Amicus Curiae Brief — FMC Corp. v. Holliday

Supreme Court, US

rIL ED

JAN <b 4959

No. 89-1048

| JOSEPH E SOANIOL. JP.

| ULE INA e

IN THE

Supreme Court of the United States

OCTOBER TERM, 1989

EMC CoRPORATION

Pe titione i.

CYNTHIA ANN HOLLIDAY,

Ri sponde nt.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Third Circuit

BRIEF AMICUS CURIAE OF SELF-INSURANCE

INSTITUTE OF AMERICA, INC. (SIDA)

IN SUPPORT OF

PETITION FOR?’ WRIT OF CERTIORARI

GEORGE J. PANTOs

VEDDER, PRICE, KAUFMAN, KAMMHOLZ

& DAY

1919 Pennsvivania Avenue, N.W

Washington, D.C. 20006

(202) 828-5026

Counsel tor Amicus Curias

WILSON - Eres Printing Cc In 789-0096 - WASHINGTON. OD C. 20001

TABLE OF CONTENTS

Page

INTEREST OF AMICUS CURIAE ............................... 2

REASONS FOR GRANTING THE WRIT ...... “ 3

A. THE THIRD CIRCUIT FAILED TO RECOG-

NIZE THE DISTINCTION BETWEEN IN-

SURANCE AND SELF-INSURANCE AND

HAS THEREBY CREATED CONFUSION ON

AN IMPORTANT QUESTION OF LAW

B. THE CONFLICT IN THE COURTS AD-

VERSELY AFFECTS THE ADMINISTRA-

TION OF SELF-FUNDED PLANS ........ 8

C. THE THIRD CIRCUIT’S DECISION ADDS

TO ESCALATING HEALTH COSTS AND

THREATENS THE CONTINUED VIABILITY

OF SELF-FUNDING AS AN ALTERNATIVE

TO INSURED HEALTH PLANS ....................... 9

or

CONCLUSION ... puicbteadeaelensidetaamaads Seana ey ena 11

ii

TABLE OF AUTHORITIES

Cases: Page

Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504

> | a ee eee Tee cle NOT ETE FEIN, SEB 6

Baxter v. Lynn, 886 F.2d 182, reh’g denied, ——

F.2d (8th Cir. 1989)........... : 4

Birdsong v. Olson, 708 F. Supp. 792 cw D. Tex.

SS tstce-sepeccceemaperakens: 10

Children’s Hospital v. Whitcomb, 778 F.2d 239

RI ees 4

Farmer v. Monsanto Co., 517 S.W. 2d 129 (1974) 7

FMC Corp. v. Holliday, 885 F.2d 79, reh'g denied,

F.2d (3d Cir. 1989) ............................passim

Insurance Board of Bethlehem Steel Corporation

v. Muir, 819 F.2d 408 (3d Cir. 1987) ........... a 4

Metropolitan Life Insurance Co. v. Massachusetts,

I I ee cuewasuebeatons passim

Metropolitan Life Insurance Co. v. Taylor, 481 U. S.

dens 6

Northern Group Services, Inc. v. Auto Ow ners

Insurance Co., 833 F.2d 85 (6th Cir. 1987),

cert. denied, 108 S. Ct. 1754 (1988) ..... Beate td passim

Pilot Life Insurance Co. v. Dedeaux, 481 U.S. 41

eet calehonts es oatidbadiosecens 6

Reilly v. Blue Cross and Blue Shield of Wisconsin,

846 F.2d 416 (7th Cir.), cert. denied, 109 S.Ct.

145 (1988) ........... cee ON Ns EOE a et a 4

Shaw v. Delta Air Lines, Inc., 463 U.S. 85

ENE SA SERRE La Sc 6

United Food & Commercial Workers & ‘Employers

Arizona Health & Welfare Trust v. Pacyga, 801

F.2d 1157 (9th Cir. 1986) ...000000.. nA 4

Statutes:

SP rss Ue EID COED ID ovcccvccscceesccc-ssccccocencnccccsceeee

we ee, Cee. Meee. Bem. © UTID........<.<ccccsccescccecess:s.-.2-. -

we ow

Other Authorities:

Bae ae, Bene. ee CROUED ..............5-...0.-0..............--

120 Cong. Rec. 29197 (1974)... on... ae

an

iii

TABLE OF AUTHORITIES—Continued

“Annual Employee Benefits Survey,” U.S. Depart-

ment of Labor, Bureau of Labor Statistics

(1986) ..... aaa prea ihendibagaunasionts

P. McDonnell, A. Guttenberg, L. Greenberg, R.H.

Arnett III, “Self-Insured Heaith Plans,” HCFA

Review, Vol. 8 No. 2 (1986) ...............................-.

Senate Comm. on Labor and Public Welfare, 94th

Cong., 2d Sess., Legislative History of Employee

Retirement Income Security Act of 1974, Vol. 1

ns snusasseassisavensens en

W. Durant, “Story of Civilization,” Vol. IV

(3966) ............ sphjdnssasiunssesswetnuecseserers

Page

IN THE

Supreme Court of the United States

OCTOBER TERM, 1989

No. 89-1048

FMC CORPORATION

Petitioner,

V.

CYNTHIA ANN HOLLIDAY,

Respondent.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Third Circuit

BRIEF AMICUS CURIAE OF SELF-INSURANCE

INSTITUTE OF AMERICA, INC. (SITA)

IN SUPPORT OF

PETITION FOR WRIT OF CERTIORARI

The Self-Insurance Institute of America, Ince.

(SITA) hereby submits this brief in support of the

petition filed in No, 89-1048 for a writ of certiorari

to review the judgment of the United States Court of

Appeals for the Third Circuit entered on September

11, 1989.

2

SIIA has obtained the written consent of both

FMC Corporation and Cynthia Ann Holliday to the

filing of a brief amicus curiae in support of the peti-

tion for certiorari.’

INTEREST OF THE AMICUS

SIIA is a non-profit corporation composed of over

700 members dedicated to the advancement and pro-

tection of the self-insurance industry. SIIA’s mem-

bership includes users of self-insurance such as em-

ployer plan sponsors, as well as service providers such

as third-party administrators, reinsurance companies,

and other entities engaged in the self-insurance busi-

ness. SIIA is the only association in the U.S. which

represents firms, professionals, and organizations

which participate in the broad spectrum of self-insur-

ance, including self-insured group health plans.

Through SIIA, its members coordinate their views

and provide practical information and recommenda-

tions to government and the public on how the self-

insurance system functions, and on the impact of gov-

erment regulations and interpretations under the

Employee Retirement Income Security Act of 1974

(ERISA) concerning self-insured health plans and

plan participants. This includes rendering assistance

to courts in their deliberations on significant self-

insured health plan issues of broad concern to mem-

bers.

SITA has an interest in the ERISA preemption is-

sue presented by the petition for three reasons. First,

member companies which sponsor self-insured benefit

plans face a significant potential monetary loss under

' Original consent letters from both FMC Corporation and

Cynthia Ann Holliday have been lodged with the Court.

3

the Pennsylvania Motor Vehicle Financial Responsi-

bility Law of 1984 (75 Pa. Cons. Stat. Ann. § 1720

(Purdon 1984)) or similiar statutes in other states

because, since the passage of ERISA in 1974, such

plans have contained subrogation clauses allowing re-

covery of medical expenses paid by such plans for

injuries sustained through the negligence of third

parties. Second, because many SIIA employer mem-

bers operate on a multistate basis, they are legiti-

mately concerned that any erosion of ERISA’s pre-

emption provisions will subject self-insured health

plans to burdensome and costly state regulation which

will severely hamper their efforts to maintain uni-

form and equitable benefits for covered employees.

Third, the Third Circuit’s decision * creates signifi-

cant administrative problems for thousands of con-

tract administrators who provide services to self-

insured health plans.

Accordingly, SIIA files this amicus curiae brief in

support of the petition for certiorari.

REASONS FOR GRANTING THE WRIT

The importance of the Third Cireuit’s decision in

this case and the need for prompt review by this

Court cannot be overstated.’ As the petition makes

clear, that decision created a square conflict with

other circuits which have followed this Court’s hold-

ing in Metropolitan Life [nsivrance Co, v. Massachiu-

setts, 471 U.S. 724 (1985), that Section 514 of

ERISA preempts state regulation of self-insured

°FMC Corp. v. Holliday, 885 F.2d 79, reh’g denied, ——

F.2d —— (3d Cir. 1989).

‘The principal issue in this case is whether through its

“deemer clause’” ERISA preempts application to self-funded

4

health plans.‘ More specifically, the Third Circuit's

decision, as well as a decision by the Sixth Circuit in

Northern Group Services v. Auto Owners Ins. Co.,

833 F.2d 85 (6th Cir. 1987), cert. denied, 108 S.Ct.

1754 (1988), that ERISA does not preempt a state

anti-subrogation insurance statute as applied to self-

insured plans, are in direct conflict with the Ninth

Cireuit’s decision in United Food & Commercial

Workers v. Pacyga, supra, 801 F.2d 1157 (9th Cir.

1986).

This conflict has created widespread uncertainty oa

an important question of federal law directly affect-

ing thousands of self-funded health plans, adminis-

trators who provide services to such plans, and mil-

lions of plan beneficiaries. It has also heightened the

potential of increased litigation involving and affect-

ing self-insured health plans, a threat which may

health plans of the anti-subrogation provision in Pennsyl-

vania’s Motor Vehicle Financial Responsibility Law of 1984.

The Third Circuit held that ERISA’s express preemption pro-

visions did not preclude application of the Pennsylavnia stat-

ute to self-funded health plans.

4 See Barter v. Lynn, 886 F.2d 182, reh’g denied, —— F.2d

(8th Cir. 1989); Reilly v. Blue Cross and Blue Shield

of Wisconsin, 846 F.2d 416 (7th Cir. 1988), ceri. denied,

109 S.Ct. 145 (1988); United Food & Commercial Workers

v. Pacyga, 801 F.2d 1157 (9th Cir. 1986); Powell v. Chesa-

peake & Potomac Tele. Co., 780 F.2d 419 (4th Cir. 1985),

cert. denied, 476 U.S. 1170 (1986); Children’s Hosp. v.

Whitcomb, 778 F.2d 239 (Sth Cir. 1985). In Insurance

Board of Bethlehem Steel Corp. v. Muir, 819 F.2d 408 (3d

Cir. 1987), the Third Circuit itself has also held that ERISA

preempts state insurance law as applied to self-insured health

plans.

5

undermine the continued growth of such plans as an

alternative to purchased insurance for delivering

health benefits to employees.

A. THE THIRD CIRCUIT FAILED TO RECOGNIZE

THE DISTINCTION BETWEEN INSURANCE AND

SELF-INSURANCE AND HAS THEREBY CRE-

ATED CONFUSION ON AN IMPORTANT QUE? -

TION OF LAW.

In holding that a state insurance law applies to

a self-insured health plan, the Third Circuit ignored

ERISA’s express statutory language and this Court’s

holding in Metropol/tan Life, supra, that such benefit

plans are exempted from state regulation. As this

Court was at pains to point out in Metropolitan Life,

‘ininsured” employee benefits are not open to even

“indirect regulation” under state law. 471 U.S. at

746-47.

The Third Circuit not only overlooked the long-

standing distinction between insurance and _ self-

insuranee recognized in Metropolitan Life, but also

misinterpreted ERISA’s legislative history relating to

preemption.” Thus, the Third Circuit’s decision has

° ERISA’s legislative history confirms that, subject to cer-

tain narrow exceptions set forth in the statute, Congress in-

tended to preempt all state law relating to employee welfare

benefit plans. As explained by Rep. Dent, former Chairman

of the Subcommittee on Labor of the House Labor and Edu-

cation Committee:

I wish to make note of what is to many the crowning

achievement of this legislation, the reservation to Federal

authority of the sole power to regulate the field of em-

ployee benefit plans. With the preemption of the field,

we round out the protection afforded participants by

6

created confusion among firms who sponsor and ad-

minister self-funded health plans and who have acted

in reliance on ERISA’s broad preemption provisions,

and this Court’s previous interpretations.’ In addi-

tion, the Third Circuit decision has created wide-

spread uncertainty over the extent to which state in-

surance laws and regulations apply to self-funded

health plans that operate currently within a federal

reguiatory framework which allows such plans the

flexibility to incorporate a variety of plan design fea-

tures, including subrogation clauses, within the plans.

There can be no serious dispute about the historical!

distinction between insurance and _ self-insurance

upon which employers who self-insure have always

relied.’ It is a longstanding practice that self-insured

eliminating the threat of conflicting and inconsistent

State and local regulation.

120 Cong. Rec. 29197 (1974). The legislative history clearly

demonstrates that Congress, in enacting ERISA, intended to

replace the conflicting system of state and local regulation of

employee benefit plans with a “uniform source of law” for

evaluating the conduct of plan administrators. Introductory

Statement of Sen. Javits on S. 1557, reprinted in 1 Legislative

History of ERISA of 1974 at 273, 279 (1973); accord 120

Cong. Rec. 29933 (1974) (statement of Sen. Williams) ; id.

at 29197 (statement of Rep. Dent).

6 E.g., Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504

(1981) ; Shaw v. Delta Air Lines, Inc., 463 U.S. 85 (1983) ;

Pilot Life Ins. Co. v. Dedeaurx, 481 U.S. 41 (1987); Metro-

politan Life Ins. Co. v. Taylor, 481 U.S. 58 (1987).

™The concept of self-insurance can be traced back to the

middle ages when the sea-faring Phoenicians assumed the

total risk of loss of destruction of their maritim: fleets on

voyages avound the world. Indeed, as far back as the thir-

teenth century, merchant guides provided members with “‘in-

surance” protection against fire, shipwreck, flood, disability

7

risks, including the medical expenses of employees,

can be financed by employers from their own current

revenues. Even prior to ERISA, state courts under-

stood that an employer who self-insures health bene-

fits is not in the “insurance business.” Farmer v.

Monsanto Co., 517 S.W.2d (Mo. 1974). ERISA ecodi-

fied and expanded this well established distinction in

1974 when it adopted a broad Section 514 preemption

provision, including a “deemer” clause which ex-

pressly removed wninsured benefit plans from the

scope of the ERISA insurance savings clause.

In concluding that ERISA’s “deemer” provision

does not insulate self-funded health plans from state

regulation, the Third Circuit fashioned a new judicial

standard. Thus, under the Third Circuit’s approach,

for the first time the “deemer” clause was held not

applicable to self-funded health plans in cases where

a state anti-subrogation law “affects a central con-

cern of ERISA.” FMC Corp. v. Holliday, supra, 885

F.2d at 89. The Third Circuit surprisingly concluded

that, notwithstanding the Pennsylvania Motor Ve-

hicle Law’s direct interference with a basic plan de-

sign feature integral to a health plan, namely a sub-

rogation clause, the Pennsylvania statute did not

affect any “core” ERISA concerns. This novel and

illogical interpretation involving application of a ju-

dicially contrived standard to ERISA’s “deemer”

clause raises a significant question of law to be ad-

dressed by this Court.

The dilemma now facing those who self-insure

health benefits simply stated is: “Do we rely on the

and other misfortunes while those not protected by the guild

assumed the risk of their own losses. W. Durant, Story of

Civilization, Vol. IV (1950).

8

express ERISA preemption language which states

that no “employee benefit plan . . . shall be deemed to

be an insurance company... or to be engaged in the

business of insurance . . ., 29 U.S.C. § 1144(b) (2)

(B), or do we expend the time and money necessary

to amend our self-insured health plans to comply with

a multiplicity of state insurance laws?” Or, more

troublesome, employers who self-insure ask: “Do we

heed the Third Circuit in FMC Corp. and terminate

our self-insured health plans (or fail to start new

ones) or should we instead convert to a more costly

insured health plan?”

In sum, this confusion and uncertainty over pos-

sible state regulation creates substantial problems

for companies, like those represented by SIIA, that

maintain self-funded health plans. It is this confu-

sion that we ask this Court to now resolve by grant-

ing the requested writ.

B. THE CONFLICT IN THE COURTS ADVERSELY

AFFECTS THE ADMINISTRATION OF SELF-

FUNDED PLANS.

The conflict in the courts is having a significant

adverse impact on the administration of thousands of

self-funded plans, particularly those which are main-

tained in more than one state. Large and medium-

sized employers which maintain self-funded plans

typically operate on a national or multi-state basis.*

Such plans, often administered by third-party admin-

istrators, need certainty that their programs will be

8 Forty-three percent of medium-sized employers (250 to

999 employees) and eighty percent of large employers (5,000

to 50,000 or more employees) sponsor self-insured health

plans. U.S. Department of Health and Human Services,

Health Care Financing Review, Vol. 8, No. 8 (1986).

9

governed by a single set of laws, rather than varying

rules decreed by courts in fifty different jurisdic-

tions.’

The phenomenal growth in self-funded plans has

been influenced to a great extent by the current sys-

tem of uniform benefit plan administration fostered

by ERISA. To subject such plans to the threat of

often conflicting and inconsistent state insurance

regulation—to say nothing of the threat of costly

state judicial proceedings—will almost certainly re-

sult in piecemeal state regulation of such plans;

rather than uniformity, chaos will prevail.

C. THE THIRD CIRCUIT’S DECISION ADDS TO ES-

CALATING HEALTH COSTS AND THREATENS

THE CONTINUED VIABILITY OF SELF-FUNDING

AS AN ALTERNATIVE TO INSURED HEALTH

PLANS.

The Metropolitan Life case, provided a significant

impetus to companies to self-insure employee health

benefits. This growth reflects recognition of self-

insurance not only as an alternative to insurance for

funding health benefits, but also as a cost efficient

method of responding to rapidly escalating health

costs.

Important cost factors which have contributed to

the growth of self-insurance within the present

® Self-funded plans provide health benefits to more than

fifty percent of the workforce. Fifty-one percent of firms

which maintain self-insured health plans utilize an outside

third-party contract administrator to administer self-insured

plans. During the five year period 1981-1985, enrollment in

self-insured health plans of medium and large firms nearly

doubled. Bureau of Labor Statistics, U.S. Labor Dept., An-

nual Employee Benefit Survey (1981-85).

10

ERISA regulatory framework include flexibility of

plan design, greater control over claims, freedom

from state insurance premium taxes and mandated

benefits laws,’ and cash flow advantages. Each of

these factors results in a reduction of health benefit

costs.

Typically self-funded plans contain coordination of

benefit or subrogation provisions. Subrogation provi-

sions generally involve plan recoveries for medical ex-

penses paid by the plan for injuries sustained in auto-

mobile accidents, for product defects, accidents on

private or public property and malpractice by hos-

pitals and doctors, which are also paid to plan par-

ticipants pursuant to legal action or settlement in

civil cases. Subrogation recoveries do not reduce med-

ical expenses which would otherwise be paid to plan

participants in the absence of a third party recov-

ery. By eliminating duplicative payments, self-

funded health plans with subrogation clauses have

contributed to a reduction of overall health costs for

such plans. Accordingly, the ability to subrogate in

such cases contributes to more cost-efficient adminis-

tration of health plans and lower health benefit pay-

ments. Thus, the Third Circuit’s decision below will

add to escalating health costs and threatens the con-

tinued use of self-insured health benefit programs as

a viable method of controlling health costs.

In sum, the threat of state interference in the ad-

ministration of self-funded health plans with its at-

tendant higher costs will continue until this Court

settles the issue now before it.

10 Self-insured plans are not subject to state premium taxes.

Birdsong v. Olson, 708 F. Supp. 792 (W.D. Tex. 1989).

1]

CONCLUSION

For the reasons set forth above, we urge the Court

to grant the writ of certiorari so that these iniportant

and practical issues can be resolved.

Respectfully submitted,

GEORGE J. PANTOS

VEDDER, PRICE, KAUFMAN, KAMMHOLZ

& DAY

1919 Pennsylvania Avenue, N.W.

Washington, D.C. 20006

(202) 828-5026

Counsel for Amicus Curiae