Amicus Curiae Brief — FMC Corp. v. Holliday

—

No. 89-1048

IN THE

Suprenwe Court of the United States

OCTOBER TERM, 1989

FMC CORPORATION,

On Writ of Certiorari to the United States

Court of Appeals for the Third Circuit

BRIE OF THE CHAMBER OF COMMERCE OF THE

UNITED STATES OF AMERICA, AS AMICUS CURLAE,

IN SUPPORT OF TILE PETITIONER

Ore Ty \ |

STi EN A. BOKA’ [ \ ,

MONA C. ZEIBER: Wi |

CHAMBER OF COMMER 0) ‘

OF THE UNITED STATI SOOM: |,

OF AMERICA Washington, D.C 2003

1615 H Street, N.W —») 46,

Washington, D.C, 20062

(202) 463-5337

MORGAN, LEWIS & BOCKII

PeoOo M Street, NW

Wiashia n. 1.C. 2OO86

TABLE OF CONTENTS

INTEREST OF AMICUS CURIAE .........................-..---..

SUMMARY OF ARGUMENT ..................00..000..20ces.

PIT aninscccsivsicansivserteintapreiatacseseninitcicituniibiciaaaadeintia

I.

Il.

III.

THE THIRD CIRCUIT’S ATTEMPT TO

“MAKE SENSE” OUT OF ERISA’S PRE-

EMPTION PROVISIONS FAILS BECAUSE

IT IGNORES FUNDAMENTAL DISTINC-

TIONS BETWEEN THE BUSINESS OF IN-

SURANCE AND EMPLOYEE BENEFIT

PLANS, AND BETWEEN INSURED AND

CORRE RIRED TOIT cece ccccssscascncstonesentinbansons

A. Historical And Functional Differences Be-

tween The Business Of Insurance And Em-

ployee Benefit Plans Justify Different Rules

ND FEIN: ssncsicscisissadanocsenobuicianhatsemesnaaabnsiennns

B. Uninsured Plans Have A Particular Need

For Complete Protection From State Insur-

I TE... siscnnciniicitiniieiinamaettiedammiamminaanee

IF THE THIRD CIRCUIT DECISION IS NOT

REVERSED, UNINSURED PLANS WILL BE

FORCED TO RESPOND TO UNWARRANTED

INCREASED ADMINISTRATIVE AND BEN-

EFIT COSTS, WHICH MAY JEOPARDIZE

THE CONTINUED DELIVERY OF COMPRE-

HENSIVE MEDICAL BENEFITS TO PLAN

PS Oe CARD cicicsevsitieninistinnitatnlinarietnmnnninnnet

IF LEFT UNDISTURBED, THE THIRD CIR-

CUIT DECISION WILL PROVOKE UNCER-

TAINTY AND FOSTER UNNECESSARY

LITIGATION AS THE FEDERAL COURTS

STRUGGLE TO APPLY AN INHERENTLY

CONFUSING AND UNWORKABLE PRE-

EMPTION TEST ........ jaabaceuestbeasidnnniiaaneeemnesdnaacises

SED I cscicrssssiisndernnssisusiiiianintadenhaiiainumaamaanaaie

11

14

18

ii | iii

TABLE OF AUTHORITIES | TABLE OF AUTHORITIES—Continued

Cases Cited Page

State: Page

— es aoe we Oe ~— Ill. Ann. Stats., Chap. 73 §§ 964, 969 (Smith-Hurd

— ee ene Sen an aa C nin ‘ SUMED. sa. -c-cumeuansbanedasubeeedetusinbeneeucimessesenenaniedbbusmapasta 15

FMC Corp. v. Holliday, 885 F.2d 79 (3d

. ae — ees. a passim Ohio Rev. Code Ann. § 3901.38 (Anderson 1989) .. 15

Fort Halifax Packing Co., Inc. v. Coyne, 482 U.S. 1 ‘ prin onien hd 1 to 720, Introduction ,

(1987) . na 10 0 Dart aaa a ene

Laborers Health and Welfare ‘Trust Fund v. Ad- Pa. Page Ann. tit. 40 § 93 Apibogye 1971) netsscensecesnees 15

vanced Lightweight Concrete Co., Inc., 484 U.S. . Nore Stat. Ann. 8 + 20 (Purdon 1984) .....

ST 2 enn. Code Ann. § 68-11-219 (1988) —..................

Liberty Mutual Insurance Group v. Iron Workers Federal Regulation Cited

Health Fund of Eastern Michigan, 879 F.2d 1384 Cc “R$ 2560.5

5" 13 ae eae GREE (ke) ”

Metropolitan Life Insurance Company v. Massa- Legislative History Cited

chusetts, 471 U.S. 724 (1985) ........................... 7,10,17 _ .

Northern Group Services, Inc. v. Auto Owners In- 120 Cong. Rec. 29197 (1974) noses eeenee eee | 9

surance Co., 833 F.2d 85 (6th Cir. 1987), cert. Other Authorities Cited

denied, 108 S.Ct. 1754 (1988) ................ ' 6, 7,12 - ,

| : . “ . Burcke, Administrative Costs Lower Among Self

a League v. NLRB, 473 U.S. 9 : Insurers: Study, Bus. Ins., February 13, 1989,

Me ee ee ae I tac sats cease taspiainpdaibenenbbenpiieestioed 11

Shaw v. . -

gee Bete Air Lines, Ine. 463 USS. 85 9.17 Collins, Regulation Best on State Level: Wash-

reg ee , burn, Bus. Ins., May 2, 1988, at 69 0... 9

Trans World Airlines, Inc. v. Independent Federa- Donahue, 53% of Group Health Plans Are Now

295

pore eee 9 Seif-Insured: HIAA, Nat’l Underwriter, June

In Re: White Farm Equipment Co., 788 F.2d 1186 18, 1988, at 13 .................. a teen 1]

(6th Cir. 1986) 16 Fisher, Agents, Consumer Groups Seek Regula-

a. amneay tory Standards, Nat’l Underwriter, June 12,

REL TE El <ccccnceempinnaseninininkaseinsimnannbiinininetmineeuinnsnnattsn 9

Statutes Cite Higegi

atutes Cited Foster Higgins, Health Care Benefits Survey—

Federal: "lia “11, 12, 18

Employee Retirement Income Security Act Howard, States to Keep Ins. Regulation, Nat'l

(“ERISA”) 29 U.S.C. §$ 1001 et seq. es 2 Underwriter, June 26, 1989, at 3 9

29 U.S.C. § 1001 (a) ................... oe AS ioe 8 Jones, The Industry Doesn't Need a Federal ‘Czar’,

29 U.S.C. § 1051(1) -...... A ae Te Pays Soa 15 Nat’! Underwriter, November 7, 1988, at 19. fe)

S| eee a 15 Shalowitz, Self-Insurance—Self-Funding Benefits

a ensosunsmicsunseuscen aay 6 at Peak of Popularity?, Bus. Ins., January 30,

29 U.S.C. § 1144(b) (2) (A) .................... aoe coer 6, 7 SS 2 pane Ss eutpphensebnennepnataianeeadiapnbdaiisseegaish 12

29 U.S.C. § 1144(b) (2) (B) | 6, 7

McCarran-Ferguson Act, 15 U.S.C. §§ 1011 et s seq... 3,8

IN THE

Supreme Court of the United States

OCTOBER TERM, 1989

No. 89-1048

FMC CoRPORATION,

Petitioner,

; »

CYNTHIA ANN HOLLIDAY,

Respondent.

On Writ of Certiorari to the United States

Court of Appeals for the Third Circuit

BRIEF OF THE CHAMBER OF COMMERCE OF THE

UNITED STATES OF AMERICA, AS AMICUS CURIAE,

IN SUPPORT OF THE PETITIONER

INTEREST OF AMICUS CURIAE

With the written consent of the parties,’ the Chamber

of Commerce of the United States (“Chamber”) submits

this brief as amicus curiae in support of the Petitioner.

The Chamber is the nation’s largest federation of busi-

ness, trade and professional organizations iv the United

States. It represents the interests of over 180,000 cor-

porations, partnerships and proprietorships, as well as

several thousand state and local chambers of commerce

and trade associations. An important function of the

Chamber is to represent the interests of its member em-

ployers in important labor relations matters before this

1 Pursuant to Supreme Court Rule 37.2, the consent letters have

been filed with the Clerk of this Court.

2

Court, the lower courts, the United States Congress, the

Executive Branch and independent regulatory agencies

of the federal government. This representation consti-

tutes a significant aspect of the Chamber’s activities.

Accordingly, the Chamber has sought to advance those

interests by filing briefs in a wide spectrum of labor

relations litigation,’ including this case, in which the

Chamber urged the Court to grant certiorari.

In the decision below, the Third Circuit Court of Ap-

peals rejected this Court’s bright-line preemption test

under the Employee Retirement Income Security Act of

1974 (“ERISA”), 29 U.S.C. $$ 1001 et seqg., which estab-

lished that state regulation of uninsured employee bene-

fit plans is preempted by ERISA, even where the state

acts through its insurance laws which are generally

“saved” from preemption. Instead, the Court of Appeals

vrafted its own test, permitting a Pennsylvania anti-

subrogation law to apply to uninsured plans, because the

law {| rediy did not address “core ERISA concerns.’

Tue Third Cireuit decision threatens to disrupt the

t+. of many Chamber members to continue to main-

and operate their self-insured employee benefit

is atso jeopardizes the financial stability of unin-

sured, collectively bargained multiemployer plans, to

which many Chamber members contribute. By prohibit-

ing uninsured plans from using subrogation rules as a

cost containment mechanism, the Third Circuit decision

will inevitably result in substantial increases in the bene-

fit costs of these plans. Further, the decision will en-

courage other states to delve into employee benefit plan

regulation, which will increase administrative costs and

expose uninsured plans to the threat of conflicting re-

2E.q., Trans World Airlines, Inc. v. Independent Federation of

Flight Attendants, 109 S.Ct. 1225 (1989): Laborers Health and

Welfare Trust Fund v. Advanced Lightweight Conercte Coa, Ine.

484 U.S. 539 (1988): Pattern Makers Leaque vo. NLRB, AT? US.

95 (1985).

3

quirements. Chamber members thus have a compelling

interest in seeking to prevent any erosion in this Court’s

commitment to comprehensive federal preemption. This

interest puts the Chamber in a position to provide the

Court with a more complete understanding of the potcn-

tial impact of the Third Circuit decision, ,and of the

necessity for this Court to act to preserve both the viabil-

ity of uninsured benefit plans and their exclusively fed-

eral scheme of regulation.

SUMMARY OF ARGUMENT

In attempting to “make sense” of ERISA’s interlock-

ing preemption provisions, the United States Court of

Appeals for the Third Circuit has adopted an unprece-

dented approach which purports to permit a “rational

system” of state and federal law to apply uniformly to

insured and uninsured employee benefit plans. Reject-

ing the unanimous view of eight Justices of this Court,

who held that ERISA preempts the application of state

insurance laws to uninsured plans, the Third Circuit con-

cluded that state laws purporting to regulate “insur-

ance” may apply to uninsured employee benefit plans as

long as they do not address “core ERISA concerns.” In

adopting this approach, however, the Court of Appeals

ignored fundamental, historical distinctions between the

business of insurance and employee benefit plans, and

overlooked critical differences between insured and unin-

sured plans—differences which render uninsured plans

acutely vulnerable to the threat of dual state and federal

regulation.

Several factors support the application of different

rules under ERISA for insured and uninsured plans.

First, Congress’ decision to save state insurance laws

from ERISA preemption was consistent with its deferral

to state regulation in the McCarran-Ferguson Act of

1945, Ch. 20, 59 Stat. 33 (1945), and its decision at

that time that continued state regulation of the business

4

of insurance was in the public interest. By contrast,

when Congress enacted ERISA in 1974, it determined

that adequate safeguards concerning the operation of

employee benefit plans were lacking, thus making fed-

eral regulation of those plans desirable.

Second, the nature and operation of employee benefit

plans make it inappropriate for them to be subject to

state insurance laws designed to regulate commercial

businesses and to protect consumers. While insurance

companies are businesses, selling consumer products to

the public, welfare benefit plans are non-profit entities

which exist to provide benefits only to sponsoring em-

ployers’ employees. They do not market their products

to outside groups or to the public at large.

Third, Congress could not have accomplished its goal of

eliminating the threat of conflicting and inconsistent em-

ployee benefit plan regulation without exempting unin-

sured plans from state regulation. Although a plan

which purchases an insurance policy may rely on the in-

surance company to comply with any state laws affecting

the company, an uninsured plan subject to state insur-

ance laws would itself become responsible for sorting

through various and conflicting state requirements. By

failing to recognize the adverse impact that its decision

would have on uninsured plans, and by ignoring the in-

tent of Congress to eliminate a “patchwork scheme of

regulation,” the Third Circuit reached a_ conclusion

which can never make sense under the ERISA regula-

tory scheme.

If, as a result of the decision below, uninsured plan

are now forced to comply with various state Insurance

laws, their administrative costs will undoubtedly in-

crease, More significantly, the Third Cireuit analysi-=

will drive up the benefit costs of uninsured plans. Sub-

rogation rules are included in many plans’ cost contain-

ment efforts, and are designed to maximize the protec-

tion available to all plan participants by providing bene-

5

fits only to those individuals who have no other avenues

of recovery. If employers and plan administrators are

prevented from using these cost containment features,

benefit costs will increase.

In order to respond to the pressures created by state-

mandated benefit increases, employers may conclude that

they have to reduce plan benefits. One alternative, al-

ready embraced by some plans, would be to eliminate

coverage entirely for medical costs arising out of auto-

mobile accidents. If injuries and illnesses arising out of

automobile accidents are not covered at all by a plan, the

subrogation issue would not arise. A change in coverage

of this magnitude, however, could have disastrous conse-

quences for the participants of uninsured plans. In

some cases, participants may have no coverage at all for

their medical claims. Thus, instead of permitting double

recoveries, as the Pennsylvania statute was designed to

do, state anti-subrogation laws may result in no avail-

able recovery for individuals otherwise covered by em-

ployee benefit plans.

Finally, the vagueness of the “core ERISA concerns”

test virtually guarantees a long period of uncertainty

during which the states will test the outer limits of the'r

newly-found authority to regulate plans. Plans and em-

ployers, on the other hand, will be fighting to preserve

some semblance of ERISA’s originally intended preemp-

tion. while at the same time struggling te comply with

conflicting laws. When these conflicting interests are

brought before the federal courts, judges will be forced

to sort through an endless series of disputes over the

meaning and scope of the Third Circuit. test. Accore-

ingly. this Court should reverse the decision below and

restore order to the regulation of employee welfare bene-

fit plans.

6

ARGUMENT

I. THE THIRD CIRCUIT’S ATTEMPT TO “MAKE

SENSE” OUT OF ERISA’S PREEMPTION PROVI-

SIONS FAILS BECAUSE IT IGNORES FUNDA-

MENTAL DISTINCTIONS BETWEEN THE BUSI-

NESS OF INSURANCE AND EMPLOYEE BENE-

FIT PLANS, AND BETWEEN INSURED AND UN-

INSURED PLANS

The Third Circuit’s unprecedented preemption analysis

is rooted in its desire to “make sense” of ERISA’s in-

terlocking preemption provisions." FMC Corp. v. Holli-

day, 885 F.2d 79, 88 (3d Cir. 1989) (“FMC”). How-

ever, in its attempt to create a “rational system” of state

and federal law which would apply uniformly to insured

and uninsured employee benefit plans,‘ the Third Circuit

3 Section 514(a) of ERISA generally provides that the provisions

of ERISA “shall supersede any and all State laws insofar as they

may now or hereafter relate to any employee benefit plan... .”

Section 514(b)(2)(A), often referred to as the “savings” clause,

states that except as provided in subparagraph: (B), nothing in

Title I of ERISA “shall be construed to exempt or relieve any

person from any law of any State which regulates insurance, bank-

ing, or securities.” 29 U.S.C. §1144(a), (b)(2)(A). Section

514(b)(2)(B) of ERISA, known as the “deemer” clause, provides

that “‘[nljeither an employee benefit plan ... nor any trust estab-

lished under such a plan, shall be deemed to be an insurance com-

pany or other insurer ... or be engaged in the business of insur-

ance ... for purposes of any law of any State purporting to regu-

late insurance companies [or] insurance contracts... .” 29 U.S.C.

§ 1144(b)(2)(B).

*The Third Circuit relied heavily in its decision on the analysis

of the Sixth Circuit Court of Appeals in Northern Group Services,

Inc. v. Auto Owners Insurance Co., 833 F.2d 85 (6th Cir. 1987),

cert. denied, 108 S.Ct. 1754 (1988) (“Northern Group Services”),

which held that ERISA does not preempt the application of state-

mandated coordination of benefits rules under a Michigan no-fault

automobile insurance law to uninsured plans. Both of these Circuit

Courts strained to reach a result preserving a uniform application

of state laws to all employee benefit plans, “so that benefit obliga-

tions are governed by a rational system of state law and federal

7

ignored fundamental, historical distinctions between the

business of insurance—which may be regulated by the

states—and employee benefit plans, which may not. The

Third Circuit approach also ignored critical differences

between insured and uninsured plans—differences which

render uninsured plans acutely vulnerable to the threat

of dual state and federal regulation.

In reaching its desired result, the Third Circuit ig-

nored this Court’s carefully reasoned ERISA preemp-

tion analysis in Metropolitan Life Insurance Company ».

Massachusetts, 471 U.S. 724 (1985) (“Metropolitan

Life”’\. In Metropolitan Life, the Court held that where

an employee benefit plan purchases an insurance con-

tract from an insurance carrier subject to state regu-

lation, the plan may be subject to indirect state regula-

tion because ERISA expressly excludes from its broad

preemption provision state laws regulating insurance.

471 U.S. at 747; Section 514(b)(2)(A) of ERISA, 29

U.S.C. § 1144(b!(2)(A). Where an employee benefit

plan is uninsured, however, it may not be subject to

state insurance laws, because ERISA expressly prohibits

the states from deeming an employee benefit plan to be

an insurance company or in the business of insurance

for purposes of a state law regulating insurance. Metro-

politan Life, 471 U.S. at 747; Section 514(b)(2)(B) of

ERISA, 29 U.S.C. $ 1144(b) (2) (B).

A. Historical And Functional Differences Between The

Business Of Insurance And Employee lienefit Plans

Justify Different Rules Under ERISA

Significant distinctions between the business of insur-

ance and the operations of employee benefit plans sup-

port the Congressionally-designed regulatory scheme pro-

hibiting the application of state laws where true insur-

ance is not involved. When Congress chose to “save”

common law.” FMC, 885 F.2d at 84, quoting Northern Group Serv-

ices, 833 F.2d at 89.

8

from preemption state laws regulating insurance, it was

doing no more than continuing its historical deferral to

state regulation in this area. The insurance industry has

traditionally been subject to extensive state regulation—

indeed, Pennsylvania insurance legislation dates back to

at least 1810. Pa. Stat. Ann. tit. 40 $$ 1 to 720, Intro-

duction p. XXI (Purdon 1971).

Congress’ decision to save state insurance laws from

ERISA preemption was consistent with its declaration in

the McCarran-Ferguson Act, 15 U.S.C. §§ 1011 et seq.

(1976 & Supp. V 1982), “that the continued regulation

and taxation by the several states of the business of in-

surance is in the public interest.” By contrast, Congress

determined when it enacted ERISA that despite the re-

cent growth in size, scope, and numbers of employee

benefit plans, adequate safeguards concerning their oper-

ation were lacking, thus making federal regulation de-

sirable. See Findings and Declaration of Policy, Section

2(a) of ERISA, 29 U.S.C. § 1001(a).

Allowing the states to continue to regulate insurance

companies, while preventing them from regulating em-

employee benefit plans, had a logical as well as historical

basis. Insurance companies (which generally operate on

a for-profit basis) are businesses, selling traditionally-

regulated consumer products to unrelated customers. In-

surance companies compete with each other for business,

and advertise and market their products within the busi-

ness community and to the public at large.

By contrast, uninsured employee welfare benefit plans

are not in the business of selling consumer insurance

products. They are non-profit entities that exist to pro-

vide benefits only to sponsoring employers’ employees.

They do not market their wares to outside groups or to

the public, and they do not attempt to broaden their base

by selling coverage to unrelated beneficiaries. These dis-

tinctions more than justify Congress’ refusal to permit

the states to extend application of their traditional,

9

consumer-protection insurance statutes directly to em-

ployee benefit plans.*

B. Uninsured Plans Have A Particular Need For Com-

plete Protection From State Insurance Laws

Even more importantly, however, critical distinctions

between the operations of insured and uninsured plans

meant that the Congressional goal of “eliminating the

threat of conflicting and inconsistent State and _ local

regulation” * of employee benefit plans could not have

been accomplished without a comprehensive clause pro-

tecting uninsured plans from state regulation. State

regulation of the business of insurance and of insurance

companies did not threaten the viability of employee

benefit plans, even where those plans purchased insurance

policies. In contrast, Congress had to exempt uninsured

plans from state regulation in order to ensure that those

plans would not be overwhelmed by conflicting require-

ments.

When an employer or employee benefit plan purchases

insurance from an insurance company, the plan does not

itself become subject to state laws or responsible for

determining the insurance company’s compliance in

various states. It is the insurance company’s obligation

to monitor the state laws that are applicable to it, and

to make certain that the insurance contracts it sells are

in compliance with those laws. Assumption of the ad-

5 State insurance laws are commonly understood to be consumer

protection statutes, regulating the sale of consumer products. See

Collins, Regulation Best on State Level: Washburn, Bus. Ins., May

2, 1988, at 69; Howard, States to Keep Ins. Regulation, Nat'l] Under-

writer, June 26, 1989, at 3; Fisher, Agents, Consumer Groups Seek

Regulatory Standards, Nat'l Underwriter, June 12, 1989, at 1;

Jones, The Industry Doesn’t Need a Federal ‘Czar,’ Nat’l Under-

writer, November 7, 1988, at 19.

6120 Cong. Rec. 29197 (1974) (statement of Rep. John Dent),

quoted in Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 99 (1983).

10

ministrative burden associated with different state insur-

ance laws is an essential component of the insurance

product purchased by an employee benefit plan.

Thus, the states do not in fact regulate the employee

benefit plans that purchase insurance policies. Rather,

the insurance companies are regulated, and plans sim-

ply choose among the types of policies that the various

states permit to be marketed.

By contrast, if the decision below is not overturned,

and if state insurance laws are applied to uninsured em-

ployee benefit plans, the plans themselves will be re-

quired to monitor and comply with extensive state reg-

ulation: This Court has already found that Congress in-

tended ERISA’s preemption provision to eliminate “{a|

patchwork scheme of regulation,” because the inefficien-

cies introduced thereby “might lead those employers with

existing plans to reduce benefits, and those without such

plans to refrain from adopting them.” Fort Halifax

Packing Co., Inc. v. Coyne, 482 U.S. 1, 11 (1987). As

the Court recognized, “{p|reemption ensures that the ad-

ministrative practices of a benefit plan will be governed

by only a single set of regulations.” /d.

By ignoring critical distinctions between insured and

uninsured plans, the Third Circuit failed to recognize

that it could never make sense under the ERISA scheme

of regulation to permit states to apply their insurance

laws directly to employee benefit plans. If the Third Cir-

cuit decision is not reversed, those plans and their spon-

soring employers will be forced to shoulder the burden

of dual and conflicting regulation. Thus, despite the

Third Circuit’s rejection of the logic behind this Court’s

decision in Metropolitan Life, the preemption analysis so

clearly articulated in that case must remain intact.

11

II. IF THE THIRD CIRCUIT DECISION IS NOT RE-

VERSED, UNINSURED PLANS WILL BE FORCED

TO RESPOND TO UNWARRANTED INCREASED

ADMINISTRATIVE AND BENEFIT COSTS, WHICH

MAY JEOPARDIZE THE CONTINUED DELIVERY

OF COMPREHENSIVE MEDICAL BENEFITS TO

PLAN PARTICIPANTS

An employer’s choice to self-insure its employee health

plan is most often an economic decision—administrative

costs for uninsured plans are generally lower than for

insured plans.’ In addition, employers insuring their own

plans can achieve savings by holding onto cash until

claims are paid, instead of paying premiums in advance

to an insurer.* These cost-saving devices are extremely

important to health plans, because employers are limited

in the amounts they can make available to finance plan

benefits. Where plans are funded, such as in the case

of collectively-bargained, jointly administered plans, the

trusts derive their assets solely from limited negotiated

contributions and the interest generated by any reserves

held. In addition, contribution levels are often fixed for

the terms of the underlying collective bargaining agree-

ments and may lag behind ever-rising medical plan costs.

Despite the administrative cost savings that are gen-

erally available to uninsured plans, there has been a

7 Burcke, Administrative Costs Lower Among Self Insurers:

Study, Bus. Ins., February 13, 1989 at 28, citing Foster Higgins,

Health Care Benefits Survey—1988, at 24 (health care administra-

tive expenses for self-insured employers total 5.2% of claims, while

insured employers’ administrative expenses total 6.6% of paid

claims). One author attributes recent growth in self-insurance to

ever-increasing health premium costs. See Donahue, 53% of Group

Health Plans Are Now Self-Insured: HIAA, Nat’l Underwriter,

June 13, 1988, at 13 (based on a 1987 survey of 771 employers by

the Health Insurance Association of America).

* Foster Higgins, supra note 7, at 23.

12

dramatic upturn in medical plan costs in recent years.’

Although this increase has affected both insured plans

and uninsured plans, uninsured plans experienced its

impact sooner.’ If, as a result of the Third Circuit de-

cision, uninsured plans are now forced to-comply with

various state insurance laws, their administrative costs

will undoubtedly increase.

Even more significant, however, is that the Third Cir-

cuit analysis will drive up the benefit costs of uninsured

plans. As a result of increased medical costs, plan ad-

ministrators and plan boards of trustees have been

forced to rely on aggressive cost containment measures.

Subrogation rules and plan-created coordination of bene-

fits provisions, like those struck down by the Third Cir-

cuit in the decision below and by the Sixth Circuit in

Northern Group Services, 833 F.2d 85, are designed to

maximize the protection available to all participants by

denying coverage or limiting benefits in many cases

where individuals have other avenues of recovery." If

® Shalowitz, Self-Insurance—Self-Funding Benefits at Peak of

Popularity ?, Bus. Ins., January 30, 1989, at 3.

10 Foster Higgins, supra note 7, at 22. The Foster Higgins Sur-

vey made the following comment with respect to 1988 cost increases:

The severity of this year’s increase took many by surprise—

including, it seems, the insurance industry. Employers with

insured programs experienced an average increase of only 13.7

percent in 1988. Self-funded plans, on the other hand, averaged

a 24.8 percent increase in the same period. Clearly, the pro-

jected trend for 1988, as reflected in the rate of increase for

insured plans, was far exceeded by the actual experience during

the period, as demonstrated by the experience of the self-funded

employers. It is likely that those fully insured or experience-

rated plans will find their 1989 premiums reflecting the deficit

caused by the understated 1988 trend.

Id. at 12.

11 The savings derived from rules of this type can be substantial:

Savings arising from enforcement of Coordination of Benefits

(COB) provisions averaged 5.1 percent of total plan payments

in 1988, ranging from an average of 4.9 percent among em-

13

employers and plan administrators are now to be pre-

vented from using these cost containment features of

plan design, benefit costs will increase.

In order to respond to the pressures created by state-

mandated benefit increases, employers may conclude that

they have to reduce plan benefits. Employers could

choose to reduce benefits across-the-board, or to address

the benefit increases caused by state anti-subrogation

laws more directly. One alternative for plans subject

to the statute addressed in FMC would be to eliminate

coverage entirely for medical costs arising out of auto-

mobile accidents. If injuries and illnesses arising out of

automobile accidents are not covered at all by the plan,

the subrogation issue would not arise. Cf. Liberty Mu-

tual Insurance Group v. Iron Workers Health Fund of

Eastern Michigan, 879 F.2d 1384 (6th Cir. 1989) (co-

ordination of benefits rules of Michigan no-fault insur-

ance laws preempted where health plan excluded cover-

age for automobile accidents).

As demonstrated by the Liberty Mutual decision, plans

have already begun to embrace this alternative as a

means of avoiding the benefit increases that would re-

sult from the Third and Sixth Circuit decisions. A

change in coverage of this magnitude, however, could

have disastrous consequences for the participants of un-

insured plans. In some cases, participants may have no

coverage at all for their medical claims.'* Thus, instead

ployers using commercial carriers to an average of 5.8 percent

among self-administered employers.

Foster Higgins, id. at 27.

12 For example, in the instant case, Respondent Holliday was

limited in her recovery from the alleged tortfeasor in her auto-

mobile accident case to approximately $50,000, despite the fact that

her medical bills have thus far exceeded twice that amount. An

uninsured motorist or pedestrian who finds himself at fault in an

automobile accident might have no avenue of recovery if coverage

is denied under his employee benefit plan.

14

of permitting double recoveries, as the Pennsylvania

statute was designed to do, state anti-subrogation laws

may result in no available recovery for individuals other-

wise covered by employee benefit plans.

Moreover, many employers and plans have routinely

covered the medical benefit costs of employees in situa-

tions where plan coverage was in question, as a con-

venience to these employees. In cases where an employee’s

recovery from another entity is uncertain or likely to be

delayed for some period of time, as in Respondent Holli-

day’s case, a plan’s early provision of benefits performs

a genuine service. Subrogation rules have served to pro-

tect the employers and plans from ultimately being re-

sponsible for benefits that were not intended to be cov-

ered. If statutes such as Pennsylvania’s anti-subrogation

law are held to survive ERISA preemption, this early

and necessary protection for employees injured in auto-

mobile accidents may be eliminated. These victims could

then be subjected to serious delays in securing reimburse-

ment for medical costs. Further, any open question as

to an individual’s eventual recovery of medical costs could

affect his ability to receive the medical care of his choice.

III. IF LEFT UNDISTURBED, THE THIRD CIRCUIT

DECISION WILL PROVOKE UNCERTAINTY AND

FOSTER UNNECESSARY LITIGATION AS THE

FEDERAL COURTS STRUGGLE TO APPLY AN

INHERENTLY CONFUSING AND UNWORKABLE

PREEMPTION TEST

The vagueness of the “core ERISA concerns” test—

under which state laws purporting to regulate “insur-

ance” may be applied to uninsured employee benefit plans

as long as they address areas other than reporting, dis-

closure and nonforfeitability of benefits '*—virtually

13 Although the opinion is far from clear, the Third Circuit's

discussion of the legislative history of ERISA’s preemption provi-

sion suggests that the area of fiduciary responsibility would also

be a “core ERISA concern.” See FMC, 885 F.2d at 87-88. In

15

guarantees a long period of uncertainty during which

the states will test the outer limits of their newly-found

authority to regulate plans. Plans and employers, on the

other hard, will be fighting to preserve some semblance

of ERISA’s originally intended preemption, while at the

same time struggling to comply with conflicting laws.

Any state that accepts the Third Circuit's open invi-

tation to regulate employee welfare plans can be expected

to attempt to apply the same extensive requirements that

are prevalent in state insurance regulation to employee

benefit plans. Although it would be impossible to predict

just how far the states will be willing to go in this area,

one can assume that various (and conflicting) anti-sub-

rogation rules and coordination of benefits laws will be

imposed, along with rules relating to benefits processing

and the timeliness of payment of claims.'' The states

may even attempt to impose minimum asset (actuarial

reserve) requirements and other traditional “insurance”

obligations on uninsured plans.'® The possibilities are

endless, and all are contrary to this Court’s preemption

analysis and the Congressional intent underlying ERISA.

addition, the Third Circuit’s designation of nonforfeitability as a

“core ERISA concern” suggests that other subject areas covered by

ERISA might also be considered ‘‘core” matters, even though they

(like nonforfeitability) are not applicable to welfare plans. See

Section 201(1) of ERISA, 29 U.S.C. § 1051(1) (excluding employee

welfare benefit plans from ERISA’s nonforfeitability rules).

4 See, e.g., Ill. Ann. Stats., Chap. 73, §§$ 964, 969 | ,mith-Hurd

1988); Ohio Rev. Code Ann. § 3901.38 (Anderson 1989); Tenn.

Code Ann. § 68-11-219 (1988). These rules would directly conflict

with ERISA’s claims procedure requirements, see 29 C.F.R.

§$ 2560.503-1 (1989), but could, nonetheless, be found not to address

reporting, disclosure and nonforfeitability.

15 See, e.g., Pa. Stat. Ann. tit. 40, § 93 (Purdon 1971). Actuarial

reserve requirements are nothing more than minimum funding re-

quirements, which ERISA limits to pension plans. See Section

$01(a)(1), 29 U.S.C. § 1081(a)(1). Again, however, a state could

assert under the authority of FMC that these requirements do not

relate to reporting, disclosure or nonforfeitability.

16

Yet, in the face of the decision below, the prospects for

employers having to face these possibilities are quite

real.

Employers, plans and plan participants will not be

alone in shouldering burdens created by the Third Cir-

cuit’s faulty preemption analysis. The federal courts

will face enormous difficulties in attempting to apply

the “core ERISA concerns” test—difficulties that are in-

herent in the Third Circuit’s own application of its

creation.

For example, that court failed to recognize that a

state anti-subrogation law affects the forfeitability of

benefits under a welfare plan. The FMC plan covers

medical costs arising out of automobile accidents, but

benefits paid are subject to recapture by the plan in the

event of another recovery. The Pennsylvania subroga-

tion law, however, prohibits any right of subrogation or

reimbursement from a participant’s tort recovery with

respect to medical claims paid. See 75 Pa. Cons. Stat.

Ann. $1720 (Purdon 1984). By prohibiting the FMC

plan from enforcing the conditional nature of the bene-

fits, the Pennsylvania law treats the benefits as “vested.”

Thus, the law in fact addresses the “core ERISA con-

cern” of nonforfeitability."®

This is obviously troublesome because Congress ex-

plicitly chose not to extend ERISA’s vesting requirements

to health and welfare plans. See In Re: Whi’e Farm

Equipment Co., 788 F.2d 1186 (6th Cir. 1986) ‘no

absolute rule requiring mandatory vesting of retiree med-

ical benefits: Congress expressly exempted welfare plans

from stringent vesting, participation and funding re-

16 Cf, Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504 (1981)

(New Jersey law prohibiting offset of pensioner’s workers’ com-

pensation benefits against his pension is preempted by ERISA;

offset would ordinarily constitute impermissible forfeiture under

ERISA, but is specifically permitted under lawful regulations of

Internal Revenue Code).

17

quirements) ; see also Metropolitan Life, 471 U.S. at 732

(ERISA does not regulate substantive content of welfare

benefit plans), citing Shaw v. Delta Air Lines, Inc., 463

USS. at 91.

Most disturbing of all, however, is that the Third

Circuit was unable to apply its own test in a rational

manner, which can only portend great confusion and

uncertainty for other courts if the “core ERISA con-

cern” rule is upheld. This Court might even have to

reconsider the unanimous conclusion of the eight Jus-

tices who determined in Metropolitan Life that a state

insurance law mandating particular benefits was pre-

empted in its application to uninsured employee benefit

plans. State mandated benefit laws generally fall outside

of the areas the Third Circuit identified as subject to

preemption( i.e., reporting, disclosure, and nonforfeit-

ability), and indeed, regulate an area which Congress

expressly declined to touch.’ The fact that the Third

Circuit’s unique preemption analysis would call into ques-

tion a unanimous decision of this Court demonstrates its

utter fallibility and its completely unworkable nature.

If the decision below is not reversed, the viability of

the nation’s uninsured welfare benefit plans will be

threatened, the benefit security of millions of plan par-

ticipants will be jeopardized, and the federal courts will

be forced to sort through an endless series of disputes

over the meaning and scope of the Third Circuit test.

This Court should reverse the decision below and restore

order to the regulation of employee welfare benefit plans.

17 ERISA leaves the question of which benefits will be provided

under a plan to the private parties creating it. See Alessi v.

Raybestos-Manhattan, Inc., 451 U.S. 504, 511 (1981).

18

CONCLUSION

The decision of the United States Court of Appeals for

the Third Circuit should be reversed.

Respectfully submitted,

Of Counsel: Harry A. RISSETTO *

STEPHEN A. BOKAT E. CARL UEHLEIN, JR.

Mona C. ZEIBERG MARGERY SINDER FRIEDMAN

CHAMBER OF COMMERCE LARISSA OMELCHENKO TARAN

OF THE UNITED STATES 1800 M Street, N.W.

OF AMERICA Washington, D.C. 20036

1615 H Street, N.W. (202) 467-7130

Washington, D.C. 20062

(202) 463-5337

MorGAN, LEWIS & BOCKIUS

1800 M Street, N.W.

Washington, D.C. 20036

(202) 467-7000 * Counsel of Record

April 20, 1990