Westmoreland Hospital Ass'n v. Blue Cross of Western Pennsylvania

• Decision Date: 10 September 1979
• Docket Number: No. 78-2491,78-2491
• Citation: 605 F.2d 119
• Parties: CA 79-3411 WESTMORELAND HOSPITAL ASSOCIATION, a non-profit corporation, Latrobe Area Hospital, a non-profit corporation, The Altoona Hospital, a non-profit corporation, The Hamot Medical Center of Erie, Pennsylvania, a non-profit corporation, Meadville City Hospital, a non-profit corporation, Saint Vincent Health Center, a non-profit corporation, Community Mental Health Center of Beaver County, a non-profit corporation, South Hills Health System, a non-profit corporation, and Henry Clay Frick Community Hospital, a non-profit corporation, Appellants, v. BLUE CROSS OF WESTERN PENNSYLVANIA, a non-profit corporation, Secretary of Health, Education and Welfare.
• Court: U.S. Court of Appeals — Third Circuit

Page 119

605 F.2d 119

CA 79-3411 WESTMORELAND HOSPITAL ASSOCIATION, a non-profit corporation, Latrobe Area Hospital, a non-profit corporation, The Altoona Hospital, a non-profit corporation The Hamot Medical Center of Erie, Pennsylvania, a non-profit corporation, Meadville City Hospital, a non-profit corporation, Saint Vincent Health Center, a non-profit corporation, Community Mental Health Center of Beaver County, a non-profit corporation, South Hills Health System a non-profit corporation, and Henry Clay Frick Community Hospital, a non-profit corporation, Appellants, v. BLUE CROSS OF WESTERN PENNSYLVANIA, a non-profit corporation, Secretary of Health, Education and Welfare.

No. 78-2491.

United States Court of Appeals, Third Circuit.

Argued Aug. 7, 1979.

Decided Sept. 10, 1979.

Raymond G. Hasley (argued), Rose, Schmidt, Dixon, Hasley, Whyte & Hardesty, Pittsburgh, Pa., B. Patrick Costello, Costello & Berk, Greensburg, Pa., H. Reginald Belden, Jr., Stewart, Belden, Herrington & Belden, Greensburg, Pa., for appellants.

Edward L. Springer (argued), Joseph Friedman, Stephen F. Ban, Springer & Perry, Pittsburgh, Pa., for appellee Blue Cross of Western Pennsylvania.

Before ALDISERT, VAN DUSEN and WEIS, Circuit Judges.

OPINION OF THE COURT

ALDISERT, Circuit Judge.

This appeal requires us to decide if there is federal question jurisdiction under 28 U.S.C. § 1331(a) ¹ to hear a claim brought by nine community hospitals against Blue Cross of Western Pennsylvania. The hospitals originally filed suit in the Court of Common Pleas of Westmoreland County, Pennsylvania to enjoin Blue Cross from computing reimbursement payments in a certain manner and to recover money damages. Blue Cross removed the action to the district court. The hospitals' motion to remand to the state court was denied and judgment on the merits was entered in favor of Blue Cross. The hospitals have appealed. Determining that proper subject matter jurisdiction exists, we affirm.

This case is an outgrowth of two successive cost-reimbursement contracts, entered on July 1, 1966 and July 1, 1973, between the hospitals and Blue Cross. Under the terms of the contracts, Blue Cross agreed to pay for the medical care and treatment provided by the hospitals to Blue Cross subscribers. The agreements provided that the hospitals would charge Blue Cross only their costs attributable to rendering service to subscriber patients, rather than their standard rate. The computation of these costs involved what the district court described as "a complicated formula" that had been developed over several decades. ² Traditionally, Blue Cross has taken the position that federal grants awarded to hospitals are to be treated as restricted funds, and as such, not included in hospital operating costs, under the theory that only the actual costs incurred by the hospital itself for patient care and service should be factored into the amount borne by Blue Cross. What gave rise to this litigation was the application by Blue Cross of its accounting practice to a number of grants to appellants under the Community Mental Health Centers Act. 42 U.S.C. § 2688 to § 2688v (current version at 42 U.S.C. § 2689 to § 2689aa).

Under the Act, the Department of Health, Education and Welfare (HEW) administers the mental health program under which these hospitals have qualified for federal grants by providing community mental health services. One of the various grants, deemed central to this dispute, is designated as the mental health staffing grant, which is measured by a percentage of the total projected expenses for wages and salaries for professional and technical employees to staff the mental health centers. HEW required that staffing grants not be used to "supplant" amounts which would otherwise be received by the hospitals from insurance companies or other third-party payers. 42 U.S.C. § 2688a(a)(4). ³ At various times since 1966 each of the hospitals has organized a community mental health center to provide the services and facilities authorized by federal law. Federal staffing grants allotted to them, already paid and forecast for the future, amount to approximately $28,000,000.

The Blue Cross accounting practice treated the federal grants as restricted funds, and in computing reimbursable costs to the hospitals, excluded the federal staff grants in determining the actual operating costs of the hospital. The hospitals, beginning in 1971 with the South Hills Health System, objected to this practice. South Hills contended that Blue Cross had no right to deduct the federal grants from the hospital's ordinary costs of operation because, in a related program (Medicare), Blue Cross had accepted HEW's designation that certain "start-up" grants were "seed grants" and did not require them to be applied to costs. South Hills wanted similar treatment for the mental health staff grants. As early as 1971, then, member hospitals and Blue Cross had begun a running disagreement over the accounting treatment by Blue Cross of the federal staffing grants.

HEW agreed with the hospitals' interpretation of their Blue Cross contracts and contended that the Blue Cross accounting treatment was tantamount to a violation of 42 U.S.C. § 2688a(a)(4) because, in the absence of federal grants, Blue Cross would have included mental health center staff costs as reimbursable operating costs of the hospital. HEW also contended that the Blue Cross contract was unenforceable as against public policy. When Blue Cross rejected the interpretation urged by the hospitals, HEW threatened to cut off the grants to the Hospitals ! Thus, to use the current idiom, the appellant hospitals found themselves between a rock and a hard place they valiantly sought reimbursement from Blue Cross, yet when they failed, HEW threatened to close off grants to them because Blue Cross interpreted the contract differently from the way HEW did. The district court has accurately described the situation:

The Secretary was aware of the controversy and, in fact, caused it. He had urged the hospitals to negotiate a change in the practice used by Blue Cross because the more money Blue Cross paid the hospitals, the better chance they would have of surviving without federal money, but Blue Cross wanted to protect its subscribers and its rates. The more Blue Cross had to pay, the higher the rates it would have to charge. Blue Cross said its subscribers would be subsidizing the taxpayers unless it was permitted to treat the federal grants as restricted grants. As was apparent to everyone, Blue Cross spends only its subscribers' money and the Secretary spends only the taxpayers' money. Finally, the Secretary precipitated this litigation when he threatened to cut off the staffing grants. The hospitals were placed in the middle because they could not operate the mental health clinics without the grants.

Appendix at 67a.

Thus it cannot be said that HEW was a casual bystander to the contract dispute. If the contract formed the basis of the controversy, it was the threatened HEW action that precipitated the present litigation.

Faced with these pressures, the hospitals filed suit seeking money damages from Blue Cross for alleged breaches of the contracts and injunctive relief to prevent Blue Cross from deducting the grants from the amount of allowable hospital costs. After removal, HEW was added as an indispensable party under Rule 19 of the Federal Rules of Civil Procedure, whereupon the Secretary counterclaimed against eight of the hospitals to recover for allegedly erroneous grant payments, claiming that the hospitals had breached the provisions of the post-1975 grants. The district court ruled in favor of Blue Cross on the hospitals' claim and in favor of the hospitals on the Secretary's counterclaim. Only the hospitals have appealed.

I.

The essence of the appellants' jurisdiction argument is that the state court action involved only a contract, to be interpreted under the common law of Pennsylvania, and that no federal question appeared in its theory of the case. Blue Cross argues that the federal question appears on the face of the complaint and that interpretation of federal statutes permeates the entire controversy.

We start from the premise that for a civil action to arise under 28 U.S.C. § 1331(a), the "right or immunity created by the Constitution or laws of the United States must be an element, and an essential one, of the plaintiff's cause of action" and that "the controversy must be disclosed upon the face of the complaint, unaided by the answer or by the petition for removal." Gully v. First National Bank, 299 U.S. 109, 112-13, 57 S.Ct. 96, 98, 81 L.Ed. 70 (1936). An unwavering series of Supreme Court decisions has emphasized this rule. See e.g., Tennessee v. Union & Planters' Bank, 152 U.S. 454, 14 S.Ct. 654, 38 L.Ed. 511 (1894); Phillips Petroleum Co. v. Texaco Inc., 415 U.S. 125, 94 S.Ct. 1002, 39 L.Ed.2d 209 (1974) (per curiam).

Furthermore, federal removal procedure clearly requires that the initial pleading in the state court must set forth the basis for removal. 28 U.S.C. § 1446(b). The Supreme Court has instructed us that the removal procedure reflects a congressional policy of severe abridgement of the right to remove a state action to federal court. In adjuring strict construction of the removal statutes, the Court has cautioned:

Not only does the language of the (removal statute, 28 U.S.C. § 1441) evidence the Congressional purpose to restrict the jurisdiction of the federal courts on removal, but the policy of the successive acts of Congress regulating the jurisdiction of federal courts is one calling for the strict construction of such legislation. The power reserved to the states under the Constitution to provide for the determination of controversies in their courts, may be restricted only by the action of Congress in conformity to the Judiciary Articles of the Constitution. "Due regard for the rightful...