BACKGROUND
A. Statutory Framework

In 1959, Congress created a subsidized health insurance program as a benefit for civilian employees and annuitants of the federal government. Federal Employees Health Benefits Act of 1959, 5 U.S.C. Secs. 8901 et seq. ("the Act"). With almost 300 plans participating the program is competitive. During a four week "open season" each year, federal employees and annuitants can compare and change plans. 5 U.S.C. Sec. 8905(e); 5 C.F.R. Sec. 890.301(d).

Under the Act, the Office of Personnel Management is given broad authority to administer the Federal Employees Health Benefits Program ("the Program"). OPM contracts with insurance carriers to provide health insurance benefits and each year renegotiates the coverage and rates based upon prior experience and insurance industry practice. 5 U.S.C. Sec. 8902(i). OPM attempts to set the rates of the various plans so they will be sufficient to cover future claims and overhead costs and maintain surplus funds for unexpected costs. 5 U.S.C. Secs. 8902(i), 8909(b).

"Reserves" are required to be established to meet anticipated claims. 5 U.S.C. Sec. 8909(b); 5 C.F.R. Sec. 890.503. Many uncertain factors affect program costs, such as the number of enrollees who will move in and out of a plan and the amount and cost of health care services that enrollees will require. GAO Report, App. 705; S.Rep. No. 468, 86th Cong., 1st Sess. 18 (1959). These uncertainties make it improbable that any premium rates negotiated by OPM will exactly equal future costs. The reserves can be drawn upon when health care claims exceed annual program income. Program reserves are held partly by the government in "contingency reserves" which are earmarked for each carrier, and partly by the participating carriers in a "special reserve."

After the premium rates are set for the next contract year, OPM determines the amount of the government's contributions. 5 U.S.C. Sec. 8906. The part of the premium not paid by the government is withheld from the pay of each enrolled employee and from the annuity of each enrolled annuitant. 5 U.S.C. Sec. 8906(d). The set premium may not be changed during the contract year. Employees and annuitants receive the contract benefits during the year at the contracted rate whether costs and claims are unexpectedly high, requiring a charge against reserves, or low, resulting in a surplus. 5 U.S.C. Sec. 8902(i).

Government and enrollee contributions to the Employees Health Benefits Fund, which is controlled by OPM, 5 U.S.C. Sec. 8909(a), may be used for three purposes. First, a percentage, not to exceed one percent of all contributions, determined by OPM, is used to pay OPM's administrative expenses. 5 U.S.C. Sec. 8909(b)(1).

Second, a percentage, not to exceed three percent of all contributions, determined by OPM, may be used to establish a contingency reserve for each plan. 5 U.S.C. Sec. 8909(b)(2). Contingency reserve funds may be used to compensate for underestimates of claims costs and may be transferred to a plan's special reserve if underestimated claims create a deficit in the special reserve. 5 C.F.R. Sec. 890.503(c). Similarly, excess special reserves may be transferred to a plan's contingency reserve. 5 U.S.C. Sec. 8909(b); 5 C.F.R. Sec. 890.503(c)(1)(v). Contingency reserves may be used, at OPM's discretion, for three purposes: (1) to defray increases in future rates; (2) to reduce the contributions of the government and enrollees; or (3) to increase the benefits provided by a plan. 5 U.S.C. Sec. 8909(b).

Third, the remaining contributions by enrollees to each plan are paid into that plan's special reserves, which are used to pay enrollees' health insurance claims. Surplus or deficit special reserves are carried over each year and become a factor in determining the appropriate rate for the following year. 41 C.F.R. Sec. 16-4.152-1(b)(2). OPM may lower enrollees' premium rates to draw down a plan's surplus special, or it may increase rates to recover from a deficit reserve balance. In both cases it is the subscribers who are enrolled for the current contract year that benefit or suffer.

B. Factual Background

Unanticipated large cost increases in the medical field and high use of health care services by enrollees created financial problems for health plans in the early 1980's. Blue Cross had a $150 million deficit in its Federal Employee Health Benefit Plan (the "Plan") special reserve by the end of 1981. In response to the deficits, OPM introduced major cost containment, benefit reduction and cost-sharing initiatives to encourage more responsible use of health care services by Program enrollees, doctors and hospitals. OPM also negotiated premiums to cover higher expected costs and to build up reserves. Nationwide reductions in medical care use and costs resulted in substantial surpluses in the Plans' special reserve accounts. In May, 1985, Blue Cross estimated that its special reserve balance would be approximately $957 million by the end of 1985, of which $754 million was surplus not necessary to cover estimated future costs.

On May 20, 1985, while OPM was evaluating various ways to decrease excess reserves, Blue Cross announced a proposal for reducing its reserves. It proposed to send all persons enrolled as of May 1, 1985 a one time payment, a "refund," which would effectively reduce their contributions toward 1985 premiums. Blue Cross also proposed to give the government a refund proportionate to the amount the government contributed toward the premiums.

OPM immediately began studying the Blue Cross proposal. On May 30, 1985, OPM conducted a public hearing to solicit comments on the Program's reserve levels, the management of the reserves and the Blue Cross proposal. Five OPM officials conducted the meeting at which fourteen witnesses expressed many divergent views. At least one OPM official and two witnesses questioned whether former enrollees should receive refunds. App. 157, 192-93, 251. OPM also asked the Office of Legal Counsel ("OLC") in the Department of Justice for its opinion as to the legality of a refund to enrollees as of May 1, 1985. App. 451-52. In a July 10, 1985 opinion, OLC concluded that the refund was legal, App. 453, reasoning that under section 8909(b), excess special reserves could be transferred to contingency reserves, and paid out as "reductions in contributions." App. 470. OLC noted, however, that while refunds could be made to employees, the word "employees" in 5 U.S.C. Sec. 8909(b) would have to be changed to "enrollees" before such refunds could legally be made to subscribing annuitants. App. 471. OLC did not discuss whether refunds could be paid to former enrollees. On July 16, 1985, OPM announced that President Reagan accepted "the essential elements" of the Blue Cross proposal. App. 473. OPM instructed the insurance carriers to decrease their special and contingency reserves to an amount equal to two months of premium income by the end of 1986. App. 505-507. All Plans had the option of reducing their reserves either by reducing 1986 contributions using refunds, or by reducing 1986 premium rates, or by a combination of both methods. App. 63, 505-507. Many Plans chose the refund option. App. 705.

OPM followed OLC's recommendation and sought legislation that would allow subscribing annuitants to share in the proposed refunds. App. 474-77. In a letter to Speaker of the House Thomas P. O'Neill, Jr., OPM set forth the proposed language for the legislation and stated that OPM planned to use surplus reserves to reduce "current contributions" of those "enrolled" in a plan. App. 474. Congress adopted OPM's proposed language in passing H.R. 3384 in December, 1985. H.R. 3384, Sec. 101, 99th Cong., 1st Sess. (1985). President Reagan vetoed the bill due to unrelated provisions, however, the necessary legislation was subsequently passed by Congress and approved by the President on February 27, 1986. Federal Employees Benefits Improvement Act of 1986, Pub.L. No. 99-251, Sec. 101, H.R. 4061 (1986), 100 Stat. 14. Eleven plans...

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