Kennedy v. Empire Blue Cross and Blue Shield

• Decision Date: 22 March 1993
• Docket Number: No. 845,D,845
• Citation: 989 F.2d 588
• Parties: Anne KENNEDY; Michael Chubre, as representative of Emily Chubre; Josette Boehm and Ralph Russo, on behalf of themselves and others similarly situated, Plaintiffs-Appellants, v. EMPIRE BLUE CROSS AND BLUE SHIELD, Defendant-Appellee. ocket 92-7923.
• Court: U.S. Court of Appeals — Second Circuit

Page 588

989 F.2d 588

25 Fed.R.Serv.3d 141

Anne KENNEDY; Michael Chubre, as representative of Emily Chubre; Josette Boehm and Ralph Russo, on behalf of themselves and others similarly situated, Plaintiffs-Appellants, v. EMPIRE BLUE CROSS AND BLUE SHIELD, Defendant-Appellee.

No. 845, Docket 92-7923.

United States Court of Appeals Second Circuit.

Argued Jan. 13, 1993.

Decided March 22, 1993.

Whitney North Seymour, Jr., New York City (Craig A. Landy, Peter James Clines, Brown & Seymour, of counsel), for appellants.

James J. Sabella, New York City (Robert A. Bicks, Patricia Anne Kuhn, Breed, Abbott & Morgan, of counsel), for appellee.

Before: MESKILL, Chief Judge, VAN GRAAFEILAND and CARDAMONE, Circuit Judges.

MESKILL, Chief Judge:

This is an appeal from a judgment of the United States District Court for the Southern District of New York, Griesa, J., dismissing the plaintiffs' breach of contract class action against defendant insurance carrier for failure to exhaust administrative remedies, 796 F.Supp. 764.

This action was brought by subscribers to several major medical insurance plans issued by defendant Empire Blue Cross and Blue Shield (Empire), challenging Empire's January 1, 1990 reformulation of the geographic zones used in determining physician reimbursement amounts. On that date, Empire abandoned its use of three broad geographic pricing zones in favor of smaller "zip code cluster pricing" zones. Plaintiff class consists of all Empire subscribers who submitted claims on or after January 1, 1990 and on whose behalf reduced payments of benefits were made because of the shift to zip code zone pricing. Plaintiffs alleged that Empire breached its contracts by changing its method of determining reimbursement amounts unilaterally and without subscriber consent, thereby reducing reimbursements to the plaintiffs.

Plaintiffs also alleged that by improperly implementing this change, Empire reduced its level of reimbursements to subscribers overall.

Empire moved the district court to dismiss the complaint pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief can be granted, on grounds, inter alia, that plaintiffs had failed to exhaust their administrative remedies prior to bringing the action. Because materials in addition to the complaint were submitted on the exhaustion issue, the district court converted the motion to a Fed.R.Civ.P. 56 motion for summary judgment pursuant to Fed.R.Civ.P. 12(b). The district court granted the motion, holding that the named plaintiff who was a federal employee had failed to make a required appeal to the Office of Personnel Management (OPM) and that the non-government employee named plaintiffs had failed to make a required appeal to Empire. We agree with the district court and affirm the judgment.

BACKGROUND

The complaint alleges that at the time this action arose, named plaintiff Anne Kennedy was a federal employee, a resident of Bronx County, New York, and an Empire major medical insurance subscriber under the "Federal Employee Program." Named plaintiff Michael Chubre, a resident of King's County, New York, represents the estate of Emily Chubre, who was an Empire subscriber under the "Wraparound" group plan. Named plaintiffs Josette Boehm and Ralph Russo were residents of Nassau and Queens Counties, New York, respectively, and Empire subscribers under the "TraditionPLUS" group plan. The class of plaintiffs consists of two subclasses: (1) federal employees, whose claims are governed by the Federal Employees Health Benefits Act, 5 U.S.C. § 8901 et seq. (FEHBA), and (2) non-federal employees, whose claims are governed by the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001 et seq. (ERISA).

Federal employee plaintiffs (FEHBA plaintiffs) such as Kennedy obtain their health benefits through the Federal Employees Health Benefits Program (FEHBP) which is governed by the provisions of FEHBA. Under FEHBA, OPM has the authority to contract with insurance carriers to provide benefits to participants in FEHBP. 5 U.S.C. § 8902(a). Insurance carriers which seek to participate in FEHBP must be approved by and enter into a contract with OPM. 5 U.S.C. § 8902. FEHBA provides that, as a condition to participating in FEHBP, insurance carriers must agree to be bound by OPM's interpretation of their contracts in disputes over individual claims. 5 U.S.C. § 8902(j).

Plaintiffs who are not federal employees (ERISA plaintiffs), such as the remaining three named plaintiffs, obtained their health insurance coverage through their employers, choosing one of Empire's policies such as Wraparound or TraditionPLUS. Typically in such cases, the employer contracts with Empire to provide coverage for its employees. Claims under such employer benefit plans are governed by the provisions of ERISA.

All of the plans to which members of the plaintiff class subscribed reimburse major medical expenses based on schedules of "Customary Charges." The contracts define Customary Charge to be the amount charged by most providers with training and experience similar to the covered person's provider who render the same type of service in the same area where the service was provided. Empire sets the Schedule of Customary Charges for a particular area by reviewing all claims submitted to them for the same procedure in the same area during a particular period of time, and then establishing the Customary Charges at a level sufficient to pay the cost of the service by ninety percent of the providers in that area.

Prior to January 1, 1990, Empire divided its operating area into three geographic zones for purposes of calculating Customary Charges. On January 1, 1990, Empire implemented its "zip code cluster pricing," dividing its operating area into a larger number of zones defined by clusters of United States Postal Service zip codes. Empire states that the change was in response Plaintiff Kennedy is the only named plaintiff to have appealed to Empire about the reductions in benefits at issue here. Upon receiving notification from Empire of the amount covered for anesthesia services rendered to Kennedy (an amount less than that received on a similar claim submitted before January 1, 1990), Dr. Joel Archer, on behalf of Kennedy, requested by letter dated May 18, 1990, that Empire review its determination. Empire reviewed the claim, concluded that the amount paid was correct and informed Dr. Archer by telephone of its determination and of Dr. Archer's right to appeal to OPM. By letter dated June 11, 1990, Dr. Archer asked Empire for a written rationale for its determination. By letter dated June 15, 1990, Yvonne S. Archer, Executive Director of the New York State Federation of Anesthesiologists, Inc. (Federation), again asked for a written rationale and stated to Empire that "[u]nder the Federal Employee Program, contract carriers (not government's Office of Personnel Management) have responsibility for implementing usual and customary fee screens. Your suggestion that the doctor now apply to Washington for an appeal is inappropriate." Empire sent a written response dated June 29, 1990 to Dr. Archer, detailing its calculations and again informing him of his right to appeal to OPM.

                to provider requests that Empire use Customary Charges that are more geographically specific.   Empire made this change without the consent of policyholders, believing that such an adjustment fell within its discretion to define relevant "geographic areas" under the contracts
                

On July 14, 1990, Yvonne Archer wrote directly to the president of Empire, repeating her assertion that Empire's calculations were inaccurate and that appeal to OPM would be pointless. On July 31, 1990, Empire responded by letter, explaining for the first time the January 1, 1990 switch to zip code zone pricing. Yvonne Archer wrote back to Empire on August 13, 1990, stating that despite Empire's methodology, "when an established method of computation is substituted for one that reduces prevailings by about 1/3, it is reasonable to assume that the new combined statistics are faulty all around," and asking to be provided with the pricing schedules for Manhattan and the zip code clusters used in calculating the schedules. A follow-up letter was sent by the Federation's attorney, Whitney North Seymour, Jr., on October 26, 1990. On December 27, 1990, Empire wrote to Seymour, informing him that the requested pricing and zone information is "proprietary and confidential information and will not be released outside the Corporation." No appeal was ever made to OPM by anyone representing Kennedy.

Plaintiffs filed their complaint in New York state court on November 18, 1991, alleging a one count state law breach of contract claim. Empire timely removed the case to the United States District Court based on federal question jurisdiction, given that ERISA preempts state law contract claims respecting denials of benefits under employee benefit plans. Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 107 S.Ct. 1549, 95 L.Ed.2d 39 (1987). On January 9, 1992, Empire moved to dismiss the complaint pursuant to Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief can be granted on grounds that (1) the language of the contracts and the relevant law make clear that Empire's adoption of zip code zones did not violate any contractual or statutory right of any of its subscribers, and (2) the plaintiffs have failed to allege and pursue the exhaustion of their administrative remedies. To demonstrate exhaustion of administrative remedies, plaintiffs included with their opposition papers the May 18, 1990 letter of Dr. Archer, the October 26, 1990 letter of Seymour and the December 27, 1990 letter of Empire.

Because materials outside of the complaint were introduced on the exhaustion issue, the district court, pursuant to Fed.R.Civ.P. 12(b), converted the motion to dismiss into a Fed.R.Civ.P. 56 motion for summary judgment and dismissed the...