Doe v. Devine

• Citation: 703 F.2d 1319
• Decision Date: 01 April 1983
• Docket Number: No. 82-1565,82-1565
• Parties: John and Joan DOE, et al., Appellants, v. Donald J. DEVINE, Director, Office of Personnel Management, et al.
• Court: United States Courts of Appeals. United States Court of Appeals (District of Columbia)

Page 1319

703 F.2d 1319

227 U.S.App.D.C. 97

John and Joan DOE, et al., Appellants, v. Donald J. DEVINE, Director, Office of Personnel Management, et al.

No. 82-1565.

United States Court of Appeals,

District of Columbia Circuit.

Argued Feb. 15, 1983.

Decided April 1, 1983.

Appeal from the United States District Court for the District of Columbia (D.C. Civil Action No. 81-02878).

Peter E. Scheer, Washington, D.C., with whom Joseph N. Onek, Joel I. Klein, Martin J. Gaynes, and Armin U. Kuder, Washington, D.C., were on brief, for appellants.

R. Craig Lawrence, Asst. U.S. Atty., Washington, D.C., with whom Stanley S. Harris, U.S. Atty., Royce C. Lamberth, Asst. U.S. Atty., and Henry G. Watkins, Associate Gen. Counsel, Office of Personnel Management, Washington, D.C., were on brief, for appellees, Devine, et al.

Philip S. Neal, Washington, D.C., with whom Terry Bancroft Dowd, and Stephanie A. Stahr, Washington, D.C., were on brief, for appellee, Blue Cross and Blue Shield Association.

Leonard W. Belter and Daniel F. Stenger, Washington, D.C., were on brief, for appellee, Aetna Life Ins. Co.

Before TAMM and GINSBURG, Circuit Judges and PECK, ^* Senior Circuit Judge for the United States Court of Appeals for the Sixth Circuit.

Opinion for the Court filed by Circuit Judge GINSBURG.

GINSBURG, Circuit Judge:

This case concerns the approval by the Office of Personnel Management (OPM) of reductions in mental health benefits in the 1982 "Government-Wide Service Benefit Plan" offered to federal employees and annuitants under the Federal Employees Health Benefits Act (FEHBA). Plaintiff-appellants ¹ contend that OPM's approval of the reductions was arbitrary and capricious within the meaning of the Administrative Procedure Act, 5 U.S.C. Sec. 706(2)(A), because the cutbacks seriously and unnecessarily undermined the policy expressed in FEHBA section 8904, 5 U.S.C. Sec. 8904, ² that federal employees have the opportunity to purchase "catastrophic" coverage for severe or extended illness. For the reasons set forth below we conclude that OPM's negotiations and final contract with Blue Cross and Blue Shield Association ("Blue Cross-Blue Shield"), the insurer that offers the government-wide service benefit plan, rationally accommodated FEHBA's several competing goals. We therefore affirm the judgment of the district court, which held that OPM did not abuse its wide discretion in arranging for federal health insurance benefits. Doe v. Devine, 545 F.Supp. 576 (D.D.C.1982) [hereafter, "District Court Opinion"].

I. BACKGROUND

A. Overview of FEHBA

FEHBA creates a subsidized health insurance system for federal employees. The system is competitive--in 1981, 121 ³ insurers participated. During a four-week "open season" held each year ⁴ federal employees may select the plan that best fits their insurance needs and budget. The government's subsidy is set at sixty percent of the average subscription costs of the six largest plans. ⁵ Employees pay the balance of the premiums due on the particular plan they select.

Insurers may offer four types of coverage: 1) a government-wide "service benefit plan"; 2) a government-wide "indemnity benefit plan"; 3) "employee organization plans"; and 4) "comprehensive medical plans." ⁶ OPM is responsible, under FEHBA section 8902(a), for negotiating and approving the terms of all plans offered to FEHBA subscribers.

OPM may negotiate one government-wide service benefit plan, and one government-wide indemnity benefit plan. Every federal employee is eligible to join these plans. The service benefit plan has, historically, offered broad "first dollar" coverage (full payment for the charges incurred by patients in the early stages of illness) while the indemnity benefit plan has required coinsurance (cost sharing by the patient and the insurer) from the earliest stages of treatment. FEHBA section 8904 directs that both government-wide plans "shall include" coverage for "health services of a catastrophic nature." This case turns on the scope of the undefined statutory term "catastrophic."

OPM may also contract with employee organization plans (open only to federal employees who join the organizations that sponsor the plans), and comprehensive medical plans (group-practice plans). FEHBA does not require these plans to include catastrophic coverage. It provides, however, that benefits under all FEHBA contracts shall be subject to "such maximums, limitations [and] exclusions ... as the Office considers necessary or desirable." ⁷

B. History of Blue Cross-Blue Shield Contracts

From FEHBA's inception in 1960 Blue Cross-Blue Shield has, under contract with OPM, offered the one government-wide service benefit plan; Aetna Life Insurance Company ("Aetna") has offered the government-wide indemnity benefit plan. ⁸

The 1960 Blue Cross-Blue Shield contract provided full coverage for 30 days per year of hospitalization for mental illness and 80% coverage for additional inpatient days; ⁹ for outpatient treatment of mental illness the plan provided 50% coverage of an unlimited number of visits. ¹⁰ In 1964 inpatient coverage of treatment for mental illness was increased from 30 days per year to 120 days per confinement; ¹¹ in 1965, to 365 days per confinement. ¹² Benefits for outpatient mental care were increased from 50% to 80% of all medically necessary visits in 1967. ¹³ From 1967 until 1975 Blue Cross-Blue Shield offered essentially the same levels of coverage for treatment of mental and physical illnesses. ¹⁴

For the 1975 contract year OPM rejected most of Blue Cross-Blue Shield's requests for significant reductions in both inpatient and outpatient mental health benefits. ¹⁵ These requests were renewed. For 1981 OPM agreed to a reduction in the rate of coverage for outpatient mental care from 80% to 70% for all medically necessary visits; ¹⁶ OPM rejected Blue Cross-Blue Shield's proposal to limit inpatient mental care to 60 days of coverage. ¹⁷ After extensive negotiations addressing diverse interests, described in relevant detail below, OPM agreed to a 1982 Blue Cross-Blue Shield contract that reduced inpatient mental coverage from 365 to 60 days, and outpatient mental coverage from 70% of all medically necessary office visits to 70% of a maximum of 50 visits. ¹⁸

C. History of Proceedings

Plaintiff-appellants promptly challenged OPM's decision to accept Blue Cross-Blue Shield's 1982 reductions in mental health coverage. On December 23, 1981, the district court denied plaintiff-appellants' request for a preliminary injunction directing OPM to renegotiate its contract with Blue Cross-Blue Shield so as to reinstate the level of mental health benefits offered in the 1981 plan. ¹⁹ This court heard an expedited appeal and affirmed on February 23, 1982. The panel agreed with the district court that, "in light of the drastic changes in the status quo" sought in this action, plaintiff-appellants had not demonstrated a likelihood of success on the merits sufficient to justify preliminary relief; the panel further stated its impression that plaintiff-appellants' strongest claim lay in their charge that OPM acted arbitrarily and capriciously in approving, without adequate explanation, the coverage reductions in the Blue Cross-Blue Shield plan. ²⁰ The panel therefore remanded the case to the district court with instructions to OPM to provide a more complete account of its reasons for approving the 1982 contract.

OPM's main initiative on remand was to file the affidavit of Kevin J. Burns, OPM's Assistant Director for Insurance Programs, Compensation Group. The Burns affidavit, J.A. 1081-90, recites the following history of the 1982 contract negotiations between OPM and Blue Cross-Blue Shield.

March 30, 1981: Burns initiated the negotiations in a letter to Blue Cross-Blue Shield and other carriers. The letter stated, in part: OPM's "objective for 1982 is to hold premiums and costs as low as possible." Burns affidavit, p 2. Blue Cross-Blue Shield responded with proposed new coverage provisions and premiums.

August 21, 1981: OPM analyzed Blue Cross-Blue Shield's proposed rates; the Agency concluded that federal budget limits on the government's FEHBA subsidy required lower rates than those proposed by Blue Cross-Blue Shield. Accordingly, on August 21, OPM suggested three major coverage changes expected to achieve about a 6% reduction in costs. These would have decreased "first dollar" coverage (by increasing deductibles and coinsurance requirements) but would have left largely intact the plan's "last dollar" coverage. Burns affidavit, paragraphs 3 & 4.

September 21, 1981: OPM invited carriers to submit, by September 25, proposals embodying benefit reductions "equivalent," in terms of costs saved, to OPM's August proposals. ²¹ Burns affidavit, p 5. Further negotiations between OPM and Blue Cross-Blue Shield ensued. ²² Blue Cross-Blue Shield proposed reducing its mental health coverage by imposing a 50-visit limit for outpatients and a 60-day limit on inpatient benefits. This fiscally "equivalent" proposal was tentatively accepted by OPM. Burns affidavit, p 8. ²³

Blue Cross-Blue Shield and OPM subsequently considered the possibility of retaining 365-day mental coverage but requiring 30% coinsurance by subscribers. This alternative would have provided the needed cost savings; it was rejected, however, because the coinsurance feature was likely to be less attractive than the Blue Cross-Blue Shield proposal to a substantial majority of federal employees. Burns affidavit, p 14; Brief of Blue Cross-Blue Shield at 26-27.

October 21, 1981: In early September, OPM studied the "serious budgetary problems in the health benefits program." Burns affidavit, p 6. In a document dated September 11, 1981, OPM acknowledged that savings beyond those in OPM's August proposals would be required to meet the cost limit set by the federal budget. On October 21, OPM advised carriers that it would be necessary to achieve a further 6.5%...