St. Francis Reg. Med. Ctr. v. Blue Cross

Decision Date30 December 1992
Docket NumberNo. 92-1580-PFK.,92-1580-PFK.
Citation810 F. Supp. 1209
CourtU.S. District Court — District of Kansas

Richard C. Hite and Arthur S. Chalmers, of Kahrs, Nelson, Fanning, Hite & Kellogg, Wichita, KS, for plaintiff.

Gary D. McCallister and Mark A. Buck, of Davis, Wright, Unrein, Hummer & McCallister, Topeka, KS, Alan L. Rupe, Steven J. Rupp and Thomas L. Steele, of Alan L. Rupe Law Offices, P.A., Payne H. Ratner, Jr., of Ratner, Mattox, Ratner, Brimer & Elam, Wichita, KS, for defendant.


PATRICK F. KELLY, Chief Judge.

The plaintiff, St. Francis Regional Medical Center, a nonprofit Kansas corporation, has brought the present action against Blue Cross Blue Shield of Kansas, Inc., seeking a determination that recent state legislation relating to Blue Cross is unconstitutional and that portions of the insurance policies issued by Blue Cross violate public policy. Specifically, St. Francis contends that the nonassignment clause utilized by Blue Cross in its insurance policies violates the Kansas public policy supporting free assignment of choses of action. St. Francis also contends that Senate Bill No. 66, L.1992, Ch. 196 (amending K.S.A. 40-19c06), violates the prohibition on special legislation and the guaranty of equal protection contained in the Kansas Constitution.

This action was originally filed by St. Francis in Sedgwick County District Court. On November 30, 1992, the action was removed by Blue Cross to this court. Blue Cross moved to dismiss the action on December 7. On December 16, St. Francis moved for a preliminary injunction preventing Blue Cross from "refusing to honor assignments" made by Blue Cross insureds to St. Francis after the current provider agreement between Blue Cross and St. Francis expires at the end of this month. St. Francis filed its brief in support of this motion for injunctive relief five days later. A hearing on the present matter was originally set for December 22. At the request of the parties, the hearing was set over for one week. On December 29, 1992, the court conducted a hearing in which the parties were extended the opportunity to address the issues raised by the motions submitted to the court. In addition, during the course of this hearing, the parties also introduced into the record certain stipulations for purposes of resolving the motion to dismiss. At the conclusion of the hearing, the court found that the present action should be dismissed. Consistent with the statements of the court at that time, and for the reasons explained more fully herein, the court hereby grants defendant Blue Cross's motion to dismiss.

Blue Cross is currently a mutual life insurance company organized under K.S.A. 40-501. Traditionally, however, Blue Cross operated as a nonprofit medical and hospital service company organized under K.S.A. 40-19c01. In 1991, the state legislature enacted K.S.A. 40-19c12, requiring Blue Cross to convert to either a mutual life insurance company under Article 5 of Chapter 40, or a mutual company other than life under Article 12 of Chapter 40. Blue Cross became a mutual life insurance company on July 1, 1992, pursuant to the election required by K.S.A. 40-19c12.

As a nonprofit insurer under Article 19c, Blue Cross was expressly required by the legislature to adopt procedures to control the growth of health care costs. One of the tools Blue Cross has utilized in fulfilling that mandate has been the use of provider agreements with health care providers, coupled with clauses in its insurance policies prohibiting the assignment of benefits.

If a health care provider has not entered into a contracting provider agreement with Blue Cross, persons receiving services from that provider cannot assign their benefits to Blue Cross directly. Instead, the insured person must pay the provider, and then seek reimbursement from Blue Cross. On the other hand, if a health care provider has obtained a contracting provider agreement with Blue Cross, it may bill Blue Cross directly for any services rendered.

Under the contracting provider agreement, the hospital agrees to accept payment from Blue Cross as payment in full, and to hold the insured harmless for any balance in excess of Blue Cross's maximum allowable payment. The contracting provider agreement also provides for Blue Cross review of hospital services and other cost containment devices.

This system was upheld by the Kansas Supreme Court in Augusta Medical Complex v. Blue Cross, 230 Kan. 361, 634 P.2d 1123 (1981). In that case, a group of Kansas hospitals challenged Blue Cross's use of nonassignment clauses in its insurance policies, contending that these provisions violated a general public policy favoring free assignment of choses in action. The Supreme Court held that this policy was insufficient to invalidate the nonassignment clauses at issue, given the legislative mandate extended to Blue Cross to contain skyrocketing hospital costs.

On April 16, 1992, Blue Cross issued a request for proposal to all Wichita hospitals having more than two hundred beds. There are three hospitals of this size in Wichita. The request invited these hospitals to submit competitive bids for provider contracts with Blue Cross, under which two hospitals would be chosen as contracting hospitals effective January 1, 1993.

Only one hospital, HCA Wesley Medical Center, responded. Neither of the other hospitals, including St. Francis, issued any bid. In subsequent correspondence, St. Francis confirmed its intention not to submit a bid with Blue Cross under the terms of the request for proposal.

In response to Blue Cross's motion to dismiss, St. Francis has argued that the motion actually seeks summary judgment and contends that it is premature to grant that relief at this time. Toward that end, St. Francis has filed an affidavit pursuant to Fed.R.Civ.P. 56(f) stating that further discovery needs to be completed. The court finds that Blue Cross's motion is appropriately addressed as a motion to dismiss. The issues raised in that motion are purely legal in nature, and the court finds that they may be decided without resort to making findings of fact not contained in St. Francis's complaint.

Although St. Francis has repeatedly emphasized the allegedly wrongful conduct of Blue Cross during the discourse between the parties during 1992, that conduct is not at issue here. St. Francis has not, for example, asserted claims of estoppel or detrimental reliance against Blue Cross in an attempt to preserve its existing provider care contract with that company. Rather, it has sought a legal determination that the nonassignment clauses are inherently illegal. Thus, while issues of the relative economic impact of the termination of the existing contractual relationship and the underlying subjective motivations of the parties which led to that termination might be relevant to such a claim (or to St. Francis's motion for injunctive relief), they are not relevant to the issue currently before the court: whether the state legislature's enactment of Senate Bill No. 66 offends various provisions of the Kansas Constitution, or whether nonassignment clauses represent a per se violation of Kansas public policy.

This court has previously addressed the use of Blue Cross contracting provider agreements in Reazin v. Blue Cross & Blue Shield, 635 F.Supp. 1287 (D.Kan. 1986) and 663 F.Supp. 1360 (D.Kan.1987). The various federal antitrust claims raised in Reazin have not been raised here. The court held that Augusta was not controlling in that case since the termination of the provider agreement there occurred by the unilateral action of Blue Cross. The plaintiff hospital wished to maintain a provider agreement with Blue Cross, but the insurer both terminated the provider agreement and refused to offer the hospital any new provider agreement. The court noted that under these circumstances "there was no question of a hospital refusing to join." 635 F.Supp. at 1334. In the present case, on the other hand, St. Francis was extended the opportunity to bid, which it declined to exercise.


In its motion to dismiss, Blue Cross contends that the majority of its policies are employee health benefit policies covered under the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1001 et seq., and that any state law requiring free assignment is preempted by federal law. Under 29 U.S.C. § 1144(a) (§ 514(a) of ERISA), the federal act preempts "any and all State laws insofar as they may now or hereafter relate to any employee benefit plan."

The Supreme Court has broadly interpreted the "relates to" language of ERISA preemption. Shaw v. Delta Air Lines, 463 U.S. 85, 98, 103 S.Ct. 2890, 2900, 77 L.Ed.2d 490 (1983). A state law "relates to" an employee benefit plan when it has "a connection with or reference to such a plan." Id. at 96-97, 103 S.Ct. at 2898-2900. Under this test, a state law may be preempted if it relates to an ERISA plan, even if the law was not specifically intended to affect such a plan or if the effect is only indirect. Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 111 S.Ct. 478, 112 L.Ed.2d 474 (1990). On the other hand, a law does not relate to an ERISA plan within the meaning of the preemption statute if it affects the plan only in a "tenuous, remote, or peripheral" manner. Shaw, 463 U.S. at 100 n. 21, 103 S.Ct. at 2901 n. 21.

Observing that there was no "simple test" for resolving the question of whether a given law "relates to" a plan, the Tenth Circuit has noted that cases finding such a relationship follow four general types.

First, laws that regulate the type of benefits or terms of ERISA plans. Second, laws that create reporting, disclosure, funding, or vesting requirements for ERISA plans. Third, laws that provide rules for the calculation of the amount of benefits to be paid under ERISA plans. Fourth, laws and common-law rules that

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