Project Posner

Lead opinion by WILL

    417 WILL, Senior District Judge.

   Kathryn and Joseph Reilly, plaintiffs-appellants, Wisconsin residents, brought this action against Blue Cross and Blue Shield United of Wisconsin ( "Blue Cross"), defendant-appellee, a Wisconsin non-profit corporation, alleging that Blue Cross arbitrarily and capriciously denied their insurance claim for Mrs. Reilly's in vitro fertilization ("IVF"). The plaintiffs' original complaint claims that Blue Cross breached the insurance contract, acted in bad faith, intentionally inflicted emotional distress and caused a loss of consortium. The plaintiffs seek compensatory and punitive damages.

   Mr. Reilly is a Milwaukee public school teacher. He and his wife were covered under a self-insured group health plan which is part of the collective bargaining agreement between the Milwaukee Teachers Education Association ("MTEA ") and the Milwaukee Public Schools ("MPS"). The plan was administered by Blue Cross for a fee "based, subject to certain limitations, on the dollar volume of covered charges approved for payment," Defendant-Appellee's Brief at 5. Blue Cross is not at risk for any health care costs.

   Pursuant to Blue Cross' motion, the case was removed from the Waukesha County Circuit Court to the Eastern District of Wisconsin because it raises questions governed by the federal Employee Retirement Income Security Act of 1974 ("ERISA "), 29 U.S.C. Sec. 1001, et seq. Federal subject matter jurisdiction is based on 29 U.S.C. Sec. 1132(e).

   Judge Curran ordered that nonexpert discovery be completed by January 1, 1987 and expert discovery by May 1, 1987. All dispositive motions were to be filed by June 1, 1987 and the trial was set for August 17, 1987. On June 1, 1987, Blue Cross moved for summary judgment against the plaintiffs' (1) ERISA claim, arguing that its decision to deny coverage was not arbitrary, capricious or motivated by bad faith, and (2) state law claims, arguing that these claims are preempted by ERISA. On June 30, 1987, the plaintiffs moved for leave to amend their complaint. They sought to add allegations of a conspiracy, fraud and breach of fiduciary duty based on newly discovered evidence allegedly concealed from them by Blue Cross.

   Judge Curran granted Blue Cross' motion for summary judgment and denied the plaintiffs' motion to amend their complaint. 418 He concluded that (1) the defendant's decision was not arbitrary, capricious or motivated by bad faith; (2) ERISA preempted the plaintiffs' state law claims; and (3) even if state law claims were not preempted, he would not take pendent jurisdiction over them. The plaintiffs appeal both the decisions on the parties' motions and the preemption conclusion as to the claims for punitive damages and of bad faith.

   We find that material issues of fact exist as to whether Blue Cross' decision was arbitrary, capricious or motivated by bad faith and we therefore reverse the district court's order granting Blue Cross' motion for summary judgment with respect to the plaintiffs' ERISA claim. Because the plaintiffs did not appeal the district court's order that their claims of intentional infliction of emotional distress and loss of consortium are preempted under ERISA, we do not review this decision and the district court's order dismissing these claims is affirmed solely on the ground that they are preempted. We find that the plaintiffs' demand for punitive damages and claim of bad faith are preempted under ERISA because the health plan at issue is self-insured and state laws arguably "regulating insurance" are preempted by ERISA as to self-insured plans. We therefore affirm the district court's order dismissing those claims. Finally, we find that amending the plaintiffs' complaint with claims of conspiracy, fraud, bad faith and breach of fiduciary duty would be futile because such claims are not separate federal causes of action but simply further evidence relevant to whether Blue Cross' action was arbitrary, capricious or motivated by bad faith in violation of ERISA. In addition, if considered as state claims, they are also preempted. We therefore affirm the district court's order denying the plaintiffs leave to file an amended complaint.

   FACTS

   By 1978, Kathryn Reilly had received treatment for infertility. In 1982, she was diagnosed as having an independently treatable condition called endometriosis, which affects a woman's ability to conceive. Blue Cross paid for her initial treatments. Thereafter she was treated with artificial insemination, among other things, which was unsuccessful. On October 15, 1984, Mrs. Reilly underwent a successful IVF procedure at Waukesha Memorial Hospital in Wisconsin. On May 22, 1985, she gave birth to a baby girl, Nora.

   The plaintiffs' insurance policy is outlined in two documents. One is a booklet distributed to plan members in January, 1981. It describes the benefits and exclusions. The other document is a group master contract which memorialized the agreement between the MPS and Blue Cross. This contract was renewed annually and, during the year following each renewal, a copy was forwarded to the MTEA. Individual group members did not receive a copy of this contract.

   Blue Cross denied coverage for the expenses incurred by Kathryn Reilly's IVF procedure on the grounds that: (1) IVF was an experimental procedure, which was excludable under the master contract's general provision excluding experimental procedures; and (2) the contract specifically excluded coverage for an IVF procedure. Blue Cross claimed that the IVF was experimental under the general exclusion because it had a success rate of less than 50%. Blue Cross accepted the Reilly's claim for expenses incurred in the delivery of Nora, including intensive care.

   The contract at issue was effective from July 1, 1984 to June 30, 1985. At the time of Mrs. Reilly's IVF, October 15, 1984, MTEA had not received the renewed contract for that period. According to the plaintiffs, as of October 1984, the MTEA was unaware of any exclusion under the master contract for IVF, either under the general provision excluding experimental procedures or as a specific exclusion.

   Also, according to the plaintiffs, the MTEA first received notice that IVF procedures were excluded on September 19, 1985, long after the baby's birth in May and nearly one year after Mrs. Reilly's IVF. Notice was sent by Rhonda Koprowski, a Blue Cross supervisor, in a letter stating that "the wording in this contract 419 was updated in October of 1984 [the effective date is July 1, 1984]. Due to the timing of the services and the updating of the contract, the group may want to consider paying these charges as an exception." Marjan R. Kmiec Affidavit, June 16, 1987, Exhibit D. Blue Cross did not make an exception.

   The district court assumed, for the purpose of its decision, that at the time of Kathryn Reilly's IVF, the parties were bound by the previous (1983-84) agreement which did not specifically list IVF either as being experimental or an excludable procedure. Accordingly, the district court assumed that the general provision in the 1983-84 contract excluding expenses for experimental and investigative procedures was the only provision under which Blue Cross could defend its decision. Our review is necessarily based on these same assumptions.

   The 1983-84 contract's general provision excluding expenses for experimental and investigative procedures reads as follows:

Services and procedures which are experimental/investigative in nature. Experimental/investigative means the use of any treatment, procedure, facility, equipment, drugs, devices or supplies not yet recognized as accepted medical practice by Blue Cross & Blue Shield United and any of such items requiring federal or other governmental agency approval and for which approval has not been granted at the time services were rendered.

Blue Cross claims that at the time of Kathryn Reilly's IVF, October, 1984, IVF was deemed experimental. The plaintiffs allege that IVF was not deemed experimental by the general expert medical community at the time of Kathryn Reilly's IVF and Blue Cross' formula employed to determine whether IVF is experimental leads to an arbitrary and capricious conclusion.

   STANDARD OF REVIEW

   We must decide (1) if viewing the evidence in a light most favorable to the plaintiffs, there is a material issue of fact as to whether Blue Cross' decision was arbitrary, capricious or motivated by bad faith and violated ERISA; Rodeo v. Gillman, 787 F.2d 1175, 1177 (7th Cir. 1986); Fed.R.Civ.P. 56(c); (2) if the district court abused its discretion under Fed.R.Civ.P. 15(a) by denying the plaintiffs' motion for leave to amend their complaint; and (3) whether the plaintiffs' state law claims for bad faith and punitive damages are preempted under ERISA.

   LIABILITY UNDER ERISA

   The plaintiffs' health plan is governed by ERISA. 29 U.S.C. §§ 1002(1) and 1003(a)(3). They may bring a civil action to recover benefits allegedly due under the plan. 29 U.S.C. § 1132(a)(1)(B). As the administrator of the employee benefit plan, Blue Cross is a fiduciary for ERISA purposes. 29 U.S.C. § 1002 (21)(B); Chicago Board Options Exchange, Inc. v. Connecticut General Life Insurance Company, 713 F.2d 254, 258-60 (7th Cir. 1983). Accordingly, Blue Cross ' duties and responsibilities for managing and administering the plaintiffs' plan are defined as follows:

   (1) . . . a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and --

(A) for the exclusive purpose of:

   (i) providing benefits to participants and beneficiaries; and

   (ii) defraying reasonable expenses of administering the plan; (B) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; . . . . (D) in accordance with the documents and instruments governing the plan . . . .

29 U.S.C. § 1104(a)(1).

   To hold Blue Cross liable for denying them benefits under the plan, the plaintiffs must establish that Blue Cross' decision or conduct was arbitrary, capricious or motivated by bad faith. Wardle v. Central States Pension Fund, 627 F.2d 820, 823-24 420 (7th Cir. 1980), cert. denied, 449 U.S. 1112, (1981) (pension benefits case). We may not undertake a de novo review as to whether we agree with Blue Cross' decision. Id. at 824.

The scope of review under the 'arbitrary and capricious' standard is narrow and a court is not to substitute its judgment for that of [an ERISA fiduciary]. Nevertheless, the [fiduciary] must examine the relevant data and articulate a satisfactory explanation for its action including a 'rational connection between the facts found and the choice made.' . . . In reviewing that explanation, we must 'consider whether the decision was based on a consideration of the relevant factors and whether there has been a clear error of judgment.' . . . Normally, [a decision by a fiduciary] would be arbitrary and capricious if the [fiduciary] relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before [it] or is so implausible that it could not be ascribed to a difference in view or the product of [its] expertise.

Motor Vehicle Manufacturers Association of the United States, Inc. et al. v. State Farm Mutual Automobile Insurance Co. et al., 463 U.S. 29, 43, (1983) (citations omitted) (defining the arbitrary and capricious standard for a decision by a federal agency); Pokratz v. Jones Dairy Farm, 771 F.2d 206, 209 (7th Cir. 1985) (adopting the Motor Vehicle standard for an administrator of a pension plan under ERISA). See also Dennard v. Richards Group Inc., 681 F.2d 306, 314 (5th Cir. 1982) (the arbitrary and capricious standard for an administrator of a pension plan under ERISA may require an analysis of the following three factors: "(1) uniformity of construction; (2) 'fair reading' and reasonableness of that reading; and (3) unanticipated costs.").

   ANALYSIS

   I.

   Blue Cross' Decision

   The plaintiffs contend that material issues of fact exist as to whether Blue Cross' administration of the plan was fair and reasonable because of the formula used to categorize IVF as experimental and in light of the evidence establishing that IVF was not in fact experimental in 1984. The plaintiffs submitted expert opinions from several doctors, including members of the American College of Obstetricians and Gynecologists and the American Fertility Society, in addition to three other fertility experts, who stated that by 1982, IVF procedures were no longer experimental. In addition, government approval was not required prior to performing an IVF procedure in October, 1984.

   The affidavit of K. Paul Katayama, M.D., Ph.D., a member of the medical staff of Waukesha Memorial Hospital, Good Samaritan Medical Center, and other Milwaukee area hospitals, and one of the plaintiffs' experts, included the following:

   5. The leading international professional organization in the field of reproductive endocrinology is the American Fertility Society. In March of 1982, the Board of Directors and members of the American Fertility Society unanimously concluded that IVF must be recognized as an acceptable treatment for achieving pregnancy.

   6. In April of 1984, the Committee on Gynecologic Practice for the American College of Obstetricians and Gynecologists issued a statement on IVF/ET [in vitro fertilization/embryo transfer]. It stated:

   Today in the United States, human IVF/ET is a clinically applicable procedure. It is no longer considered purely experimental.

   7. In October of 1984, I did not consider IVF/ET to be an experimental procedure, nor do I consider it so at this time. In my opinion, human IVF/ET ceased being an experimental procedure by 1982. IVF was well accepted within the medical community in 1984.

   8. I am aware that Blue Cross Blue Shield United of Wisconsin continued to characterize IVF as experimental until at 421 least October, 1985. No practitioners intimately involved in the field of IVF, as far as I know, characterized IVF as experimental at the time. In my opinion Blue Cross' characterization of IVF as experimental in 1984 and 1985 was unreasonable.

Katayama Affidavit, June 16, 1987. Dr. Katayama has an extensive and impressive curriculum vitae and his qualifications as an expert in the field of IVF have not been challenged.

   The affidavit of Gloria M. Halverson, M.D., a member of the medical staff at Waukesha Memorial Hospital and Elmbrook Memorial Hospital, and another plaintiffs' expert, included the following:

   5. That your affiant did not consider IVF to be an experimental procedure in 1984. That in your affiant's opinion, IVF ceased being an experimental procedure in 1982. That IVF is a well accepted procedure within the medical community and was in 1984.

   6. That your affiant is aware that Blue Cross Blue Shield United of Wisconsin continued to characterize IVF as experimental until at least October, 1985. That no practitioners intimately involved in the field of IVF, that your affiant is aware of, characterized IVF as experimental at that time and Blue Cross' characterization as experimental is unreasonable.

Halverson Affidavit, June 15, 1987. Dr. Halverson also has an extensive and impressive curriculum vitae and her qualifications as an expert in the field of IVF have not been challenged.

   The plaintiffs also proffered the deposition testimony of Dr. Sander S. Shapiro, the Director of the Reproductive Endocrine Infertility Clinic in Madison.

Dissent by POSNER

   POSNER, Circuit Judge, concurring and dissenting.

   I would affirm the district judge's decision in its entirety. There is no basis for 427 supposing that Blue Cross of Wisconsin (as I shall call the defendant) acted arbitrarily or capriciously in denying Mrs. Reilly's claim. She underwent in vitro fertilization in 1984, at a cost of something under $ 3,000. The employee benefits plan under which she seeks to recoup this expense excludes "services and procedures which are experimental/investigative in nature," defined as any treatment "not yet recognized as accepted medical practice by" Blue Cross of Wisconsin. In deciding that in vitro fertilization was still an experimental procedure in 1984, and in denying her claim on that ground, the defendant consulted both its own medical advisory committee and a national association of Blue Cross-Blue Shield plans that evaluates and makes recommendations concerning medical procedures. Both groups advised it that in vitro fertilization, in part because of its success rate (below 50 percent, and perhaps as low at 10 percent), was still experimental.

   The denial of benefits may be right or wrong but it is a reasonable interpretation of the plan, and that should be the end of the case. Judge Will, skilled lawyer that he is, is able to find a number of holes in the defendant's case -- hearsay, lack of expert evidence to counter Mrs. Reilly's experts (with their impressive credentials), and the implausibility of classifying a procedure as experimental merely because it has a low success rate (implying, if pushed to a logical extreme, that all treatments for the terminally ill are experimental). And he is able to conjure up a host of unanswered questions concerning the qualifications of the members of the advisory committees, the committees' evidentiary basis, the method of compensating their members, and the impact of the decision on other Blue Cross-Blue Shield plans. Judge Will even questions the validity, as well as the defendant's interpretation, of the "experimental/investigative" provision -- although Mrs. Reilly does not -- on the ground that it gives too much discretion to the defendant.

   All this probing and questioning would be fine if this were a suit for breach of a contract of insurance rather than an action for judicial review of the denial of a claim for employee benefits, if the burden of proof in a breach of contract suit were on the defendant rather than the plaintiff, and if the plaintiff in such a suit were arguing unconscionability. None of these things is true. Not only has Judge Will disregarded our role in this proceeding, the nature of the proceeding, the standard of review, and the burden of proof, but he has gone beyond the issues framed by the parties, since as I have said Mrs. Reilly does not question the validity of the "experimental/investigative" provision, but only its application to her claim.

   The administrators of Blue Cross of Wisconsin are in no position to make a personal judgment on whether in vitro fertilization is an experimental procedure. They must consult experts. They consulted two expert bodies: their own medical advisory committee, and a national association of Blue Cross-Blue Shield groups that serves as a clearinghouse for medical information. On the face of things this seems a reasonable way to have proceeded. If Mrs. Reilly thought that these expert bodies were prejudiced or incompetent, she could have deposed their members; it was her responsibility, if she wanted to defeat the defendant's motion for summary judgment, to answer the unanswered questions noted by Judge Will. Instead of questioning the qualifications of the members of the advisory bodies on which the defendant relied, she presented affidavits by physicians who believe that in vitro fertilization had by 1984 moved beyond the experimental stage. As it happens these physicians are specialists in the treatment of fertility and naturally want to encourage the use of an exciting and promising treatment. All that their affidavits show, however, is that there is a difference of opinion in the medical community on the experimental character of the treatment. The existence of such a disagreement does not begin to demonstrate that Blue Cross of Wisconsin acted arbitrarily or capriciously in relying on its medical advisors.