Barr v. Arkansas Blue Cross and Blue Shield, Inc., 88-202

• Decision Date: 05 December 1988
• Docket Number: No. 88-202,88-202
• Citation: 297 Ark. 262,761 S.W.2d 174
• Parties: James G. BARR and Delois Barr, Appellants, v. ARKANSAS BLUE CROSS AND BLUE SHIELD, INC., Appellee.
• Court: Arkansas Supreme Court

Page 174

761 S.W.2d 174

297 Ark. 262

James G. BARR and Delois Barr, Appellants, v. ARKANSAS BLUE CROSS AND BLUE SHIELD, INC., Appellee.

No. 88-202.

Supreme Court of Arkansas.

Dec. 5, 1988.

Q. Byrum Hurst, Hot Springs, for appellants.

Wright, Lindsey & Jennings, Little Rock, for appellee.

GLAZE, Justice.

This case involves a claim dispute under the Federal Employees Health Benefits Act (FEHBA) embodied in 5 U.S.C.A. §§ 8901-8914 (West 1967 & Supp.1988). Appellant James G. Barr, a retired Federal employee, paid into the Federal Employees Benefit Plan offered through the appellee, Arkansas Blue Cross and Blue Shield. Under FEHBA, the United States Office of Personnel Management (OPM) enters into contracts with private carriers, in this case the appellee, that will administer the Federal Benefit plan. OPM promulgated regulation 5 C.F.R. § 890.105 (1986) which sets forth a procedure for resolving benefit claim disputes between a FEHBA plan's carrier and enrollees in the plan, such as appellants.

Appellants submitted hospital and medical bills to appellee for payment under the terms of FEHBA. After appellee denied two requests for payment of those bills, appellants filed suit against appellee in circuit court, alleging breach of contract and the tort of bad faith for appellee's alleged outrageous conduct in denying the appellants' claims. Appellee moved to dismiss the appellants' action because the appellants had not exhausted their administrative remedies by appealing to the OPM. Appellee also moved for partial summary judgment on the tort of bad faith claim on the basis that such a state claim was preempted by FEHBA. The trial court granted both of appellee's motions, and we affirm.

Regarding the preemption issue, we first turn to the terms of the preemption clause contained in § 8902(m)(1) of FEHBA, which provides as follows:

The provisions of any contract under this chapter which relate to the nature or extent of coverage or benefits (including payments with respect to benefits) shall supersede and preempt any State or local law, or any regulation issued thereunder, which relates to health insurance or plans to the extent that such law or regulation is inconsistent with such contractual provisions. (Emphasis added.)

The Ninth Circuit Court of Appeals in Hayes v. Prudential Ins. Co. of America, 819 F.2d 921 (9th Cir.1987), considered the foregoing clause in a case similar to the one before us. In Hayes, the retired employee claimed he was wrongfully refused benefits under FEHBA and sought damages against the contract carrier (Prudential Insurance Co.) alleging state law causes of action which included breach of contract and breach of a duty of good faith and fair dealing. The employee contended his state claims were not preempted under § 8902(m)(1) because the claims related to the manner in which Prudential Insurance Co. processed his benefits and not to the "nature or extent of coverage or benefits." The court rejected the contention, stating no such distinction existed since tort claims arising out of the manner in which a benefit claim is handled are not separable from the terms of the contract. The court reasoned that the employee's state claims "relate to" the health insurance plans, under § 8902(m)(1) of FEHBA, as long as they have a connection with or refer to the plan. Because the court determined the employee's state law claims referred to the health insurance plan provided under FEHBA, it held the claims fell under the Act's preemption clause. The Hayes court further concluded as follows:

Because the state law claims invariably expand appellees' obligations under the terms of the Plan, the claims are inconsistent with the Plan and, hence, preempted under § 8902(m)(1). ¹

The rationale employed by the court in Hayes is well supported by the Supreme Court's decision in Pilot Life Ins. v. Dedeaux, 481 U.S. 41, 107 S.Ct. 1549, 95 L.Ed.2d 39 (1987). In Dedeaux, the Court held that the Employee Retirement Income Security Act (ERISA) preempts state common law tort and contract claims for benefits under an ERISA regulated plan. The Supreme Court's holding was based upon its interpretation and application of the following preemptive clause contained in ERISA, which is notably similar to FEHBA's preemptive clause before us now:

[T]he provisions of this subchapter ... shall supersede any and all state laws insofar as they may now or hereafter relate to any employee benefit plan.... 29 U.S.C. § 1144(a) (1982).

In construing the foregoing clause, the Supreme Court gave the phrase "relate to" its broad common-sense meaning, such that a state law "relates to" a benefit plan in the normal sense of the phrase if it has a connection with or reference to such a plan. In doing so, the Court emphasized that the preemption clause was not limited to state laws specifically designed to affect employee benefits plans and concluded that common law causes of action raised in Dedeaux's complaint, each based on alleged improper processing of a claim for benefits under an employee benefit plan, undoubtedly met the criteria for preemption under the clause. Cf. Allis-Chalmers Corp. v. Lueck, 471 U.S. 202, 105 S.Ct. 1904, 85 L.Ed.2d 206 (1985) (where the Court held § 301 of the Labor Management Relations Act, 29 U.S.C. § 185(a) (1982), preempted Wisconsin tort law for alleged bad faith delay in making disability payments under a collective bargaining agreement).

We believe the principles employed by the Court in Dedeaux, to determine Congress's intent and purpose in enacting the preemptive clause in ERISA, are equally applicable here, when construing FEHBA's preemptive clause. As we have cited already, other jurisdictions have adopted this same view when holding state causes of actions, such as contract and bad faith tort, are precluded under FEHBA. In the present case, appellants' actions clearly made reference or related to the plans provided by FEHBA, and in order to prevail in their breach of contract and bad faith tort claims, appellants must show that the appellee failed, in varying degrees, to comply with the requirements under that federal law when appellee denied appellants their benefits. In accordance with what we believe to be the controlling law on this subject, we conclude that appellants' state actions are preempted under FEHBA, and that the trial court was correct in so holding.

Next, we address appellants' argument that the trial court erred in dismissing their action because appellants failed to exhaust their administrative remedies. ² The doctrine of exhaustion of administrative remedies provides that no one is entitled to judicial relief for a supposed or threatened injury until the prescribed administrative remedy has been exhausted. Myers v. Bethlehem Shipbuilding Corp., 303 U.S. 41, 58 S.Ct. 459, 82 L.Ed. 638 (1938). The doctrine is,...