Kent General Hospital, Inc. v. Blue Cross and Blue Shield of Delaware, Inc.

• Decision Date: 10 March 1982
• Citation: 442 A.2d 1368
• Parties: KENT GENERAL HOSPITAL, INC., Appellant, v. BLUE CROSS AND BLUE SHIELD OF DELAWARE, INCORPORATED, Appellee.
• Court: United States State Supreme Court of Delaware

Page 1368

442 A.2d 1368

KENT GENERAL HOSPITAL, INC., Appellant, v. BLUE CROSS AND BLUE SHIELD OF DELAWARE, INCORPORATED, Appellee.

Supreme Court of Delaware.

Submitted Feb. 16, 1982.

Decided March 10, 1982.

Upon appeal from the Court of Chancery. Affirmed.

Randy J. Holland (argued) and William H. Sudell, Jr. of Morris, Nichols, Arsht & Tunnell, Wilmington, for appellant.

Max S. Bell, Jr. (argued) and William J. Wade of Richards, Layton & Finger, Wilmington, for appellee.

Before DUFFY and QUILLEN, JJ., and BALICK, Judge.

QUILLEN, Justice:

This is an appeal from a final order of the Court of Chancery denying the petition of Kent General Hospital ("Kent General") for declaratory relief and a permanent injunction and granting the cross-petition of Blue Cross and Blue Shield of Delaware, Inc. ("Blue Cross") for declaratory relief. We rely heavily on Kent General's opening brief for our statement of the nature of proceedings and facts. The lawsuit concerns a clause in Blue Cross subscriber agreements, the agreements that establish the scope of coverage guaranteed a subscriber in return for premiums paid to Blue Cross.

In particular, this appeal is from the conclusion of the Court of Chancery that the provision in the Blue Cross subscriber contracts which forbids the assignment of benefit payments is valid and enforceable.

Kent General sought a declaratory judgment, preliminary injunction, and a permanent injunction that, beginning on July 1, 1981, would have required Blue Cross to pay Kent General directly for services rendered to patients having Blue Cross coverage. The direct payment to the hospitals would have been made by Blue Cross pursuant to an assignment executed by the patients to Kent General.

Discovery was conducted, briefs and affidavits submitted, and oral argument heard on petitioner's motion for preliminary injunctive relief. By its Letter Opinion of June 26, 1981, the Court denied the motion for preliminary relief, having determined that "the condition ... which forbids the assignment of benefits provided for in the subscriber contracts appears to be valid and enforceable".

Thereafter, Kent General and Blue Cross agreed that the record before the Court for purposes of the motion for a preliminary injunction would be the record to be considered by the Court of Chancery for the purpose of ruling on the request for a permanent injunction and the reciprocal request for a declaratory judgment. After reviewing that record, the Court of Chancery entered its final order on July 20, 1981. The Court stated that, for the reasons set forth in its Letter Opinion of June 26, 1981, the request by Kent General for a permanent injunction and declaratory judgment was denied and the application by Blue Cross for a declaratory judgment was granted.

The factual framework of this appeal is the contractual arrangements which Blue Cross has traditionally entered into (1) with area hospitals and (2) with its subscribers. For a number of years, Kent General has contracted with Blue Cross to provide hospital services to Blue Cross patient-subscribers as a "Plan" hospital. A Plan hospital is one which has executed an agreement, called a "Provider Agreement" with Blue Cross.

Plan hospitals routinely submit a subscriber-patient's bill directly to Blue Cross and Blue Cross makes reimbursement directly to the hospital in accordance with the terms of the Provider Agreement. As there is no such contractual arrangement between a Non-Plan hospital and Blue Cross, absent an assignment mechanism of the sort sought by Kent General herein, a Non-Plan hospital would typically send a bill to the subscriber-patient who is responsible for paying that bill. The subscriber would seek reimbursement from Blue Cross in accordance with the Non-Plan benefit provisions of his subscriber agreement. Blue Cross would remit the payment to the subscriber and the hospital would have to look to the subscriber for payment. Obviously, prompt direct payment by Blue Cross to a hospital can have an effect on the hospital's cash flow and its success at debt collection.

The non-assignment clause in the subscriber contracts generally reads as follows:

Subject to the reductions in the amount of coverage set forth elsewhere in this Contract, (Blue Cross) shall have full and exclusive discretion in determining who shall receive payment in the event services are received from a provider of service not participating in a plan of (Blue Cross). Such payment shall not be assignable without the written approval of (Blue Cross).

Provider Agreements generally run for an indefinite term and are periodically renegotiated. Negotiations between Kent General and Blue Cross for a new contract broke down in early May, 1981. Effective June 30, 1981, the then-existing Provider Agreement between Kent General and Blue Cross expired and Kent General became a Non-Plan hospital. A Non-Plan hospital has no contractual arrangement with Blue Cross.

The issue on appeal is whether Blue Cross, in accordance with its contracts with its subscribers, may refuse to honor assignments by its subscribers to Kent General. For present purposes, we assume Kent General has sufficient standing to litigate the issue without any subscriber being a party. We also assume that at the time of the assignment the services have been rendered by Kent General and that payment in some amount is owed by Blue Cross to the subscriber. There does seem to be a dispute between the parties as to when Blue Cross is finally obligated to pay its subscribers, with Blue Cross contending its payments to subscribers are customarily "interim" payments because they are subject to review. This factual contention could be significant but, under our view of the case, we do not reach it.

The case seems to turn on public policy with regard to the non-assignment clause in the subscriber contract. To support validity, Blue Cross cites the freedom of contract (14 Williston on Contracts § 1630 at 11 (3d Ed. 1972); State v. Tabasso Homes, Del.Gen.Sess., 28 A.2d 248, 252 (1942); Kelly v. Bell, Del.Ch., 254 A.2d 62, 70 (1969), aff'd Del.Supr., 266 A.2d 878 (1970) ) and the specific upholding of non-assignment clauses in contract cases generally (37 A.L.R.2d 1251 (1954); Paul v. Chromalytics Corp., Del.Super., 343 A.2d 622 (1975) ). Kent General, on the other hand, argues that there is a public policy which generally supports the free assignment of the right to receive money and in insurance law particularly there is a policy which invalidates a non-assignment clause in a contract after loss has been incurred. International Rediscount Corporation v. Hartford Accident and Indemnity, D.Del., 425 F.Supp. 669 (1977). Courts distinguish between assignment of a policy by an insured, which might change the risk, and assignment of the mere right to receive payment, which is a fixed obligation of the insurer, enforcing contract provisions barring the former, but not those barring the latter. Cf. 18 Del.C. §§ 2720, 3504.

We look first at some reasons commonly given for the policy in insurance cases prohibiting non-assignment after the loss is ascertained. The reasons are variously stated but the concepts are related. It is said that failure to honor the assignment "would be a mere act of caprice or bad faith." International Rediscount, 425 F.Supp. at 672 quoting Georgia Co-Operative Fire Association v. Borchardt & Company, Ga.Supr., 123 Ga. 181, 51 S.E. 429, 430 (1905). It is said the prohibition on assignment is "inconsistent with the obligation of the insurer to provide the indemnity called for by the terms of its contract and ... contrary to public policy." 16 Couch on Insurance 2d § 63.41 (1966). It is said "total avoidance of the policy as a consequence of assignment after loss would be highly penal." 3 Williston on Contracts § 422 at 135 (1960).

These statements are simply inapplicable to the present situation. Blue Cross is not trying to avoid payment. It simply wants to retain the right to pay its subscriber directly when it does not have a contract with the provider. Its view is that it can monitor price through provider contracts and thus perform a cost containment function on behalf...