Selcke v. MEDCARE HMO, 92 C 5704.
| Decision Date | 01 December 1992 |
| Docket Number | No. 92 C 5704.,92 C 5704. |
| Citation | 147 BR 895 |
| Parties | Stephen F. SELCKE, Director of Insurance of the State of Illinois, Plaintiff-Appellant, v. MEDCARE HMO, Defendant-Appellee. |
| Court | U.S. District Court — Northern District of Illinois |
Roland Burris, Atty. Gen., James R. Carroll, Roger P. Flahaven, Asst. Attys. Gen., Barry B. Gross, Clifford E. Yuknis, Cary E. Donham, Sp. Asst. Attys. Gen., Shefsky & Froelich Ltd., Chicago, IL, for plaintiff-appellant.
James H.M. Sprayregan, Geoffrey Slaughter, Kirkland & Ellis, Chicago, IL, for defendant-appellee.
Irving M. Friedman, Denise S. Poloyac, Katz, Friedman, Schur & Eagle, Chicago, IL, for amicus curiae Local 73 Trust Fund.
Ann Gillespie Pieterick, Arlington Heights, IL, for amicus curiae Illinois Ass'n of Health Maintenance Organizations.
Wm. Carlisle Herbert, Mary Kay McCalla, Hopkins & Sutter, Chicago, IL, for amicus curiae The Illinois Health Maintenance Organization Guar. Ass'n.
William F. Dolan, Bickel & Brewer, Chicago, IL, for amicus curiae the University of Chicago Hospitals.
Defendant-appellee MedCare HMO ("MedCare") has petitioned for voluntary Chapter 11 bankruptcy. Plaintiff-appellant Stephen F. Selcke, Director of Insurance of the State of Illinois ("the Director"), appeals the bankruptcy court's refusal to dismiss MedCare's petition on the ground that MedCare is not a debtor under 11 U.S.C. § 109(b) because it is a "domestic insurance company." This court granted the Director leave to take an interlocutory appeal pursuant to 28 U.S.C. § 158(a), see Selcke v. MedCare HMO, No. 92 C 5704, Min.Ord. (N.D.Ill. issued Sept. 30, 1992), and now reverses.1
MedCare is a not-for-profit Illinois corporation licensed and operating since 1985 as a health maintenance organization ("HMO"). It is the seventh largest HMO in the Chicago metropolitan area, serving approximately 54,000 enrollees. MedCare is licensed by Illinois only as an HMO, not as an insurance company.
MedCare, like other HMOs, provides a variety of services. Each of its customers, or enrollees, pays MedCare a fixed monthly premium. In return, MedCare arranges and pays for the delivery of the health care services required by the enrollee. MedCare provides various corrective health care services: Physician services, hospital care, skilled nursing care, extended care and intermediate care facilities, home health care, pharmacy services, medical appliances and ambulance services. It also provides numerous preventative services, including prenatal care, a healthy kids program, regular adult physical examinations and preventative tests.
In some respects, MedCare's business closely resembles that of a direct health care provider — like a hospital. For example, MedCare generally contracts with physicians through thirty-nine associations to provide their services to MedCare enrollees. MedCare pays the associations an upfront or "capitated" monthly fee to provide enrollees with physician's services. This capitated fee does not vary with the frequency of enrollee visits or the physician's actual cost in providing services. In areas where it is unable to contract with physician associations, MedCare provides physician's services directly through its own health care clinics. MedCare provides hospital services through contracts with hospitals that call for MedCare to pay a per diem fee for each occupied bed; the per diem fee also does not vary with the hospital's actual cost of services.
In other ways, MedCare's operations mirror those of an insurance company. From an enrollee's point of view, for example, MedCare assumes the risk of health care costs in exchange for a monthly fee. Even though MedCare pays a flat per diem rate for hospital services, it retains much of the risk presented by hospital costs because MedCare cannot predict either the frequency or length of enrollee hospital visits. In other circumstances, MedCare becomes a strict indemnitor. Whenever an enrollee requires emergency medical services, or obtains services outside MedCare's service area, MedCare is required by statute to indemnify the enrollee for the cost of the services. MedCare has also been unable to mitigate the risk of many of the other services it provides — MedCare pays for over two-thirds of the services it provides on a fee-for-service regime under which it retains the full risk of the frequency and severity of the costs.
Illinois law recognizes the hybrid nature of HMOs. A corporation may be certified as an insurance company, an HMO, or both. However, both HMOs and insurance companies are supervised by the Director of Insurance. See, e.g., Ill.Rev.Stat. ch. 111½, ¶ 1415. Illinois has comprehensive regulatory schemes for both insurance companies and HMOs.2 The schemes are distinct and may be found under separate chapters in the Illinois code. Compare Ill. Rev.Stat. ch. 111½, ¶ 1401 et seq. (HMO Act) with id. ch. 73, ¶ 613 et seq. (insurance code). But the HMO regulations fairly mirror the insurance regulations; often the HMO regulations just incorporate the insurance regulations by reference. See, e.g., Ill.Rev.Stat. ch. 111½, ¶¶ 1409.4, 1409.5(c), 1411.2(a), 1412, 1414, 1417, 1418.11. Illinois has established a separate HMO guaranty fund similar to that for insurance companies. Compare id. ch. 73, ¶ 1065.80-1 et seq. with id. ch. 111½, ¶ 1418.1 et seq. Illinois also subjects HMOs to the same state liquidation and rehabilitation schemes as insurance companies, giving enrollees a priority over general creditors.
MedCare's current troubles began when the Director issued a "Notice of Impairment" to MedCare in March 1992. The notice gave MedCare thirty days to correct an impairment of its net worth of over $5 million. After it obtained an extension from the Director, MedCare filed a voluntary petition for Chapter 11 bankruptcy relief on June 3, 1992. MedCare currently operates as a debtor in possession.
The bankruptcy court subsequently granted the Director leave to intervene in the Chapter 11 proceedings. The Director moved to dismiss the petition on the ground that MedCare is not an eligible debtor under 11 U.S.C. § 109(b) because it is a "domestic insurance company."3 The bankruptcy court took three days of testimony on the issue. At the conclusion of the hearing, the bankruptcy court ruled orally that MedCare is not a "domestic insurance company":
It\'s clear to me from the testimony that HMOs are a different animal. They are unlike insurance companies, even though they indemnify. They indemnify like insurance companies. . . . But that does not make them an insurance company.
7/22/92 Tr. at 323.
This court granted the Director's motion for leave to take an interlocutory appeal under 28 U.S.C. § 158(a). Whether MedCare is a "domestic insurance company" under Section 109(b) presents a disputable controlling question of law, the resolution of which materially advances this litigation.
This court reviews the factual findings of the bankruptcy court for clear error, but the bankruptcy court's legal conclusions receive de novo review. Fed.R.Bankr.P. 8013; In re Newman, 903 F.2d 1150, 1152 (7th Cir.1990). The powers and responsibilities of insurance companies and HMOs may raise questions of fact or of law. But given particular factual findings, the ultimate question of whether an entity is a domestic insurance company under Section 109(b) remains one of law — regardless of the test applied. Thus, accepting the bankruptcy court's factual findings regarding the powers of HMOs as true unless clearly erroneous, the bankruptcy court's conclusion is nonetheless reviewed de novo.
The Director argues that the bankruptcy court erred when it refused to dismiss MedCare's petition for lack of jurisdiction.4 The Director contends that the bankruptcy court lacks jurisdiction because MedCare is a domestic insurance company under Section 109(b). Any person who resides or has a domicile, place of business or property in the United States may be a debtor. 11 U.S.C. § 109(a). However, a person may be a debtor only if that person is not a domestic insurance company. Id. § 109(b)(2). The bankruptcy court's jurisdiction thus turns on whether MedCare, an Illinois HMO, is a "domestic insurance company" under Section 109(b)(2). The question is one of first impression in this circuit.
A petitioner may be a Section 109(b) excluded entity under either of two lines of analysis — the independent classification test or the state classification test. In re Cash Currency Exchange, Inc., 762 F.2d 542, 548 (7th Cir.1985). Accord 2 King, Collier on Bankruptcy § 109.02 (15th ed. 1985). The independent classification test construes Section 109(b) itself, considering the text of the section, its legislative history and court interpretations, to determine whether a petitioner is an excluded entity. Id. at 552; In re Beacon Health, Inc., 105 B.R. 178, 180 (Bankr. D.N.H.1989). Section 109(b), which must be construed narrowly, see Cash Currency, 762 F.2d at 552, does not by its terms exclude HMOs. Moreover, at the time of the last amendments to the section, Congress was fully aware of the existence of HMOs: Congress had enacted a federal regulatory scheme for HMOs. See In re Family Health Services, Inc., 104 B.R. 268, 272-73 & n. 1 (Bankr.C.D.Cal.1989); 42 U.S.C. § 300e.
In the face of the plain terms of Section 109(b) and the implications of the legislative history, the Director urges an application of the test that places dispositive weight on the underlying rationale of the section. Because HMOs have a public nature and their own state liquidation schemes, the Director asserts that HMOs fall within the professed legislative justification of the section. Cf. Beacon Health, 105 B.R. at 180. But the object of this test is to determine what Congress actually intended to be excluded, not what its underlying reasoning could support. Bearing that in mind, the plain terms of the Section...
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