July 8, 2014 – A three-judge panel for the Seventh Circuit Court of Appeals has ruled that a lawsuit by three Wisconsin school districts against a health care insurance administrator must go back to state court where it first started more than two years ago.
In Hartland Lakeside No. 3 School District v. WEA Insurance Corp., No 13-3787 (June 27, 2014), a three-judge panel ruled that the federal court lacked subject matter jurisdiction to decide the case, which involves reimbursements for medical care.
Specifically, the Hartland/Lakeside, Oconomowoc, and Arrowhead school districts were entitled to reimbursements for medical care expenses to some early retirees. The Patient Protection and Affordable Care Act provides federal money for that purpose.
WEA Insurance, which administered health care programs for those school districts, was to collect the federal reimburse money for them. But WEA Insurance, the school districts’ allege, decided to hold reimbursements to reduce premiums in future years.
The school districts want the reimbursements owing in the year the medical expenses were incurred. They say their decision to switch health care administrators means they will not receive the future premium rebates. They want the federal money now.
The school districts, claiming conversion of reimbursements owed to them, filed the lawsuit in state court. But WEA Insurance removed the case to federal court.
They said the case involves a federal question under the Affordable Care Act (ACA) and regulations. The school district fought to return the matter back to state court. The district judge certified the issue for interlocutory appeal, but it was denied.
Ultimately, the case stayed in federal court, and district Judge William Callahan ruled in favor of WEA Insurance on the merits. On appeal, the three-judge appeals court panel ruled that the federal district court lacked subject matter jurisdiction to hear the case.
The school districts, now not wanting to relitigate the whole matter in state court, asked for a final decision on the merits by the federal appeals court. But the court refused.
“We appreciate that the school districts, which initially wanted a remand, now prefer a final decision in federal court where they believe … that they can prevail outright,” wrote Judge Frank Easterbrook. “But practical considerations never justify a federal court’s adjudication of a suit over which it lacks subject matter jurisdiction.”
Not a Federal Question
The federal court lacked subject matter jurisdiction, the court ruled, because the claim did not arise under federal law. In addition, there was no diversity jurisdiction.
“[T]he complaint relies entirely on state law, and although WEA contends that federal law is material to the suit, the existence of a federal issue rarely allows removal,” wrote Judge Easterbrook, rejecting that claim that the ACA provided WEA with a defense.
“Where’s the federal defense? To say that a particular plan of distribution complies with federal law (as a rebate also would) is not the end of the line,” Judge Easterbrook wrote. “Many things comply with federal law but violate state law.”
The appeals panel noted that most insurance disputes arise under state law because the McCarran-Ferguson Act “gives states preeminence in the domain of insurance regulation.” Ignoring state insurance law would “disrupt the state-federal allocation.”
“[T]he school districts’ claim to the economic benefit of the federal subsidies that were justified by the medical expenses of the districts’ retirees is a dispute about ownership and belongs in state court,” Judge Easterbrook wrote.