No. 94-555 In the Supreme Court of the United States OCTOBER TERM, 1994 ROCKY MOUNTAIN HOSPITAL AND MEDICAL SERVICE, PETITIONER V. JUDITH PHILLIPS ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE TENTH CIRCUIT BRIEF FOR THE UNITED STATES AS AMICUS CURIAE SUPPORTING RESPONDENT PAUL BENDER Acting Solicitor General FRANK W. HUNGER Assistant Attorney General JAMES A. FELDMAN Assistant to the Solicitor General WILLIAM KANTER JOHN P. SCHNITKER Attorneys Department of Justice Washington, D.C. 20530 (202)514-2217 ---------------------------------------- Page Break ---------------------------------------- QUESTION PRESENTED Whether there is federal question jurisdiction, under 28 U.S.C. 1331, over this action by a health insurance carrier, in which the carrier seeks a declaration concerning its obligations to provide certain insurance benefits to an enrollee in its health benefits plan established under the Federal Employees Health Benefits Act. (I) ---------------------------------------- Page Break ---------------------------------------- TABLE OF CONTENTS Interest of the United States . . . . 1 Statement . . . . 2 Summary of argument . . . . 9 Argument: A. By requiring that cases involving disputes over OPM's denials of FEHBA claims be brought against OPM, rather than the FEHBA carriers, the interim regulations substantially alter the significance of the issue in this case . . . . 11 B. If the Court decides this case on its merits, the judgment of the court of appeals should be affirmed . . . . 21 Conclusion . . . . 24 TABLE OF AUTHORITIES Cases: American Fed'n of Gov't Employees v. Devine, 525 F. Supp 250 (D.D.C. 1981) . . . . 2 Boron Oil Co v. Downie, 873 F.2d 67 (4th Cir. 1989) . . . . 19 Boyle v. United Technologies Corp., 487 U.S. 500 (1988) . . . . 14 Caudill v. Blue Cross & Blue Shield, 999 F.2d 74 (4th Cir. 1993) . . . . 6, 14 Clear field Trust Co. v. United States, 318 U.S. 363 (1943) . . . . 14 Franchise Tax Bd. v. Construction Laborers Vacation Trust, 463 U.S. 1 (1983) . . . . 16, 17 Gully v. First National Bark, 299 U.S. 109 (1936) . . . . 22 Howard v. Group Hosp. Service, 739 F.2d 1508 (lOth Cir. 1984) . . . . 7, 16 Louisville & N.R.R. v. Mottley, 211 U.S. 149 (1908) . . . . 17 McCarthy v. Madigan, 503 U.S. 140 (1992) . . . . 15 Merrell Dow Pharmaceuticals, Inc. v. Thompson, 478 U.S. 804 (1986) . . . . 17, 22 Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58 (1987) . . . . 16 (III) ---------------------------------------- Page Break ---------------------------------------- IV Statutes and regulations: Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667 (1950) . . . . 16 Smith v. Kansas City Title & Trust Co., 255 U.S. 180 (1921) . . . . 17 The Fair v. Kohler Die & Speciality Co., 228 U.S. 22 (1913) . . . . 16 Administrative Procedure Act, 5 U.S.C. 701 et seq.: 5 U. S. C. 702 . . . . 19 5 U. S. C. 703 . . . . 19 5 U.S.C. 706 . . . . 18 5 U.S.C. 706(2)(A) . . . . 9, 15 Equal Access to Justice Act, 28 U.S.C. 2412 . . . . 19 28 U.S.C. 2412(a)(l) (Supp. V 1993) . . . . 19 28 U.S.C. 2412(d)(l)(A) . . . . 19 Federal Employees Health Benefits Act of 1959, 5 U.S.C. 8901 et seq . . . . 1 5 U.S.C. 8902 (1988 & Supp. V 1993) . . . . 2 5 U.S.C. 8902(d) . . . . 2, 5, 12 5 U.S.C. 8902(.j) . . . . 4, 13, 18, 20 5 U.S.C. 8902(m)(l) . . . . 3, 12, 14 5 U.S.C. 8903 . . . . 2 5 [U.S.C. 8905 (1988 & Supp. V 1993) . . . . 2 5 U.S.C. 8905(d)-(f) . . . . 3 5 U.S.C. 8906(b) (1988 & Supp. V 1993) . . . . 3 5 U.S.C. 8906(d) (Supp. V 1993) . . . . 3 5 U.S.C. 8906(g) (1988 & Supp. v 1993) . . . . 3 5 U.S.C. 8907(a) . . . . 2 5 U.S.C. 8907(b) . . . . 3 5 U.S.C. 8913(a) . . . . 4, 12 28 U.S.C. 1331 . . . . 6, 10, 16 5 C. F. R.: Section 890.105(a) . . . . 4 Section 890.105(b)(3) . . . . 4 Section 890.105(d)(2) . . . . 4 Section 890.105 (d)(3) . . . . 4 Section 890.105(d)(4) . . . . 4 ---------------------------------------- Page Break ---------------------------------------- V Regulations- -Continued: Section 890 .105(d) (5) . . . . 4 Section, 890. 107 . . . . 4, 8 48 (C.F.R. Subpt. l652.2 . . . . 8 Section 1652.216-7 . . . . 20 Miscellaneous: H.R. Rep. No. 1656, 94th Cong., 2d Sess. (1976) . . . . 19 H.R. Rep. No. 282, 95th Cong., 1st Sess. (1977) . . . . 14 S. Rep. No. 996, 94th Cong., 2d Sess. (1976) . . . . 19 David Shapiro, Jurisdiction and Discretion, 60 N.Y.U.L. Rev. 543 (1985) . . . . 22-23 ---------------------------------------- Page Break ---------------------------------------- In the Supreme Court of the United States OCTOBER TERM, 1994 No. 94-555 ROCKY MOUNTAIN HOSPITAL AND MEDICAL SERVICE, PETITIONER v. JUDITH PHILLIPS ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE TENTH CIRCUIT BRIEF FOR THE UNITED STATES AS AMICUS CURIAE SUPPORTING RESPONDENT INTEREST OF THE UNITED STATES This case presents the question whether federal jurisdiction exists over claims by enrollees or health carriers concerning the enrollees' rights to benefits under contracts procured by the United States Office of Personnel Management (OPM), pursuant to the Federal Employees Health Benefits Act of 1959 (FEHBA), 5 U.S.C. 8901 et seq. The FEHBA program was designed to provide health care benefits to federal employees, annuitants, and their dependents. Under FEHBA, the United States is a party to the contracts under which such disputes over benefits arise. In (1) ---------------------------------------- Page Break ---------------------------------------- 2 addition, OPM plays a substantial role in adminis- tering the FEHBA program and, in particular, in resolving disputes about benefits available under specific FEHBA contracts. The United States ac- cordingly has a substantial] interest in the develop- ment of orderly procedures for resolving disputes about benefits available under FEHBA plans. STATEMENT 1. Congress enacted FEHBA in 1959 "to protect federal employees against the high and unpredictable costs of medical care and to assure that federal employee health benefits are equivalent to those available in the private sector so that the federal government can compete in the recruitment and retention of competent personnel." American Fed'n of Gov't Employees v. Devine, 525 F. Supp. 250, 252 D.D.C. 1981). The essentials of the FEHBA plan are established by statute. OPM contracts with numerous insurers and other health plans to offer health coverage to federal employees. 5 U.S.C. 8902, 8903 (1988 & Supp. V 1993). Each contract must "contain a detailed statement of benefits offered and shall include such maximums, limitations, exclusions, and other defini- tions of benefits as [OPM] considers necessary or desirable." 5 U.S.C. 8902(d). OPM is responsible for making available to each person eligible for en- rollment in a FEHBA plan "such information, in a form acceptable to [OPM] after consultation with the carrier, as may be necessary to enable the individual to exercise an informed choice" among the available plans. 5 U.S.C. 8907(a). Each eligible individual then selects a plan from the available options in which to enroll. 5 U.S.C. 8905 (1988 & Supp. V 1993). Once the ---------------------------------------- Page Break ---------------------------------------- 3 individual is enrolled, the plan itself must provide "an appropriate document setting forth or summarizing" the benefits offered. 5 U.S.C. 8907(b). Under speci- fied circumstances, or under such regulations and conditions as OPM prescribes, the enrollee may change from one plan to another. 5 U.S.C. 8905(d)-(f). The cost of coverage is shared between the enrollee and the government, with the government generally paying between 60% and 75% of the total cost. 5 U.S.C. 8906(b) (1988 & Supp. V 1993). The govern- ment's share comes from an annual appropriation by Congress, U.S.C. 8906(g) (1988 & Supp. V 1993), while the t enrollee's share is generally withheld from salary, 5L U.S.C. 8906(d) (Supp. V 1993). Currently, OPM contracts with more than 300 health plans, which cover approximately nine million federal employees annunitants, and dependents. Pet. App. 42a, 59a. Contracts between OPM and the health plans have two features of particular relevance to this case. First, the terms of each contract preempt incon- sistent. state law, under FEHBA's express pre- emption provision. That provision states: The provisions of any contract under [FEHBA] 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. 5 U.S.C. 8902 (m)(l). Second, the contract must provide that OPM's determination that an enrollee is entitled to a benefit be given conclusive weight. ---------------------------------------- Page Break ---------------------------------------- 4 Under 5 U.S.C. 8902(j), each contract "shall require the carrier to agree to pay for or provide a health service or supply in an individual case if [OPM] finds that the [enrollee] is entitled thereto under the terms of the contract." 2. The Act grants OPM general authority to "prescribe regulations necessary to carry out [FEHBA]." 5 U.S.C. 8913(a). Pursuant to that authority, OPM has promulgated regulations that govern claims by enrollees that they are entitled to particular benefits from their carriers. The regula- tions currently in force provide that enrollees must initially submit all such claims to their carriers. 5 C.F.R. 890.105(a). If an enrollee is dissatisfied with the carrier's resolution of the claim, the enrollee may "write to OPM and request that OPM review the plan's decision." 5 C.Y.R. 890.105(b)(3). For the purpose of that review, OPM may request additional information from the enrollee, the plan, or an outside source. 5 C.F.R. 890.105(d)(2) and (3). OPM must give a written notice of its decision within 30 days after receipt of the enrollee's claim or receipt of all the evidence. 5 C. F. It. 890.105(d)(4) and (5). As noted above, if 0PM determines that the enrollee is entitled to the disputed benefit, the carrier must pay it. 5 U.S.C. 8902(j). Under the regulations currently in force, if OPM determines that the enrollee is not entitled to the disputed benefit, the enrollee's remedy is a suit "against the carrier, not against OPM." 5 C.F.R. 890.107. The current regulations also state that "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." Ibid. ---------------------------------------- Page Break ---------------------------------------- 5 The contract between OPM and petitioner also refers to the procedure for resolving disputed claims. The Statement of Benefits, which is a necessary part of the contract, see 5 U.S.C. 8902(d), provides that "[n]o lawsuit may be brought to recover on a claim for * * * benefits until [the enrollee] * * * exhausts th[e] OPM review procedure" established by the above regulations. Pet. App. 56a. The Statement of Ben- efits also provides that "[f]ederal law exclusively governs all claims for relief in a lawsuit that relate to * * * benefits or coverage or payments with respect to those benefits." Id. at 57a. The Statement also states that, as provided by the contract between OPM and petitioner, "judicial action on such claims for relief is limited to a review of OPM's final decision to determine if it is arbitrary or capricious under the terms of this Statement of Benefits." Ibid. Damages in such a suit "are limited to the amount of * * * contract benefits in dispute, plus simple prejudgment interest * * * and court costs." Ibid. 3. Respondent is a resident of Fort Collins, Colorado, and an enrollee in the 1993 Blue Cross "Service Benefit Plan" (the Plan), a government-wide FEHBA plan established pursuant to a contract between the Blue Cross and Blue Shield Associa- tion-of which petitioner is a member-and OPM. Respondent has breast cancer and sought pre- treatment authorization under the Plan for a procedure called high-dose chemotherapy with auto- logous bone marrow transplant (HDC/ABMT). On June 14, 1993, petitioner informed respondent of its belief that HDC/ABMT was not a "covered benefit" under the Plan. See Pet. App. 5a. A Colorado state court had previously ruled that, under that State's law, HDC/ABMT is covered under ---------------------------------------- Page Break ---------------------------------------- 6 the 1993 Plan. See Pet. App. 15a-31a. On the other hand, OPM had determined in a number of cases that enrollees in the Plan were not entitled to benefits for that treatment. See Pet. App. 45a-46a, 50a, 63a-64a; see also Caudill v. Blue Cross & Blue Shield, 999 F.2d 74 (4th Cir. 1993). On the same day that it formally denied respondent's claim for benefits, petitioner filed the instant declaratory judgment action in the United States District Court for the District of Colorado to obtain a resolution of the dispute. Insofar as is relevant here, petitioner sought [a] declaration of the rights of [petitioner] and [respondent] under the Service Benefit Plan pur- suant to 5 U.S. C. 706 after OPM's adminis- trative review is complete; namely, if OPM finds that prior approval should be denied, a ruling that OPM's decision is not arbitrary or capricious or otherwise unlawful. J.A. 30. 1 On July 12, 1993, shortly after petitioner filed this action, OPM affirmed petitioner's denial of benefits. See J.A. 36-38. 4. The district court dismissed the action on the ground that the court lacked federal question juris- diction under 28 U.S.C. 1331.2 The court relied upon ___________________(footnotes) 1 Petitioner's claim for that declaration is the only claim at issue in this case. Although petitioner originally also sought a declaration that federal law preempts respondent's state law claim, petitioner has not sought review of the district court's determination that that claim could not form the basis for federal jurisdiction. See Pet. Br. 15 n.8. 2 In its opinion, the district court noted that petitioner "agreed to pay benefits for [respondent's] bone marrow transplant subject to its right to contest her claim." Pet. App. 5a-6a. Although it thus appears that respondent has now ---------------------------------------- Page Break ---------------------------------------- 7 the Tenth Circuit's decision in Howard v. Group Hosp. Service, 739 F.2d 1508 (1984). In Howard, the Tenth Circuit had held that benefits claims by FEHBA enrollees are generally governed by state, rather than federal, law. The Howard opinion stated that "[s]tate court awards of monetary judgments in [FEHBA] benefits actions do not have a sufficiently direct effect on the federal treasury to necessitate federal jurisdiction." Id. at 1511. The opinion noted that the FEHBA contract "is a federal contract authorized by federal law and negotiated by OPM," but stated that "the rights created under the contract belong to the participants." Id. at 1512. Thus, a dispute about FEHBA benefits between a federal en- rollee and a FEHBA carrier "is a private controversy in which the federal government simply does not have an interest sufficient to justify invoking federal question jurisdiction." Ibid. 5. In a brief, unpublished opinion, the Tenth Circuit affirmed the district court's decision and declined to reconsider or overrule Howard. Pet. App. la-3a. ___________________(footnotes) received the treatment, petitioner has reserved the right to seek repayment from respondent, This case is therefore not moot. On September 20, 1994, OPM announced in a press release that, "[e ]ffective immediately, OPM will now require coverage by all plans * * * of high dose chemotherapy with autologous bone marrow transplantation (HDC/ABMT) in the treatment of breast cancer. " Although that policy would permit individuals in respondent's position in the future to obtain the treatment she sought through her FEHBA plan, it does not affect the dispute in this case, nor does it have any bearing on the issue of federal jurisdiction now before this Court. ---------------------------------------- Page Break ---------------------------------------- 8 6. While this case has been pending in this Court, OPM has been reviewing its regulations concerning judicial review of FEHBA claims disputes. As a result of this review, the Director of OPM has approved a notice of new interim regulations and request for comments and forwarded the notice for publication in the Federal Register as soon as pos- sible. The interim regulations will continue to provide that enrollees must exhaust both the carrier and OPM review processes before seeking judicial review of a denied benefits claim. They also, however, will eliminate the requirement in the former version of 5 C.F.R. 890.107 that an enrollee who is dissatisfied with OPM's denial of a claim must sue the carrier, rather than OPM. Instead, the interim regulations will provide that the judicial remedy for an enrollee who is dissatisfied with OPM's decision is a suit against OPM. In such a suit, OPM's denial of benefits would be subject to review under the standards generally applicable to review of final agency action under applicable federal law. The interim regulations will also make a number of minor changes in the pro- cedures for resolving disputed claims. The interim regulations will take effect immediately upon publication in the Federal Register. The interim regulations will also add a new provision to the Federal Employees Health Benefits Acquisition Regulation, 48 C.F.R. Subpt. 1652,2. The new regulation would provide that FEHBA contracts must contain clauses setting forth the procedure for resolving disputes about claims for benefits under FEHBA plans. That procedure would conform to the procedure set forth in the interim regulations. It would include the requirement that a claim must first be submitted to the carrier, that the carrier's initial ---------------------------------------- Page Break ---------------------------------------- 9 denial of a claim must then be pursued through the carrier's internal claims process, that the enrollee may then seek OPM review of the denial of the claim, and that the enrollee, after exhausting that process, may commence an action against OPM for judicial review of OPM's final agency action. The contractual provision would make clear that exhaustion of the entire process is a prerequisite for obtaining judicial review of OPM's final action on the claim. SUMMARY OF ARGUMENT The regulations currently in force create a scheme for judicial resolution of disputes about FEHBA benefits that is part private contract action and part action for administrative review of agency action. Congress did not create a right of action for FEHBA benefits by enrollees against their carriers. Accord- ingly, the only cause of action available to an enrollee claiming an entitlement to FEHBA benefits is an action under state contract law. That contract action is unusual, however, in that it closely resembles an action for administrative review of federal agency action. In addition, virtually every issue in the case is governed by federal law. As in an action for administrative review, the enrollee must show at the outset that the administrative remedies available from the FEHBA carrier and OPM were exhausted before the enrollee filed suit. The sub- stantive issue in the case turns on whether OPM's denial of the claim was arbitrary or capricious, a standard that is commonly used under the Administrative Procedure Act (APA), 5 U.S.C. 706(2)(A). And the resolution of that issue itself turns on the construction of a FEHBA contract ---------------------------------------- Page Break ---------------------------------------- 10 governed by federal statutory law and federal regulations. Determining whether such an action for FEHBA benefits under the current regulations "arises under" federal law for purposes of federal jurisdiction under 28 U.S.C. 1331 presents difficult questions. On the one hand, the plaintiff can plead the action as a state contract action and assert that all of the federal elements come in only as preemption defenses. Under the well-pleaded complaint rule, that would ordinarily be insufficient to invoke federal "arising under" jurisdiction. on the other hand, the defendant can argue that the federal elements in such a case so predominate and the federal interest in the action is so strong that it constitutes one of the unusual instances in which a plaintiff's state law cause of action contains federal elements sufficient for "arising under" jurisdiction. Participating as amicus in the court of appeals, we agreed with that con- tention. OPM's new interim regulations fundamentally alter the significance and the analysis of the question presented in this case. Under those regulations, the hybrid action is eliminated. Instead, an enrollee seeking judicial vindication of a claim for FEHBA benefits will be required to sue OPM directly under the Administrative Procedure Act, challenging OPM's final agency action denying benefits. Federal jurisdiction over such an action would be clear and, indeed, principles of sovereign immunity would bar such an action against a federal agency in state court. Because the new regulations will eliminate the possibility of a suit between the enrollee and the carrier over FEHBA benefits, the question presented in this case -whether there would be federal ---------------------------------------- Page Break ---------------------------------------- 11 jurisdiction over such a suit-would cease to have continuing importance. The Court may therefore find it appropriate to dismiss the writ of certiorari in this case as improvidently granted. If the (hurt proceeds to the merits in this case, we submit that the judgment-but not the reasoning-of the court of appeals should be affirmed. The well- pleaded complaint rule generally precludes federal jurisdiction in cases in which, as here, the plaintiff can plead a suit based on a state cause of action. Exceptions to that rule have been recognized, but none clearly cover the circumstances of this case. In light of the interim regulations, there is no need to consider the creation of an additional exception for cases of this sort. In the future, the only question in a suit brought by an enrollee against a carrier for FEHBA benefits would be whether the action is preempted by the APA action against OPM. That issue is the kind of straightforward preemption question that state courts ordinarily have to resolve. Accordingly, if the Court reaches the merits of this case, the judgment of the court of appeals should be affirmed. ARGUMENT A. By Requiring That Cases Involving Disputes Over OPM's Denials Of FEHBA Claims Be Brought Against OPM, Rather Than The FEHBA Carriers, The Interim Regulations Substantially Alter The Significance Of The Issue in This Case. The interim regulations will fundamentally alter the legal context in which this case arises. In order to describe the change, it is necessary first to set forth briefly the scheme governing resolution of ---------------------------------------- Page Break ---------------------------------------- 12 disputes about FEHBA claims under the current regulations. 1. Under the current regulations, a FEHBA enrollee seeking benefits cannot sue OPM. Instead, if the enrollee seeks judicial recourse for a claim for FEHBA benefits, the enrollee has to sue the health carrier. Such an action is a private action on a contract, because there is no provision of federal law that creates a cause of action for the plaintiff/enrollee against the carrier to obtain benefits under FEHBA.3 But the action is not an ordinary private contract action. In important respects, it resembles an action for judicial review of administrative agency action and it is largely governed by federal law. a. A FEHBA plan is governed not only by FEHBA itself and the regulations OPM promulgates pursuant to its general regulatory authority under 5 U.S.C. 8913(a), but also by the contract entered into between OPM and the FEHBA carrier in question. Each such contract must contain a Statement of Benefits. 5 U.S.C. 8902(d). Congress has expressly endowed the Statement of Benefits with preemptive force. Under 5 U.S.C. 8902(m)(l), "[t]he provisions of any contract under [FEHBA] which relate to the nature or extent of coverage or benefits * * * supersede and preempt any State or local law * * * to the extent that such law * * * is inconsistent with such contractual provisions. " Thus, if provisions in a Statement of Benefits are contrary to provisions of state law that would govern an ordinary health ___________________(footnotes) 3 A dispute has existed regarding whether the enrollee's status is that of a third-party beneficiary or a contracting party. Resolution of that dispute would not appear to have any impact on the issues in this case. ---------------------------------------- Page Break ---------------------------------------- 13 insurance or other contract, the provisions of state law are preempted. The Statement of Benefits in petitioner's FEHBA plan (which is typical in relevant respects of the statement in all current FEHBA plans) provides that an enrollee may not commence a lawsuit based on a claim for FEHBA benefits "until [the enrollee] * * * exhausts th[e] OPM review procedure" established to resolve benefits disputes. Pet. App. 56a. If the OPM review procedure results in a determination that the enrollee is entitled to the benefits sought, then there will be no lawsuit because FEHBA provides that "the carrier [must] agree to pay for or provide a health service or supply in an individual case if [OPM] finds that the [enrollee] is entitled thereto under the terms of the contract." 5 U.S.C. 8902(j). But if OPM determines that the enrollee is not entitled to benefits, then the enrollee may file a suit against the health plan carrier to obtain them. An initial issue in such a lawsuit will be whether the enrollee properly invoked the OPM review procedure and whether OPM in fact denied the enrollee's claim. The Statement of Benefits also provides that "judicial action on such claims for [FEHBA benefits] is limited to a review of OPM's final decision to determine if it is arbitrary or capricious under the terms of this Statement of Benefits." Pet. App. 57a. Thus, the primary issue on the merits in a case concerning an enrollee's entitlement to FEHBA benefits is whether OPM's denial of the claim was arbitrary or capricious. The key component of the question whether OPM's denial of the claim was arbitrary or capricious will be the reasonableness of OPM's interpretation of the substantive benefits provisions of the FEHBA --------------------------------------- Page Break ---------------------------------------- 14 contract itself. Interpretation of those benefits provisions will be governed by federal law, for at least two reasons. First, as noted above, the Statement of Benefits in a FEHBA contract preempts state laws with which it is inconsistent, under 5 U.S.C. 8902(m)(l). Thus, the interpretation of the Statement of Benefits must itself be a matter of federal law; it would make no sense to interpret a provision that preempts state law in accordance with whatever limitations or exceptions state law would impose. Second, the federal government has a strong interest in seeing to it that uniform benefits are available to all individuals enrolled in a particular FEHBA plan, regardless of where they live.4 Cf. Boyle v. United Technologies Corp., 487 U.S. 500, 508 (1988) ("where the federal interest requires a uniform rule, the entire body of state law applicable to the area conflicts and is replaced by federal rules"); Clearfield Trust Co. v. United States, 318 U.S. 363, 366-367 (1943). Enrollees in a particular FEHBA plan in one State should not be required to pay for benefits that ___________________(footnotes) 4 The Fourth Circuit has noted that the federal government "has an overwhelming interest in ensuring that all of its employees subject to a particular health insurance policy are treated equally regardless of the state in which they live, and the application of state law interferes with this interest." Caudill v. Blue Cross & Blue Shield, 999 F.2d 74, 79 (1993). When Congress enacted FEHBA's preemption provision, the House committee similarly stated that the application of state law to FEHBA benefits issues "can be expected to result in * * * [a] lack of uniformity of benefits for enrollees in the same plan which would result in enrollees in some States paying a premium based, in part, on the costs of benefits provided only to enrollees in other States." H.R. Rep. No. 282, 95th Cong., 1st Sess. 4 (1977). ---------------------------------------- Page Break ---------------------------------------- 15 are available only to enrollees of that plan in another State because of application of unique features of the second State's common or statutory law. b. Under the FEHBA scheme, an action by an enrollee for FEHBA benefits thus resembles in important respects an action for judicial review of administrative action. Before the enrollee may file suit, the enrollee must exhaust available adminis- trative remedies, just as in ordinary suits for judicial review of administrative action. See, e.g., McCarthy v. Madigan, 503 U.S. 140, 144-146 (1992). When the enrollee files suit, the primary issue on the merits is whether the administrative agency acted arbitrarily or capriciously. That standard is one of the primary standards set forth in the Administrative Procedure Act for judicial review of agency action. See 5 U.S.C. 706(2)(A). Finally, as in an ordinary action for judicial review of agency action, the question whether the agency acted arbitrarily or capriciously is determined by reference to a body of federal law, including the FEHBA statute, the relevant federal regulations, and the Statement of Benefits in the FEHBA contract, which itself resembles a regulation and must be interpreted as a matter of federal law. 2. The result of the above scheme is a hybrid action, in form a contract action between two private parties but in substance an action seeking judicial review of agency action. The action can be pleaded as arising under state law, and it would appear that state law provides the cause of action for the plaintiff to sue upon. But that is the most that state law contributes to such an action; once the cause of action is invoked, it appears that every issue in the case is to be resolved as a matter of federal law. ---------------------------------------- Page Break ---------------------------------------- 16 The question whether such a hybrid suit "arises under" federal or state law for purposes of 28 U.S.C. 1331 is a difficult one. The governing standards for resolving that issue are not controversial. Under the well-pleaded complaint rule, "a cause of action arises under federal law only when the plaintiff's well- pleaded complaint raises issues of federal law." Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58, 63 (1987). Moreover, "the party who brings a suit is master to decide what law he will rely upon," The Fair v. Kohler Die & Specialty Co., 228 U.S. 22, 25 (1913), although the plaintiff may not "defeat [federal jurisdiction] by omitting to plead necessary federal questions in a complaint." Franchise Tax Bd. V. Construction Laborers Vacation Trust, 463 U.S. 1,22 (1983).' Applying those rules to the hybrid action for FEHBA benefits, however, is difficult. Plaintiffs (who are in the same posture as respondent here) can claim that their complaints could be framed under state contract law, and that any federal issues become relevant only insofar as they ___________________(footnotes) 5 The discussion in text concerns a case, like Howard v. Group Hosp. Service, 739 F.2d 1508 (lOth Cir. 1984), in which the plaintiff enrollee sues a FEHBA carrier, claiming an entitlement to FEHBA benefits under the carrier's plan. The present case is instead an anticipatory, declaratory judgment action brought by the carrier against the enrollee. There appears to be no dispute, see Pet. Br. 17, 21-22, however, that the jurisdictional fate of this case is to be determined by whether a case like Howard-an ordinary, coercive lawsuit concerning an enrollee's claim for benefits-would arise under federal law for purposes of Section 1331. See Franchise Tax Bd., 463 U.S. at 19; Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667 (1950). Accordingly, for purposes of resolving the jurisdictional issue before the Court, we treat this case as if it were such a case. ---------------------------------------- Page Break ---------------------------------------- 17 are presented as preemption defenses. In addition, plaintiffs can point out that in two important recent cases this Court has relied on the absence of a federally created cause of action for the plaintiff as a factor of special importance in refusing to find that the complaint arose under federal law. See Merrell Dow Pharmaceuticals, Inc. v. Thompson, 478 U.S. 804,810-812 (1986); Franchise Tax Bd., 463 U.S. at 21, 25. The defendant FEHBA carrier (who is in the same posture as petitioner here) can argue that the federal issues in such cases so predominate-and the federal interest in uniform interpretation of FEHBA benefits contracts across the country is so overwhelming- that any complaint seeking benefits under FEHBA contracts necessarily has federal ingredients, even if the cause of action itself is created by state law. Compare Smith v. Kansas City Title & Trust Co., 255 U.S. 180 (1921). There appear to be no precedents in this Court directly in point. This Court has recognized that the well-pleaded complaint rule must be applied even where "awkward results" are produced because a case must remain in state court, notwithstanding a virtual certainty that the predominant-or even sole-issues will be federal. Franchise Tax Bd., 463 U.S. at 12; see also Louisville & N.R.R. v. Mottley, 211 U.S. 149, 152- 154 (1908). But the cases in which that principle has been applied ordinarily involve the application by a state court of a "simple" federal preemption defense that, if it applied, would bar the state court proceed- ing from going forward.6 In the case of claims for ___________________(footnotes) 6 That was true in Franchise Tax Board and Mottley. See Franchise Tax Bd., 463 U.S. at 14; Mottley, 211 U.S. at 151-152. ---------------------------------------- Page Break ---------------------------------------- 18 FEHBA benefits, however, there is little doubt that, if the suit is not deemed to "arise under" federal law, a state court proceeding could go forward to decide the merits of the case. Yet every substantive issue in such a case would appear to be governed by federal law. 3. OPM's new interim regulations will eliminate the hybrid action and, in doing so, will substantially clarify the jurisdictional issue. Under the interim regulations, suit is to be brought against the admin- istrative decisionmaker, OPM. Such a suit seems clearly to be one "arising under" federal law. It is a familiar action for judicial review of final agency action-in this case, OPM's determination to deny a claim. The standard of review in such a suit is also familiar, since it is supplied by the standards governing judicial review of administrative action in the APA, 5 U.S.C. 706. Although the plaintiff in such a suit would not be able to obtain money damages, the plaintiff would be able to obtain virtually the same remedy that the plaintiff previously could have gotten from the FEHBA carrier. Under the prior scheme, the Statement of Benefits provided that damages in such a suit "are limited to the amount of * * * contract benefits in dispute, plus simple prejudgment interest * * * and court costs." Pet. App. 57a. In an APA action against OPM, the remedy would be a determination that OPM had erred, under the appropriate APA standards, in denying the claim. In such a case, OPM would presumably be required upon remand to find that the enrollee is entitled to the claimed benefit. That, in turn, would trigger the carrier's obligation under 5 U.S.C. 8902(j) to pay the benefit. Court costs would be available to the same extent as otherwise available under applicable ---------------------------------------- Page Break ---------------------------------------- 19 statutes and rules.7 See, e.g., 28 U.S.C. 2412(a)(l) (Supp. v 1993). There is no doubt that a suit challenging final agency action of OPM under the interim regulations could be brought in federal court. See 5 U.S.C. 703. It is equally clear that such a suit could not be litigated on the merits in state court. Sovereign immunity would bar such a suit from proceeding against a federal agency unless there is an applicable waiver. See Boron Oil Co. v. Downie, 873 F.2d 67, 71 (4th Cir. 1989). The only possible waiver would be the one applying to suits "in a court of the United States" under the Administrative Procedure Act, 5 U.S.C. 702." Thus, under the new procedure established in the interim regulations, a suit against OPM seeking FEHBA benefits will have to be litigated in federal court. It also seems clear that, under the interim regulations, the federal court suit for judicial review of OPM's action denying a claim will preempt any suit by an enrollee solely against a carrier for FEHBA benefits, regardless of whether such a suit is brought in federal or state court. If the old "hybrid" suit against the carrier were allowed to proceed alongside ___________________(footnotes) 7 There could be a further benefit to claimants under the APA scheme. Under the Equal Access to Justice Act, pre- vailing plaintiffs could be able to recover attorneys' fees if they satisfied the statutory conditions. 28 U.S.C. 2412(d)(l)(A). 8 When Congress amended Section 702 in 1976 to include the waiver of sovereign immunity, the relevant committee reports made clear that the waiver extended only to suits in federal courts. See S. Rep. No. 996, 94th Cong., 2d Sess. 10 (1976) ("the United States remains immune from suit in state courts"); H.R. Rep. No. 1656, 94th Cong., 2d Sess. 11 (1976) (same). ---------------------------------------- Page Break ---------------------------------------- 20 the action for judicial review of OPM's denial of administrative benefits, the carrier would be faced with the possibility of conflicting obligations. In a given case, OPM could reach the conclusion that benefits were not allowed, and that conclusion could remain unreversed. But a state or federal court adjudicating a private contract action could conclude that the enrollee was entitled to benefits, requiring the carrier to pay them. The result would place the carriers in a position in which they would be required to pay out benefits for which they could not obtain federal reimbursement under the FEHBA program.9 It would also be hopelessly at odds with Congress's purpose in providing for an orderly administrative claims process, see 5 U.S.C. 8902(j), and it would make it impossible for OPM to fulfill its re- sponsibilities to administer the FEHBA program. ___________________(footnotes) 9 Federal regulations provide that FEHBA contracts must contain provisions requiring the carrier to furnish audited financial statements to OPM. Such statements shall include, in the category of benefits paid, "payments made and liabilities incurred for covered health care services on behalf of FEHBP subscribers." 48 C.F.R. 1652.216-71 (emphasis added). Such statements must also contain a certification that "[t]he costs included in the statement are allowable and allocable in accordance with the terms of the contract and with the cost principles of" the relevant regulations. Ibid. The audited statements provide the basis for OPM's determination of whether an experience-rated carrier (like petitioner) has drawn the proper amount from its Treasury account for claims paid. If a court were to order a carrier to pay for health care services that were not "covered health care services" or that were not "allowable and allocable in accordance with the terms of the contract," the carrier could not include the amounts in its audited statement and could not obtain reimbursement from the Treasury for such amounts. ---------------------------------------- Page Break ---------------------------------------- 21 Finally, it would conflict with the vital federal interest in uniformity of benefits availability for all enrollees in a given FEHBA program, regardless of where they live. 4. As a result of the interim regulations, therefore, the issue in this case is unlikely to arise in future cases. The question presented in this case turns on whether an action by an enrollee against a carrier for FEHBA benefits arises under federal law. Under the interim regulations, that issue should no longer arise, because an enrollee's sole judicial recourse for a denial of a FEHBA benefit will be through an action against OPM for administrative review of OPM's denial of the enrollee's claim. The federal jurisdictional basis for such a suit is secure. Because suits by enrollees against carriers for benefits will no longer be maintainable, the question whether such suits would arise under federal law would be of only academic interest. For that reason, we believe that this Court may want to dismiss the writ of certiorari in this case as improvidently granted. B. If The Court Decides This Case On Its Merits, The Judgment Of The Court Of Appeals Should Be Affirmed If the Court proceeds to the merits of this case, we believe that the court of appeals' judgment that there is no federal jurisdiction should be affirmed, albeit for reasons different from those given by the Tenth Circuit. Like other cases in which the jurisdictional issue turns on whether there is a necessary federal element embedded in a state cause of action, re- solution of the jurisdictional issue here requires "sensitive judgments about congressional intent, ---------------------------------------- Page Break ---------------------------------------- 22 judicial power, and the federal system. "Merrell Dow Pharmaceuticals, 478 U.S. at 810. Such judgments must be made "in light of * * * the demands of reason and coherence, and the dictates of sound judicial policy," and "with an eye to practicality and necessity." Ibid. 10 Under the prior OPM regulations, a decision refusing to recognize federal jurisdiction through a straightforward application of the well-pleaded com- plaint rule would lead to a highly anomalous situation. As explained above, state courts would be required to-and federal courts could not, in the absence of diversity of citizenship-adjudicate claims for FEHBA benefits in which the crucial issues all turned on federal law. At the heart of such cases would be the construction of a federal contract in which the federal government has a strong interest and the merits of such a case would turn on whether a federal administrative agency had acted arbitrarily or capriciously. "[T]he demands of reason and co- herence," " the dictates of sound judicial policy," and considerations of "practicality and necessity" all suggest that vital federal interests-in particular, the federal interest in uniformity-might not adequately be protected if cases of that sort could only be litigated in state court. See David Shapiro, ___________________(footnotes) 10 See also 478 U.S. at 814 (recognizing "need for careful judgments about the exercise of federal judicial power in an area of uncertain jurisdiction"); Gully v. First National Bank, 299 U.S. 109, 117-118 (1936) ("What is needed is something of [a] common-sense accommodation of judgment to kaleidoscopic situations which characterizes the law in its treatment of problems of causation * * * [,] a selective process which picks the substantial causes out of the web and lays the other ones aside."). ---------------------------------------- Page Break ---------------------------------------- 23 Jurisdiction and Discretion, 60 N.Y.U. L. Rev. 543, 568 (1985). It is for that reason that we supported petitioner's position in the court of appeals in this case that federal jurisdiction existed. Under the interim regulations, however, the situation is substantially altered. Future cases in which an enrollee sues a carrier for FEHBA benefits will be likely to raise only one issue: whether the case can proceed at all, or whether instead, as we believe, it must be dismissed because it is preempted by the action for administrative review now available against OPM. That is a simple, up-or-down pre- emption question, and it is the type of preemption question that state courts typically resolve successfully in other federal regulatory areas. If disuniformity should develop among the federal or state courts in the resolution of that preemption question, this Court would be able to resolve the resulting conflict. In short, in light of the interim regulations, there is no longer a substantial need for this Court to consider creation of an exception to the well-pleaded complaint rule in order to deal with the unusual jurisdictional situation presented by this case. Accordingly, if the Court proceeds to the merits in this case, the judgment of the court of appeals should be affirmed. ---------------------------------------- Page Break ---------------------------------------- 24 CONCLUSION The judgment of the Tenth Circuit should be affirmed. In the alternative, the Court may want to dismiss the writ of certiorari as improvidently granted. Respectfully submitted. PAUL BENDER Acting Solicitor General * FRANK W. HUNGER Assistant Attorney General JAMES A. FELDMAN Assistant to the Solicitor General WILLIAM KANTER JOHN P. SCHNITKER Attorneys MARCH 1995 ___________________(footnotes) * The Solicitor General is disqualified in this case.