# Petition for Writ of Certiorari — Hayes v. Prudential Insurance Co. of America

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 1988
- **Citation:** 484 U.S. 1060

## Text

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JOSEPH F. SPANIOL, UR.
CLERK

IN THE

Supreme Court of the United States

OCTOBER TERM, 1987

KIP HAYES,
Petitioner,

vs.

PRUDENTIAL INSURANCE
COMPANY OF AMERICA,
NATIONAL LEAGUE OF POSTMASTERS
OF THE UNITED STATES, et al.,
Respondents.

ON PETITION FOR WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

PETITION FOR WRIT OF CERTIORARI

HARVEY R. LEVINE, ESQ.
RICK L. BOVE, ESQ.

SHERNOFF & LEVINE
Suite 1400 ag
1200 Third Avenue
San Diego, California 92101
(619) 231-9449

Attorneys for Petitioner

Lawyers Brief Service / Legal Publishers / (213) 383-4457 / (714) 720-1510

EDITOR'S NOTE

THE FOLLOWING PAGES WERE POOR HARD COPY
AT THE TIME OF FILMING. IF AND WHEN A
BETTER COPY CAN BE OBTAINED, A NEW FICHE
WILL BE ISSUED,

QUESTIONS PRESENTED

This action involves a medical insurance contract
covering petitioner pursuant to the Federal Employees
Health Benefits Act, 5 U.S.C. Section 8901, et seq.
(“FEHBA”’). Section 8902(m)(1) of FEHBA provides:

The provisions of any contract under this chapter
which relate to the nature or extent of coverage or
benefits (including payments with respect to
benefits) shall supersede and preempt any State or
local law, or any regulation issued thereunder,
which relates to health insurance or plans to the
extent that such law or regulation is inconsistent
with such contractual provisions.

The United States Court of Appeals for the Ninth
Circuit, based solely upon Section 8902(m)(1), held that
petitioner could not maintain an action under California
law against private insurance carriers to enforce petitioner’s
rights under a FEHBA medical insurance plan.

The questions presented are:

1. Whether FEHBA contains a comprehensive civil
enforcement scheme intended by Congress to both displace
and supplant state laws designed to regulate private
insurers—that is, does FEHBA provide a superseding
federal remedy that will accomplish the express purpose of
FEHBA to provide federal employees with health insurance
benefits co-extensive with those available to the private
sector, at the lowest possible cost.

2. Whether petitioner’s state law claims against private
insurance carriers to enforce his rights to receive benefits
under FEHBA are inconsistent with Section 8902(m)(1).

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3. Whether the dispute between petitioner and respon-
dents, private insurance carriers, is a private controversy, in
which the federal government simply does not have an
interest sufficient to justify federal court jurisdiction.

LIST OF PARTIES

The parties to the proceedings below were petitioner, KIP
HAYES, and respondents, PRUDENTIAL INSURANCE
COMPANY OF AMERICA, NATIONAL LEAGUE OF
POSTMASTERS OF THE UNITED STATES, and
petitioner’s father, NOBEL A. HAYES.

— W—

TABLE OF CONTENTS

Page
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TABLE OF AUTHORITIES ..... Sebi didslidusapeltidiedalnaiabeispenan vii
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IEE BUM s icssecsscssanessrnesescccescadecssssssaieees 5

B. Petitioner’s Claims For Nursing Care
SARTRE Ss AS Oo 7

C. Pursuant To The Request And Direction
Of OPM, The PLAN Was Liberalized In
1983 To Provide Petitioner With Unlim-
ited Private Duty Nursing Care Benefits
From The Plan’s Contingency Reserve
Fund Based Upon OPM’s Determination
That Said Payments Were In The Best
I loci csschiadaverinametebvassanaasasdvecesans 8

REASONS FOR GRANTING THE WRIT

II

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D. NLP And PRUDENTIAL Refused To
Comply With OPM’s Request To Provide
Petitioner With Unlimited Private Duty
Nursing Care Benefits For Calendar Year
1984, Despite OPM’s Determination That
Said Payments Were In The Best Interests
Of The PLAN, The United States Govern-

ment, And Federal Employees. ....................5.

E. Petitioner’s Claims Under California State

a eae ee

THE NINTH CIRCUIT’S DECISION
THAT PETITIONER’S STATE LAW
CAUSES OF ACTION ARE “PRE-
EMPTED” BY §8902(M)(1) IS IN DIRECT
CONFLICT WITH A DECISION FROM
THE TENTH CIRCUIT COURT OF

FEED seibnisicieoenrecinantsegensicnbvabtininianiatiabepsaeaeinia is

THE NINTH CIRCUIT’S OPINION IS
WHOLLY CONTRARY TO PRINCIPLES
OF PREEMPTION ESTABLISHED BY

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Page

III THE NINTH CIRCUIT’S FINDING OF
PREEMPTION IS IN DIRECT CONFLICT
WITH OPINIONS ISSUED BY CALI-
FORNIA COURTS AND RAISES IMPOR-
TANT ISSUES CONCERNING THE
RIGHTS OF STATES TO REGULATE
THE BUSINESS OF INSURANCE ................ 28

A MINIT sinssscupadnciiccsecsucansistnnsingndabaenbibaianienasaanmatanes 30

——

APPENDIX A

Order of United States District Court,
Southern District of California Granting
Defendants’ Motion for Summary Judgment,

PURGE FOMNEY Zak, TDS secccessernsstimnesisenionsiovecnsseton

APPENDIX B

Opinion of United States Court of Appeals for
the Ninth Circuit affirming the District
Court’s Order Granting Defendants’ Motion

for Summary Judgment, Filed June 15, 1987 .....

APPENDIX C

Order of United States Court of Appeals for
the Ninth Circuit Denying Appellant’s Peti-

tion for Rehearing, Filed July 21, 1987 ...............

APPENDIX D

The Federal Employees Health Benefits Act

Of 1959, 5 U.S.C. §§ 8901-8913 (FEHBA) ..........

Page

_— =

TABLE OF AUTHORITIES

Page

Cases

Allis-Chalmers Corp. v. Lueck
471 U.S. 202, 105 S.Ct. 1904,
OD cee I CIGD. cecetecrccniccsetsonsesseees 21, 22, 27

Blue Cross and Blue Shield of Florida, Inc. v.
Department of Banking & Finance
coy @> 8s. - A, jn 16

Clearfield Trust Co. v. United States
318 U.S. 363, 63 S.Ct. 573,
Be ens. ee IIE ilk ciestintinbutichisiennsaianniscsccansinaicionion 18

Cort v. Ash
422 US. 66, 45 L.Ed.2d 26,
Re Re 23, 27

Director, Edward J. Meyer Memorial
Hospital v. Stetz
Cae a. Fe COP eee Es. SUED intetrieentimnnn 18

Doe v. Divine Z
ro Bo i fo Se: ee 6

Fields v. Blue Shield of California
163 Cal.App.3d 570,
209 Cal.Rptr. 781 (1985) ooccccccccccccsssssssssssssceseesesees 28

—- Vili—

Page

Hayes v. Prudential Insurance
Company of America, et al.
819 F.2d 921 (9th Cir. 1987) «0.0.0... m 82, 33

Howard v. Group Hospital Service
739 F.2d 1508 (10th Cir. 1984) ..................... 15-20

Malone v. White Motor Corp.
435 U.S. 497, 98 S.Ct. 1185,
Se Te PE CPOE -teccctnncensternaneennesceennensens ai, 23

Massachusetts Mutual Life
Insurance Co. v. Russell
473 US. 134, 105 S.Ct. 3085,
Be IE TEI, METI | piissiatasteinnnsasscnsnndeansenedssenctsenass 27

McCormick v. Sentinel Life Insurance Co.
me ES 8. ene 14

Miree v. DeKalb County
433 US. 25, 97 S.Ct. 2490,
Fg, er ner nN eT anem 18

Myers v. United States
oie y 8 ee 6 ee | ee 16

National Federation of Federal
Employees v. Divine
ee ee Se Me iis OD eiesccseccnseniestcsonccencns 6

Pilot Life Insurance Co. v. Dedeaux
am Sy ate eee Ee
ee © Fen y) ee. Se

o-_—-—

soins

Page

Railsback v. United States

181 F.Supp. 765 (D. Neb. 1960) ............04 19, 20
Retail Clerks v. Schermerhorn

375 US. 96, 84 S.Ct. 219,

Be is Re ED eitcictiesensnsnssensennessssrecineisnetssinens 21
SEC v. National Securities, Inc.

393 U.S. 453, 89 S.Ct. 564,

Be Beis CUE ME PUMOIIED saiiciasscndcacsnnsacncscccsoncssnssoseqnendacs 29
Silberg v. California Life Insurance Co.

Fe ee He Ce aikccirtcisatstientintscrinsenintsicnneinctins 14
Tackitt v. Prudential Insurance Co.

(po ee wey wel AR. eeeeennee™ 16

Federal Statutes

SU BIC.G GBO1 66 BOG, cccessiscrsccscccccsscssssacssessescessosozscssssesoonees i, 5
S OTA BRED srccnetinernsttcincsnsccscrsinissenccssssnssosessesscsscsaseps 3
OF EE Oe Ee tarctittescccneseninscnsscosrcininsstsensccnnsscasctuoassinsasinessenions 5
FU I reccincterevnnieciccossinrsonseccnsscnncnesosnsimsivasaninsscianeiasss 6
FF ie I Seisenttcniscnsncecsssecencsdsineensasnesnsnnsnesnatssnionnboiins 6
UE iiiestntarscianitintattiinterseseisncnesinanionions passim
FOF ari Be siiseteanteccccccasenescsccssnsnssenasesanonsensssapenassnatasnonaniessis 6
Fe ee witttectnceintcticcccctncnisccnsisnnnicsvonsoncsenoens aletaiedidaddads 5
Fae ID eietnercnercrcsoncntcresesecsccnsoneessesssasoansiin ey ee
FO Is ie tics tnttcitninnesniscctetnnssasicszonsnnsneinenseasnenaceasesnesinéntes 4

vie <a ENGR aPientroai cr earn es ier 7

Page
McCarran-Ferguson Act 59 Stat. 33
1S U.S.C. GG 1011 OF 0g. ..cccccccrcccrcscrrssessccrseseraveccssessssnssncsenes 22
1S UF TER OO GG. vnieiscsecisnsscscasscscsssrrcsesassunarinntnsaracinss 28
15 US.C.@ BOEZ CISTE) .......cccsccscsesccrscssscsascesssenccsscasansassoness 29
BE UT A BE GICID wrsstcsensissszesssirinreccrcesenctiminanormmanabirape 2
BE CETL. BOR vsicsscesssnsicsssssssccnsscssssceassoxaasesesenieensnsinasantents 2,4
BO TE BR TARRMD essssiesssccsccscreesssoscsersinsnrccensanedinaencaseeseninene 2,4
BG UT ALD BOE -cnscsccascsssssnscssscasatsasarersencacesssasesasoqnansnnintinate 2,4
RO TT BR, Ge FRI erin sacanenisinccasniisinncepccdennsanassisusiasninceensaensoninn 25
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SP UES TED vice citencnivcsennindssainsnsaceacssncnsnecesassavenasiniadionsh 25
State Statute
California Insurance Code
SD FID COPIED TICE) erssitentccseninssssecesssesssresestsniens 14
Federal Regulations
Fe Be ai tein eas taisseciecincedeensncaeniiiiotiatnedantiainnniaaa 7
FE Ne ssa ctirnniiscincassuasssnsninecencsonsaceeanninanigtiniasins 16-18
SD FO FOGG seniinsnssssvcssnonsnencsiviniiastendisusiaizinsinnsss 7,9

Federal Rule

Federal Rules of Civil Procedure
asi eeaeeeiee occas Ranma aun 12

_—_—

Text

W. Sheroff, S. Gage & H. Levine, INSURANCE

BAD FAITH LITIGATION §§6.01-6.02[6] .......

Congressional Records and Hearings

Congressional Record, Volume 123, part 16,
p. 19780 (95th Cong., Ist Sess.,

I a IE ictal as nieendiceesehhn taainidonandbindsinpienssesenses

Congressional Record, Volume 124, Part 12,
p. 16243 (95th Cong., 2nd Sess.,

Ss iia ac altansa nasasaidbioaaeunvasosbnsens

Federal Employee Health Benefits Program —
Health Care Costs: Hearings Before the
Subcomm. on Compensation and Employee
Benefits of the Com. on Post Office and Civil

Service, 95th Cong., Ist Sess., p. 11 (1977) ..........

Miscellaneous

Report of the Comptroller General of the United
States, MWD 76-49, p. 16, October 17, 1975...

1959 U.S. Code Cong. & Ad. News 2914 ......cccccesssereees

Page

No.

IN THE

Supreme Court of the United States
October Term 1987

KIP HAYES,
Petitioner,

vs.

PRUDENTIAL INSURANCE
COMPANY OF AMERICA,
NATIONAL LEAGUE OF POSTMASTERS
OF THE UNITED STATES, et al.,
Respondents.

PETITION FOR WRIT OF CERTIORARI

Petitioner, KIP HAYES, respectfully prays that a writ of
certiorari issue to review the judgment and opinion of the
United States Court of Appeals for the Ninth Circuit,
entered in the above-entitled proceeding on June 15, 1987.

OPINIONS BELOW

The order of the United States District Court, Southern
District of California (Nielsen, L.C.) granting respondents’
motion for summary judgment has not been reported. It is
re-printed in Appendix “A,” attached hereto. -

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The opinion of the United States Court of Appeals for
the Ninth Circuit affirming the district court’s order
granting respondents’ motion for summary judgment is
reported at 819 F.2d 921 (9th Cir. 1987), and is re-printed in
Appendix “B,” attached hereto.

The order of the United States Court of Appeals for the
Ninth Circuit denying petitioner’s petition for rehearing in
the Ninth Circuit Court of Appeals, is reprinted in
Appendix “‘C,” attached hereto.

JURISDICTION

Petitioner originally brought this action in the Superior
Court of California, County of San Diego, on April 16,
1984. Thereafter, respondent NATIONAL LEAGUE OF
POSTMASTERS OF THE UNITED STATES removed
the action to the United States District Court, for the
Southern District of California, alleging federal jurisdiction
under 28 U.S.C. §§1331, 1332(a) and 1441.

Thereafter, respondents brought a motion for summary
judgment seeking an order dismissing petitioner’s state law
claims on the grounds said claims were preempted by
§8902(m)(1) of FEHBA. Said motion was granted by the
district court on January 14, 1985.

Thereafter, petitioner filed a timely appeal to the Ninth
Circuit Court of Appeals. On June 15, 1987, the Ninth
Circuit Court of Appeals issued an order affirming the
district court’s order. A petition for rehearing was timely
sought and subsequently denied on July 21, 1987.

On October 2, 1987, Justice O’Connor ordered that the

time for filing the petition for a writ of certiorari be
extended to and including November 18, 1987. :

The jurisdiction of this court to review the judgment of
the Ninth Circuit is invoked under 28 U.S.C. §1254(1).

=

STATUTES INVOLVED

The Federal Employees Health Benefits Act of 1959, 5
U.S.C. §§ 8901-8913. The entire Federal Employees Health
Benefits Act (““FEHBA”) is re-printed in Appendix “D,”
attached hereto.

STATEMENT OF THE CASE

Petitioner initiated this action in the Superior Court for
the State of California, County of San Diego, alleging, inter
alia, that respondents PRUDENTIAL INSURANCE
COMPANY OF AMERICA (“PRUDENTIAL”) and
NATIONAL LEAGUE OF POSTMASTERS OF THE
UNITED STATES (“NLP”)! tortiously breached the
insuring provisions of the POSTMASTERS BENEFIT
PLAN (the “PLAN”), an “employee organization” medical
insurance plan issued by NLP and underwritten by
PRUDENTIAL. Petitioner alleged, inter alia, that NLP
and PRUDENTIAL conspired to unreasonably deny
health insurance benefits to petitioner, payment of which
had been requested by the UNITED STATES OFFICE OF
PERSONNEL MANAGEMENT (“OPM”) pursuant to
the administrative liberalization provisions of FEHBA.
OPM’s request was based upon its findings that payment of
said benefits was in the best interests of the United States
government, federal employees, and the carriers themselves.
In addition, petitioner’s complaint set forth separate and
distinct allegations of nonpayment and delays in payment
of other separate and unrelated claims.

| The NATIONAL LEAGUE OF POSTMASTERS OF THE
UNITED STATES is a nonprofit corporation principally conducting
business as a “carrier” under the Federal Employees Health Benefits
program.

callie

On April 15, 1984, NLP petitioned for removal to the
United States District Court for the Southern District of
California alleging jurisdiction under 28 U.S.C. §§1331,
1332(a) and 1441, on the grounds of: (1) complete diversity
of citizenship; and (2) federal question jurisdiction. NLP’s
petition alleged that the POSTMASTERS BENEFIT
PLAN is a government procurement contract governed by
federal law, and the district court had original jurisdiction
over petitioner’s action because petitioner’s state law claims
were preempted pursuant to 5 U.S.C. 9§8912 and
8902(m)( 1).

Respondents PRUDENTIAL and NLP subsequently
moved for summary judgment seeking an order dismissing
petitioner’s state law claims on the grounds that said claims
were preempted by §8902(m)(1) of FEHBA. The district
court granted respondents’ motion, and petitioner fiiled a
timely appeal to the Ninth Circuit Court of Appeals.”

2 As set forth at pp. 10-13, infra, prior to petitioner initiating hiis state
court action, NLP had filed a declaratory relief action in the United
States District Court for the Southern District of California maming
OPM as a defendant and seeking a judicial! declaration that respondents
could lawfully disregard OPM’s findings and requests made pursuant
thereto. Thereafter, based upon NLP’s filing of a NOTIC'E OF
RELATED CASE, petitioner’s action was consolidated with the action
brought by NLP against OPM, and both cases were heard lby the
Honorable Leland C. Nielsen, District Judge.

Thereafter, on motions for summary judgment, the district court
found against OPM in the declaratory relief action initiated by NLP,
and dismissed petitioner’s action as being preempted by FEHBA.. Both
actions were subsequently appealed to the Ninth Circuit Court of
Appeals. Due to the related nature of the two actions, separate and
complete records were not prepared for each action presented to the
Ninth Circuit of Appeals. Thus, facts set forth in the instant petitiion are
supported by the excerpts of record submitted in both consollidated
cases, National League of Postmasters of the United States v. United
States of Personnel Management, et al., District Court Case No. &-

Ge tin .

A. Overview Of FEHBA.

In 1959, Congress enacted the Federal Employees Health
Benefits Act, 5 U.S.C. §8901, et seq., which created a
subsidized health insurance system for federal employees.
The government’s subsidy is set at 60% of the average
subscription costs of the six largest plans. 5 U.S.C. §8906.
Employees pay the balance of the premiums due on the
particular plan they select.

ee

Congress expressly enacted FEHBA to provide “a
measure of protection for civilian government employees
against the high, unbudgetable, and, therefore, financially
burdensome costs of medical services through a compre-
hensive Government-wide program of insurance for
Federal employees and their dependents ....” 1959 U.S.
Code Cong. & Ad. News, legislative history, 2914. At the
time FEHBA was enacted, Congress recognized that “a
wide gap” existed between the Government, in its capacity
of employer, and employers in private enterprise, with
respect to health benefits for employees. Jd. at 2914. Thus,
FEHBA was designed to close the gap between health
insurance benefits available in the private sector and those
available to federal employees, therefore making the federal
government more competitive in the recruitment and
retention of competent civilian personnel. Jd. at 2914.

FEHBA is designed to be competitive, with numerous
private insurance carriers acting as underwriters. Insurers
may offer four types of coverage including: (1) a
government-wide “‘service benefit plan’; (2) a government-
wide “indemnity benefit plan”; (3) “‘employee organization

0341 LCN, Court of Appeal Case No. 85-5528, and Kip Hayes vy.
Prudential Insurance Company of America, et al., District Court Case
No. 84-1245, Court of Appeal Case No. 85-5527.

—

plans”; and (4) “comprehensive medical plans.” 5 U.S.C.
§8903. The instant action involves an “employee organiza-
tion plan” with NLP acting as the “carrier” and
PRUDENTIAL acting as the “underwriter.”

The UNITED STATES OFFICE OF PERSONNEL
MANAGEMENT (“OPM’’) is responsible, under FEHBA
§8902(a), for negotiating and approving the terms of
“employee organization plans” such as the one offered by
respondents. The benefits under all FEHBA contracts are
subject to “such maximums, limitations [and] exclusions . . .
as [OPM] considers necessary or desirable.” 5 U.S.C.
§8902(d). OPM assumes the obligation of considering costs
to federal employees and the government in approving
and/or modifying health benefit plans. FEHBA specifically
delegates administrative responsibilities to OPM to ensure
maximum health benefits for federal employees at the
lowest possible cost to the employees and the United States
government. Doe vy. Divine, 703 F.2d 1319 (D.C. Cir. 1983).

Essentially, OPM, as the governmental agency author-
ized to administer public funds on behalf of FEHBA plan
participants, is charged with the duty of performing that
function in the best interest of both the employees and the
United States government.

FEHBA confers express authority upon OPM to attain
the goals and objectives underlying the act. 5 U.S.C.
§8909(b)(2) provides that OPM shall set aside a fund “not
to exceed 3% of the contributions toward the plan,
determined by the Office to be reasonably adequate to

3 In Doe vy. Divine, 703 F.2d 1319 (D.C. Cir. 1983), and National
Federation of Federal Employees v. Divine, 679 F.2d 907 (D.C. Cir.
1981), the United States Court of Appeals, District of Columbia Circuit,
provides a more complete ‘overview of FEHBA,” as well as an in-depth
analysis of OPM’s duties with respect to the administration of the
FEHBA program. _

pao. eae

provide a contingency reserve.” 5 U.S.C. §8909(b)(2)
further provides that “the contingency reserves may be
used . . . to increase the benefits provided by, the plan from
which the reserves are derived, as the Office from time to
time shall determine.”

5 U.S.C. §8913 provides OPM with authority to prescribe
regulations necessary to carry out the provisions of the act.
Pursuant to that legislative directive, OPM has promulgated
regulations set forth in 5 C.F.R. §890. Section 890.503(c)(5)
of OPM’s regulations provides:

In addition to those amounts, if any, paid under
the above subparagraphs of this paragraph, OPM
may authorize such other payments from the
contingency reserve as, in the judgment of OPM
may be in the best interest of employees and
annuitants enrolled in the program.

B. Petitioner’s Claim For Nursing Care
Benefits.

Petitioner is eligible for coverage under the PLAN as a
dependent of his father, a retired federal employee and
member of the PLAN. Petitioner’s coverage became
effective under the PLAN on January 1, 1982.

Since 1974, petitioner has been a respirator-dependent
quadriplegic as a result of a spinal cord injury sustained in a
high school football game. Petitioner’s spinal cord injury
was So severe that he was hospitalized for two years and was
released from the hospital only upon condition that he
receive 24-hour private duty nursing care. During calendar
years 1982 and 1983, petitioner received approximately
$170,000 per year in private duty nursing care insurance
benefits under the PLAN. It is undisputed that if petitioner
did not receive these nursing care benefits, the only mode of
care compatible with continued preservation of his life

— a

would be confinement in an acute hospital care facility. It is
also undisputed that acute hospital care would cost the
PLAN approximately twice as much as the 24-hour nursing
care.

Effective January 1, 1983, the PLAN was modified to
limit private duty nursing care benefits to a maximum of
$10,000 per year.* Hospitalization benefits, however,
remained unlimited.

C. Pursuant To The Request And Direction Of
OPM, The PLAN Was Liberalized In 1983
To Provide Petitioner With Unlimited
Private Duty Nursing Care Benefits From
The Plan’s Contingency Reserve Fund Based
Upon OPM’s Determination That Said
Payments Were In The Best Interest Of The
Plan.

Recognizing its duty to preserve and further the
economic interests of the United States government, the
PLAN, and federal employees, OPM engaged in a
comprehensive investigation and analysis aimed at deter-
mining whether or not implementation of the $10,000
nursing care limitation would be cost-effective as to
petitioner. OPM’s investigation included consideration of
specific economic and technical factors including, but not
limited to:

a. A detailed examination of the specific nursing care
provided to-petitioner and the extent to which said nursing
care was medically necessary;

* The terms of the NLP PLAN are renegotiated each year. In 1982,
the PLAN provided “unlimited” benefits for private duty nursing care.

ro

a

b. A determination as to whether alternative care was
available through local or state government medical care
programs;

c. The cost of alternative care in an acute hospital
confinement facility; and

d. The extent to which confinement in an acute hospital
care facility would endanger petitioner’s health and
interfere with the continued enjoyment of his life.

Based upon their investigation, OPM determined that
petitioner would be contractually entitled to receive acute
hospital confinement care benefits and that those benefits
would cost the United States government, the PLAN, and
federal employees approximately twice as much as
continued payment of nursing care benefits.

Based upon OPM’s determination that hospital
confinement benefits would cost the PLAN twice as much
as nursing care benefits, OPM requested and directed NLP
to remove the $10,000 limitation for private duty nursing
care from the PLAN for contract year 1983. On January 6,
1983, after considering the request and direction from
OPM, NLP’s board of directors’ agreed to liberalize the
PLAN and remove the $10,000 nursing care limitation as to
petitioner, on condition that OPM authorize a special
contingency reserve payment to NLP pursuant to OPM’s
authority under 5 C.F.R. 890.503(c)(5).

Thus, petitioner received unlimited nursing care benefits
during calendar year 1983.° Thereafter, the $10,000
limitation on private duty nursing care benefits remained in

5 It is undisputed that the only individuals with authority at NLP or
PRUDENTIAL to approve OPM'’s request, was the NLP Board of
Directors.

® Respondents were reimbursed for these payments from the PLAN'’s
contingency reserve fund.

—

the PLAN for calendar year 1984, and OPM once again
requested that NLP remove the $10,000 limitation as to
petitioner, based upon the aforementioned specific econo-
mic considerations which had remained unchanged.

D. NLP And PRUDENTIAL Refused To
Comply With OPM’s Request To Provide
Petitioner With Unlimited Private Duty
Nursing Care Benefits For Calendar Year
1984, Despite OPM?’s Determination That
Said Payments Were In The Best Interests
Of The PLAN, The United States Govern-
ment, And Federal Employees.

On September 28, 1983, while negotiations were being
conducted between OPM and NLP regarding the terms of
the 1984 PLAN, Kevin J. Burns, Assistant Director of
Insurance Programs at OPM, telephoned Mr. Keith
Micheli, PLAN Administrator at NLP,’ to request that
NLP renew its agreement to provide petitioner with
unlimited private duty nursing care benefits for contract
year 1984. Mr. Micheli thereafter informed NLP’s
President, R. Fain Hambright, of Mr. Burns’ request in a
memo dated September 28, 1983.

On October 27, 1983, Mr. Burns wrote directly to NLP’s
President, Mr. Hambright, informing him that OPM had
determined that it would be in the best interests of the
FEHBA program to continue providing petitioner with
private duty nursing care for calendar year 1984.

? Although Mr. Micheli was the PLAN administrator for NLP, he
was also a full-time paid employee of PRUDENTIAL. Mr. Micheli’s
dual capacity with NLP and PRUDENTIAL reflects the true nature of
the identity of interests between NLP and PRUDENTIAL.

eT A

=

On November 15, 1983, approximately two and one-half
months before the NLP Board of Directors voted on
whether or not to accede to OPM’s request to provide
petitioner with unlimited private duty nursing care benefits
for 1984, Mr. Ken Michler, Senior Claim Consultant at
PRUDENTIAL, informed all PRUDENTIAL claims
individuals involved with the NLP PLAN, that petitioner
would not receive private duty nursing care benefits in
excess of $10,000 for calendar year 1984.

Despite PRUDENTIAL’s pre-determination that peti-
tioner would not receive nursing care benefits in excess of
$10,000, on December 29, 1983, OPM advised petitioner
that OPM had not withdrawn its request that NLP provide
petitioner with unlimited nursing care benefits for contract
year 1984.

On February 6, 1984, the NLP Board of Directors met.
Although no one from OPM was present, PRUDENTIAL’s
Vice-President, John Adelham, and employees Keith
Micheli, and C. L. Fritz attended the meeting. During the
meeting, Mr. Harvey Moritz, Vice-President of NLP,
moved to liberalize the 1984 PLAN and provide petitioner
with unlimited nursing care benefits to the same extent
those benefits were provided during calendar year 1983, on
condition that OPM approve a modification of the 1984
PLAN. The NLP Board of Directors were never advised
that OPM had already requested such a modification! This
was despite the presence of PRUDENTIAL employee
Keith Micheli, and NLP President, Fain Hambright, both
of whom had personally received communications from
OPM indicating such a request.

Mr. Moritz’ motion failed, on a five-to-four vote.® After
the motion failed, another NLP Board member, Mr.

8 The NLP Board of Directors consists of nine members.

=

Victoria, moved to initiate a lawsuit against petitioner
seeking a judicial declaration that the $10,000 nursing care
limitation could lawfully be enforced against petitioner for
1984.

Thereafter, on February 13, 1984, NLP filed a declara-
tory relief action in the United States District Court for the
Southern District of California, seeking a judicial
declaration that the $10,000 nursing care limitation could
be lawfully enforced against petitioner. This action was
filed despite OPM’s uncontradicted determination that
providing petitioner with unlimited nursing care benefits
from the PLAN’s contingency reserve fund was in the best
interests of the PLAN, the Federal Government, and
Federal employees.?

In the declaratory relief action, NLP, as the only
plaintiff, named as defendants only OPM and petitioner’s
father, Nobel Hayes. NLP then brought a motion for
summary judgment seeking a judicial declaration that NLP
was not obligated to pay claims for benefits in excess of
$10,000 for private duty nursing care services rendered to
petitioner during calendar year 1984.

Thereafter, petitioner moved, pursuant to Rule 19 of the

Federal Rules of Civil Procedure, that he be joined as a
defendant in the declaratory relief action brought by NLP

° Petitioner has been able to discern only a single motive for NLP and
PRUDENTIAL’s refusal to comply with OPM's request. Under the
FEHBA program, carriers have a financial incentive to pay, not deny,
claims, because the allocation of administrative expense funds is
determined on an historical claims-paid basis. (Oversight hearing on the
Federal Employee Health Benefits Program—Health Care Costs:
Hearings Before the Subcomm. on Compensation and Employee
Benefits of the Com. on Post Office and Civil Service, 95th Cong., Ist
Sess., p. 11, 55-56 (1977).) Thus, NLP and PRUDENTIAL will receive a
higher allocation of administrative expense funds if petitioner receives
more benefits for acute hospital care than private duty nursing care.

a

on .

against OPM, and submitted a memorandum of points and
authorities in opposition to NLP’s motion for summary
judgment.!°

The district court granted NLP’s motion for summary
judgment, holding that NLP was not required to provide
petitioner with private duty nursing care benefits in excess
of $10,000 during calendar year 1984.

Petitioner appealed the district court’s ruling on NLP’s
declaratory relief action, arguing that 5 U.S.C. §8909(b)(2)
grants OPM the authority to compel a carrier’s concurrence
regarding expenditures from the contingency reserve fund
when such actions are in the best interests of the PLAN.!!
OPM did not appeal the district court’s adverse ruling but,
instead, filed a brief with the Ninth Circuit Court of
Appeals indicating that OPM interpreted §8909(b)(2) as
requiring the carrier’s voluntary assent to any liberalization
of the PLAN. After considering petitioner’s argument, the
Ninth Circuit Court of Appeals concurred with OPM’s
interpretation. (819 F.2d 921 (9th Cir. 1987.))

E. Petitioner’s Claims Under California State
Law.

On April 16, 1984, petitioner filed his state court action
in response to NLP’s declaratory relief action.!?

'0 The district court never issued a ruling on petitioner’s motion to be
joined as a defendant in the action brought by NLP against OPM. The
court did, however, accept for filing petitioner’s points and authorities.

'! The Ninth Circuit Court of Appeals noted that the district court
did not rule on petitioner’s motion to be joined as a defendant in the
NLP vy. OPM action; however, the Ninth Circuit specifically found that
petitioner’s appeal of the district court’s order was effective. Hayes v.
Prudential, 819 F.2d 921, 924 (9th Cir. 1987); p. B-7, infra.

'2 Petitioner stated the following causes of action: 1. Breach of
Contract; 2. Declaratory Relief; 3. Breach of the Duty of Good Faith

eat aia ae

pa es

Petitioner’s state claims included allegations that NLP
and PRUDENTIAL breached California’s implied cove-
nant of good faith and fair dealing by unreasonably refusing
to comply with OPM’s request.'? Petitioner further alleged
that NLP and PRUDENTIAL delayed and failed to make
benefit payments to petitioner which were separate and
distinct from OPM’s request for liberalization'*

and Fair Dealing; 4. Breach of the Statutory Duties under California
Insurance Code §790.03 (West’s 1982); 5. Civil Conspiracy to Breach
the Implied Covenant of Good Faith and Fair Dealing and to Violate
California Insurance Code §790.03; 6. Common Law Fraud; and
7. Breach of Fiduciary Duty.

'3 Although OPM does not have authority under FEHBA to compel
private insurance carriers such as NI.P and PRUDENTIAL to liberalize
their plans and receive payments from the contingency reserve fund, the
implied covenant of good faith and fair dealing under California law
provides a clear remedial mechanism for effectuating the express
purposes of Congress—to provide Federal employees with the best
possible medical insurance at the lowest possible cost. Under California
law, the implied covenant of good faith and fair dealing “requires that
neither party will do anything to injure the right of the other to receive
the benefits of the agreement, and an insurer is obligated to give the
interests of the insured at least as much consideration as it gives its
own interests. [Emphasis added.] Silberg v. California Life Insurance
Co., 11 Cal.3d 452, 460 (1974). More recently, in McCormick v. Sentinel
Life Insurance Co., 153 Cal.App.3d 1030 (1984), the court pointed out
that the “duty of good faith and fair dealing requires an insurer to place
the interests of the insured above its own or its stockholders’ interest{s] in
maximizing gains and limiting disbursements.” Jd. at 1043. Clearly,
NLP and PRUDENTIAL’s decision to maximize their own
administrative expense receipts, by refusing to comply with OPM’s
request designed to minimize costs to Federal employees and the
government, constitutes a per se violation of the implied covenant of
good faith and fair dealing as it exists under California law.

'* Although it is undisputed that petitioner is entitled to additional
nursing care benefits which have not been paid, the Ninth Circuit's
decision precludes petitioner from bringing an action under California
law to compel payment, while at the same time, FEHBA does not

——e—e——w—m—m————

=

As set forth above, the district court ultimately dismissed
plaintiff’s state court causes of action, holding they were
preempted by §8902(m)(1) of FEHBA. The district court’s
order was affirmed by the Ninth Circuit Court of Appeals,
giving rise to the instant Petition for Certiorari.

REASONS FOR GRANTING THE WRIT

THE NINTH CIRCUIT’S DECISION THAT
PETITIONER’S STATE LAW CAUSES OF
ACTION ARE “PREEMPTED” BY §8902
(m1) IS IN DIRECT CONFLICT WITH A
DECISION FROM THE TENTH CIRCUIT —
COURT OF APPEALS

In his briefs to the Ninth Circuit Court of Appeals,
petitioner, citing substantial legislative history, argued that
§8902(m)(1) was intended by Congress to be a statute of
“limited preemption” not intended to displace and supplant
all state law regulating insurers under FEHBA. Petitioner
further relied upon the holding in Howard vy. Group
Hospital Service, 739 F.2d 1508 (10th Cir. 1984) in support
of his argument that FEHBA, in and of itself, does not
provide FEHBA participants with a sufficient remedy to
enforce individual claims for payment of benefits.

In holding that petitioner’s state law claims were
completely preempted by §8902(m)(1), the Ninth Circuit
acknowledged that its decision was not in agreement with
the Tenth Circuit's holding in Howard. Hayes, 819 F.2d at

provide any remedial mechanism to compel the carriers to pay. (See
discussion of Howard v. Group Hosp. Service, 739 F.2d 1508 (10th Cir.
1984) at pp. 15-20, infra.)

926, p. B-12, infra. Instead, the Ninth Circuit, without
discussing the legislative history of §8902(m)(i) or its own
decision that OPM was powerless to require respondents to
act in the best interests of federal employees and the PLAN,
cited such cases as Blue Cross and Blue Shield of Florida,
Inc. v. Department of Banking & Finance, 791 F.2d 1501
(11th Cir. 1986), Myers v. United States, 767 F.2d 1072
(4th Cir. 1985), and Tackitt v. Prudential Insurance Co.,
758 F.2d 1572 (11th Cir. 1985), none of which address the
legislative history of §8902(m)(1) or the distinct lack of
remedies available to FEHBA plan participants under
federal law.

The Ninth Circuit does not take issue with the Tenth
Circuit’s réasoning in Howard, nor does the Ninth Circuit’s
opinion address 5 C.F.R.§890.107, relied upon by the Tenth
Circuit in support of its conclusion that claims for recovery
under FEHBA plans should not involve the federal
government, but should be individual actions brought
directly against the health benefit insurers. Howard, 739
F.2d at 1511.

Unlike the cases interpreting §8902(m)(1) relied upon by
the Ninth Circuit in its opinion below, the Howard court
sets forth a thoughtful and well-reasoned basis for
concluding that §8902(m)(1) does not preempt state law
actions for recovery on individual claims under FEHBA
insurance plans.

In Howard, the Tenth Circuit pointed out that FEHBA
does not contain a procedural mechanism designed to
provide a means of adjudicating individual claims:

There is no adversarial process set up within the
OPM to litigate these claims. Under 5 C.F.R.
§890.105(b), the carrier initially determines
whether a claim is covered under the policy, and if
a claim is denied, 5 C.F.R. §890.106(c) permits a

a, he

claimant to ‘make a written request to OPM’s
Associate Director for Compensation for a review
to determine whether the plan’s denial is in accord
with the terms of OPM’s contract with the carrier
of the plan,’ and 5 USC §8902(j) permits the OPM
to require the carrier to pay. This review
procedure apparently is designed to permit OPM
to resolve major conflicts between itself and the
carrier over interpretation of the plan. The
regulations specifically declare that ‘OPM does
not adjudicate individual claims for payment or
service under health benefit plans.” 5 C.F.R.
§890.105(a). Under a section titled, ‘Legal
Actions’ the implementing regulations for the
FEP program state, ‘An action to recover on a
claim for health benefits should be brought against
the carrier of the health benefits plan.’ 5 C.F.R.
§890.107.'5 This contemplates that claims for
recovery under the plans should noi involve the

=

'5 At the time Howard was decided, 5 C.F.R.§890.107 provided:

An action to compel enrollment of an employee or annuitant
not excluded by §890.102(c) should be brought against the
employing office. An action to recover on a claim for health
benefits should be brought against the carrier of the health
benefits plan. An action to review the legality of OPM’s
regulations or a decision made by OPM should be brought
against the Office of Personnel Management, Washington,
D.C. 20415.

After Howard was decided OPM amended §890.107 to further clarify

what type of actions must be brought against the carrier. §890.107 was

amended, May 21, 1986, to add the following:
However, an enrollee’s dispute of an OPM decision solely
because it concurs in a health plan carrier’s denial of a claim
is not a challenge to the legality of OPM’s decision.
Therefore, any subsequent litigation to recover on the claim
should be brought against the carrier, not against OPM.

A |

ee eS

federal government, but should be individual
actions against the health benefit carrier.
(Emphasis added.)

Id.at 1511.

The Howard court went on to cite with approval,
Director, Edward J. Meyer Memorial Hospital v. Stetz, 433
F.Supp. 323 (W.D.N.Y. 1977). In Stetz, the Civil Service
Commission (now OPM) expressed its desire not to be
involved in the adjudication of claims for individual
benefits.'© Basing its decision upon OPM’s express desire
not to be involved in the adjudication of individual claims,
the Stetz court specifically found that actions to enforce
individual claims under FEHBA programs are specifically
authorized only against the carrier. Jd. at 325. The court
thereafter remanded the action to state court, concluding
that federal question jurisdiction did not exist, and finding
that “the sole recourse for the Stetzes is against the carrier
under the statutory scheme.” Jd. at 326 (Emphasis added).

The Howard court, after reviewing the decisions in
Clearfield Trust Co. v. United States, 318 U.S. 363, 63 S.Ct.
573, 87 L.Ed. 838 (1943) and Miree v. DeKalb County, 433
U.S. 25, 97 S.Ct. 2490, 53 L.Ed.2d 557 (1977), decided that

'© The Civil Service Commission, predecessor to OPM, has long
recognized that the states have authority to regulate and tax FEHBA
insurance carriers. The Civil Service Commission and OPM have always
taken the position that FEHBA was not designed to regulate the
insurance business or to override any state regulatory scheme and that
no legal basis existed for it to issue a regulation restricting the
applicability of state law to FEHBA contracts. For example, the Deputy
General Counsel for the Civil Service Commission reported to a U. S.
House Subcommittee: “It is recommended that the Civil Service
Commission take appropriate action to inform carriers that the fact that
they are administering a federal contract is no reason for circumventing
compliance with applicable state laws.” Report of the Comptroller
General of the United States, MWD 76-49, p. 16, October 17, 1975.

—

various state court adjudications of individual FEHBA
benefit claims would not frustrate the operation of the act
or conflict with any specific national policy. Howard, 739
F.2d at 1509-1511.

The Tenth Circuit’s reasoning in Howard is equally, if
not more, applicable to the facts of the instant case. Without
the application of state law in the instant case, petitioner,
OPM, and all federal FEHBA plan participants would be
left without any remedial scheme that could effectuate the
express Congressional purpose of providing federal
employees with medical insurance benefits at the lowest
possible cost to the government and to the employees.
Application of California state law to petitioner’s individual
claim for benefits will not frustrate the operation of
FEHBA, but will assist in accomplishing the express
purposes of the Act.

Finally, the Howard court, citing Railsback v. United
States, 181 F.Supp. 765 (D.Neb.1960), specifically held that
individual claims for benefits under FEHBA are purely
private controversies in which the federal government
simply does not have an interest sufficient to justify
invoking federal question jurisdiction. Howard, 739 F.2d. at
512. Railsback involved a claim brought under a federal
group life insurance policy negotiated by the Civil Service
Commission (now OPM), a situation not unlike that
presented by the instant action. The Tenth Circuit agreed
with the following passage from Railsback:

In negotiating for and procuring a policy of group
life insurance for its employees, the United States
government acts as an agent and not as the
insurer. There is no policy of insurance between
the government and the employee. It is clear from
a reading of the Act that an employee is insured
under a policy purchased by the Civil Service
Commission, and not under any contract with or

ia ita

—

obligation of the United States. The decedent here
was insured under a policy with Metropolitan.

* * *

Under the facts in this case and the Act in
question, this Court concludes that the plaintiff
has no claim against the United States upon which
relief can be granted, and that the United States
has not consented to a suit against itself for the
claim here made.

The plaintiff here is not without remedy. She may
yet proceed in the State Courts in order that her
claim might be litigated. There is, however, no
jurisdiction in this or any other federal court upon
her claim.

Howard, 739 F.2d at 1512, quoting Railsback v. United
States, 181 F.Supp. 765, 766-67 (D. Neb. 1960).

The Ninth Circuit’s decision in the instant action is
directly in conflict with the thoughtful and well-reasoned
decision of the Tenth Circuit in Howard. As Howard
indicates, federal employees have no remedy for the
adjudication of individual claims under FEHBA and, in
fact, OPM’s implementing regulations require that indivi-
dual claims for recovery of benefits be brought directly
against the insurance carriers. This court’s plenary
consideration of the instant action is essential in order to
provide clarification to the millions of federal employees
insured under FEHBA benefit plans.

an

II

THE NINTH CIRCUIT’S OPINION IS
WHOLLY CONTRARY TO PRINCIPLES OF
PREEMPTION ESTABLISHED BY THIS
COURT

In a recent line of cases, ending with Pilot Life Insurance
Co. v. Dedeaux, — U.S. — , 107 S.Ct. 1549, 95 L.Ed.2d 39
(1987), this court has made ii clear that areas of state law
traditionally left to regulation by the states are not
preempted by federal law unless the federal law both
displaces and supplants state law—that is, when the federal
law provides a_ superseding remedy replacing and
preempting state law. This court has long held that
“whether a certain state action is pre-empted is one of
congressional intent. ‘The purpose of Congress is the
ultimate touchstone.’ ” Pilot Life Ins. Co. v. Dedeaux, at —
U.S. — , 107 S.Ct. 1549, 1552 (1987) citing Allis-Chalmers
Corp. v. Lueck, 471 U.S. 202, 208, 105 S.Ct. 1904, 1909, 85
L.Ed.2d 206 (1985), quoting Malone v. White Motor Corp.,
435 U.S. 497, 504, 98 S.Ct. 1185, 1189, 55 L.Ed.2d 443
(1978), quoting Retail Clerks v. Schermerhorn, 375 US. 96,
103, 84 S.Ct. 219, 222, 11 L.Ed. 179 (1963).

Congress has not explicitly stated to what extent
§8902(m)(1) is intended to preempt state law.'? Thus, the

'7 Petitioner contends that both the specific wording of §8902(m)(1) and
the legislative history which preceded its enactment in 1978, make it
clear that the provision was never intended to supersede State Laws
regulating insurance companies. By its terms, §8902(m)(1) preempts only
state laws regarding coverage or benefits and then only state laws which
are inconsistent with the contractual provisions of the FEHBA plan. It
does not address petitioner’s action against respondents for their
wrongful conduct in unreasonably refusing OPM’s request to provide
benefits. In addition, there is no conflict between §8902(m)(1) and the

courts must sustain petitioner’s state action “unless it
conflicts with federal law or would frustrate the federal
scheme, or unless the courts discern from the totality of the
circumstances that Congress sought to occupy the field to
the exclusion of the States.” Allis-Chalmers yv. Lueck, 471

state remedies sought by petitioner.

The legislative history of §8902(m)(1) was enacted after Congress
received a report by the Comptroller General of the United States on
October 17, 1975. (Report of the Comptroller General of the United
States, MWD 76-49, p. 16, October 17, 1975.) The report is entitled,
“Conflicts Between State Health Insurance Requirements And
Contracts Of The Federal Employee Health Benefits Carriers.” This
report specifically addresses difficulties arising from state laws requiring
medical insurance carriers to provide certain types of benefits. Likewise,
a thorough examination of the Senate and House Reports in hearings
before Senate and House Subcommittees reveals no mention of any
intent by Congress that FEHBA supersede the McCarran-Ferguson Act
and preempt all state laws regulating the business of insurance. In fact,
even the titles of the bill as they changed going in and out of House and
Senate Subcommittees make it clear that Congress intended only a very
limited preemption. The 1978 amendment adding §8902(m)(1) was
initially recorded by the Congressional Record to read: “an act to
amend Chapter 89 of Title 5 of the United States Code to establish
uniformity in federal employee health benefits and coverage by
preempting state or local laws pertinent to such benefits and coverage
which are inconsistent with such contracts.” (Congressional Record,
Volume 123, part 16, p. 19780 (95th Cong., Ist Sess., June 20, 1977).)
The title was thereafter changed to read, “An Act to amend chapter 890
of title 5 of the United States Code to estabish uniformity in federal
employee health benefits and coverage by preempting certain
inconsistent State and local laws which are inconsistent with such
contract.” (emphasis added.) (Congressional Record, Volume 124, Part
12, p. 16243 (95th Cong., 2nd Sess., June 5, 1978).)

It is inconceivable that Congress intended 5 U.S.C. §8902(m)(1) to
entirely emasculate the McCarran-Ferguson Act (15 U.S.C. §1011, et
seq.) without ever mentioning it, or indeed, without enacting specific
federal law designed to supplant state laws currently regulating the
business of insurance.

= =

U.S. 202, 209, 105 S.Ct. 1904, 1910, 85 L.Ed.2d 206 (1985),
quoting Malone v. White Motor Corp., 435 US. at 504, 98
S.Ct. at 1190.

This Court has repeatedly underscored the need to fully
analyze legislative intent with respect to the preemption
issue. In Cort v. Ash, 422 U.S. 66, 78, 45 L.Ed.2d 26, 36, 95
S.Ct. 2080 (1975), this Court set forth the following four-
factored analysis to be used in determining whether state
law is preempted:

In determining whether a private remedy is
implicit in a statute not expressly providing one,
several factors are relevant. First, is the plaintiff
‘one of the class for whose especial benefit the
statute was enacted,’ Texas & Pacific R. Co. v.
Rigsby, 241 U.S. 33, 39, 60 L.Ed 874, 36 S.Ct. 482
(1916) (emphasis supplied}—that is, does the
statute create a federal right in favor of the
plaintiff? Second, is there any indication of
legislative intent, explicit or implicit, either to
create such a remedy or to deny one? See, e.g.,
National Railroad Passenger Corp. v. National
Assn. of Railroad Passengers, 414 U.S. 453, 458,
460, 38 L.Ed.2d 646, 94 S.Ct. 690 (1974)
(Amtrak). Third, is it consistent with the
underlying purposes of the legislative scheme to
imply such a remedy for the plaintiff? See, e.g.,
Amtrak, supra; Securities Investor Protection
Corp. v. Barbour, 421 U.S. 412, 423, 44 L.Ed.2d
263, 95 S.Ct. 1733 (1975); Calhoon v. Harvey, 379
U.S. 134, 13 L.Ed.2d 190, 85 S.Ct. 292 (1964).
And finally, is the cause of action one
traditionally relegated to state law, in an area
basically the concern of the States, so that it
would be inappropriate to infer a cause of action
based solely on federal law? See Wheeldin v.

_—

Wheeler, 373 U.S. 647, 652, 10 L.Ed.2d 605, 83
S.Ct. 1441 (1963); cf. J. F. Case Co. v. Borak, 377
U.S. 426, 434, 12 L.Ed.2d 423, 84 S.Ct. 1555
(1964); Bivens v. Six Unknown Federal Narcotics
Agents, 403 U.S. 388, 394-395, 29 L.Ed.2d 619, 91
S.Ct. 1999 (1971); id. at 400, 29 L.Ed.2d 619, 91
S.Ct. 1999 (Harlan, J., concurring in judgment).

422 US at 78-79.

Applying this four-factor analysis to FEHBA, the only
reasonable conclusion is that Congress did not intend that
FEHBA preempt petitioner’s state law created causes of
action. First, FEHBA obviously creates a right in favor of
petitioner. Second, there is nothing in FEHBA, or the
legislative history of FEHBA, that indicates Congress
intended to create a comprehensive civil enforcement
mechanism designed to replace and supplant state laws
regulating FEHBA insurers. To the contrary, the legislative
history establishes that Congress intended §8902(m)( 1) to be
a statute of “limited” preemption.” Third, it would be
inconsistent with the underlying purposes of FEHBA to
allow respondents to go unregulated and, therefore, expose
thousands of federal employees to the unilateral, self-
serving decisions of FEH®A insurers in conscious
disregard of the welfare of the United States government
and federal employees. Finally, the business of insurance
has traditionally been regulated by state law. See W.
Shernoff, S. Gage, & H. Levine, INSURANCE BAD
FAITH LITIGATION, §§6.01-6.026].

Most recently, this Court addressed the preemption issue
as it applies to the Employees Retirement Security Act of
1974, 29 U.S.C. §§1001, et seg. (ERISA) in Pilot Life
Insurance Co. v. Dedeaux, _ US. —, 107 S.Ct. 1549
(1987). In Pilot Life, the Court set forth a detailed analysis

a

of the legislative history of §502(a) of ERISA,'® finding
that Congress intended that §502 be the exclusive remedy
for all ERISA plan participants, to the exclusion of any and
all state laws. Id. _ U.S. at — , 107 S.Ct. at 1558. This
court found that Congress’ enactment of a detailed civil
enforcement scheme under ERISA clearly reflects Con-
gress’ intent that ERISA’s civil enforcement scheme be
exclusive:

'8 Section 502(a), as set forth in 29 U.S.C. §1132(a) provides:
A civil action may be brought—

(1) by a participant or beneficiary—

(A) for the relief provided for in subsection (c) of this
section, [concerning requests to the administrator for
information]; or

(B) to recover benefits due to him under the terms of
his plan, to enforce his rights under the terms of the plan, or
to clarify his rights to future benefits under the terms of the
plan;

(2) by the Secretary, or by a participant, beneficiary or
fiduciary for appropriate relief under section 1109 of this
title [breach of fiduciary duty];

(3) by a participant, beneficiary, or fiduciary (A) to
enjoin any act or practice which violates any provision of
this subchapter or the terms of the plan, or (B) to obtain
other appropriate equitable relief (i) to redress such
violations or (ii) to enforce any provisions of this subchapter
or the terms of the plan;

(4) by the Secretary, or by a participant, or beneficiary
for appropriate relief in the case of a violation of 1025(c) of
this title [information to be furnished to participants];

(5) except as otherwise provided in subsection (b) of this
subsection, by the Secretary (A) to enjoin any act or practice
which violates any provision of this subchapter, or (B) to
obtain other appropriate equitable relief (') to redress such
violation or (ii) to enforce any provision of this subchapter;

(6) by the Secretary to collect any civil penalty under
subsection (i) of this section.

—_, a

The civil enforcement scheme of §502(a) is one of
the essential tools for accomplishing the stated
purposes of ERISA. The civil enforcement
scheme is sandwiched between two other ERISA
provisions relevant to enforcement of ERISA and
to the processing of a claim for benefits under an
employee benefit plan.... Under the civil
enforcement provisions of §502(a), a plan partici-
pant or beneficiary may sue to recover benefits
due under the plan, to enforce the participant’s
rights under the plan, or to clarify rights to future
benefits. Relief may take the form of accrued
benefits due, a declaratory judgment on entitle-
ment to benefits, or an injunction against a plan
administrator’s improper refusal to pay benefits.
A participant or beneficiary may also bring a
cause of action for breach of fiduciary duty, and
under this cause of action may seek removal of
the fiduciary. §§502(a)(2), 409. In an action under
these civil enforcement provisions, the court in its
discretion may aliow an award of attorney’s fees
to either party. §502(g)....

In sum, the detailed provisions of §502(a) set forth
a comprehensive civil enforcement scheme that
represents a careful balancing of the need for
prompt and fair claims settlement procedures
against the public interest in encouraging the
formation of employee benefit plans. The policy
choices reflected in the inclusion of certain
remedies and the exclusion of others under the
federal scheme would be completely undermined
if ERISA-plan participants and beneficiaries were
free to obtain remedies under state law that
Congress rejected in ERISA. ‘The six carefully
integrated civil enforcement provisions found in

a, ee

§502(a) of the statute as finally enacted
provide strong evidence that Congress did not
intend to authorize other remedies that it simply
forgot to incorporate expressly.’

The deliberate care with which ERISA’s civil
enforcement remedies were drafted and the
balancing of policies embodied in its choice of
remedies argue strongly for the conclusion that
ERISA’s civil enforcement remedies were in-
tended to be exclusive.

107 S.Ct. at 1555-1556.

FEHBA, unlike ERISA, does not contain a detailed and
comprehensive civil enforcement mechanism. Therefore,
petitioner’s state law causes of action should not, and
cannot be preempted by any civil enforcement mechanisms
in FEHBA. Certainly, if petitioner had an opportunity to
avail himself of a comprehensive civil enforcement scheme,
such as the one set forth in §502(a) of ERISA, preemption
would appropriately apply to petitioner’s state law causes of
action. However, a holding that FEHBA preempts state-
created remedies deprives petitioner and all federal
employees of any remedy to enforce their rights under
FEHBA programs.

In the instant action, the Ninth Circuit incorrectly relied
upon Pilot Life, in holding that petitioner’s state causes of
action are preempted by FEHBA. In making this
determination, the Ninth Circuit clearly violated the well-
established principles of preemption set forth by this court
in cases such as Pilot Life, Massachusetts Mutual Life
Insurance Co. v. Russell, 473 U.S. 134, 105 S.Ct. 3085, 87
L.Ed.2d 96 (1985), Allis Chalmers Corp. v. Lueck, 471 U.S.
202, 105 S.Ct. 1904, 85 L.Ed. 206 (1985), and Cort v. Ash,
422 US. 66, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975).

ani
III

THE NINTH CIRCUIT’S FINDING OF PRE-
EMPTION IS IN DIRECT CONFLICT WITH
OPINIONS ISSUED BY CALIFORNIA
COURTS AND RAISES IMPORTANT
ISSUES CONCERNING THE RIGHTS OF
STATES TO REGUEATE THE BUSINESS OF
INSURANCE

In Fields v. Blue Shield of California, 163 Cal.App.3d
570, 209 Cal.Rptr. 781 (1985), the court specifically found
that §8902(m)(1) provides “limited preemption” and does
not preclude recovery by FEHBA plan participants against
FEHBA insurers based upon California law. Id. at 589, 209
Cal.Rptr. at 793. The California Court of Appeals pointed
out that counsel for Blue Shield, a FEHBA insurer, “‘was
unable to cite any federal law which would preclude
recovery by Dr. Fields on the state action.” Id.

The California decision in Fields is not surprising given
the history of state primacy in the field of insurance. In
1945, Congress reestablished the national policy of state
primacy in the regulation of insurance by enacting the
McCarran-Ferguson Act, 15 U.S.C. §§1012, et seg. The
McCarran-Ferguson Act provides, in pertinent part:

Regulation by State law: Federal law relating
specifically to insurance, applicability of certain
Federal laws after June 30, 1948.(a) The business
of insurance, and every person engaged therein,
shall be subject to the laws of the several States
which relate to the regulation or taxation of such
business.

(b) No Act of Congress shall be construed to
invalidate, impair, or supersede any law enacted

_— se

by any State for the purpose of regulating the
business of insurance... .

15 U.S.C.§ 1012 (1976) (emphasis added).

In SEC vy. National Securities, Inc., 393 U.S. 453, 89 S.Ct.

564, 21 L.Ed. 668 (1969), this Court observed:

The McCarran-Ferguson Act was an attempt to
turn back the clock, to assure that the activities of
insurance companies in dealing with their
policyholders would remain subject to state -
regulation.

. Insurance companies may do many things
which are subject to paramount federal regulation;
only when they are engaged in the ‘business of
insurance’ does the statute apply .... Congress
was concerned with the type of state regulation
that centers around the contract of insurance, the
transaction which Paul v. Virginia[, 8 Wall. 168,
19 L.Ed. 357] held was not ‘commerce.’ The
relationship between insurer and insured, the type
of policy which could be issued, its reliability,
interpretation, and enforcement-these were the
core of the ‘business of insurance.’ Undoubtedly,
other activities of insurance companies relate so
closely to their status as reliable insurers that they
too must be placed in the same class. But whatever
the exact scope of the statutory term, it is clear
where the focus was—it was on the relationship
between the insurance company and the policy-
holder. Statutes aimed at protecting or regulating
this relationship, directly or indirectly, are laws
regulating the ‘business of insurance.’

Id. at 459-60, 89 S.Ct. at 568.

It is inconceivable that Congress intended FEHBA to
supersede the McCarran-Ferguson Act and thereby totally

= en

emasculate the rights of the states to protect and regulate
the relationship between- its citizens and insurers doing
business within those states. The facts of this case establish
that Congress did not enact a comprehensive civil
enforcement scheme capable of effectuating the express
purpose of FEHBA, to provide federal employees with
medical insurance benefits at the lowest possible cost. Thus,
the only civil enforcement scheme capable of effectuating
the express purposes of FEHBA, under the facts of this
case, is California state law.

The Ninth Circuit’s opinion in the instant action raises
serious and important issues concerning the continued
rights of states to regulate the business of insurance.

CONCLUSION

For these various reasons, this petition for certiorari
should be granted. Petitioner respectfully submits that
Congress did not intend that FEHBA completely preempt
all state laws regulating insurers under FEHBA plans. To
the contrary, the legislative history of FEHBA, as well as
the distinct absence of any comprehensive civil enforcement
scheme designed to effectuate the express purposes of
FEHBA, reflect Congress’ intent that §8902(m)(1) be a
statute of “limited preemption.” The irreconcilable dis-
agreement between the circuit courts on the preemption
issue reflects the clear need for resolution of these issues by
this Honorable Court.

DATED: November 12, 1987
Respectfully submitted,

Law Offices of

SHERNOFF & LEVINE

By: HARVEY R. LEVINE
RICK L. BOVE

APPENDIX “A”

A-1

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF CALIFORNIA

FILED, JAN 22, 1985

ENTERED, JAN 23, 1985
Clerk, U.S. District Court
Southern District Of California
By S. Miller Deputy

KIP HAYES, Civil No.
84-1245-N (M)

Plaintiff,

V.
ORDER GRANTING

PRUDENTIAL INSURANCE DEFENDANTS '
COMPANY, NATIONAL MOTION FOR
LEAGUE OF POSTMASTERS SUMMARY

OF THE UNITED STATES, JUDGMENT

and NOBEL A. HAYES,

Defendants.

mm me ee ee ee ee ee ee ee”

This matter came before this Court
on January 14, 1985, for hearing on the
motion for summary judgment of
defendants Prudential Insurance Company

and National League of Postmasters.

A-2

Plaintiff Kip Hayes appeared by Harvey
R. Levine of Shernoff & Levine.
Defendant Prudential Insurance Company
appeared by James S. Cline of Adams,
Duque & Hazeltine, and defendant
National League of Postmasters appeared
by John T. Kotelly of Dickstein, Shapiro
& Morin. Upon consideration of the
arguments of counsel and the moving and
opposing papers:

IT IS HEREBY ORDERED that
defendants’ motion for summary judgment
is granted as to all counts of the
plaintiff's complaint. This Court
concludes as to counts one and two of
the complaint that benefits for private
duty nursing care have been lawfully

reduced to $10,000 per person per year

in the 1984 Postmasters Benefit Plan and

A-3

that defendants are not obligated to pay
claims for private duty nursing benefits
in excess of this amount during 1984 nor
during any year thereafter so long as
the limitation remains. As to the
remaining counts in plaintiff's
complaint, this Court concludes that
these claims under California state laws
are preempted under Title V, United
States Code section 8902(m) (1).

IT IS SO ORDERED.

Dated: January 22, 1985.

LELAND C. NIELSEN,
United States District Judge

Copies to:

John T. Kotelly

DICKSTEIN, SHAPIRO & MORIN
2101 L Street, N.W.
Washington, D.C. 20037

Marcia Hughes

CASEY, GERRY, CASEY,
WESTBROOK, REED & HUGHES
110 laurel Street

San Diego, CA 92101

Harvey R. Levine

Rick L. Bove

SHERNOFF & LEVINE

1200 Third Avenue, Ste. 1400
San Diego, CA 92101-4157

John J. Robinson,
Assistant U. S. Attorney

Raymond J. Coughlan, Jr.
LILLICK, MCHOSE & CHARLES
110 West A St., Ste. 1260
San Diego, CA 92101

James S. Cline

ADAMS, DUQUE & HAZELTINE
523 W. Sixth Street

Los Angeles, CA 90014

APPENDIX ‘“B”

FOR PUBLICATION
UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT
Kip Hayes.
Plaintiff-Appellant, Nos. 85-5527;
"4 85-5528
PRUDENTIAL INSURANCE COMPANY : D.C. Nos.

OF AMERICA, NATIONAL LEAGUE OF CV-84-1245-LCN

POSTMASTERS OF THE UNITED CV-84-0341-LCN

STATES, et al., OPINION
Defendants-Appellees.

Argued and Submitted
November 4, 1985—San Diego, California

Filed June 15, 1987

Before: James R. Browning, Charles Wiggins and
Melvin Brunetti, Circuit Judges.

Opinion by Judge Brunetti
Appeal from the United States District Court

for the Southern District of California
Leland C. Nielsen, District Judge, Presiding

SUMMARY

Public Employees
Appeal from two summary judgments. Affirmed.

Appellant Kip Hayes (Kip) is the son of Nobel Haves
(Haves). a retired federal employee. Kip was injured in a high

z HAYES v. PRUDENTIAL INSURANCE COMPANY

school football game and became a respirator-dependent
quadriplegic requiring 24-hour private duty nursing care. At
the time of the injury Kip was covered as a family member on
his father’s plan issued under the FEHBA. The plan, adminis-
tered by Aetna Life Insurance Company, placed no monetary
limit on the benefits for private duty nursing care. When the
Aetna plan was modified to eliminate such benefits, Hayes
enrolled in another FEHBA plan during an open season
enrollment period during which changes were permitted. In
1982 Hayes switched to a plan offered by the National League
of Postmasters (NLP). In 1983 the NLP was formulated to
place a $10,000 limit on benefits for private duty nursing
care. The limit was lifted for 1983, but instituted for 1984 and
future years.

In February 1984, NLP filed a declaratory relief action in
district court naming the Office of Personnel Management
(OPM) [which negotiated with NLP regarding the scope of
coverage of the plan] and Hayes as defendants. The district
court granted summary judgment in favor of NLP on the
ground that benefits for private duty nursing care lawfully
had been reduced to $10,000 in the 1984 plan. In April 1984
Kip brought an action against NLP in state court arguing that
his enrollment in the 1982 plan gave him a vested contractual
right to receive, indefinitely, unlimited private duty nursing
care benefits. The action was removed to federal district court
where the court granted summary judgment in favor of the
defendants on the grounds that the benefits lawfully had been
reduced, and that the state law claims were preempted under
FEHBA.

{1] Although neither Hayes or the OPM appealed the
declaratory judgment action in favor of NLP, Kip requested
that he be joined as a defendant in that action and the court
consolidated the two cases. Kip therefore effectively appealed
from the summary judgment in the declaratory relief suit.

[2] An FEHBA provision requiring that a carrier agree to
pay in an individual case if OPM finds the family member is

Hayes v. PRUDENTIAL INSURANCE COMPANY 3

entitled to payment under the terms of the contract does not
grant OPM authority unilaterally to alter the terms of the
plan. but only requires that the carrier comply with the
OPM’s interpretation of the plan. OPM’s consistently held
view is that appellant is not entitled to unlimited benefits
under the plan. [3] Appellant also urges that an FEHBA provi-
sion providing for a contingency reserve grants OPM author-
itv to compel a carrier to provide benefits beyond those in the
negotiated plan. But the OPM's interpretation of the provi-
sion as requiring the carrier's concurrence before contingency
reserve funds may be used is entitled to substantial deference.
[4] Consistent with this view the OPM never invoked author-
itv to direct payment of the additional benefits, and appellant
has not challenged OPM’s interpretation of its authority. [5]
Appellant also contends that the Catastrophic Protection pro-
vision of the plan allows the benefits, [6] but this provision
only requires payment of 100% of eligible expenses (as
opposed to 80%) in some circumstances and does not operate
independent of the $10,000 limitation on private nursing
care. [7] The limitation on private duty nursing care restricts
the eligible expenses subject to the Catastrophic Protection
provision.

[8] Appellant’s contention that his state law tort and con-
tract claims are not preempted by FEHBA because the claims
relate to the manner in which the claim was processed. not to
the nature or extent of coverage or benefits. draws a distinc-
tion that cannot be made. Tort claims arising out of the man-
ner in which a benefit claim is handled are not separable from
the terms of the contract. [9] Because the state law claims
invariably expand obligations under the terms of the plan. the
claims are inconsistent with the plan and preempted by
FEHBA. This holding is supported by the Supreme Court’s
decision that the Emplovee Retirement Income Secunity Act
preemipts state common law tort and contract claims for ben-
efits. To the extent the state law claims are predicated on an
alleged obligation to provide benefits in excess of the $10,000
limit the claims are moot.

|
. |

4 HAYES v. PRUDENTIAL INSURANCE COMPANY

COUNSEL

Harvey R. Levine, Rick L. Bove, and Janet Lewis, San Diego,
California, for the plaintiff-appellant.

Edward R. Cohen, John T. Kotelly, Ira Mitzner and Elaine
Metlin, Washington. D.C.; James S. Cline, Los Angeles, Cali-
fornia; R. J. Coughlin, Jr., San Diego, California, for the
defendants-appellees.

Phillip S. Neal, Washington, D.C.; James R. Barnett, Wash-
ington, D.C., for the amicus curiae.

OPINION
BRUNETTI, Circuit Judge:

This is an appeal from summary judgments granted in two
consolidated cases. Kip Hayes v. Prudential Insurance Co.,
No. 85-5527 (D.C. No. 84-1245), and National League of
Postmasters of the United States v. United States Office of Per-
sonnel Management and Nobel Hayes, No. 85-5528 (D.C. No.
84-0341). We are asked to review the district court’s rulings
that federal employee health benefits lawfully may be reduced
from year to year, and that the Federal Employee Health Ben-
efits Act preempts state law tort and contract actions.

Though we are moved by the compelling circumstances
surrounding Kip Hayes and his family, we find that the stat-
ute and health benefits plan we are called upon to construe
require an unmistakable result. Until Congress acts to ensure
continued coverage for federal enrollees who require long-
term care. this court will be powerless to provide appellant
with the remedy he seeks.

We affirm the district court.

Hayes v. PRUDENTIAL INSURANCE COMPANY 5

I. THE FEDERAL EMPLOYEE HEALTH BENEFITS
ACT

The Federal Emplovee Health Benefits Act (FEHBA) estab-
lished a comprehensive program to provide federal employ-
ees and retirees with subsidized health care benefits. 5 U.S.C.
§§ 8901-8913 (1982 & Supp. 1987). Under the Act. the
. United States does not act as an insurer, but. through the
Office of Personnel Management (OPM), contracts with vari-
Ous private carriers to develop health care plans with varying
coverages and costs. The plans are for a term of one year, and
are renegotiated annually.

After OPM negotiates changes with the carriers all federal
enrollees are permitted to switch enrollment from one plan to
another, regardless of their state of health, during a period
called “open season.” Each enrollee thus may obtain the most
beneficial plan but is not guaranteed the same coverage in
future vears that had been available the preceding vear.

The National League of Postmasters (NLP or Postmasters)
is a nonprofit corporation and a carrier under FEHBA. Each
year, OPM and Postmasters negotiate a contract that deter-
mines the benefits Postmasters will provide that year to
enrollees in the Postmasters Health Benefits Plan (Plan). The
contract between OPM and Postmasters sets forth the precise
terms of coverage under the Plan. OPM then issues a Post-
masters Benefit Brochure (Brochure) which provides a com-
plete description of the benefits available to enrollees that
year.

For several years, Prudential Insurance Company of Amer-
ica (Prudential) has entered into agreements with Postmas-
ters whereby Prudential issues an annual policy to
Postmasters which incorporates the terms and conditions of
the Brochure as negotiated by Postmasters and OPM for the
year. Pursuant to the policy. Prudential administers certain
claims presented to Postmasters for payment and. in effect.

6 HAyYES v. PRUDENTIAL INSURANCE COMPANY

guarantees that Postmasters can pay the benefits due enroll-
ees under the Plan.

II. FACTS AND PROCEEDINGS

Appellant Kip Haves is the son of Nobel! Haves. a retired
federal emplovee. Appellant was injured in a high school foot-
ball game in November 1976, and was rendered a respirator-
dependent quadriplegic requiring 24-hour private duty nurs-
ing care. At the time of his injury, appellant was covered as a
family member under a FEHBA plan in which his father was
enrolled. This plan, administered by Aetna Life Insurance
Company, placed no monetary limit on the benefits for pri-
vate duty nursing care. When the Aetna plan later was modi-
fied to eliminate private duty nursing care benefits, Nobel
Hayes enrolled during open season in another FEHBA plan
that did provide unlimited benefits for private duty nursing
care. By 1982, Nobel Hayes again had switched coverage, and
enrolled in the plan offered by Postmasters, which at the time
had no limits on benefits for private duty nursing care.

In October 1982, following negotiations between OPM and
Postmasters, the 1983 Postmasters Plan was formulated to
place a $10,000 limit on benefits for private duty nursing
care. By subsequent agreement between OPM and Postmas-
ters, the 1983 Plan was amended to remove the $10,000 limit.

The Postmasters Plans for 1984 and 1985 again contained
a $10,000 limit on benefits for private duty nursing care. The
1984 and 1985 Plans were not amended and, through the date
of the summary judgments in both cases, contained the
$10,000 limitation.

In February 1984, Postmasters filed in district court a
declaratory relief action naming OPM and Nobel Hayes as
defendants. NLP v. OPM, D.C. No. CV-84-0341-LCN. Post-
masters sought a declaration that private duty nursing care
benefits provided under its 1982 Plan could be reduced in

Sa nian ht htt Sr SG ae cin asintaie nila em

See eee es ee eet

ee ee ee ee ae

Hayes v. PRUDENTIAL INSURANCE COMPANY 7

subsequent policy contract years and that under its 1984 Plan
Postmasters was not obligated to provide Kip Hayes with pri-
vate nursing benefits in excess of $10,000.

In April 1984, appellant brought an action against Pruden-
tial and Postmasters in the Superior Court for the State of
California. The action was removed to federal district court.
Haves v. Prudential, D.C. No. CV-84-1245-LCN. Appellant
alleged that his enrollment in the 1982 Plan gave him a vested
contractual right to receive, indefinitely, unlimited private
duty nursing care benefits, and that Postmasters and Pruden-
tial had breached the contract by refusing to provide unlim-
ited benefits in 1984. Based on this theory of his rights under
the Plan, appellant sought damages alleging various state law
causes of action including breach of a duty of good faith and
fair dealing. and breach of Cal. Ins. Code § 790.03 (West
1982).

The district court granted summary judgment in favor of
Postmasters in NLP v. OPM on the ground that benefits for
private dutv nursing care lawfully had been reduced to
$10.000 in the 1984 Postmasters Plan and that Postmasters
accordingly was not required to pay claims in excess of that
amount.

In Haves v. Prudential, the court granted summary judg-
ment in favor of defendants on the grounds that the benefits
lawfully had been reduced, and that the state law claims were
preempted under FEHBA. 5 U.S.C. § 8902(m)(1).

III. DISCUSSION
1. Effective Appeal.
Postmasters and OPM contend that there has been no

effective appeal from NLP v. OPM. The basis for this conten-
tion is that neither OPM nor Nobel Haves. the named defen-

8 Hayes v. PRUDENTIAL INSURANCE COMPANY

dants, have appealed, and the appeal by Kip Hayes is not
effective because he was not a party to the action.

[1] A motions panel of this court, however, has determined
that Kip Hayes’ appeal in NLP v. OPM was effective. In his
Memorandum of Points and Authorities in Opposition to
Motion for Summary Judgment in the NLP v. OPM action.
appellant requested that the district court join him as a defen-
dant pursuant to Fed. R. Civ. P. 19. The district court treated
appellant’s request as a motion for consolidation with Hayes
v. Prudential, and consolidated the cases. Consolidation by
the district court led the motions panel to conclude that Kip
Hayes effectively appealed from the summary judgment in
NLP v. OPM.

2. Standard of Review.

We review de novo the district court’s decision regarding
the $10,000 limit on benefits and the preemption of state law
claims. See Darring v. Kincheloe, 783 F.2d 874, 876, (9th Cir.
1986) (grant of summary judgment is reviewed de novo).
Summary judgment is appropriate when there are no genuine
issues of materia! fact and the moving party is entitled to
judgment as a matter of law. Fed. R. Civ. P. 56(c).

3. $10,000 Limit on Nursing Care Benefits.

Appellant contends that the district court erred in granting
summary judgment for appellees because (1) Postmasters and
Prudential were required to comply with an OPM directive to
provide him unlimited private duty nursing care benefits, and
(2)the Plan’s Catastrophic Protection provision requires
Postmasters and Prudential to provide nursing care benefits
without regard to the $10,000 limitation stated elsewhere in
the policy.

a) OPM Directive.
Appellant cites two sections of FEHBA which he contends

grant OPM the authority to require Postmasters and Pruden-
tial to provide him with unlimited nursing care benefits.

HAYES v. PRUDENTIAL INSURANCE COMPANY 9

[2] 5 U.S.C. § 8902(j) provides that “[eJach contract under
this chapter shall require the carrier to agree to pay for or pro-
vide a health service . . . in an individual case if [OPM] finds
that the ... family member .. . is entitled thereto under the
terms of the contract.” This provision does not grant OPM
authority unilaterally to alter or amend the terms of the Plan:
it requires only that the carrier comply with OPM’s interpre-
tation of the Plan. OPM’s consistently held view is that,
under the Plan’s terms, appellant is not entitled to unlimited
benefits. As a result, Postmasters and Prudential were not
required, under section 8902(j), to provide appellant benefits
in excess of the $10,000 limit.

Appellant also cites as support 5 U.S.C. § 8909(b)(2). That
section states that OPM shall set aside not more than three
percent of the payments to each FEHBA plan as a contin-
gency reserve which may be used, among other purposes, to
increase the benefits in the plan from which the reserves are
derived. The contingency reserve is a resource OPM can use
in negotiations with a carrier to expand plan benefits. The
availability of such funds was central to the agreement
between OPM and Postmasters to remove the $10,000 limit
from the 1983 Plan.

[3] Appellant urges that section 8909(b)(2) grants OPM
authority to compel a carrier to provide benefits beyond those
in the negotiated plan. The provision apparently has not been
construed by the courts. OPM interprets the provision as
requiring the carrier's concurrence before contingency
reserve funds may be used to extend benefits beyond those
within the express terms of the Plan. OPM’s interpretation of
the provision is entitled to substantial deference, and will be
upheld unless unreasonable. See Filiberti v. Merit Sys. Protec-
tion Bd., 804 F.2d 1504, 1508 (9th Cir. 1986)

[4] We do not decide the nature or extent of OPM’s author-
itv under section 8909(b)(2). Consistent with its view that the
carrier's concurrence was necessary, OPM never invoked

10 Haves v. PRUDENTIAL INSURANCE COMPANY

authority under the section to direct Postmasters to provide
additional benefits. Appellant has not challenged OPM’s
interpretation of its authority under section 8909(b)(2), nor
has he alleged that OPM had a duty to ensure that contin-
gency reserve funds be used to provide him with increased
benefits. OPM. in fact. was never named as a defendant in
appellant's suit to obtain nursing care benefits.

Contrary to appellant’s repeated assertions, the record
indicates only that OPM unsuccessfully sought Postmasters’
voluntary agreement to amend the 1984 contract. We find no
legal or factual bases for appellant's claim that Postmasters or
Prudential violated a binding OPM directive.

b) Catastrophic Protection.

[5] Appellant next contends that the Catastrophic Protec-
tion provision of the Plan ensures him unlimited private duty
nursing care benefits. The provision, at page 20 of the Bro-
chure, states:

CATASTROPHIC PROTECTION

Under the High Option. if, in a calendar year, the
out-of-pocket expenses for coinsured eligible
expenses exceed $1,000 for a person under Self Only
($2,000 per family under Self and Family) the Plan
will pay 100% of the eligible expenses during the
remainder of that calendar year.

Expenses incurred for the treatment of mental. psv-
choneurotic and personality disorders are not
included under the Catastrophic Protection Benefit.

[6] This provision requires Postmasters to pay 100% of eli-
gible expenses (when out-of-pocket expenses exceed a certain
amount) as opposed to 80% of such expenses it would pay in
other situations. The provision does not. however. operate

a

Hayes v. PRUDENTIAL INSURANCE COMPANY 1]

independent of the $10,000 limitation on private nursing
care.

[7] The operative language here is the phrase “eligible
expenses.” The eligible expenses for nursing care are set out
immediately above the Catastrophic Protection provision:

PRIVATE DUTY NURSING CARE BENEFIT

Benefits for private duty nursing care by a profes-
sional registered nurse (R.N.), licensed practical
nurse (L.P.N.), or a licensed vocational nurse
(L.V.N.) are limited to a maximum of $10,000 per
person per calendar year.

Appellant's contention that the Catastrophic Protection pro-
vision requires Postmasters to provide unlimited private
nursing care benefits renders meaningless the phrase “eligible
expenses” and ignores the $10,000 limitation stated plainly
on the same page of the Brochure and again on page 27. See
Garvey v. Prudential Ins. Co. of America, 596 F. Supp. 1119,
1126 (E.D. Pa. 1984) (Catastrophic Protection provision is
subject to the $10,000 limitation on benefits for private duty
nursing care). We find no merit in appellant’s alternative
argument that the Brochure language is ambiguous and
should be construed in his favor. See Jd. at 1125-26.

4. State Law Claims.

The final issue before us concerns the extent to which
FEHBA preempts state law. The district court granted sum-
mary judgment for appellees in Hayes v. Prudential on this
issue on the ground that FEHBA’s section 8902(m)(1) pre-
empted appellant’s state law claims.

This section reads:

The provisions of any contract under this chapter
which relate to the nature or extent of coverage or

12 Hayes v. PRUDENTIAL INSURANCE COMPANY

benefits (including payments with respect to bene-
fits) shall supersede and preempt any State or local
law, or any regulation issued thereunder. which
relates to health insurance or plans to the extent that
such law or regulation is inconsistent with such con-
tractual provisions. .

5 U.S.C. §8902(m)(1). The policy underlying section
8902(m)(1) is to ensure uniformity in the administration of
FEHBA benefits. See H.R. Rep. No. 282. 95th Cong.. Ist
Sess. 1, 4 (1977).

The parties advance differing views concerning the extent
of federal preemption under FEHBA. Appellees contend that
the preemption provision is extremely broad, while appellant
characterizes the provision as one of “limited preemption”
which precludes only those state claims that apply to the
“benefit structure” of the plan. The courts are not in agree-
ment on this question. Compare Blue Cross & Blue Shield of
Florida, Inc. v. Department of Banking and Fin., 791 F.2d
1501 (11th Cir. 1986)(Florida’s Unclaimed Property Act pre-
empted to the extent it conflicts with federal employee benefit
plan); Mvers v. United States, 767 F.2d 1072, 1074 (4th Cir.
1985) (state law which purports to allow recovery of addi-
tional benefits not contemplated by a federal insurance con-
tract must be deemed inconsistent with and preempted by
FEHBA): and Tackitt v. Prudential Ins. Co., 758 F.2d 1572,
1575 (11th Cir. 1985)(“the interpretation of health insurance
contracts is controlled by federal, not state, law”) with How-
ard v. Group Hosp. Serv., 739 F.2d 1508, 1510-12 (10th Cir.
1984) (approving state law interpretation of FEHBA Plan
provisions).

[8] Appellant contends that his state law claims’ are not

‘Appellant alleged the following state law causes of action: (1) breach of
contract, (2) breach of the implied covenant of good faith and fair dealing,
(3) breach of duties under Cal. Ins. Code § 790.03 (West 1982). (4) civil
conspiracy to breach the implied covenant of good faith and fair dealing
and to violate Cal. Ins. Code § 790.03 (West 1982). (5) common law fraud.
and (6) breach of fiduciary duty.

Ta al hin ah ast Sone Shi 2

HAYES V. PRUDENTIAL INSURANCE COMPANY 13

preempted under section 8902(m)(1), because the claims
relate to the manner in which Postmasters and Prudential
processed his benefits, and not to the “nature or extent of cov-
erage or benefits.” No such distinction can be made. Tort
claims arising out of the manner in which a benefit claim is
handled are not separable from the terms of the contract. See
Allis-Chalmers Corp. v. Lueck, 471 U.S. 202, 213-20 (1985)
(state tort claim stemming from manner in which a Labor
Management Relations Act insurance benefit claim was han-
dled is not independent of insurance contract and therefore is
preempted by federal law). Moreover, the claims “relate to”
the plan under section 8902(m)(1) as long as they have a con-
nection with or refer to the plan. Blue Cross, 791 F.2d at
1504. All appellants’ state law claims refer to the plan, and
therefore fall under the preemption clause.

[9] Because the state law claims invariably expand appel-
lees’ obligations under the terms of the Plan, the claims are
inconsistent with the Plan and, hence, preempted under
§ 8902(m)(1). Our holding is supported by the Supreme
Court’s recent decision that the Employee Retirement
Income Security Act (ERISA) preempts state common law
tort and contract claims for benefits under an ERISA-
regulated plan. Pilot Life Ins. Co. v. Dedeaux, 55 U.S.L.W.
4471 (U.S. Apr. 6, 1987)(No. 85-1043). ERISA’s preemption
clause is similar to section 8902(m)(1) of the FEHBA.? And
the Court held that the state claims were preempted despite
a saving clause, 29 U.S.C. § 1144(b)(2)(A), which has no
counterpart in the FEHBA. Thus, we hold Hayes’ state law
claims are preempted by the FEHBA. We note that, to the
extent the state law claims are predicated on an alleged obli-
gation of appellees to provide benefits in excess of the
$10,000 limit stated in the Plan, the claims are moot in light
of our ruling that no such obligation existed.

*ERISA’s preemption clause states that “the provisions of this subchap-
ter... shall supersede any and all state laws insofar as they may now or
hereafter relate to any employee benefit plan. .. .” 29 U.S.C. § 1144(a).

14. Hayes v. PRUDENTIAL INSURANCE COMPANY

IV. CONCLUSION

Appellant has brought an effective appeal from the sum-
mary judgment in NLP v. OPM. Postmasters lawfully reduced
private duty nursing care benefits to $10.000 in the 1984 and
~ 1985 Plans, and was not required by OPM or the Cata-
strophic Protection provision to provide appellant with bene-
fits in excess of that amount. Appellant’s state law claims are
preempted under 5 U.S.C. § 8902(m)(1). The judgment of the
district court is AFFIRMED.

APPENDIX ‘“C”

C=-1

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

FILED, JUL 21 1987
Cathy A. Catterson, Clerk
U.S. Court of Appeals

CA Nos.
85-5527
85-5528

KIP HAYES,
Plaintiff-Appellant,

vs. DC Nos.

COMPANY OF AMERICA, CV-84-0341-LCN
NATIONAL LEAGUE OF
POSTMASTERS OF THE
UNITED STATES, et al.,

)
)
)
)
)
)
PRUDENTIAL INSURANCE ) CV-84-1245-LCN
)
)
) ORDER
)
)
)

Defendants-Appellees.
)

Before: BROWNING, WIGGINS and BRUNETTI,
Circuit Judges.
Appellant's petition for rehearing

is denied.

- APPENDIX ‘“D”

ee

D-1
Federal Employees Health Benefits Act
("FEHBA") 5 U.S.C.
§ 8901. Definitions
For the purpose of this chapter--
(1) “employee” means--

(A) an employee as defined by
section 2105 of this title;

(B) a Member of Congress as
defined by section 2106 of this
title;

(C) a Congressional employee as
defined by section 2107 of this
title;

(D) the President;

(E) an individual employed by

the government of the District of
Columbia;

(F) an individual employed by

Gallaudet College; and

se ll

D=-2

(G) an individual employed by a
county committee established under
section 590h(b) of title 16; |
but does not include--
(i) an employee of a corporation
supervised by the Farm Credit
Administration if private interests
elect or appoint a member of the
board of directors;
(ii) an individual who is not a
citizen or national of the United
States and whose permanent duty
station is outside the United
States, unless the individual was
an employee for the purpose of this
chapter on September 30, 1979, by
reason of service in 4&n Executive

agency, the United States Postal

Service, or the Smithsonian

D-3

Institution in the area which was
then known as the Canal Zone;

(iii) an employee of the
Tennessee Valley Authority; or

(iv) an employee excluded by
regulation of the Office of
Personnel Management under section
} 8913(b) of this title;

(2) “Government" means the Government
of the United States and the government

of the District of Columbia;

(3) “annuitant” means--

| (A) an employee who retires on an
| immediate annuity under subchapter
III of chapter 83 of this title or
another retirement system for
employees of the Government, after
5 or more years of service or for

disability;

D-4

(B) a member of a family who
receives an immediate annuity as

the survivor of an employee or of a

retired employee described by

subparagraph (A) of this paragraph; |
(C) an employee who receives |
monthly compensation under
subchapter I of chapter 81 of this
title and who is determined by the
Secretary of Labor to be unable to
return to duty; and
(D) a member of a family who
receives monthly compensation under
subchapter I of chapter 81 of this
title as the surviving beneficiary
of--

(i) an employee who dies as

a result of injury or illness

D-5

compensable under that
subchapter; or

(ii) a former employee who
is separated after having
completed 5 or more years of
service and who dies while
receiving monthly compensation
under that subchapter and who
has been held by the Secretary
to have been unable to return

to duty;

(4) “servyce", as used by paragraph
(3) of this section, means service which
is creditable under subchapter III of

chapter 83 of this title;

| (5) "member of family" means the
spouse of an employee or annuitant and
an unmarried dependent child under 22

years of age, including--

D-6

(A) an adopted child or
recognized natural child; and
(B) a stepchild, or foster child
but only if the child lives with
the employee or annuitant in a
regular parent-child relationship;
or such an unmarried dependent child
regardless of age who is incapable of
self-support because of mental or
physical disability which existed before
age 22;

(6) “health benefits plan" means a
group insurance policy or contract,
medical or hospital service agreement,
membership or subscription contract, or
similar group arrangement provided by a
carrier for the purpose of providing,
paying for, or reimbursing expenses for

health services;

net is rT ee

D-7

(7) “carrier” means a voluntary
association, corporation, partnership,
or other nongovernmental organization
which is lawfully engaged in providing,
paying for, or reimbursing the cost of,
health services under group insurance
policies or contracts, medical or
hospital service agreements, membership
or subscription contracts, or similar
group arrangements, in consideration of
premiums or other periodic charges
payable to the carrier, including a
health benefits plan duly sponsored or
underwritten by an employee
organization;

(8) “employee organization" means an
association or other organization of
employees which is national in scope, or

in which membership is open to all

D-8

employees of a Government agency who are
eligible to enroll in a health benefits
plan under this chapter, and which,
after December 31, 1978, and before
January 1, 1980, applied to the Office
for approval of a plan provided under
section 8903(3) of this title;

(9) "dependent", in the case of any
child, means that the employee or
annuitant involved is either living with
or contributing to the support of such
child, as determined in accordance with
such regulations as the Office shall
prescribe; and

(10) "former spouse" means a former
spouse of an employee, former employee,
Or annuitant--

(A) who has not remarried before

age 55 after the marriage to the

D-9

employee, former employee, or
annuitant was dissolved,

(B) who was enrolled in an
approved health benefits plan under
this chapter as a family member at
any time during the 18-month period
before the date of the dissolution
of the marriage to the employee,
former employee, or annuitant, and

(C) (i) who is receiving any
portion of an annuity under section
8345(j) of this title or a survivor
annuity under section 8341(h) of
this title (or benefits similar to
either of the aforementioned
annuity benefits under a retirement
system for Government employees
other than the Civil Service

Retirement System),

D-10

(ii) as to whom a court order or
decree referred to in section
8341 (h) or 8345(j) of this titie
(or similar provision of law under
any suck pecieeeel system other
than the Civil Service Retirement
System) has been issued, or for
whom an election has been made
under section 8339(j) (3) of this
title (or similar provision of
law), or

(iii) who is otherwise entitled
to an annuity or any portion of an
annuity as a former spouse under a
retirement system for Government
employees, except that such term
shall not include any such

unremarried former spouse of a

former employee whose marriage was

D-11

dissolved after the former
employee's separation from the

service (other than by retirement).

§ 8902. Contracting authority

(a) The Office of Personnel
Management may contract with qualified
carriers offering plans described by
section 8903 of this title, without
regard to section 5 of title 41 or other
statute requiring competitive bidding.
Each contract shall be for a uniform
term of at least 1 year, but may be made
automatically renewable from term to
term in the absence of notice of

termination by either party. .

D-12

(b) To be eligible as a carrier for
the plan described by section 8903(2) of
this title, a company must be licensed
to issue group health insurance in all

the States and the District of Columbia.

(c) 2 contract for a plan described
by section 8903(1) or (2) of this title
shall require the carrier--

(1) to reinsure with other
companies which elect to
participate, under an equitable
formula based on the total amount
of their group health insurance
benefit payments in the United
States during the latest year for
which the information is available,
to be determined by the carrier and

approved by the Office; or

D-13

(2) to allocate its rights and
obligations under the contract
among its affiliates which elect to
participate, under an equitable
formula to be determined by the
carrier and the affiliates and

approved by the Office.

(d) Each contract under this chapter
shall contain a detailed statement of
benefits offered and shall include such
maximums, limitations, exclusions, and
other definitions of benefits as the

Office considers necessary or desirable.

(e) The Office may prescribe
reasonable minimum standards for health
benefits plans described by section 8903

of this title and for carriers offering

D-14

the plans. Approval of a plan may be
withdrawn only after notice and
opportunity for hearing to the carrier
concerned without regard to subchapter
II of chapter 5 and chapter 7 of this
title. The Office may terminate the
contract of a carrier effective at the
end of the contract term, if the Office
finds that at no time during the
preceding two contract terms did the
carrier have 300 or more employees and
annuitants, exclusive of family members,

enrolled in the plan.

(f) A contract may not be made or a
plan approved which excludes an
individual because of race, sex, health
status, or, at the time of the first

opportunity to enroll, because of age.

D=-15

(g) A contract may not be made or a
plan approved which does not offer to
each employee, annuitant, family member,
or former spouse whose enrollment in the
plan is ended, except by a cancellation
of enrollment, a temporary extension of
coverage during which he may exercise
the option to convert, without evidence
of good health, to a nongroup contract
providing health benefits. An employee,
annuitant, family member, or former
spouse who exercises this option shall
pay the full periodic charges of the

nongroup contract.

(h) The benefits and coverage made

available under subsection (g) of this

section are noncancelable by the carrier

D-16

except for fraud, over-insurance, or

nonpayment of periodic charges. |

(i) Rates charged under health
benefits plans described by section 8903 |

of this title shall reasonably and

equitably reflect the cost of the
benefits provided. Rates under health
benefits plans described by section
8903(1) and (2) of this title shall be
determined on a basis which, in the
judgment of the Office, is consistent
with the lowest schedule of basic rates
generally charged for new group health
benefit plans issued to large employers.
The rates determined for the first
contract term shall be continued for

later contract terms, except that they

may be readjusted for any later term,

D-17

based on past experience and benefit
adjustments under the later contract.
Any readjustment in rates shall be made
in advance of the contract term in which
they will apply and on a basis which, in
the judgment of the Office, is
consistent with the general practice of
carriers which issue group health

benefit plans to large employers.

(j) Each contract under this chapter
shall require the carrier to agree to
pay for or provide a health service or
supply in an individual case if the
Office finds that the employee,
annuitant, family member, or former

spouse is entitled thereto under the

terms of the contract.

D-18

(k) When a contract under this
chapter requires payment or
reimbursement for services which may be
performed by a clinical psychologist or
optometrist, licensed or certified as
such under Federal or State law, as
applicable, an employee, annuitant,
family member, or former spouse covered
by the contract shall be free to select,
and shall have direct access to, such a
clinical psychologist or optometrist
without supervision or referral by
another health practitioner and shall be
entitled under the contract to have
payment or reimbursement made to him or
on his behalf for the services
performed. The provisions of this
subsection shall not apply to group

practice prepayment plans.

D-19

{1) The Office shall contract under
this chapter for a plan described in
section 8903(4) of this title which any
qualified health maintenance carrier
which offers such a plan. For the
purpose of this subsection, "qualified
health maintenance carrier" means any
qualified carrier which is a qualified
health maintenance organization within
the meaning of section 1310(d)(1) of
title XIII of the Public Health Service

Act (42 U.S.C. 300c-9(d)).

(m) (1) The provisions of any contract
under this chapter which relate to the
nature or extent of coverage or benefits
(including payments with respect to
benefits) shall supersede and preempt

any State or local law, or any

D-20

regulation issued thereunder, which
relates to health insurance or plans to
the extent that such law or regulation
is inconsistent with such contractual

provisions.

(2) (A) Notwithstanding the provisions
of paragraph (1) of this subsection, if
a contract under this chapter provides
for the provision of, the payment for,
or the reimbursement of the cost of
health services for the care and
treatment of any particular health
condition, the carrier shall provide,
pay, Or reimburse up to the limits of
its contract for any such health service
properly provided by any person licensed
under State law to provide such service

if such service is provided to an

D-21

individual covered by such contract ina
State where 25 percent or more of the
population is located in primary medical
care manpower shortage areas designated
pursuant to section 332 of the Public

Health Service Act (42 U.S.C. 254e).

(B) The provisions of subparagraph
(A) shall not apply to contracts entered
into providing prepayment plans
described in section 8903(4) of this

title.
§ 8903. Health benefits plans
The Office of Personnel Management

may contract for or approve the

following health benefits plans:

D-22

(1) Service benefit plan.--One
Government-wide plan, offering two
levels of benefits, under which
payment is made by a carrier under
contracts with physicians,
hospitals, or other providers of
health services for benefits of the
types described by section 8904 (1)
of this title given to employees,
annuitants, members of their
families, or former spouses or,
under certain conditions, payment
is made by a carrier to the
employee, annuitant, family member,
or former spouse.

(2) Indemnity benefit plan.--One
Government-wide plan, offering two
levels of benefits, under which a

carrier agrees to pay certain sums

D-23

of money, not in excess of the
actual expenses incurred, for
benefits of the types described by
section 8904(2) of-this title.

(3) Employee organization
plans.--Employee organization plans
which offer benefits of the types
referred to by section 8904(3) of
this title, which are sponsored or
underwritten, and are administered,
in whole or substantial part, by
employee organizations, which are
available only to individuals, and
members of their families, who at
the time of enrollment are members
of the organization.

(4) Comprehensive medical plans.--

(A) Group-practice prepayment

plans.--Group-practice prepayment

D-24

plans which offer health benefits
of the types referred to by section
8904(4) of this title, in whole or
in substantial part on a prepaid
basis, with professional services
thereunder provided by physicians
practicing as a group in a common
center or centers. The greup shall
include physicians representing at
least three major medical
specialties who receive all ora
substantial part of their
professional income from the
prepaid funds.

(B) Individual-practice
prepayment plans.--Individual-
practice prepayment plans which
offer health services in whole or

substantial part on a prepaid

D=-25

basis, with professional services
thereunder provided by individual
physicians who agree, under certain
conditions approved by the Office,

to accept the payments provided by
the plans as full payment for

covered services given by them
including, in addition to in-
hospital services, general care

given in their offices and the
patients' homes, out-of-hospital
diagnostic procedures, and preventive
care, and which plans are offered by
organizations which have successfully
operated similar plans before approval
by the Office of the plan in which

employees may enroll.

D-26

§ 8904. Types of benefits

The benefits to be provided under

plans described by section 8903 of this

title may be of the following types:
(1) Service benefit plan.--
(A) Hospital berefits.
(B) Surgical benefits.
(C) In-hospital medical
benefits.
(D) Ambulatory patient
benefits.
(E) Supplemental benefits.
(F) Obstetrical benefits.
(2) Indemnity benefit plans.--
(A) Hospital care.
(B) Surgical care and

treatment.

D-27

(C) Medical care and
treatment.

(D) Obstetrical benefits.

(E) Prescribed drugs,
medicines, and prosthetic devices.

(F) Other medical supplies and
services.

(3) Employee organization
plans.--Benefits of the types named
under paragraph (1) or (2) of this
section or both.

(4) Comprehensive medical
plans.--Benefits of the types named
under paragraph (1) or (2) of this
section or both.

All plans contracted for under
paragraphs (1) and (2) of this section

shall include benefits both for costs

D-28

associated with care in a general
hospital and for other health services
of a catastrophic nature. Pub.L.

89-554, Sept 6, 1966 80 Stat.603.

§ 8905. Election of coverage

(a) An employee may enroll in an
approved health benefits plan described
by section 8903 of this title either as

an individual or for self and family.

(b) An annuitant who at the time he
becomes an annuitant was enrolled in a
health benefits plan under this
chapter--

(1) as an euployee for a period
of not less than--
(A) the 5 years of service

immediately before retirement;

D-29

(B) The full period or periods
of service between the last day of
the first period, as prescribed by
regulations of the Office of
Personnel Management in which he is
eligible to enroll in the plan and the
date on which he becomes an annuitant;
or

(C) the full period or periods
of service beginning with the
enrollment which became effective
before January 1, 1965, and ending
with the date on which he becomes
an annuitant;

whichever is shortest; or
(2) as a member of the family of
an employee or annuitant;

may continue his enrollment under the

D-30

conditions of eligibility prescribed by

regulations of the Office.

(c) (1) A former spouse may--
(A) within 60 days after the
dissolution of the marriage, or
(B) in the case of a former
spouse of a former employee whose
marriage was dissolved after the
employee's retirement, within 60
days after the dissolution of the
marriage or, if later, within 60
days after an election is made
under section 8339(4j) (3) of this
title for such former spouse by the
retired employee,
enroll in an approved health benefits
plan described by section 8903 of this

title as an individual or for self and

D-31

family as provided in paragraph (2)
of this subsection, subject to an
agreement to pay the full
subscription charge of the
enrollment, including the amounts
determined by the Office to be
necessary for administration and
reserves pursuant to section
8909(b) of this title. The former
spouse shall submit an enrollment
application and make premium
payments to the agency which, at
the time of divorce or annulment,
employed the employee to whom the
former spouse was married or, in
the case of a former spouse who is
receiving annuity payments under

section 8341(h) or 8345(3j) of this

D-32

title, to the Office of
Personnel Management.

(2) Coverage for self and family
under this subsection shall be
limited to--

(A) the former spouse; and

(B) unmarried dependent
natural or adopted children of the
former spouse and the employee who
are--

(i) under 22 years of age;
or

(ii) incapable of self-
support because of mental or
physical disability which

existed before age 22.

(ad) If an employee has a spouse who

is an employee, either spouse, but not

D-33

both, may enroll for self and family, or
each spouse may enroll as an individual.
However, an individual may not be
enrolled both as an employee or

annuitant and as a member of the family.

(e) An employee, annuitant, or former
spouse enrolled in a health benefits
plan under this chapter may change his
coverage or that of himself and members
of his family by an application filed
within 60 days after a change in family
status or at other times and under
conditions prescribed by regulations of

the Office.

(f) An employee, annuitant, or former
spouse may transfer his enroilment from

a health benefits plan described by

D-34

section 8903 of this title to another
plan described by that section at the
times and under the conditions

prescribed by regulations of the Office.
§ 8906. Contributions

(a) The Office of Personnel
Management shall determine the average
of the subscription charges in effect on
the beginning date of each contract year
with respect to self alone or self and
fanily enrollments under this chapter,
as applicable, for the highest level of
benefits offered by--

(1) the service benefit plan;
(2) the indemnity benefit plan;
(3) the two employee organization

pians with the largest number of

D-35

enrollments, as determined by the
Office; and
(4) the two comprehensive medical
plans with the largest number of
enrollments, as determined by the
Office.

(b) (1) Except as provided by
paragraphs (2) and (3) of this
subsection, the biweekly Government
contribution for health benefits for an
employee or annuitant enrolled ina
health benefits plan under this chapter
is adjusted to an amount equal to 60
percent of the average subscription
charge determined under subsection (a)
of this section. For an employee, the
adjustment begins on the first day of
the employee's first pay period of each

year. For an annuitant, the adjustment

D-36

begins on the first day of the first
period of each year for which an annuity
payment is made.

(2) The biweekly Government
contribution for an employee or
annuitant enrolled in a plan under this
chapter shall not exceed 75 percent of
the subscription charge.

(3) In the case of an employee who is
occupying a position on a part-time
career employment basis (as defined in
section 3401(2) of this title), the
biweekly Government contribution shall
be equal to the percentage which bears
the same ratio to the percentage
determined under this subsection
(without regard to this paragraph) as
the average number of hours of such

employee's regularly scheduled workweek

D-37

bears to the average number of hours in
the regularly scheduled workweek of an
employee serving in a comparable
position on a full-time career basis (as
determined under regulations prescribed
by the Office)

(c) There shall be withheld from the
pay of each enrolled employee and the
annuity of each enrolled annuitant and
there shall be contributed by the
Government, amounts, in the same ratio
as the contributions of the employee or
annuitant and the Government under
subsection (b) of this section, which
are necessary forthe administrative
costs and the reserves provided for by
section 8909(b) of this title.

(ad) the amount necessary to pay the

total charge for enrollment, after the

D-38

Government contribution is deducted,
shall be withheld from the pay of each
enrolled employee and from the annuity
of each enrolled annuitant. The
withholding for an annuitant shall be
the same as that for an employee
enrolled in the same health benefits
plan and level of benefits.

(e) (1) An employee enrolled in a
health benefits plan under this chapter
who is placed in_a leave without pay
status may have his coverage and the
coverage of members of his family
continued under the plan for not to
exceed 1 year under regulations
prescribed by the Office. The
‘regulations may provide for the waiving
of contributions by the employee and the

Government.

D-39

(2) an employee who enters on
approved leave without pay to serve as a
full-time officer or employee of an
organization composed primarily of
employees as defined by section 8901 of
this title, within 60 days after
entering on that leave without pay, may
file with his employing agency an
election to continue his health benefits
enrollment and arrange to pay currently
into the Employees Health Benefits Fund,
through his employing agency, both
employee and agency contributions from
the beginning of leave without pay. The
employing agency shall forward the
enrollment charges so paid to the Fund.
If the employee does not so elect, his
enrollment will continue during ncnpay

status and end as provided by paragraph

D-40

(1) of this subsection and implementing
regulations.

(f) The Government contributions for
health benefits for an employee shall be
paid--

(1) in the case of employees
generally, from the appropriation
or fund which is used to pay the
employee;

(2) in the case of an elected
official, from an appropriation or
fund available for paymer*: of other
salaries of the same office or
establishment;

(3) in the case of an employee of
the legislative branch who is paid
by the Clerk of the House of

Representatives, from the

contingent fund of the House; and

D-41

(4) in the case of an employee in
a leave without pay status, from
the appropriation or fund which
would be used to pay the employee
if he were in a pay status.

(g) The Government contributions
authorized by this section for health
benefits for an annuitant shall be paid
from annual appropriations which are
authorized to be made for that purpose
and which may be made available until
expended.

(h) The Office shall provide for
conversion of biweekly rates of
contribution specified by this section
to rates for employees and annuitants
paid on other than a biweekly basis, and

for this purpose may provide for the

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adjustment of the converted rate to the

nearest cent.

§ 8907. Information to individuals eligible to
enroll

(a) The Office of Personnel
Management shall make available to each
individual eligible to enroll ina
health benefits plan under this chapter
such information, in a form acceptable
to the Office after consultation with
the carrier, as may be necessary to
enable the individual to exercise an
informed choice among the types of plans
described by section 8903 of this title.

(b) Each enrollee in a health
benefits plan shall be issued an

appropriate document setting forth or

summarizing the--

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(1) services or benefits,
including maximums, limitations,
and exclusions, to which the
enrollee or the enrollee and any
eligible family members are
entitled thereunder;

(2) procedure for obtaining
benefits; and

(3) principal provisions of the
plan affecting the enrollee and any

eligible family members.

§ 8908. Coverage of restored employees and
survivor annuitants

(a) An employee enrolled in a health
benefits plan under this chapter who is
removed or suspended without pay and
later reinstated or restored to duty on

the ground that the removal or

suspension was unjustified or

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unwarranted may, at his option, enroll
as a new employee or have his coverage
restored, with appropriate adjustments
made in contributions and claims, to the
same extent and effect as though the
removal or suspension had not taken

place.

(b) A surviving spouse whose survivor
annuity under this title was terminated
because of remarriage and is later
restored may, under such regulations as
the Office of Personnel Management may
prescribe, enroll in a health benefits
plan described by section 8903 of this
title if ah enenes was covered by any

such plan immediately before such

annuity was terminated.

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§ 8909. Employees Health Benefits Fund

(a) There is in the Treasury of the
United States an Employees Health
Benefits Fund which is administered by
the Office of Personnel Management. The
contributions of enrollees and the
Government described by section 8906 of
this title shall be paid into the Fund.
The Fund is available--

(1) without fiscal year
limitation for all payments to
approved health benefits plans;
and

(2) to pay expenses for
administering this chapter within
the limitations that may be

specified annually by Congress.

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(b) Portions of the contributions
made by enrollees and the Government
shall be regularly set aside in the Fund
as follows:

(1) a percentage, not to exceed 1
percent of all contributions,
determined by the Office to be
reasonably adequate to pay the
administrative expenses made
available by subsection (a) of this
section.

(2) For each health benefits
plan, a percentage, not to exceed 3
percent of the contributions toward
the plan, determined by the Office
to be reasonably adequate to

provide a contingency reserve.

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The Office, from time to time and in
amounts it considers appropriate, may
transfer unused funds for administrative
expenses to the contingency reserves of
the plans then under contract with the
Office. When funds are so transferred,
each contingency reserve shall be
credited in proportion to the total
amount of the subscription charges paid
and accrued to the plan for the contract
term immediately before the contract
term in which the transfer is made. The
income derived from dividends, rate
adjustments, or other refunds made by a
plan shall be credited to its
contingency reserve. The contingency
reserves may be used to defray increases
in future rates, or may be applied to

reduce the contributions of employees

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and the Government to, or to increase
the benefits provided by, the plan from
which the reserves are derived, as the
Office from time to time shall
determine.

(c) The Secretary of the Treasury may
invest and reinvest any of the money in
the Fund in interest-bearing obligations
of the United States and may sell these
obligations for the purposes of the
Fund. The interest on and the proceeds
from the sale of these obligations
become a part of the Fund.

(d) When the assets, liabilities, and
membership of employee organizations
sponsoring or underwriting plans
approved under section 8903(3) of this
title are merged, the assets (including

contingency reserves) and liabilities of

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the plans sponsored or underwritten by
the merged organizations shall be
transferred at the beginning of the
contract term next following the date of
the merger to the plan sponsored or
underwritten by the successor
organization. Each employee, annuitant,
or former spouse affected by a merger
shall be transferred to the plan
sponsored or underwritten by the
successor organization unless he enrolls
in another plan under this chapter.

(e) Except as provided by subsection
(a) of this section, when a plan
described by section 8903(3) or (4) of
this title is discontinued under this
chapter, the contingency reserve of that
plan shall be credited to the

contingency reserves of the plans

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continuing under this chapter for the
contract term following that in which
termination occurs, each reserve to be
credited in proportion to the amount of
the subscription charges paid and
accrued to the plan for the year of

termination.

§ 8910. Studies, reports, and audits

(a) The Office of Personnel
Management shall make a continuing study
of the operation and administration of
this chapter, including surveys and
reports on health benefits plans
available to employees and on the

experience of the plans.

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(b) Each contract entered into under
section 8902 of this title shall contain
provisions requiring carriers to

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385019_0417%3A1. Public record. Not legal advice.