Chester County Intermediate Unit v. Pennsylvania Blue Shield

• Decision Date: 28 February 1990
• Docket Number: No. 89-5577,89-5577
• Citation: 896 F.2d 808
• Parties: CHESTER COUNTY INTERMEDIATE UNIT, Lincoln Intermediate Unit, Mr. and Mrs. John M. Gillespie, and Mr. and Mrs. Kevin Nonemaker, Appellants, v. PENNSYLVANIA BLUE SHIELD and Capital Blue Cross.
• Court: U.S. Court of Appeals — Third Circuit

Page 808

896 F.2d 808

CHESTER COUNTY INTERMEDIATE UNIT, Lincoln Intermediate Unit,

Mr. and Mrs. John M. Gillespie, and Mr. and Mrs.

Kevin Nonemaker, Appellants, v. PENNSYLVANIA BLUE SHIELD and Capital Blue Cross.

No. 89-5577.

United States Court of Appeals,

Third Circuit.

Argued Nov. 28, 1989.

Decided Feb. 28, 1990.

Allen C. Warshaw (argued), Duane, Morris & Heckscher, Harrisburg, Pa., for appellants.

Thomas E. Wood (argued) and Donna S. Weldon, Keefer, Wood, Allen & Rahal, Harrisburg, Pa., for appellee, Pennsylvania Blue Shield.

Mary Jane Forbes (argued), McNees, Wallace & Nurick, Harrisburg, Pa., for appellee, Capital Blue Cross.

Ernest N. Helling, Acting Chief Counsel and Debra R. Cruel, Asst. Counsel, Harrisburg, Pa., for amicus curiae, Pennsylvania Dept. of Educ.

Before SLOVITER and BECKER, Circuit Judges, and LIFLAND, District Judge ^*.

OPINION OF THE COURT

SLOVITER, Circuit Judge.

I. Introduction

The principal issue before us is whether the Education of the Handicapped Act (EHA or Act), 84 Stat. 175, as amended, 20 U.S.C. Secs. 1400 et seq., precludes companies offering medical and hospital insurance from excluding from coverage services provided free of charge under that Act. The parents of two handicapped children who received physical therapy as related services in conjunction with the mandated education required under the Act were covered by health insurance policies issued by defendants Capital Blue Cross and Pennsylvania Blue Shield (Blue Cross/Blue Shield). The intermediate educational units (IUs) which provided the physical therapy submitted bills to Blue Cross/Blue Shield for reimbursement, but Blue Cross/Blue Shield refused payment, relying on various contractual provisions. The parents and the IUs filed suit for a declaratory judgment. Defendants' motion to dismiss brought to issue the effect of the EHA on the obligation of Blue Cross/Blue Shield to reimburse subscribers or providers for certain services rendered pursuant to the Act. The district court dismissed the action, holding that the plaintiffs' claim was inconsistent with the reimbursement provisions of the applicable policy. The plaintiffs appeal.

II. Facts and Procedural History

On review of an order dismissing the complaint, we must take as true all material facts as pleaded. Rogin v. Bensalem Township, 616 F.2d 680, 685 (3d Cir.1980), cert. denied, 450 U.S. 1029, 101 S.Ct. 1737, 68 L.Ed.2d 223 (1981).

Appellants Chester County Intermediate Unit (Chester IU) and Lincoln Intermediate Unit (Lincoln IU) are two of the twenty-nine area intermediate educational units formed as part of the Pennsylvania public school system. Appellants Mr. and Mrs. John Gillespie are the parents of a handicapped child, Todd, who was provided physical therapy by licensed physical therapists employed by or affiliated with Chester IU from October 5, 1987 through February 29, 1988. Appellants Mr. and Mrs. Kevin Nonemaker are the parents of a handicapped child, Kevin, who was provided physical therapy by licensed physical therapists employed by or affiliated with Lincoln IU from February 3, 1987 through November 4, 1987.

Both the Gillespies and the Nonemakers have policies with Pennsylvania Blue Shield and Capital Blue Cross covering their families' health care needs. The billing offices for the Chester and Lincoln IUs submitted the Nonemakers' and Gillespies' claims for payment to Blue Cross/Blue Shield. They apparently rely on the Major Medical benefits which supplement Blue Cross and Blue Shield basic coverage and provide coverage for, inter alia, "[p]hysical therapy prescribed by the attending provider as to type and duration when performed by a duly qualified physical therapist." Complaint at Exhibit A, App. at 63, and Exhibit B, App. at 121. The Gillespies and the Nonemakers attached the descriptive brochures they received covering such benefits to the complaint. The Major Medical provisions described in the two brochures are identical and, for convenience, we will refer to the document describing such benefits as the "policy."

When Blue Cross/Blue Shield disclaimed coverage, plaintiffs sought an administrative resolution of their claims. Both the Pennsylvania Insurance Department and the Pennsylvania Department of Education notified plaintiffs that they were not the appropriate fora to resolve the dispute. Plaintiffs then filed this suit as a class action in the district court. The complaint alleged that the Lincoln and Chester IUs were representatives of all IUs in Pennsylvania which provided special education and related services under the EHA and that the Nonemakers and Gillespies were representatives of all parents of handicapped children receiving special education and related services from licensed providers employed by or affiliated with Pennsylvania's IUs and who are covered by a Blue Cross/Blue Shield policy such as the one which covers the Nonemakers and Gillespies.

Blue Cross/Blue Shield filed a motion to dismiss under Fed.R.Civ.P. 12(b)(6). They argued that the provisions of the EHA requiring states to provide special education and related services to parents without charge and at public expense precluded shifting the costs of such services to those parents who carry health insurance. They also argued, inter alia, that the physical therapy services are not covered under any interpretation of the Blue Cross/Blue Shield Major Medical policy for several reasons. First, they contended that the policy covers only "medically necessary hospitalization and medical benefits," see App. at 60, and that notwithstanding the affidavits from the children's doctors stating that the physical therapy was medically necessary, see App. at 168-71, the physical therapy provided to the children would never have been prescribed by doctors but for the EHA. Second, Blue Cross/Blue Shield relied on the provision of the policy excluding coverage for services which the subscriber "is not legally obligated to pay" or which the subscriber is entitled to receive from a governmental unit or agency "without cost." Third, they relied on the reimbursement provisions of the policy, which they argued do not require them to make direct payment to a provider but only provide for reimbursement to the subscriber after submission of itemized bills and payment of the required deductible and coinsurance.

The district court dismissed the action. It stated, in agreement with plaintiffs' position, "that insurers are not relieved of contractual obligations they would otherwise have had had the [EHA] not been enacted." App. at 7 (emphasis in original). The court then examined the policy attached by plaintiffs to the complaint and held that as a matter of law Blue Cross/Blue Shield were not obligated under that policy to make payments to the IUs for the physical therapy treatments. Regarding the three contractual provisions relied on by Blue Cross/Blue Shield in denying reimbursement to the IUs, the court noted there was a disputed issue of fact as to whether the physical therapy provided to Todd Gillespie and Kevin Nonemaker would have been medically necessary if the EHA had not been enacted. The court assumed, for purposes of the motion, that the services would have been medically necessary.

The court held, however, that there was no disputed issue of material fact with respect to the procedure for reimbursement for Major Medical coverage. The court construed the policy as requiring payment directly to the subscriber, and held that there is no applicable provision for assignment. The court accepted defendants' contention that "because there is no actual charge upon which an appropriate Blue Shield reimbursement calculation could be based" and "no deductibles are paid," the reimbursement provisions of the policy bar payment. It stated that the plaintiffs' "suggested scheme for payments to be made directly to the IU's, totally disregards the [reimbursement] terms of the policy." Consequently, the court concluded that plaintiffs had not stated a cause of action upon which relief can be granted under the terms of their policy with Blue Cross/Blue Shield. Under this approach, the court never reached the issues of the construction and validity of the exclusionary provisions of the Blue Cross/Blue Shield policy. ¹

The scope of our review from the district court's grant of a motion to dismiss is plenary. Daly v. United States Dept. of the Army, 860 F.2d 592, 593 (3d Cir.1988).

III. Discussion

A.

The EHA is a comprehensive program enacted by Congress to assist the states "in complying with their constitutional obligations to provide public education for handicapped children." Smith v. Robinson, 468 U.S. 992, 1009, 104 S.Ct. 3457, 3467, 82 L.Ed.2d 746 (1984). Under the Act, federal funding to support education for handicapped children is available to states if they have in effect a "policy that assures all handicapped children the right to a free appropriate public education." 20 U.S.C. Sec. 1412(1) (1988). The Act defines "free appropriate public education" as

special education and related services that--(A) have been provided at public expense, under public supervision and direction, and without charge, (B) meet the standards of the State educational agency, (C) include an appropriate preschool, elementary, or secondary school education in the State involved, and (D) are provided in conformity with the individualized education program required under section 1414(a)(5) ...

20 U.S.C. Sec. 1401(a)(18) (1988). ²

Although defendants agree with the district court's action in dismissing the complaint, they argue that the district court erred in construing the statutory language "free appropriate public education" to mean "free to the parents." Defendants argue that the IUs have a statutory duty to provide an appropriate public education for handicapped children at public expense, and they complain that the district court should have adopted their position that the EHA does not...