Bolden v. Blue Cross and Blue Shield Ass'n

• Decision Date: 28 October 1986
• Docket Number: Civ. A. No. 85-2658.
• Citation: 669 F. Supp. 1096
• Parties: Ethel BOLDEN, et al., Plaintiffs, v. BLUE CROSS AND BLUE SHIELD ASSOCIATION, et al., Defendants.
• Court: U.S. District Court — District of Columbia

669 F. Supp. 1096

Ethel BOLDEN, et al., Plaintiffs, v. BLUE CROSS AND BLUE SHIELD ASSOCIATION, et al., Defendants.

Civ. A. No. 85-2658.

United States District Court, District of Columbia.

October 28, 1986.

John Ellsworth Stein, Stein, Sills & Brodsky, Michael D. Hausfeld, Cohen, Milstein & Hausfeld P.C., Washington, D.C., for plaintiffs.

Philip S. Neal, Washington, D.C., for Blue Cross & Blue Shield Ass'n.

Robert C. Chestnut, U.S. Dept. of Justice, Washington, D.C., for defendant Horner.

MEMORANDUM OPINION

JOHN H. PRATT, District Judge.

Plaintiffs, representatives of two classes of present or former enrollees in the Blue Cross and Blue Shield Association's Government-wide Service Benefit Plan, seek to compel their inclusion in a $784 million refund by Blue Cross and Blue Shield Association. As presently structured, the refund will embrace only the federal government and those individuals enrolled in the Service Benefit Plan as of May 1, 1985. Plaintiffs claim that the refund should benefit 1983 and 1984 enrollees, whose allegedly "excessive" premium payments built the surplus now propelling the refund. Before the court are the parties' cross-motions for summary judgment.

I. Background

A. Statutory Framework

In 1959 Congress established a subsidized health insurance program for federal workers and annuitants, or retired federal workers. Federal Employees Health Benefits Act (FEHBA), Pub.L. No. 99-251, 100 Stat. 14 (1986), codified in 5 U.S.C. § 8901, et seq. The FEHBA provides for optional employee enrollment in one of approximately three-hundred competing health benefits plans. The FEHB Program covers approximately nine million federal and postal service employees and annuitants, and their dependents. In 1985 it generated $6 billion in premium income.

Each year there is a four-week enrollment period, called "open season," during which employees may switch from one health benefits plan to another. 5 U.S.C. § 8905(e); 5 C.F.R. § 890.301(d) (1986). Once enrolled in a particular plan, the employee pays only a portion of the fixed premium. The government contributes an amount equal to 60% of an average subscription charge but no more than 75% of the actual subscription charge for an enrolled individual. 5 U.S.C. § 8906(b). The rest of the premium is withheld from the enrollee's paycheck or annuity. 5 U.S.C. § 8906(d).

The statute vests the Office of Personnel Management (OPM) with broad authority to administer the FEHB Program. Pursuant to its contracting authority, OPM annually renegotiates with each carrier the rates and benefits for the next contract year. 5 U.S.C. § 8902. The FEHBA requires that rates "reasonably and equitably reflect the cost of the benefits provided." 5 U.S.C. § 8902(i). In determining the proper rates, OPM considers both prior experience and insurance industry practice. Id. Once set, rates remain in effect throughout the contract term. Id.

Premium payments by the Government and the enrollees are deposited into the Employees Health Benefits Fund. 5 U.S.C. § 8909(a). The Fund is used for three purposes. First, a percentage, not to exceed 1%, of contributions is set aside to pay OPM's administrative expenses. § 8909(b)(1). Second, for each health benefits plan, a percentage, not to exceed 3%, of contributions is set aside in the "Contingency Reserve" maintained by OPM for the particular carrier. § 8909(b)(2). The FEHBA allows OPM to use the Contingency Reserves to defray increases in future rates, to reduce the contributions of enrollees and the Government, or to increase the benefits of the plan from which the reserves are derived. § 8909(b). Third, the remaining monies, the basic enrollment charges, are paid biweekly into the carrier's own "Special Reserve," from which the carrier then pays the medical claims submitted by the enrollees. 5 C.F.R. § 890.201(a)(8). If enrollees' claims exceed the premium charges in effect for a contract year, the Special Reserve suffers a deficit. If charges exceed claims, it enjoys a surplus. The balance in the Special Reserve is carried over from year to year and is a factor in determining the following year's rates.

B. Factual Background

Since 1960, defendant Blue Cross and Blue Shield Association (BCBSA) has contracted with OPM to provide health insurance to federal employees and annuitants under the Government-wide Service Benefit Plan. There are now three million enrollees in the Service Benefit Plan, the largest of the FEHB plans. The Plan offers two choices of coverage—high option and standard option—and two types of coverage within each option—single and family.

In the early 1980's, the major FEHB carriers all suffered severe shortfalls in their Special Reserves. By the end of 1981, BCBSA's Special Reserve had a $150 million deficit. To remedy this threatening situation, OPM took several steps, including cost containment and cost-sharing measures, benefit reductions and premium increases.

The turn-around was dramatic. BCBSA's Special Reserve posted a $13 million surplus by the end of 1982. The surplus grew to $392 million in 1983 and $740 million in 1984. In May 1985, BCBSA projected that its Special Reserve would equal $957 million by the end of 1985.

On May 20, 1985, BCBSA announced its intention to refund $754 million from its Special Reserve to the Government and to employees and annuitants enrolled as of May 1, 1985. BCBSA attributed the spectacular growth in its Special Reserve to unexpectedly low utilization of health care resources by its enrollees. The amount of an individual's refund from the reserve would be determined per capita on an option-by-option basis and would range from $18 for a Postal Service employee with single standard option to $374 for a federal employee or annuitant with family high option. BCBSA later added $30 million to its refund proposal to benefit high option subscribers.

The day after BCBSA announced the refund, OPM scheduled a public hearing to explore BCBSA's proposal.¹ At the hearing, held May 30, 1985, a number of witnesses testified both for and against the refund. The issue of the May 1, 1985 eligibility date was raised by both the witnesses and OPM. See Administrative Record (R. ___) at 67-68, 75-76, 97-99, 119, 130-31, 133-34.

On June 14, 1985 OPM asked the Department of Justice for an opinion on the legality of BCBSA's proposal. On July 9, 1985 the Justice Department issued a Memorandum approving the refund proposal. The Justice Department concluded that the excess funds in the Special Reserves could properly be transferred to the Contingency Reserve and then used to reduce employees' contributions either through suspension in paycheck withholding or through a one-time refund check. R. 393-411. The Justice Department saw "no reason" why a refund of employee "contributions" would not include "current contributions." R. 405. However, it advised that the FEHBA as then written would not permit the refund to annuitants, since the reductions provision of 5 U.S.C. § 8909(b) referred only to "employees." R. 405. The Justice Department recommended legislation to correct this technical flaw. R. 405, 411.

On July 16, 1985, OPM announced that President Reagan had decided to accept "the essential elements" of the BCBSA proposal. R. 413. This announcement mentioned no reasons for the decision. At the same time, OPM offered other FEHB plans projecting excess special reserves the opportunity to propose similar refunds. Id. OPM instructed these plans to reduce their combined Contingency and Special Reserves to a level equal to no more than two months of premium income by the end of 1986. R. 447. The plans were given the choice of refunds, rate reductions, or a combination of the two. R. 445. OPM also amended its regulations to implement the reserve reductions. 51 Fed.Reg. 7428, 7430 (1986) (amending 5 C.F.R. § 890.503(c)(5)). Ten carriers chose to follow BCBSA in giving a refund. R. 511. Others negotiated substantial premium reductions for 1986. See, e.g., R. 449, 512-17. In September 1985 OPM announced the 1985 rate reductions and 1986 premium rates for each carrier. R. 512-68.

As promised, OPM submitted to Congress a proposal to amend the FEHBA so that the refund could include annuitants. R. 414-17. OPM indicated to Congress that the planned BCBSA refund would benefit only "current" subscribers. R. 414-15, 441, 502. Congress then passed a bill that included a provision substituting the word "enrollees" for "employees" in 5 U.S.C. § 8909(b). H.R. 3384, 99th Cong., 1st Sess., § 2(d) (1985). In December 1985, however, President Reagan vetoed the bill for reasons unrelated to the annuitant provision. Congress tried again, this time omitting the matter the President had found objectionable. On February 27, 1986, the amendment to § 8909(b) was signed into law. H.R. 4061, 99th Cong., 1st Sess. (1986), Pub.L. No. 99-251, § 101, 100 Stat. 14 (1986).

In the meantime, OPM had been negotiating with BCBSA to resolve the details of the $784 million refund. In March 1986, OPM and BCBSA reached agreement on the final contract amendments. R. 681. On March 31, 1986, OPM issued a Decisional Memorandum setting out the reasons for having accepted the BCBSA refund proposal and specifically the May 1, 1985 eligibility date. R. 2-3.

C. Procedural History

On August 20, 1985, five federal employees filed a class action against BCBSA. Plaintiffs claimed to represent two classes of present or former BCBSA enrollees: (1) federal employees enrolled in a BCBSA plan in 1983 or 1984 but no longer enrolled as of May 1, 1985 (Employee Class) and (2) federal employees enrolled in the BCBSA high option or family plan in 1983 or 1984 but enrolled in the BCBSA low option or single enrollment plan as of May 1, 1985 (Reduced Benefits Class). Plaintiffs alleged that BCBSA had charged them "impressibly increased and excessive premiums" in 1983 and 1984. Complaint ¶ 31. Plaintiffs further alleged that by using a May 1, 1985 eligibility...