Augusta Medical Complex, Inc. v. Blue Cross of Kansas, Inc., 53012

• Decision Date: 23 October 1981
• Docket Number: No. 53012,53012
• Citation: 634 P.2d 1123,230 Kan. 361
• Parties: AUGUSTA MEDICAL COMPLEX, INC., et al., Appellees, v. BLUE CROSS OF KANSAS, INC., Appellant.
• Court: Kansas Supreme Court

Page 1123

634 P.2d 1123

230 Kan. 361

AUGUSTA MEDICAL COMPLEX, INC., et al., Appellees, v. BLUE CROSS OF KANSAS, INC., Appellant.

No. 53012.

Supreme Court of Kansas.

Oct. 23, 1981.

Syllabus by the Court

The provision in the subscribers' contracts rendering benefits personal and nonassignable is vital to the functioning of defendant Blue Cross as a mutual nonprofit hospital service corporation in carrying out its statutory duties and obligations and, accordingly public policy requires that the same be upheld as valid and enforceable, all as is more fully set forth in the opinion.

Gerald L. Goodell, of Goodell, Stratton, Edmonds, Palmer & Wright, Topeka (argued) and Charles R. Hay, Topeka and O. J. Connell, of Connell & Connell, El Dorado, on brief, for appellant.

Robert J. Roth and J. Michael Kennalley, of Hershberger, Patterson, Jones & Roth, Wichita (argued) and David C. All, of Gaines & All, Augusta, Stephen M. Blaes, of Blaes & Heath and J. Francis Hesse, of Jochems, Sargent & Blaes, Wichita, on brief, for appellees.

Derek J. Shafer, Sp. Asst. Atty. Gen., and Fletcher Bell, Commissioner of Insurance, on brief, as amicus curiae for the Commissioner of Insurance of the State of Kansas.

McFARLAND, Justice:

This is an appeal by Blue Cross of Kansas, Inc., from a district court determination that assignments from Blue Cross subscribers are enforceable against Blue Cross, notwithstanding nonassignability provisions in all subscribers' contracts. The plaintiffs consist of 15 Kansas hospitals which have no contracts with Blue Cross and two individual subscribers of Blue Cross.

This is the fourth time in less than two years that Blue Cross has been before this court in litigation arising from conflicting ideas of how best to contain spiraling hospital service costs in Kansas. Blue Cross & Blue Shield v. Bell, 227 Kan. 426, 607 P.2d 498 (1980); Augusta Medical Complex, Inc. v. Blue Cross, 227 Kan. 469, 608 P.2d 890 (1980); and Comanche County Hospital v. Blue Cross of Kansas, Inc., 228 Kan. 364, 613 P.2d 950 (1980).

Most of the events leading up to this action are chronicled in the earlier Augusta Medical Complex case and need not be repeated in detail. It is sufficient to say that for many years Blue Cross and all Kansas hospitals had retrospective reimbursement contracts. The hospitals were reimbursed directly by Blue Cross on the basis of 104% of allowable costs. If subscribers incurred services at a nonmember hospital the subscriber would be paid directly 80% of the allowable cost and assignments were not prohibited. Inasmuch as all Kansas hospitals were members of Blue Cross, presumably this payment feature provided at least some incentive to participate as a member.

In the mid-1970's, under pressure from the insurance commissioner, Blue Cross announced it was shifting from hospital contracts based on retrospective reimbursement to contracts based on prospective reimbursement. Efforts at securing the voluntary cooperation of the hospitals failed and a mandatory shift was initiated. The move was viewed by Blue Cross as an integral part of a statutorily mandated program of health care cost containment. Several hospitals viewed the change as an intolerable and unwarranted intrusion into the hospitals' internal affairs. The battle lines were drawn. Blue Cross gave the hospitals a choice agree or be terminated. These hospitals rebelled and sought, in the first Augusta Medical Complex case, to prevent their termination. The hospitals lost and were terminated.

Along with this shift came another change. Blue Cross concluded that paying only 80% of subscribers' costs incurred at nonmember hospitals unfairly penalized their subscribers, who often had little or no choice as to which hospitals to enter. Accordingly, as of July 1, 1980, a rider was added to all subscribers' contracts which, in essence, stated that henceforth subscribers would be reimbursed 100% of allowable costs. This increase in payment also eliminated a significant incentive for hospital participation in Blue Cross; therefore, another provision of the rider stated the benefits were personal and could not be assigned.

The plaintiff hospitals, now nonmembers of Blue Cross, requested and received assignments from their patients who were Blue Cross subscribers. Blue Cross refused to honor these assignments and continued to pay the subscribers directly. This state of affairs was financially painful to the affected hospitals for, at the very least, payments to them were delayed and, at most, never received. This declaratory action was commenced to determine whether or not the nonassignability provision was enforceable. The trial court held that the subscriber's right to benefits was a chose in action and, as such, assignable as a matter of law. Blue Cross appeals therefrom.

Before we can consider the case on its merits we must dispose of a jurisdictional issue. Blue Cross contends that the twin doctrines of exhaustion of administrative remedies and of primary jurisdiction bar this action. Blue Cross notes that K.S.A. 1980 Supp. 40-1806 required it to first submit the rider in controversy to the insurance commissioner, who has certain statutory duties in connection therewith. This was done. The statute further provides any person adversely affected by the commissioner's order or action may commence an action against the commissioner of insurance.

The plaintiff hospitals requested an opinion from the attorney general on the validity of the nonassignability rider, with said request being referred to the commissioner of insurance. This request was withdrawn prior to any formal action by the commissioner. Without burdening this opinion with a lengthy discussion of these two important doctrines, it is sufficient to say that the controversy involved in this declaratory judgment is a question of law and is not of a nature that either the statutes or case law of Kansas require its submission to the commissioner of insurance as a prerequisite to determination by the court system, or that the commissioner is required to be named a defendant herein.

On the merits, a single narrow issue is raised. Is the provision in the July 1, 1980, Blue Cross rider, stating the contract benefits are personal and nonassignable, valid and enforceable? The rider provides in relevant part:

"2. Notwithstanding any other provision of the Contract or Certificate, payment of benefits will be made to the Subscriber for services of a Non-Member Hospital in the Kansas Plan Area. The benefits of the Contract or Certificate are personal to the Subscriber and are not assignable by the Subscriber in whole or in part to a Non-Member Hospital in the Kansas Plan Area or to any other person or entity."

The plaintiffs contend Blue Cross subscribers have a right to assign as a matter of law since their right to payment is a chose in action. This is the ground upon which the district court based its decision.

Blue Cross agrees that the general rule holds choses in action are freely assignable. It argues instead that the rule is not absolute and that the trial court erred in not going beyond this general rule and considering other applicable rules and exceptions.

The term "chose in action" refers to a right to be paid (O'Grady v. Potts, 193 Kan. 644, 648, 396 P.2d 285 (1964)) and, generally speaking, assignments thereof are valid and enforceable. Commodore v. Armour & Co., 201 Kan. 412, 418, 441 P.2d 815 (1968). As a general rule, a contract is not assignable where the nature or terms of the contract make it nonassignable. 6A C.J.S., Assignments § 30, p. 630. But, logically, if the parties are to be held to have agreed to make the contract or particular rights thereunder nonassignable, then it should have been a negotiated contract. This distinction is perhaps one of the major reasons that assignments of insurance benefits after loss are generally enforced despite...