Opposition Brief — New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co.

wer onan

Nos. 93-1408, 93-1414, 93-1415 FILED

| IN THE APR 8 194

Supreme Court of the United $tateso me

October Term, 1993

MARIO M. CUOMO, in his official Capacity as Governor of the State of New York; MARK CHASSIN,

M.D.., in his Official Capacity as Commissioner of Health of the State of New York; SALVATORE R.

CURIALE, in his Official Capacity as Superintendent of Insurance of the State of New York; MARY JO

BANE, in her Official Capacity as Commissioner of Social Services of the State of New York; and

ROBERT ABRAMS, in his Official Capacity as Attorney General of the State of New York; NEW

YORK STATE CONFERENCE OF BLUE CROSS & BLUE SHIELD PLANS and EMPIRE BLUE

CROSS AND BLUE SHIELD; and HOSPITAL ASSOCIATION OF NEW YORK STATE,

Petitioners,

against

THE TRAVELERS INSURANCE COMPANY, THE HEALTH INSURANCE ASSOCIATION OF

AMERICA, AMERICAN COUNCIL OF LIFE INSURANCE, LIFE INSURANCE COUNCIL OF

NEW YORK, INC., AETNA LIFE INSURANCE COMPANY, AETNA HEALTH PLANS OF NEW

YORK, INC., MUTUAL OF OMAHA INSURANCE COMPANY, UNION LABOR LIFE INSUR-

ANCE COMPANY, PROFESSIONAL INSURANCE AGENTS OF NEW YORK, INC. TRUST, NEW

YORK STATE HEALTH MAINTENANCE ORGANIZATION CONFERENCE and HEALTH

SERVICES MEDICAL CORPORATION, MVP HEALTH PLAN, WELLCARE OF NEW YORK,

MID-HUDSON HEALTH PLAN, OXFORD HEALTH PLAN, CAPITAL DISTRICT PHYSICIANS

HEALTH PLAN, CHOICBCARE LONG ISLAND, INDEPENDENT HEALTH, TRAVELERS OF

NEW YORK, PHYSICIANS HEALTH SERVICES, PREFERRED CARE and U.S. HEALTHCARE,

Respondents.

ON PETITIONS FOR A WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE SECOND CIRCUIT

RESPONDENTS’ BRIEF IN OPPOSITION TO PETITIONS

FOR A WRIT OF CERTIORARI

HAROLD N. ISELIN*

WENDY L. RAVITZz

Couch, WHITE, BRENNER, HOWARD & FEIGENBAUM

540 Broadway

P. O. Box 22222

Albany, NY 12201-2222

(518) 426-4600

Attorneys for Respondents, New York State Health Maintenance Organization

Conference, Capital District Physicians Health Plan, Inc., Choicecare Long

Island, Inc., Health Services Medical Corporation of Central New York, Inc.,

Independent Health Association, Inc., Mid-Hudson Health Plan, Inc., MVP

Health Plan, Inc., Oxford Health Plans, Inc., Physicians Health Services of New

York, Inc., Preferred Care, Inc., Travelers Health Network of New York, Inc.,

U.S. Healthcare, Inc., Welicare of New York, Inc.

*Counsel of Record

Dated: April 8, 1994

THe Reporter Company, Inc.—Walton, NY 13856—800-252-718!

Syracuse Office, University Building, Syracuse, NY |3202—315-426-1235

NYC Office—30 Vesey Si., New York, NY 10007—212-732-6978—800-800-4264

(3901—1994)

Counterstatement of Question Presented

Whether the Second Circuit Court of Appeals correctly

held that section 2807-c (2-a) of New York’s Public Health

Law, which increases the cost of health care coverage pro-

vided by a health maintenance organization (“‘HMO”’’) to an

employee benefit plan if the HMO is unable to enroll a

targeted number of Medicaid recipients, is preempted by

ERISA?

Supreme Court Rule 29.1 Statement

Pursuant to Supreme Court Rule 29.1, the respondents

listed below have the following parent companies and sub-

sidiaries (except wholly owned subsidiaries):

Oxford Health Plans (NY), Inc.

PARENT COMPANY: Oxford Health Plans, Inc.

Physicians Health Services of New York, Inc.

PARENT COMPANY: Physicians Health Services, Inc.

Preferred Care

PARENT COMPANY: Preferred Care Holding Co.

Travelers Health Network of New York, Inc.

PARENT COMPANIES: Travelers Health Network, Inc.;

Travelers Health Co., Inc.;

Travelers Employee Benefits

Co., Inc.;

Travelers Insurance Co.;

The Travelers Inc. (formerly

Primerica Corp., successor

to The Travelers Corp.);

Associated Madison

Companies, Inc.;

and

The Travelers Insurance Group,

Inc.

U.S. Healthcare, Inc.

PARENT COMPANY: U.S. Healthcare, Inc.

Wellcare of New York

PARENT COMPANY: Wellcare Management Group,

Inc.

The remainder of the respondents do not have any parent

companies or subsidiaries, other than wholly owned

subsidiaries.

iv.

Table of Contents

Page

Counterstatement of Question Presented............ i

Supreme Court Rule 29.1 Statement ..............- il

TURES GE AMEROTUIES . oc cc ccccccccccccccccccvesces vi

Counterstatement of the Case ..........00cceeeeees 2

Preliminary Statement ...........666eeeeeeeeeees 2

HMOs And Their Role In New York’s Health Care

DYGRTER . cc cccccccccccccscecececccesossesees 3

HMOs And Employee Benefit Plans........... 4

The New York Statute ..........00ceceeeeeees 5

The 9% Assessment Has a Substantial Economic

Impact on Employee Benefit Plans ............ 7

The District Court Decision ..............66.- 7)

The Second Circuit Decision ...............+.-. 11

Page

REASONS FOR DENYING THE WRIT:

I. There is no Conflict Between the Circuits as to

Preemption of a State Law that Increases an Em-

ployee Benefit Plan’s Cost of HMO Health Care

Coverage if the HMO is Unable to Enroll a Certain

Number of Medicaid Recipients ............... 12

II. The Issues Presented by the 9% Assessment are

Neither Matters of National Importance Nor

SAE oc caus ccusssotdenbbthstéotbas 15

Ill. The Second Circuit Correctly Held That The 9%

Assessment is Preempted by ERISA ........... 17

A. The 9% Assessment Relates to Employee Ben-

SRP TED 6 ben ddacacubunceedebbavcccbeass 17

B. The Second Circuit Was Correct in Refusing to

Follow United Wire and Rebaldo ........... 20

CR dctvovsddutdetibeoctccdcsdssaseim 23

vi.

TABLE OF AUTHORITIES

Page

CASES:

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

EROUED cecccvcccesssssccseoceceostabocadios 19

District of Columbia v. Greater Wash. Bd. of Trade,

SED Be. Ges Sew CESSES occccccccscccvesesceses 17

E-Systems, Inc. v. Pogue, 929 F.2d 1100 (Sth Cir.),

cert. denied, 112 S. Ct. 585 (1991) ............ 19

FMC Corp. v. Holliday, 498 U.S. 52 (1990) ........ 21

General Electric Co. V. New York State Dep’t of La-

bor, 891 F.2d 25 (2d Cir. 1989), cert. denied, 496

Das Fae CUED Sed eben eecdevesccnacddceoses 19

Ingersoll-Rand Co. v. McClendon, 498 U.S. 133

GREE oOd heb ec cecodeedcetnvecososess 17, 21, 22

Mackey v. Lanier Collection Agency & Serv., Inc., 486

De GE CEE Cocccesecevevesoedeesoéucecse 19

Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987)... 17

Rebaldo v. Cuomo, 749 F.2d 133 (2d Cir. 1984), cert.

denied, 472 U.S. 1008 (1985). ............. passim

vii.

Shaw v. Delta Air Lines, 463 U.S. 85 (1983)........ 21

Smith v. Dunham-Bush, Inc., 959 F.2d 6 (2d Cir. 1992) 21

Travitz v. Northeast Department ILGWU Health and

Welfare Fund, 13 F.3d 704 (3d Cir. 1994) ...... 14

United Wire, Metal & Machine Health & Welfare Fund

v. Morristown Memorial Hosp., 995 F.2d 1179 (3d

Cir.), cert. denied, 114 S. Ct. 382 (1993).... passim

STATUTES

FEDERAL:

26 U.S.C.A. § 162(n) (West Supp. Novemler 1993).. 16

29 U.S.C.A. $1001 et seq. (West 1985 & Supp. 1993) 2

STATE:

N.Y. Ins. Law § 1109(a) (McKinney 1985 & Supp.

FEUD co ddccsesdccceddoove seesvavcesoserers 22

N.Y. Pub. Health Law § 2807-c (2-a) (McKinney 1993) 2

N.Y. Pub. Health Law § 4403 (McKinney 1985).... 4, 18

viii.

Page

N.Y. Pub. Health Law § 4407 (McKinney 1985)..... 4

N.Y. Pub. Health Law § 4411 (McKinney 1985)..... 22

REGULATIONS

FEDERAL:

GB Claes © GEG GG onc cvevccccdcceccccccnsens 4

STATE:

N.Y. Comp. Codes R. & Regs. tit. 10, § 98.6 (1992). 4

N.Y. Comp. Codes R. & Regs. tit. 10, § 98.11 (1992) 9

N.Y. Comp. Codes R. & Regs. tit. 10, § 98.15 (1992).. 4, 18

OTHER

White House Domestic Policy Council, Working

Group Draft (September 7, 1993), reprinted in The

President's Health Security Plan -- The Complete

Draft Report of the White House Domestic Policy

Council 80 (Times Books) (1993) ............. 20

Nos. 93-1408, 93-1414, 93-1415

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1993.

MARIO M. Cuomo, in his Official Capacity as Governor

of the State of New York, et al.,

Petitioners,

against

THE TRAVELERS INSURANCE COMPANY, THE HEALTH IN-

SURANCE ASSOCIATION OF AMERICA, AMERICAN COUN-

CIL OF LIFE INSURANCE, LIFE INSURANCE COUNCIL OF

New York, INC., AETNA LIFE INSURANCE COMPANY,

AETNA HEALTH PLANS OF New York, INC., MUTUAL OF

OMAHA INSURANCE COMPANY, UNION LABOR LIFE IN-

SURANCE COMPANY, PROFESSIONAL INSURANCE AGENTS

OF New York, INC. Trust, NEw York STATE HEALTH

MAINTENANCE ORGANIZATION CONFERENCE and HEALTH

SERVICES MEDICAL CORPORATION, MVP HEALTH PLAN,

WELLCARE OF NEw YORK, MID-HUDSON HEALTH PLAN,

OXFORD HEALTH PLAN, CAPITAL DISTRICT PHYSICIANS

HEALTH PLAN, CHOICECARE LONG ISLAND, INDEPEN-

DENT HEALTH, TRAVELERS OF NEW YORK, PHYSICIANS

HEALTH SERVICES, PREFERRED CARE and U.S. HEALTH-

CARE,

—s

Respondents.

°

Brief in Opposition to Petitions for a Writ of Certiorari

2

Counterstatement of the Case

Preliminary Statement

This brief is submitted on behalf of the respondents New

York State Health Maintenance Organization Conference

and twelve health maintenance organizations (collectively

referred to as the “‘HMOs’’)! in opposition to the petitions

for a writ of certiorari of Mario M. Cuomo et al. (collec-

tively referred to herein as “the State’), New York State

Conference of Blue Cross and Blue Shield Plans and Empire

Blue Cross and Blue Shield (collectively referred to herein

as “‘the Blues’’) and the Hospital Association of New York

State (referred to herein as ““HANYS”’). Petitioners seek

review of a judgment of the United States Court of Appeals

for the Second Circuit that affirmed the District Court’s

February 3, 1993 Opinion and Order of Judge Louis Freeh.

Judge Freeh held, inter alia, that the Employee Retirement

Income Security Act of 1974, 29 U.S.C.A. §§ 1001 et seq.

(West 1985 & Supp. 1992) (hereinafter ““ERISA”), pre-

empts Section 2807-c (2-a) of the New York Public Health

Law, which imposes a penalty, calculated at 9% of the

HMOs’ aggregate cost of hospitalization, on HMOs that fail

to enroll a specified number of Medicaid patients.”

'The twelve HMOs are Health Services Medical Corporation of

Central New York, Inc., MVP Health Plan, Inc., Wellcare of New York,

Inc., Mid-Hudson Health Plan, Inc., Oxford Health Plans (NY), Inc.,

Capital District Physicians’ Health Plan, Inc., ChoiceCare Long Island,

Inc., Independent Health Association, Inc., Travelers Health Network

of New York, Inc. Physicians Health Services of New York, Inc.,

Preferred Care, Inc. and U.S. Healthcare, Inc.

2Although the disputed statute imposes surcharges of 9, 11 and

13%, the HMOs are subjected only to the 9% assessment and this brief

only addresses preemption of that assessment.

3

Although petitioners attempt to drape their arguments

equally over the 9%, 11% and 13% assessments, there are

critical differences between the 9% assessment levied on

HMOs and the 11% and 13% surcharges imposed on com-

mercial insurers. Similarly, petitioners gloss over the signif-

icant differences between HMOs, which actually provide

care, and fee-for-service indemnity insurance companies.

These differences make petitioners’ arguments in favor of

certiorari not only unpersuasive but also largely irrelevant

as applied to the 9% assessment.

HMOs And Their Role In New York’s Health Care System

The New York State Health Maintenance Organization

Conference is a not-for-profit corporation consisting of 27

health maintenance organizations licensed to operate in and

located throughout New York State. The HMOs in the Con-

ference currently provide health care to more than three

million people in New York.

HMO coverage differs from traditional health insurance.

By combining the provision and financing of comprehen-

sive health care, including primary and specialty physician

care, with inpatient hospitalization, HMOs are able to pro-

vide quality health care in a cost efficient manner. HMOs

accomplish this through a variety of contractual arrange-

ments with doctors, other providers and hospitals.*

Unlike commercial insurance companies and the Blue

Cross/Blue Shield indemnity insurance plans, HMOs serve

3For example, some HMOs (group and staff models) employ their

own physicians. Other HMOs (individual practice associations) use

networks of physicians who agree to serve the HMO’s subscribers and

to adhere to the HMO’s practice and payment guidelines.

4

Medicaid recipients. Under the State’s Medicaid managed

care program, HMOs enroll Medicaid recipients into their

provider networks and receive a fixed monthly rate for each

individual. HMOs also ensure that Medicaid recipients and

their families have a primary physician to monitor their care

on a regular basis. The use of a primary care physician and

the availability of a health care network provide Medicaid

recipients with better access to primary and preventive care

than otherwise available under the traditional fee-for-serv-

ice system and helps reduce costly emergency room visits.

(JA 1550, | 10)*.

HMOs And Employee Benefit Plans

HMOs are required by state and federal law to offer a

comprehensive health benefits package. 42 C.F.R. § 417

(1992); N.Y. Pub. Health Law § 4403 (McKinney 1985);

N.Y. Comp. Codes R. & Regs. tit. 10, § 98.6 (1992). Be-

cause of the State’s regulatory requirements, HMOs may not

revise their benefits packages at will and may not reduce

their core package beyond a certain level of benefits.

Under state law, employers generally are required to offer

HMOs as a health benefit option to their employees. N.Y.

Pub. Health Law § 4407 (McKinney 1985); N.Y. Comp.

Codes R. & Regs. tit. 10, § 98.15 (1992). Most HMO con-

tracts are with employee benefit plans.

When an employee benefit plan contracts with an HMO,

the employees and their dependents must each select a

primary care physician who has the responsibility to over-

*“(A—)” refers to the Appendix filed by Petitioners herein.

“(JA—)” refers to the Joint Appendix filed in the Court of Appeals.

“(R—)” refers to the Record on Appeal in the Court of Appeals.

5

see and coordinate the care that is provided. By designating

a single physician to coordinate care, there is one individual

who knows the medical history and needs of each employee

and the employee’s family. In most cases, members must

receive the approval of the primary care physician before

seeing a specialist. HMOs also work closely with their

members prior to and during hospitalization to ensure that

there is adequate preparatory work and to minimize the

length of the hospital stay. (JA 1551, 44 13, 14).

As noted above, in some cases the HMO’s physicians are

salaried employees of the HMO and are principally avail-

able only to serve the members of the HMO. Thus, if an

employee benefit plan terminates its contract with such an

HMO and switches to a different type of health care cover-

age, the employees and their families would not be able to

continue to use the physicians who they have been using and

who are most familiar with their medical history. (JA 1551,

q 15).

The New York Statute

Generally speaking, inpatient hospital care in New York

is reimbursed on a case-based system, rather than on the

charges that the hospital might otherwise impose. Upon

entering a hospital, a patient is placed into a category known

as a diagnosis-related group (““‘DRG’’) based on the pa-

tient’s condition. The patient is then billed for the rate

assigned to the appropriate DRG rather than for the actual

cost of treatment incurred.

Since the inception of DRGs in 1988, the DRG rate has

been increased by 13% for patients covered by commercial

insurance or self-insured plans. N.Y. Pub. Health Law

6

§ 2807-c(1)(b) (McKinney 1993). The 13% surcharge is

added to the patient’s DRG rate, billed by the hospital and

paid by the patient or insurer directly to the hospital. The

revenue generated by the 13% surcharge is retained by the

hospital.

On April 2, 1992, New York State adopted the Omnibus

Revenue Act of 1992 (the “‘statute’’) which amended the

Public Health Law to impose (1) an additional 11% sur-

charge on the DRG rates of patients insured by commercial

insurers; and (2) a penalty calculated at 9% of an HMO’s

aggregate cost of hospital care payable to the State by

HMOs that fail to enroll a target number of Medicaid

recipients.

Like the 13% surcharge, the 11% surcharge is added to

the patient’s hospital bill and paid directly to the hospital.

The funds generated by the 11% surcharge are forwarded by

the hospital to a pool established by the Commissioner of

Health and then deposited into the State’s General Fund.

The 9% assessment applies only to HMOs and directly

affects the employee benefit plans that HMOs serve. The

Statute imposes a penalty, payable to the State and calculated

at 9% of an HMO’s aggregate cost of inpatient hospital care,

on HMOs that are unable to attain certain Medicaid enrollment

objectives set by the State. The 9% assessment is not an

increase in the actual DRG rates that HMOs pay hospitals.

Rather, it is a separate charge that is based on the aggregate

monthly cost of the inpatient hospitalization that is paid by the

HMO. In effect, the HMO calculates the cost of its inpatient

hospitalization, multiplies the total by 9% and pays this

amount into a statewide pool. The funds are then deposited by

a State-designated pool administrator into the State’s

7

General Fund. The funds are never paid to the hospital

providing the service.

Under the statute, an HMO can reduce or eliminate the

9% assessment if the HMO achieves certain Medicaid en-

rollment objectives. An HMO can eliminate the 9% assess-

ment if the HMO (1) has Medicaid contracts with every

county in which it operates and (2) enrolls a defined target

number of Medicaid recipients. Thus, unlike the 13% and

11% differentials, the 9% assessment can be reduced or

eliminated if the HMO achieves the State’s objective of

enrolling a sufficient number of Medicaid enrollees into the

HMO’s managed care network.

The 9% assessment at issue also differs sharply from the

13% differential and 11% surcharge because the 9% assess-

ment is not an increase in the rate of payment to hospitals.

The rate an HMO pays a hospital is unaffected by the 9%

assessment, and the 9% assessment produces no revenue for

hospitals.

The 9% assessment is not an attempt to regulate either the

hospital reimbursement system or the insurance system.

Rather, the primary purpose of the 9% assessment is to

encourage HMOs to enroll Medicaid patients (JA 482,

{ 27). A secondary purpose is to raise revenue for the State.

The 9% Assessment Has a Substantial

Economic Impact on Employee Benefit Plans

Although HMOs can reduce or eliminate the 9% assess-

ment if they fulfill the State’s Medicaid objectives, it has

been exceedingly difficult for some HMOs to do so. Indeed,

8

for any HMO that did not already have Medicaid contracts

in place and a substantial enrollment at the time the statute

was enacted, it was virtually impossible to satisfy the re-

quirements for eliminating the assessment in 1992. (JA 15,

{ 21). Only ten HMOs qualified either for an elimination or

reduction of the 9% assessment for the 1992 rate period.

(JA 761, ¥ 15).

Moreover, while some HMOs were able to eliminate or

reduce the 9% surcharge for the 1992 year, (JA 761, 4 15),

there is no assurance that they will continue to be able to do

so because the enrollment target increases in succeeding

years. In addition, because there is no corresponding man-

date on Medicaid recipients to enroll in an HMO, some

HMOs with sufficient enrollment in one year may lack the

requisite enrollment in the next year and thereby become

subject to the 9% surcharge. (JA 1553, J 21). As the district

court recognized, ‘HMOs which do not or cannot meet the

Statutory requirements must pay the full amount.” (A 22).

The assessment has had an immediate and dramatic effect

on the rates that HMOs charge their subscribers, including

employee benefit plans. Because the cost of hospitalization

accounts for approximately 40% of the overall costs of an

HMO, the 9% surcharge translated into an immediate in-

crease of up to 3.5% in total costs for most HMOs.

(JA 1553, ¥ 22).

HMOs cannot absorb this increase. (JA 1554, 4 23).

Many HMOs are not-for-profit, including seven of the re-

spondent HMOs. Some HMOs do not have large financial

reserves and cannot absorb major and unexpected costs such

as the cost of the 9% assessment. They cannot use reserves

to fund these increased costs because, in the rate setting

9

process, the State has placed limits on the size of an HMO’s

reserves and, more importantly, because the reserves must

be retained in the event that an HMO experiences unusually

heavy medical claims. N.Y. Comp. Codes R. & Regs. tit. 10,

§ 98.11 (1992).

The impact of the 9% assessment has been substantial.

For example, for the period July 1, 1992 through December

31, 1992, Independent Health of Western New York was

required to pay approximately $2.5 million and MVP Health

Plan was required to pay approximately $1.5 million as a

result of the assessment. In the face of such substantial

charges, the HMOs have had no recourse but to request rate

increases in order to transfer the cost of the assessment to

their subscribers. (JA 1550, { 9).

The New York State Insurance Department, recognizing

that the cost of the 9% assessment was an expense that

HMOs could not absorb, has granted rate increases that

reflect the amount of the 9% assessment. (JA 1554, 44 24,

25; see Exhibit “B”’ annexed to R 32 [JA 16]). For example,

Oxford Health Plans was awarded a 2.6% increase for the

last three months of 1992 “to reflect the 9% inpatient

hospital surcharge it currently pays.”” (Exhibit ““B"’ annexed

to R 32 [JA 16)).

The District Court Decision

Respondents moved for summary judgment in the district

court on the grounds that the 11% and 13% surcharges are

preempted by the Federal Employees Health Benefits Act

(“FEHBA”) and that the 9%, 11% and 13% surcharges are

preempted by ERISA. Petitioners cross-moved for summary

judgment to dismiss the complaints.

10

By Opinion and Order dated February 3, 1993, Judge

Louis J. Freeh held, inter alia, that all of the surcharges

related to employee benefit plans and were preempted by

ERISA. Rejecting the Second Circuit's then out-dated anal-

ysis in Rebaldo v. Cuomo, 749 F.2d 133 (2d Cir. 1984), cert.

denied, 472 U.S. 1008 (1985), Judge Freeh held that the

surcharges were preempted by ERISA because they im-

posed a substantial economic burden ce: «employee benefit

plans that was likely to affect the struciwie and/or adminis-

tration of the plans. Specifically, Judge Freeh stated that the

9% assessment will force HMOs to transfer the cost of the

assessment, via an increase in rates, to employee benefit

plans. (A-71). Judge Freeh also noted that, in many cases,

the assessment could result in a 2.5%-3.5% increase in the

rates charged to subscribers. (A-71-72, nn. 6-7).

Significantly, Judge Freeh recognized that the additional

revenue generated by the assessment is not applied to any

use even remotely related to the health care of plan partici-

pants. (A-74). Thus, to the extent that the assessment diverts

plan resources by directing that they be paid to the State, it

has a substantial impact on ERISA plans—costing plan

sponsors and participants millions of dollars annually.

Judge Freeh also held that the surcharges were not pre-

served by the insurance savings clause, which exempts from

preemption laws regulating the business of insurance. As to

the 9% assessment, the court held that it “could not possibly

fall within the scope of the savings clause because HMOs

. . .do not engage in the ‘business of insurance’ as a matter

of law.” (A-79).

11

The Second Circuit Decision

On January 14, 1994, the United States Court of Appeals

for the Second Circuit issued an amended opinion affirming

Judge Freeh’s decision that ERISA preempted all of the

challenged surcharges.* The court held that the surcharges

were sufficiently ‘““connected with’ employee benefit plans

to justify preemption. Noting that the 9% assessment inter-

fered with an ERISA plan’s selection of the most effective

way to provide benefits, the court held that the surcharges

purposely interfered with the choices that such plans make

for health care coverage. Indeed, the court held that the

surcharges substantially increase the cost to ERISA plans of

providing beneficiaries with a given level of health care

benefits, thereby forcing ERISA plans “to increase either

plan costs or reduce plan benefits.’ (A-23). Thus, the court

held that the surcharges also have an impermissible impact

on ERISA plan structure and administration. (A-24).

The court expressly declined to follow the Third Circuit's

decision in United Wire, Metal & Machine Health & Welfare

Fund v. Morristown Memorial Hosp., 995 F.2d 1179 (3d

Cir.), cert. denied, 114 S. Ct. 382 (1993), on the grounds

that it improperly relied on Rebaldo v. Cuomo and too

narrowly interpreted ERISA’s preemption provision.

Expressly adopting the district court’s holding that HMOs

are not, as a matter of law, insurance companies, the court

also rejected the claim that any of the surcharges were

preserved by the insurance savings clause.

5The amended opinion supplemented the court's earlier opinion by

holding that the 11% and 13% surcharges were also preempted by

FEHBA.

12

On March 7, 1994, the Second Circuit denied the motion

of the Blues and HANYS that the court rehear the ERISA

preemption issue in banc.

REASONS FOR DENYING THE WRIT

I. There is no Conflict Between the Circuits as to Pre-

emption of A State Law that Increases an Employee

Benefit Plan’s Cost of HMO Health Care Coverage if

the HMO is Unable to Enroll a Certain Number of

Medicaid Recipients

Regardless of any conflict that petitioners claim exists

between the Second Circuit’s decision regarding the 11%

and 13% surcharges and the Third Circuit’s decision in

United Wire, there is no conflict regarding the 9%

assessment.

Petitioners do not deny that the 9% assessment has af-

fected employee benefit plans. They do not dispute that the

9% assessment has caused, and will continue to cause,

HMOs to increase the rates charged to their subscribers. Nor

do they deny that th ‘se increases will be substantial. They

also do not dispute that most HMO contracts are with em-

ployee benefit plans. Instead, they rely primarily on the

Third Circuit’s decision in United Wire, which involved a

hospital rate statute far different from the one at issue here,

to support their claim that the 9% assessment is not pre-

empted by ERISA and that a conflict between the circuits

exists.

The statute at issue in United Wire (the ““New Jersey

statute’’) concerned the rates actually charged by hospitals

|

13

for certain procedures and the discounts given by the hospi-

tals to particular categories of payors. The New Jersey

Statute prospectively set hospital rates on the basis of DRGs

and required hospitals to include in the DRG rate a charge to

cover bad debt expenses and the cost of uncompensated care

provided to the indigent. The New Jersey statute also pro-

vided DRG discounts to high volume plans and plans with

open enrollment. At the same time, the New Jersey statute

authorized hospitals to charge patients who did not belong

to such plans an increased rate to allow hospitals to recover

the income lost by virtue of the discounts.

In contrast, the 9% assessment has nothing to do with

hospital rate reimbursement. The purposes of the 9% assess-

ment are to compel HMOs to enroll Medicaid recipients and

to raise revenue for the State. The statute attempts to accom-

plish this goal by imposing a penalty, calculated at 9% of its

aggregate hospitalization cost, on HMOs that fail to comply

with the State’s Medicaid objectives. That the 9% assess-

ment is connected to the cost of hospitalization is purely

arbitrary. The legislature could have selected any other

fixed or variable yardstick to determine the amount to be

paid by HMOs that were unable to comply with the State’s

Medicaid objectives.

Thus, the 9% assessment differs in many critical respects

from the hospital reimbursement scheme challenged in

United Wire. First, unlike the United Wire surcharge which

is added to the patient’s hospital bill and is kept by the

hospital, the 9% assessment does not increase the actual rate

that HMOs pay hospitals. Rather, it is a separate charge that

is imposed by the State on HMOs that fail to enroll a target

number of Medicaid recipients. As such, the 9% assessment

14

has no effect on the rate an HMO pays a hospital for the cost

of services provided to its subscribers. Second, unlike the

surcharges at issue in United Wire that were specifically

designed to reimburse hospitals for bad debts and uncom-

pensated care, the 9% assessment does not function as a tool

to reimburse hospitals. Indeed, the assessment produces no

revenue whatsoever for the hospitals. Third, unlike pay-

ments made directly to hospitals pursuant to the New Jersey

Statute, the 9% assessment is paid by the HMOs into a

Statewide pool and deposited directly into the State’s Gen-

eral Fund. Thus, the hospitals neither receive the funds nor

act as a conduit for their transfer to the State. Lastly, unlike

the United Wire payment scheme, the 9% assessment does

not regulate the cost of hospital care. Indeed, the primary

purpose of the 9% assessment is to encourage HMOs to

enroll Medicaid patients.°

Thus, the petitioners’ efforts to construct a conflict be-

tween the Third Circuit’s decision in United Wire and the

Second Circuit’s decision in this case fall apart when ap-

plied to the 9% assessment. There simply is no conflict and,

accordingly, no reason for this Court to grant certiorari on

the question of whether the 9% assessment is preempted by

ERISA.

®Even if the statutes here were identical, there would not be a

conflict requiring review. United Wire relied principally on the Second

Circuit’s decision in Rebaldo v. Cuomo, whose analysis has now been

discredited by subsequent decisions of the Supreme Court and the

Second Circuit. See infra at 20-22. Indeed, the Third Circuit appears to

be retreating from its own decision. See Travitz v. Northeast Depart-

ment ILGWU Health and Welfare Fund, 13 F.3d 704, 710 (3d Cir. 1994)

(court declined to follow United Wire distinguishing the facts of that

case from the one before it).

15

II. The Issues Presented by the 9% Assessment are Nei-

ther Matters of National Importance Nor Likely to

Recur

The Second Circuit’s decision preempting the 9% assess-

ment will have no substantive effect beyond the cc “nes of

this particular case. The 9% assessment is nothing more than a

narrowly tailored attempt by New York State to encourage

HMOs to enroll Medicaid recipients by imposing a penalty on

those that fail to achieve certain Medicaid targets. It does not

regulate the cost of hospital care, nor does the money gener-

ated by it ever flow through the hospital system. Indeed, there

are no cases currently pending that involve a similar assess-

ment, nor have there been any reported decisions on the issue.

Moreover, New York appears to be the only state with such an

assessment.’

Petitioners nonetheless regale the Court with a “sky is

falling” argument that all hospital and health care regulation

throughout the nation will come to an immediate halt if the

Second Circuit’s decision that the 9% assessment and other

surcharges are preempted is allowed to stand. Even if peti-

tioners’ arguments as to the 11% and 13% surcharges were

correct, they are inapplicable to the 9% assessment. The 9%

assessment does not regulate either the cost of hospital care or

the cost of goods used by hospitals. As such, its preemption

will have no effect whatsoever on the ability of New York, or

any other state, to regulate the operation of hospitals and the

cost of hospital care.®

7Although the State asserts that at least 22 other states have health

care regulations similar to “one or more of the disputed surcharges” (State

Petition at 14), it does not point to any state with a penalty like the one

imposed here.

8Indeed, none of the many cases cited by petitioners which purport

to involve similar hospital reirabursement schemes involve anything

like the 9% assessment at issue in this case.

16

Similarly, the Second Circuit’s decision preempting the

9% assessment will not impede federal cost containment

policies or the ability of states to enact comprehensive all-

payor hospital cost containment legislation. (See HANYS

Petition at 18). As previously discussed, the 9% assessment

is tied to the cost of hospitalization only because of an

arbitrary decision by the State to use that mechanism as a

way to impose a penalty on HMOs that do not enroll the

target number of Medicaid recipients. Neither the imposi-

tion nor the collection of the penalty itself is related to the

cost of hospitalization in any substantive fashion. Indeed, if

the 9% assessment was removed entirely from New York’s

hospital rate regulation scheme, there would be no effect on

hospitals.

Lastly, the decision of the lower court that the 9% assess-

ment is preempted by ERISA is simply not ripe for review at

this juncture. As noted by the State, the nation is on the

verge of health care reform (see State Petition at 16). As

part of the legislative process, Congress will have every

opportunity to revise or amend the scope of ERISA’s pre-

emption provision if it so chooses. Thus, the pendency of

national health care reform argues in favor of this Court

deferring review of the Second Circuit’s 9%-preemption

decision.

%Moreover, at the request of petitioners New York State and

HANYS, Congress enacted legislation that would cause businesses to

lose their ability to deduct the cost of their health care coverage if their

insurer, or HMO, does not reimburse hospitals in accordance with New

York State’s hospital reimbursement scheme. Section 13442 of the

Omnibus Budget Reconciliation Act of 1993, 26 U.S.C. § 162(n). Thus,

contrary to petitioners’ claims, a decision to deny certiorari will have

little immediate impact on hospitals or the State.

17

III. The Second Circuit Correctly Held That The 9%

Assessment is Preempted by ERISA

A. The 9% Assessment Relates to Employee Benefit Plans

The Second Circuit correctly interpreted governing Su-

preme Court precedent, which emphasizes the broad nature

of ERISA’s preemptive sweep, in concluding that the 9%

assessment is preempted by ERISA. As noted by the Second

Circuit and as this Court has long emphasized, a law relates

to an employee benefit plan for the purposes of preemption

if “it has a connection with or reference to such a plan’.

District of Columbia v. Greater Wash. Bd. of Trade, 113 S.

Ct. 580, 583 (1992). Under the “‘broad common-sense

meaning” attributed to this phrase by the Supreme Court,

Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 47 (1987), “‘a

state law may ‘relate to’ a benefit plan, and thereby be

preempted, even if the law is not specifically designed to

affect such plans or the effect is only indirect.”’ Jngersoll-

Rand v. McClendon, 498 U.S. 133, 139 (1990).

Despite the Supreme Court’s broad interpretation of

ERISA’s preemptive reach, petitioners nonetheless assert that

the Second Circuit wrongly concluded that the 9% assessment

does not sufficiently “relate to” an employee benefit plan to

warrant preemption. Petitioners fail to acknowledge, however,

that the economic impact experienced by the HMOs is not

merely an incidental or indirect cost of doing business. In

essence, the cost of the 9% assessment had to be large enough

to persuade the HMOs that it was not economically feasible to

refuse to enroll the desired number of Medicaid patients. Thus,

Judge Freeh found that the effect was intended to be and was

in fact substantial. (A-73).

The HMOs submitted substantial evidence of this impact,

which was relied on by the District Court and the Second

Circuit in arriving at their conclusion that the economic

impact of the 9% assessment on employee benefit plans was

substantial. For example, in the 1993-1994 fiscal year, the

9% assessment was intended to raise approximately $30

million from HMOs and the employee benefit plans they

serve. (JA 1733). Thus, HMOs were required to pay mil-

lions of dollars to the State. The HMOs themselves simply

cannot absorb this cost. (JA 1554, 9 23). Because the re-

serves maintained by HMOs cannot be used to defray ad-

ministrative expenses like the 9% assessment, HMOs have

no choice but to pass the cost of the assessment on to the

ERISA plans.

Faced with the threat of increased fees and/or reduced

benefits, an ERISA plan cannot, as suggested by petitioner

HANYS (see HANYS Petition at 20-21), merely switch to

an alternative health insurance system. HMOs do not simply

reimburse independent providers of care; HMOs provide

access to care. Accordingly, an ERISA plan cannot select

alternative coverage without, in many cases, disrupting the

care that is being provided to its employees. Nor can em-

ployee benefit plans simply opt to avoid the assessment by

eliminating HMOs as a health care option. See N.Y. Pub.

Health Law § 4403 (McKinney 1985); N.Y. Comp. Codes

R. & Regs. tit. 10, § 98.15 (1992) (employers with more

than 25 employees must offer HMOs as a health care

option).

Moreover, because the 9% assessment forces ERISA

plans to either pay increased plan costs to provide the same

level of benefits or reduce plan benefits to offset the cost of

the assessment, the Second Circuit correctly found that the

bs

19

9% assessment sufficiently “interfere{[d] with the choices

that ERISA plans make for health care coverage” as to

constitute a “connection with” ERISA plans. (A-22-23). The

assessment thus imposes precisely the kind of burden on plan

administration that ERISA was designed to avoid. For exam-

ple, the Second Circuit relied on E-Systems, Inc. v. Pogue,

929 F.2d 1100 (Sth Cir.), cert. denied, 112 S. Ct. 585 (1991),

in which a state statute imposing a 2.5% tax on administra-

tive and service fees was preempted by ERISA. In E-Systems,

the Fifth Circuit held that

The cost of the plan must therefore increase for the

employer and/or employees or the benefits must be

adjusted downwards to offset the tax bite. This is the

type of impact Congress intended to avoid when it

enacted the ERISA legislation.

E-Systems, Inc., 929 F.2d at 1103. See also General Electric

Co. v. New York State Dep't of Labor, 891 F.2d 25, 28 (2d

Cir. 1989) (provision of New York labor law which required

particular employers to pay employees certain benefits was

preempted by ERISA because “private parties, not the Gov-

ernment, control the level of benefits’”’ under ERISA) (quot-

ing Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 511

[1981]), cert. denied, 496 U.S. 912 (1990).'°

'0The case at hand is very different from Mackey v. Lanier Collec-

tion Agency & Serv., Inc., 486 U.S. 825 (1988), relied on by petitioners.

In Mackey, the Supreme Court based its decision that a state law

permitting the garnishment of welfare benefits was not preempted by

ERISA on the presence of a separate provision in ERISA which ex-

pressly forbid garnishment of a participant’s pension benefits, rather

than on an analysis of the statute’s economic impact on the plan. The

Court held that once Congress was aware that ERISA plan benefits

could be attached or garnished, its decision to remain silent regarding

welfare plan benefits “acknowledged and accepted the practice, rather

than prohibiting it.”” 486 U.S. at 837 (quoting Alessi, 451 U.S. at 516).

20

In addition, although not ra sed by petitioners, it is impor-

tant to note that the 9% assessment cannot function irrespec-

tive of ERISA plans. As a general matter, the Second Circuit

noted that eighty-eight percent of non-elderly Americans re-

ceive some form of private health care coverage through

ERISA plans. (A-6). The vast majority of the HMOs’ sub-

scribers are beneficiaries of ERISA plans.

Further evidence that ERISA was intended to preempt sur-

charges such as the 9% is found in President Clinton’s pro-

posed Health Security Plan. In that plan, the President ex-

pressly provides that the new plan will modify ERISA’s current

preemption provision to, inter alia, permit states more flex-

ibility in regulating health care. White House Domestic Policy

Council, Working Group Draft (September 7, 1993), reprinted

in The President's Health Security Plan—The Complete Draft

Report of the White House Domestic Policy Council 80 (Times

Books) (1993). Had the President and his health care council

believed that such laws were not already preempted by

ERISA, no such modification provision would have been

necessary.

B. The Second Circuit Was Correct in

Refusing to Follow United Wire and Rebaldo

The Second Circuit also properly rejected petitioners’

reliance on United Wire and Rebaldo. As noted by the

Second Circuit, tne principle that to be preempted a state

law must “purport to regulate” an ERISA plan, emanating

from Rebaldo v. Cuomo, has now been expressly rejected by

the Supreme Court. (A-21).'! Because the United Wire deci-

'!In Rebaldo, the Second Circuit held that regulations governing

the right of self-insured employee benefit plans to negotiate discounts

with hospitals was not preempted by ERISA because the law did not

purport to regulate the terms and conditions of employee benefit plans.

Rebaldo, 749 F.2d at 137.

ee

21

sion relied heavily on Rebaldo and too narrowly interpreted

ERISA’s preemption clause, the Second Circuit declined to

follow it.

In 1990, the Supreme Court issued two decisions which

establish that in order to be preempted by ERISA, a state

law need not make express reference to nor purport to

regulate an ERISA plan. In the first, FMC Corp. v. Holliday,

498 U.S. 52 (1990), this Court held that its earlier ERISA

preemption decision of Shaw v. Delta Air Lines, 463 U.S.

85, 95 (1983), which held that a law related to an employee

welfare plan and is preempted by ERISA if it has ‘‘a connec-

tion with or reference to such a plan,” was not intended to

mean that only those state laws “specifically designed to

affect employee benefit plans” or concerning the subject

matter covered by ERISA, are preempted by ERISA. In-

deed, the Supreme Court further elaborated on this issue a

short time later in its decision in Ingersoll-Rand v. McClen-

don. In Ingersoll-Rand, the Court held that a law relates to a

benefit plan for preemption purposes “even if the law is not

specifically designed to affect such plans, or the effect is

only indirect.” 498 U.S. at 139.

Following those decisions, the Second Circuit shifted

gears and held that “‘a state law of general application, with

only an indirect effect on a pension plan, may nevertheless

be considered to ‘relate to’ that plan for preemption pur-

poses.” Smith v. Dunham-Bush, Inc., 959 F.2d 6, 9 (2d Cir.

1992). In the District Court’s decision here, Judge Freeh

adopted this analysis and concluded that the 9% assessment

is preempted by ERISA. (A-69, 75).

The Second Circuit here correctly adopted Judge Freeh’s

determination that Rebaldo’s fundamental premise, rejected

by the Supreme Court (and later Second Circuit precedent),

poisoned that decision’s entire analysis. (A-21). Thus, the

22

Second Circuit properly held that petitioners’ reliance on

Rebaldo was misplaced and refused to follow the decision of

United Wire which relied on it. The Second Circuit held

instead that the surcharges satisfied the less stringent “‘con-

nection with” standard of Ingersoll-Rand. (A-22).'2

12There is no reason for this Court to review the Second Circuit's

decision that the 9% assessment is not saved from preemption by the

insurance savings clause. First, petitioners did not argue below and do

not appear to be arguing here that the 9% assessment is saved from

preemption. Second, and most importanti,, the 9% assessment is di-

rected solely at HMOs. As the Second Circuit held, New York law does

not require HMOs to be state-licensed insurers. N.Y. Ins. Law § 1109(a)

(McKinney 1985 & Supp. 1993). Nor can HMOs include in their names

“words generally regarded as descriptive of the insurance function.”

N.Y. Public Health Law § 4411. (McKinney 1985). Thus, the court

correctly held that the 9% assessment does not fall within the scope of

the savings clause because HMOs do not engage in the business of

insurance. (A-26-27 n.5).

23

Conclusion

For the foregoing reasons, the petitions for a writ of

certiorari should be denied.

Dated: Albany, New York

April 8, 1994

Respectfully submitted,

HAROLD N. ISELIN*

WENDY L. RAVITZ

CoucH, WHITE, BRENNER, HOWARD &

FEIGENBAUM

540 Broadway

P.O. Box 22222

Albany, New York 12201-2222

Telephone: (518) 426-4600

Attorneys for Respondents New York State

Health Maintenance Organization Conference,

Capital District Physicians’ Health Plan, Inc.,

Choicecare Long Island, Inc., Health Services

Medical Corporation of Central New York,

Inc., Independent Health Association, Inc.,

Mid-Hudson Health Plan, Inc., MVP Health

Plan, Inc., Oxford Health Plans, Inc.,

Physicians Health Services of New York, Inc.,

Preferred Care, Inc., Travelers Health

Network of New York, Inc., U.S. Healthcare,

Inc., Welicare of New York, Inc.

* Counsel of Record