Jahnke v. Blue Cross & Blue Shield of Kan., Inc.

• Citation: 51 Kan.App.2d 678,353 P.3d 455
• Decision Date: 26 June 2015
• Docket Number: 111,769.
• Parties: Samuel R. JAHNKE and Sons and Mary K. Jahnke, Executor of the Estate of Samuel R. Jahnke, Appellees, v. BLUE CROSS AND BLUE SHIELD OF KANSAS, INC., Appellant.
• Court: Court of Appeals of Kansas

51 Kan.App.2d 678

353 P.3d 455

Samuel R. JAHNKE and Sons and Mary K. Jahnke, Executor of the Estate of Samuel R. Jahnke, Appellees

v.BLUE CROSS AND BLUE SHIELD OF KANSAS, INC., Appellant.

111,769.

Court of Appeals of Kansas.

June 26, 2015.

Jeremy K. Schrag, of Kutak Rock LLP, of Wichita, Tory M. Bishop and Kathryn E. Jones, of the same firm, of Omaha, Nebraska, and Scott H. Raymond of Blue Cross Blue Shield of Kansas, Inc., for appellant.

Mark Edwards and Peter Charles Rombold, of Hoover, Schermerhorn, Edwards, Pinaire & Rombold, of Junction City, for appellees.

Before MALONE, C.J., ARNOLD–BURGER and GARDNER, JJ.

Opinion

GARDNER, J.

Rarely do we permit a party to raise a new issue on appeal, but we must do so here. At oral argument, counsel for Blue Cross and Blue Shield of Kansas, Inc. (BCBS) alleged, for the first time in this case, that this court lacks subject matter jurisdiction because the only statute which BCBS allegedly violated does not provide a private right of action. Because we agree that both the district court and this court lack subject matter jurisdiction , we vacate the judgment entered by the district court and dismiss this appeal.

Procedural summary

Samuel Jahnke (Jahnke) brought suit against Blue Cross and Blue Shield of Kansas, Inc., due to BCBS's refusal to pay medical bills he incurred for his treatment, including surgery, of a brain tumor

. BCBS denied benefits for the medical costs associated with the surgery because the costs had been incurred during the policy's 240–day waiting period for the treatment of tumors and growths. The Jahnkes claim that the 240–day waiting period violated the Kansas Small Employer Health Care Act, K.S.A. 40–2209b et seq., (the Act) which relates to “health benefits plans covering small employers.” K.S.A. 40–2209c.

BCBS removed this action to federal court on the basis that the Jahnkes' claims were preempted by the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. §§ 1001 –1461 (2006). The federal court disagreed, finding no federal subject matter jurisdiction, and remanded the case to the state district court.

Upon remand, the Jahnkes and BCBS filed cross-motions for summary judgment. The district court granted BCBS's motion for summary judgment on Count I pursuant to the agreement of the parties but granted the Jahnkes' motion for summary judgment on Count II. In doing so, the district court adopted the federal court's ruling that ERISA did not apply due to the safe habor exemption. The district court ruled the policy was subject to the Act, the Act restricted waiting periods to 90 days' maximum, and BCBS's 240–day waiting period violated the Act. The court awarded the Jahnkes damages in the amount of $99,459.97, plus interest. Following a subsequent motion and hearing, the court awarded $93,839.51 in attorney fees to the Jahnkes.

BCBS appeals. In it's briefs, it argues: (1) the district court erred in granting summary judgment to the Jahnkes because the policy's 240–day waiting period does not violate K.S.A. 40–2209f(f) ; (2) the district court erred in denying summary judgment to BCBS on the basis of ERISA preemption because the safe harbor exemption does not apply; (3) the district court erred in awarding attorney fees to the Jahnkes because BCBS did not act without just cause or excuse in denying the claim.

The farming enterprise

The facts are largely undisputed. Samuel R. Jahnke & Sons is a family farming enterprise that employed Samuel R. Jahnke, his wife Mary, and their sons Matthew and Eric. The ownership of Jahnke & Sons was divided equally among the family, with Samuel and Mary owning a one-third interest, Matthew owning a one-third interest, and Eric and Kristel Jahnke owning a one-third interest.

Since March 30, 2007, Jahnke & Sons has been a Subchapter S Corporation, thus Jahnke and Sons' income, losses, deductions, and credits passed through to the corporate owners or shareholders who then paid taxes on the corporation's income on their individual tax returns. As an S corporation, Jahnke & Sons did not pay any taxes; rather, all of Jahnke & Sons' tax liability was passed through to its shareholders. Each of the three Jahnke households, as equal shareholders, claimed one-third of Jahnke & Sons' income and expenses on their personal tax returns.

The health insurance policies

On September 1, 2005, BCBS issued a policy of health insurance for the employees of Jahnke & Sons and their family members. From 2005 to 2008, the owners of Jahnke & Sons were covered by a group policy issued by BCBS. On September 1, 2008, the Jahnkes elected to cancel their group insurance policy and purchase new individual policies for the purpose of dropping unneeded maternity coverage and lowering their premiums. The new policies, which became effective September 1, 2008, deleted maternity coverage but included different terms and conditions.

Jahnke acknowledged and agreed to the different coverage and new conditions by signing the Enrollment Confirmation Form which expressly set out the new policy's waiting periods. That form specifically notified Jahnke of a 240–day waiting period for the “[t]reatment of tumors or growths,” stating:

“B. Waiting Periods. The Insured must have had continuous coverage for 240 days dating from the date this coverage becomes effective for the conditions named below before benefits are available.

“1. Removal of tonsils and or adenoids.

“2. Treatment of tumors or growths.

“3. Treatment for a hernia

.

“4. Treatment for conditions of the gall bladder, rectum, or genito-urinary tract.”

Payment of the premiums

Each of the three shareholders of Jahnke & Sons claimed a self-employed health insurance deduction on their personal tax returns for one-third of the total health insurance premiums paid by Jahnke & Sons. Jahnke & Sons paid its employees' health insurance premiums directly to BCBS “out of the corporate account” and “out of the corporate cash.” However, the insurance premiums paid by Jahnke & Sons were allocated equally to the three shareholders as distributions despite the fact that the shareholders' actual individual premium amounts were unequal. The actual amounts of the premium payments were not reported as income on the employees' W–2 forms.

Reference to individual policies as a group policy

In the correspondence to the Jahnkes noting the change in coverage, BCBS identified the policy as Group Number M008395, projected to be effective on September 1, 2008. When the coverage was changed, BCBS identified the group name as Samuel R. Jahnke & Sons. The package code was identified as “First Choice Business,” not “True Group,” “First Choice Individual,” or “Plan 65.” The reissued policy was prefaced by and delivered to Jahnke & Sons under a group name and with a specified group number. Correspondence regarding the policy also specified the group name. The BCBS member summary for the policy provided:

“BLUE CHOICE COMP MAJOR MEDICAL OPTION/PLAN 1, DRUG EMPLOYEE GROUP (1–4),

“CANCELLED: SYSTEM ASSIGNED—GROUP ID CHANGED TO A NEW GROUP ID.”

BCBS admits that its correspondence often referred to the policy as a group policy, but it contends such references were for mere convenience and are immaterial because the policy was an individual policy which it never treated as a group policy.

The denial of coverage

On or about April 19, 2009, approximately 11 days before expiration of the 240–day waiting period, Jahnke underwent an operation to remove a brain tumor

. BCBS denied the subsequent related claim under the policy's 240–day waiting period for the treatment of tumors or growths.

After BCBS denied coverage, Jahnke exhausted the internal appeals set forth in the BCBS policy. Before his death, Jahnke filed this case against BCBS in the district court, asserting two claims. Count I of the petition alleged that the policy violated K.S.A. 40–2209(a)(8) in failing to waive the preexisting conditions exclusion. Count II alleged that the policy's 240–day waiting period violated K.S.A. 40–2209f(f)'s provision that health benefit plans covering small employers cannot have a waiting period longer than 90 days.

The federal court proceedings

After conducting limited discovery, BCBS removed this action to the United States District Court for the District of Kansas, alleging preemption by the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. §§ 1001 –1461 (2006).

The federal court granted summary judgment to BCBS on Count I based on its “determination that the policy at issue was an individual rather than a group plan.” The Jahnkes have since abandoned this theory of relief.

As to Count II, the federal court denied summary judgment, finding a question of material fact as to whether K.S.A. 40–2209f(f) applied to the policy because the evidence failed to establish beyond a reasonable doubt that the Samuel Jahnke policy was issued to him totally independent of the small employer group. See K.S.A. 40–2209e(d), (a). The federal court found a material question of fact as to whether Jahnke & Sons contributed to payment of the policy premiums such that ERISA's safe harbor exemption would apply. In addition, the federal court found that BCBS “did not act arbitrarily or capriciously” when it denied the claim. Samuel R. Jahnke & Sons, Inc. v. Blue Cross/Blue Shield of Kansas, No. 10–4098–JTM, 2011 WL 4526778 (D.Kan.2011) (unpublished opinion).

The court later held an evidentiary hearing on the application of ERISA's “safe harbor” provision, 29 C.F.R. § 2510.3–1(j). It ultimately found that the payments to BCBS for the Jahnkes' health insurance had not been made by an employer but had been paid by the individual shareholders of Jahnke & Sons. Accordingly, ERISA's safe harbor exemption applied and the action was not preempted by ERISA. Because no federal question provided a basis for subject matter jurisdiction, the federal court remanded this action to the state district court. Samuel R. Jahnke & Sons, Inc. v. Blue Cross/Blue Shield of Kansas, No. 10–4098–JTM, 2012 WL 3234757 ...