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

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W WY Yu, Supreme Court, U.S,

Nos. 93-1408, 93-1414 and 93-1415 FI DE D.- | ‘

In the Supreme Court of the United Stalk 1° 19%

ICTOBER TERM, 1994 ) OFFICE OF THE CLERK

New YorK STATE CONFERENCE OF BLU® Cross

& BLUE SHIELD PLANS, et al.,

Petitioners,

V.

TRAVELERS INSURANCE Co., et al.

Respondents.

MaArRIo Cuomo, et al.,

. Petitioners,

TRAVELERS INSURANCE Co., ef al.

Respondents.

HOSPITAL ASSOCIATION OF NEW YORK,

» Petitioner,

TRAVELERS INSURANCE Co., et al.

Respondents.

On Writ of Certiorari to the

United States Court of Appeals

for the Second Circuit

BRIEF OF THE AMERICAN FEDERATION OF

STATE COUNTY AND MUNICIPAL EMPLOYEES,

AFL-CIO AS AMICUS CURIAE

IN SUPPORT OF PETITIONERS

ROBERT M. WEINBERG LARRY P. WEINBERG *

IAN D. LANOFF JOHN C. DEMPSEY

ANDREW D. ROTH General Counsel

BREDHOFF & KAISER AMERICAN FEDERATION OF

1000 Connecticut Ave., N.W. STATE COUNTY AND

Washington, D.C. 20036 MUNICIPAL EMPLOYEES,

AFL-CIO

1101 17th Street, N.W.

Washington, D.C. 20036

(202) 775-5900

* Counsel of Record

( Additional Counsel Listed on Inside Cover)

WILSON - Eres PRINTING Co., Inc. - 789-0096 - WASHINGTON, D.C. 20001

@ EB oo

NANCY E. HOFFMAN

CIVIL SERVICE EMPLOYEES’

ASSOCIATION

143 Washington Avenue

Albany, New York 12210

ROBERT PEREZ-WILSON

RICHARD J. FERRERI

DISTRICT COUNCIL 37

125 Barclay Street, Room 510

New York, New York 10007

4

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TABLE OF CONTENTS

TABLE OF AUTHORITIES

INTEREST OF THE AMICUS CURIAE

INTRODUCTION AND SUMMARY OF ARGUMENT...

CONCLUSION ...

ii

TABLE OF AUTHORITIES

CASES Page

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

1 | RRR Se ss 15

Cipollone v. Liggett Group, Inc., —— US. ——,

oo § EF & —-_ SE ee ereee 11

District of Columbia v. Greater Washington Bd. of

Trade, —— U.S. ——.,, 118 S. Ct. 580 (1992)... 15

Fisher v. City of Berkeley, 475 U.S. 260 (1986) ...... 18

FMC Corp. v. Holliday, 498 U.S. 52 (1990) -........... 15

Fort Halifax Packing Co. v. Coyne, 482 US. 1

(Re RES SR ON ae RE SRY SS 16-17

Hillsborough County v. Automated Medical Labs.,

Inc., 471 U.S. 707 (1985) . 11

Ingersoll-Rand Co. v. McClendon, 498 US. “188

ST PE ES A an 15, 17

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

FG GF ES a ee 11-12, 15

Metropolitan Life Ins. Co. v. Massachusetts, 471

I ie ccna sini eriiiie ial eetattteridtinmatien 15, 18

Munn v. Ilinois, 94 U.S. 118 (1877) -........................ 18

Nebbia v. New York, 291 U.S. 501 (1984) ............. 18

Pennell v. City of San Jose, 485 U.S. 1 (1988)... 18

Pilot Life Ins. Co. v. Dedeauzx, 481 U.S. 41 (1987)... 15, 18

Shaw v. Delta Air Lines, Inc., 468 U.S. 85 (1988) .. 12, 15,

16

STATUTES

ae 8

29 U.S.C. § 1002(1) ................ ncttcipeitinamatiatiaa initiates 8

EE stentiiaibtiaiiaal passim

29 U.S.C. § 1144(B) (3B) (A) ...........--..<.-2000000.020..-000000-2 18

N.Y. Ins. Law § 4817(a) (McKinney Supp. 1994) .. 7

MISCELLANEOUS

Legislative History of ERISA (Sen. Labor Sub.

I 16

120 Cong. Rec. 29,197 (1974) siiaaaiihaias 16

120 Cong. Rec. 29,983 (1974) — 16

120 Cong. Rec. 29,942 (1974) ...... enn. 16

Iu the Supreme Court of the United States

OcToBER TERM, 1994

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

New York STATE CONFERENCE OF BLUE Cross

& BLUE SHIELD PLANS, ef al.,

. Petitioners,

TRAVELERS INSURANCE Co., ef ai.,

Respondents.

Mario Cuomo, et ai.,

Vv. Petitioners,

TRAVELERS INSURANCE Co., et ai.,

Respondents.

HOSPITAL ASSOCIATION OF NEW YORK,

7 Petitioner,

TRAVELERS INSURANCE Co.., ef al.,

Respondent.

On Writ of Certiorari to the

United States Court of Appeals

for the Second Circuit

BRIEF OF THE AMERICAN FEDERATION OF

STATE COUNTY AND MUNICIPAL EMPLOYEES,

AFL-CIO AS AMICUS CURIAE

IN SUPPORT OF PETITIONERS

This brief amicus curiae of the American Federation of

State County and Municipal Employees, AFL-CIO

2

(“AFSCME”) is filed with the written consent of the par-

ties, as provided for in the Rules of this Court.

INTEREST OF THE AMICUS CURIAE

AFSCME is a nationwide labor organization with a

current membership of approximately 1.3 million public

employees. Several thousand AFSCME members are em-

ployed by public hospitals in the State of New York and

are thus interested in the validity of the state statutes at

issue here, which govern the cost of inpatient hospital

services.

AFSCME’s brief is joined by two AFSCME affiliates:

New York City District Council 37, AFSCME, AFL-CIO

(“District Council 37”); and State of New York, Civil

Service Employees’ Association, Local 1000, AFSCME,

AFL-CIO (“CSEA”). District Council 37 represents New

York City hospital employees, and CSEA represents New

York State hospital employees.

INTRODUCTION AND SUMMARY OF ARGUMENT

The state scheme of regulating charges for hospital

care that is at issue in this case is crafted to address

both the obligations placed on hospitals to care for seg-

ments of the population at charges that are below what

an unregulated market would generate and the complica-

tions inherent in providing inpatient hospital care insur-

ance coverage to high risk individuals and groups. The

essence of the solution adopted by the State is a system

of differential hospital prices—and of differential gov-

ernment surcharges to those regulated prices—that is

designed to spread the costs of providing inpatient hos-

pital care to all segments of the population uniformly

among private third-party payors, rather than to permit

those costs to fall disproportionately on some payors

because of the particular characteristics of the segment of

the population that those payors serve.

A group health plan must necessarily choose from

among various options for paying for health benefits pro-

3

vidéd to those Covered by the plan. The decision below

stands ‘for the’ proposition that any state scheme ‘for

regulating hospital charges for inpatient care that alters

the relative costs of those various options from what

those costs would have been in an unregulated market

“relate[s] to” health plans covered by the Employee Re-

tirement Income Security Act of 1974, 29 U.S.C. §§ 1001

et seq., and hence is preempted by-ERISA § 514(a). On

that decision, then, ERISA preemption serves to assure

that ERISA plans can secure inpatient hospital services

through a “free market” that is not “distorted” by state

regulation of hospital charges.

It is our submission that ERISA does not force a state

to choose a segmented “free market” hospital cost pay-

ment structure with its discriminatory inequities over a

market structure that takes the benefit out of opportunistic

activity by charging all private payors their fair portion

of total hospital costs. ERISA, we submit, was not

founded on the premise that health care providers and

health insurers with whom plan sponsors and fiduciaries

deal must be unregulated and that the providers and in-

surers must be free to set their charges and otherwise con-

duct their affairs so as to maximize the market options

of ERISA health plans. ERISA does not in fact assume,

dictate, regulate, or prefer any given means of providing,

pricing, or insuring health care.

Contrary to the ruling below, then, ERISA cannot be

read to deprive a state of the authority—which the States

otherwise have as part of their traditional police powers—

to regulate health care providers and insurers and to

thereby structure the markets in which those entities func-

tion in the manner that the state determines will best

achieve legitimate state regulatory objectives—and that

does not interfere with any objective of ERISA.

As we show below, the general language of ERISA’s

preemption provision § 514(a), 29 U.S.C. § 1144(a),

does not warrant such a federal intrusion into the tradi-

4

tional prerogatives of the States. The words “relate to

any employee benefit plan” in §514(a) were not in-

tended to preempt state regulation that simply alters the

relative costs of options that plan sponsors and fiduciaries

remain free to adopt. This Court’s decisions on the mean-

ing of §514(a) are entirely consistent with that

understanding.

ARGUMENT

I

The state statutory provisions here at issue are part

of a comprehensive scheme of regulation. We therefore

begin by setting out the essentials of that scheme and

the place of the challenged provisions within that scheme.

(a) The public policy of the State of New York, and of

the United States, is to ensure that all segments of the pop-

ulation will be able to secure needed inpatient hospital care.

Both the State and the Federal Government therefore

treat hospitals as institutions imbued with a public pur-

pose and subject both to certain responsibilities and to cer-

tain forms of price regulation. The Medicare and Medi-

caid programs finance hospital care—albeit on a severely

discounted price basis established by government regula-

tion—for a large part of the elderly population and the

indigent population. Under certain circumstances, hos-

pitals are, moreover, required to provide care to indigent

patients not covered by Medicaid without receiving any

payment of the costs associated with providing that care.

In addition, the practice of individuals in this society is

to safeguard against the uncertainties and high costs asso-

ciated with serious illness and accidents by securing insur-

ance to provide for the costs of inpatient hospital care.

There is a wide variation in the general population, from

individual to individual, and among certain groupings of

individuals, as to the risks of incurring significant in-

patient hospital costs. If individuals and insurers were

left to their own devices, individuals and groups with

low risk characteristics would be able to secure hospitali-

zation insurance at comparatively low premiums. And,

5

those with high risk characteristics would either be unable

to secure such insurance or would be forced to pay higher

premiums for that insurance.

(b) In New York, Blue Cross and Blue Shield (“the

Blues”), both by practice and by virtue of regulatory

obligation, have historically accepted the public burden

of providing health insurance to otherwise uninsurable,

high risk populations. See Joint Appendix (“JA”) 161-

62, 196-98, 218-19. The Blues have carried that burden

through such practices as open enrollment and community

rating of small, high risk groups. /d.

Since 1970, the State, pursuant to statute, has set the

prices charged by hospitals to the Blues for inpatient hos-

pital services at levels below those charged to other third-

party payors. JA 148, 222. The State’s action provided

what was in practical terms a subsidy that enabled the

Blues to continue to cover otherwise uninsurable, high

risk populations and to provide insurance to other popu-

lations at competitive rates. This action meant that hos-

pitals charged higher prices to other third-party payors

to cover the costs of the services provided to the Blues’

insureds—as well as of the services provided to Medicaid

and Medicare patients at discounted rates. JA 148-49,

162.

(c) In the 1970s and early 1980s, some third-party pay-

ors were able to use their market power to obtain discounted

hospital prices at or approaching the prices charged to

the Blues. JA 149-50. This resulted in still more cost-

shifting to the remaining third-party payors. JA 150. By

1982, the prices charged to all private third-party payors

other than the Blues were on average 25% higher than

the prices charged to the Blues, and in some areas of

the State as much as 40% higher. JA 149.

In 1983, the State implemented a new statute setting

a maximum rate differential between the Blues and other

private third-party payors (except Health Maintenance

Organizations, “HMOs”) at 15%, and prohibiting hos-

pitals from charging discounted prices to preferred private

6

third-party payors and not to all such payors. The prac-

tical result of this regime was a generally uniform 15%

differential between the Blues and the other private third-

party payors. JA 150.

(d) In 1988, New York replaced the 1983 scheme with

a new comprehensive scheme, directly regulating the hos-

pital charges for inpatient services to all third-party

payors. The scheme establishes a base level price for

every inpatient hospital procedure. Appendix to Petition

for Writ of Certiorari (“Pet. App”) 101-02. That is

the price paid to the hospitals by Medicaid, the Blues,

and HMOs. Pet. App. 101. By 1988, HMOs were in

the same position as the Blues by reason of state regula-

tion requiring similar open enrollment and community

rating practices. JA 261-64.

The 1988 scheme establishes a second category of

payors, including all commercial insurance companies

and all self-insured groups that directly pay hospitals for

inpatient hospital services provided to their beneficiaries.

Prices for payors in this category are set at 13% above

the base level. Pet. App. 102. This differential in the

amounts payable to hospitals is a continuation of the

State’s effort to spread the costs of providing hospital care

to high risk populations among the entire class of private

third-party payors, and not just among those payors that

have assumed the burden of providing that coverage. JA

153, 164-65, 228-29, 263-64.

In sum, with respect to the Blues and to HMOs, the

13% pricing differential serves to compensate for the

competitive disadvantage those entities incur by virtue of

their disproportionate coverage of high risk populations.

(e) In 1992, the State enacted additional provisions di-

rected toward protecting the inpatient hospital services

market. The State was confronted with a growing prac-

tice by commercial insurers that was causing further

skewing of pricing in the health insurance market, and

was again jeopardizing the ability of the Blues and

HMOs to compete in that market. The problem, in brief,

7

was that, particularly in the late 1980s and early 1990s,

private commercial insurers were actively “cherry pick-

ing” low risk groups, by offering those groups low pre-

miums based on experience rating, thereby leaving the

Blues, and the HMOs, the segment of the population that

was becoming even more disproportionately comprised of

high risk individuals. See JA 204-06, 232-33.

The State addressed this problem in two stages. The

initial stage was to put into place a now-expired one-year

surcharge of 11% on all inpatient hospital charges to

patients covered by commercial insurers, but not to pa-

tients covered by other payors. Pet. App. 104. This sur-

charge served as a short-term measure to correct the

market distortions resulting from commercial insurers

experience-rating small low risk groups in order to garner

the most attractive segments of the population. JA 206-

07, 232-34."

A long-term measure designed to address the “cherry

picking” problem was put into effect by the State imme-

diately upon the expiration of the one-year surcharge—

April 1, 1993. This enactment requires that all health

insurance policies in the State for individuals or for groups

of 50 or fewer persons be issued on a community rated

and open-enrollment basis, whether offered by commer-

cial insurers or by the Blues. See N.Y. Ins. Law § 4317

(a) (McKinney Supp. 1994); JA 294.

A second aspect of the 1992 market reforms ad-

dressed the State’s desire to control the spiraling costs of

the Medicaid program by inducing HMOs—which utilize

cost-saving managed-care techniques—to enroll an in-

creased share of the Medicaid population. JA 175-77.

The State sought to accomplish this purpose by imposing

a variable surcharge on inpatient hospital services charged

to HMOs, varying from 9% down to zero, depending

upon each HMO’s success in enrolling a defined target

1 Unlike the 18% pricing differential, this surcharge was paid to

the State and thus served the additional purpose of providing reve-

nue for the State. JA 284-35.

8

number of Medicaid eligible persons. Pet. App. 106-13;

JA 175-77.’

II

Among those that provide group coverage for inpatient

hospital costs and that arrange for the payment of such

costs on behalf of members of the group are single em-

ployer, multi-employer, and employee organization health

benefit plans that come within the ambit of ERISA.

ERISA defines the term “employee welfare benefit plan”

to include any plan established by an employer or em-

ployee organization “for the purpose of providing for its

participants or their beneficiaries, through the purchase

of insurance or otherwise, . . . medical, surgical, or

hospital care or benefits.” 29 U.S.C. § 1002(1). The

New York regulatory scheme here at issue has an impact

on ERISA health benefit plans and that impact is what

generates this ERISA preemption dispute. We therefore

pause to describe that impact in some detail.

To begin, the state scheme does not regulate ERISA

health benefit plans. The provisions at issue here do not

impose any legal requirement on the sponsors or fiduci-

aries of such ERISA plans to take, or not to take, any

particular actions. The impact of the scheme on ERISA

plans—and the only impact—is not regulatory but eco-

nomic. ERISA plans, like other third-party payors, are

subject to the secondary effects of the state regulation

of hospital charges. By reason of that regulation of enti-

ties that are not immune from state regulation under

ERISA or any other federal law, ERISA plans face a

different set of economic possibilities and opportunities

than the plans would face in an unregulated market or a

differently regulated market.

After the state regulation at issue here, as before,

ERISA health plans continue to be free to choose from

2 This surcharge is also paid to the State and not to the hos-

pitals. JA 175.

9

among a variety of health benefit packages for the plans’

beneficiaries, and a variety of methods for providing those

benefits. For example, in New York as elsewhere, the

plans are entirely free to purchase health insurance from

non-profit or for-profit insurance carriers; contract with

health maintenance organizations or preferred provider

groups; enter into arrangements that include some com-

bination of the foregoing arrangements; or pay for the

covered health services directly rather than through some

intermediary. Pet. App. 6-7.

By definition, government regulation of a class of serv-

ice providers aimed at restructuring their market will serve

to alter the relative cost-based advantages of the providers.

Here, because of the scheme at issue, certain mechanisms

for paying for inpatient hospital services provided to

ERISA plan beneficiaries may well have become more or

less attractive than in a market that had not been re-

structured. Thus, absent the restructuring, the Blues might

not have been able to offer to ERISA plans a package

as advantageous to the plans as can be offered by the Blues

after the restructuring. By the same token, other mecha-

nisms for paying for inpatient hospital services—commer-

cial insurance or self-funding—may have become relatively

less advantageous from the plans’ standpoint, at least on

a cost basis.

These changes in the relative advantages of the various

payment mechanisms are the direct consequence of the

State’s restructuring the market so that all private payors

equitably share the costs of providing inpatient hospital

care to all segments of the State’s population, including

the high risk and indigent populations, rather than per-

mitting those costs to fall disproportionately on some

payors because of the particular characteristics of the

segment of the population that they serve.

By reason of these market adjustments, those payors that

cover a disproportionately high proportion of low risk

segments of the population will have to pay more for

inpatient hospital services than the amount that they

10

would have paid in a market predicated on the risk

characteristics of each particular segment of the popula-

tion and on the actual costs of the hospital care provided

to each covered individual. And, of course, the opposite

would be true for those payors that cover a dispropor-

tionately high proportion of high risk segments of the

population.

Ill

There is room to dispute the wisdom and the efficacy

of the State’s efforts to regulate hospital charges to pre-

vent the inpatient hospital services market and the health

insurance market from becoming segmented and to pro-

vide that the moneys paid by all insured patients cover

the shortfall caused by discounts to Medicare and Medi-

caid and by the provision of services to indigent patients

not covered by Medicaid.

But there is no room to dispute that the State is, indeed,

regulating hospital charges and that the entirety of the

effect on ERISA health benefit plans is the economic

effect of this regulation. The question here then is whether

ERISA precludes a state from engaging in such regula-

tion of hospital charges—or, more technically, whether

ERISA exempts ERISA health plans from having to pay

for patient care provided to their beneficiaries on a basis

that charges them their share of total hospital costs as

established through such a regulated market.

(a) ERISA § 514(a)—the ERISA preemption provision

—-states that “the provisions of this subchapter . . . shall

supersede any and all State laws insofar as they may

now or hereafter relate to any employee benefit plan.”

29 U.S.C. § 1144(a). This Court has made it plain that,

as the statutory language indicates, ERISA preemption

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

96-97 (1983) (“A law ‘relates to’ an employee benefit

plan, in the normal sense of the phrase, if it has a con-

nection with or reference to such a plan.”). But neither

11

the statutory words nor this Court’s decisions interpreting

those words stand for the proposition that ERISA pre-

emption is limitless. The term “a law that ‘relate[s] to’ a

party” is not a term of art that is inevitably equated with,

or inevitably encompasses, every “state regulation of a

third person that has an economic effect on that party.”

And, it is our position here that a state law regulating

hospital charges, and doing so on a rational basis that does

not single out ERISA plans, is not a state law that “re-

late[s] to” ERISA plans merely because the law generates

secondary economic effects on all private payors including

ERISA plans.

On a certain world view everything is related to every-

thing else. Whatever the merit of that view, if the “relate

to” language of § 514(a) were read in that way, ERISA

plans would literally be placed above all the civil law of

the states in which they operate. Such a reading would be

extraordinary. We know of no context in which Congress

has ever taken such a step with respect to any private

entity. To ascribe such an intention to Congress from

the general words “relate to,” and without a more spe-

cific and express statement of such an intention, would

run counter to the most basic understandings of the rela-

tionship between the Federal Government and the States.

“(W]e start with the assumption that the historic police

powers of the States were not to be superseded by the

Federal Act unless that was the clear and manifest pur-

pose of Congress.” Hillsborough County v. Automated

Medical Labs., Inc. 471 U.S. 707, 715 (1985) (internal

quotations omitted). Accord, e.g., Cipollone v. Liggett

Group, Inc., —— US. , 112 S. Ct. 2608, 2617-18

(1992).

That being so, this Court has already made it clear

that “relate to” in § 514(a) does not sweep away the run

of state law. In Mackey v. Lanier Collection Agency &

Serv., Inc., 486 U.S. 825 (1988), this Court recognized

that §514(a) does not preempt a variety of state law

claims brought directly against ERISA plans:

12

ERISA plans may be sued in a second type of

civil action, as well. These cases—lawsuits against

ERISA plans for run-of-the-mill state-law claims

such as unpaid rent, failure to pay creditors, or even

torts committed by an ERISA plan—are relatively

commonplace. Petitioners and the United States (ap-

pearing here as amicus curiae) concede that these

suits, although obviously affecting and involving

ERISA plans and their trustees, are not pre-empted

by ERISA § 514(a). [Id. at 833 (footnote omitted). ]

The state law actions described as not “relate[d] to”

ERISA plans in this passage operate directly on such

plans. Those actions are predicated on legal obligations

imposed on the plans by state law, and may result in the

imposition on the plans of state law remedies. The state

scheme at issue here has no such relational nexus to

ERISA plans. As we have shown the state scheme regu-

lates hospital prices and imposes surcharges on commercial

insurers and HMOs. The sum and substance of the

state regulations’ relation to ERISA plans is to restruc-

ture the market in which ERISA plans, among others,

deal in a manner that has an economic impact on those

plans; that impact is one that alters the relative costs of

the various options that are available to ERISA plans for

paying for the health benefits of plan beneficiaries from

what those costs would have been in an unregulated

market. And, this economic consequence of the state

scheme affects ERISA health plans in precisely the same

way as non-ERISA health plans.

So far as we are aware, in the “normal sense of the

phrase,” Shaw, 463 U.S. at 97, a law regulating A in a

manner that structures what A can offer on the market

and thereby affecting B, C and D who are on the other side

of that market is not a law that “relate[s] to” B, C and

D. In our jurisprudence, B, C and D have no expectation,

much less a right, to participate in any particular market

or to deal with market participants who are free of regula-

tory constraints. That general understanding applies with

full force to a market structured by health care regulations.

13

Health care providers have long been heavily regulated

by the States. State licensing provisions, tax provisions,

staffing requirements, patient care protocols, malpractice

standards and remedies, health care subsidies and scores

of other forms of state regulation are major determinants

of the types of inpatient hospital care that is available

on the market in any state and of the cost of that care.

The scheme of regulation here at issue is well within the

scope of the traditional state regulation of health care.

As we have shown, the State has sought, through reg-

ulation of hospital charges, to spread the costs of pro-

viding inpatient hospital care to all segments of the pop-

ulation uniformly among the various types of private third-

party payors. Like the other forms of state regulation

of the provision of hospital care, the regulation of hos-

pital charges here is a classic exercise of the police power

to achieve a basic social good. See, e.g., Pennell v. City

of San Jose, 485 U.S. 1, 11-14 (1988); Fisher v. City

of Berkeley, 475 U.S. 260, 264 (1986); Nebbia v. New

York, 291 U.S. 502 (1934); Munn v. Illinois, 94 U.S.

113 (1877).

State regulation of hospital care—and the attendant

effects of that regulation on the costs of hospital care—

was prevalent when ERISA was enacted, as it is today.

Yet there is nothing in ERISA’s language or its legislative

history evincing an affirmative congressional intent to

federalize the regulation of the provision of hospital care

in all its manifest complexity. Nor is there any express

indication in ERISA of a congressional intent to end state

regulation of hospital care and to replace it with a

federally mandated regulatory void—or, in more precise

terms, to entitle ERISA plans to secure hospital services

in an unregulated market.

The only possible exception to the foregoing assertions

is the “relate to” language of § 514(a), standing alone.

We submit that those words cannot possibly bear that

weight. It is one thing to say, as this Court has said,

that in the interests of uniformity Congress intended to

prevent the States from directly or indirectly imposing

14

legal or administrative obligations on ERISA plans. See

infra pp. 14-18. That, after all, is consistent with the

Act’s purpose in setting a national legal framework for

employee benefit plans, including plans that operate on a

multi-state basis. It is quite another to say that Congress,

without a whisper to so indicate, intended to oust the

States from regulating health care providers in any manner

that affects—or substantially affects—the opportunities of

ERISA plans. That would amount to a congressional inten-

tion to create a right of ERISA plans to procure hospital

services for plan beneficiaries in a uniform unregulated

market. It would be folly to attribwte to Congress the

silent desire to create a nationwide health care “free

market” for ERISA plans. There has never been such a

market and it is all but impossible to conceptualize how

such a market could be created in this society or how it

could function.

Even without the kinds of state law provisions at

issue here, the markets for procuring health services

available to ERISA health plans will differ from state

to state depending upon a multitude of variables re-

specting the structure of health care delivery systems

within each state, demographic and geographic consider-

ations, variations in cost structure in the health care de-

livery systems and in the insurance systems within each

State, and so on. Multi-state ERISA health plans must

take these market differences from state to state into

account in determining what kind of payment system to

adopt or maintain. The provisions at issue here do no

more than affect the relative cost structure in one of the

markets ERISA plan sponsors and fiduciaries must evalu-

ate in exercising their discretion to adopt a payment

system suited to their respective plans.

(b) While the precise issue presented here is one of first

impression, this Court’s cases construing the meaning

of “relate to” in §514(a) are entirely consistent with

the conclusion that the state statutes at issue here are

not preempted by ERISA. This Court’s decisions giving

that language a broad sweep have been generated by

15

state laws that were premised on the existence of ERISA

plans or that sought, directly or indirectly, to impose a

legal requirement on ERISA plans—viz., that sought to

require those plans to take, or not to take, a certain

action. See Alessi v. Raybestos-Manhattan, Inc., 451

U.S. 504, 524 (1981) (provision in New Jersey workers’

compensation statute “relates to” ERISA pension plans

because it would prohibit plans from employing “one

method for calculating pension benefits—integration—

that is permitted by federal law”); Shaw, 463 U.S. at 97

(“the Human Rights Law, which prohibits employers

from structuring their employee benefit plans in a manner

that discriminates on the basis of pregnancy, and the

Disability Benefits Law, which requires employers to

pay employees specific benefits, clearly ‘relate to’ benefit

plans”); Metropolitan Life Ins. Co. v. Massachusetts,

471 U.S. 724, 739 (1985) (Massachusetts insurance

law provision “bears indirectly but substantially on all

insured benefit plans, for it requires them to purchase

the mental-health benefits specified in the statute when

they purchase a certain kind of common insurance

policy.”); Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41,

47-48 (1987) (state common law tort and contract ac-

tions “relate to” ERISA plans to the extent that they

are premised on the failure of an ERISA plan to pay

benefits); Mackey, 486 U.S. at 829 (“The Georgia stat-

ute at issue here expressly refers to—indeed, solely

applies to—ERISA employee benefit plans.”); FMC

Corp. v. Holliday, 498 U.S. 52, 60 (1990) (Pennsyl-

vania antisubrogation law relates to ERISA plans be-

cause it “prohibits plans from being structured in a

manner requiring reimbursement in the event of

from a third party.”); Ingersoll-Rand Co. v. McClendon,

498 U.S. 133, 140 (1990) (“Texas cause of action

makes specific reference to, and indeed is premised on,

the existence of a pension plan.”); District of Columbia

v. Greater Washington Bd. of Trade, US. ——,

113 S. Ct. 580, 583 (1992) (provision in workers’ com-

pensation statute “relate{[s] to” ERISA plans where the

obligations it imposes on employers depends entirely on

whether the employer has chosen to create and maintain

an ERISA plan).

16

In Shaw, the Court quoted liberally from floor state-

ments made by three members of Congress who managed

the legislation. Those floor statements describe the final,

conference version of § 514(a) as preempting state laws

that, directly or indirectly, impose legal requirements for

the operation of ERISA plans.

For example, Representative Dent, in the passage

quoted in Shaw, stressed that the conference version of

§ 514(a) was intended to assure “the reservation to Fed-

eral authority [of] sole power to regulate the field of em-

ployee benefit plans . . . by eliminating the threat of

conflicting and inconsistent State and local regulation.”

463 U.S. at 99, quoting 120 Cong. Rec. 29,197 (1974)

(emphasis supplied). Similarly, Senator Williams referred

to an intention “to preempt the field for Federal regula-

tions, thus eliminating the threat of conflicting or incon-

sistent State and local regulation.” Id., quoting 120 Cong.

Rec. at 29,933 (1974) (emphasis supplied). And, Sen-

ator Javits said that § 514(a) addresses “the desirability

of further regulation—at either the State or Federal

level.” Id. at 99 n.20, quoting 120 Cong. Rec. 29,942

(1974) (emphasis supplied). See also Senator Javits’

comment, in a colloquy not quoted in Shaw, that with

respect to plans providing prepaid legal services “it is

intended that State regulation—but not bar association

ethical rules, guidelines or disciplinary actions” be pre-

empted, Legislative History of ERISA, 4789 (Sen. Labor

Sub. Print 1976); id. (“the State, directly or indirectly

through the bar, is preempted from regulating the form

and content of a lezal service plan”).

Subsequently. in Fort Halifax Packing Co. v. Coyne,

482 U.S. 1, 9 (1987), the Court characterized these

floor statements as “clearly disclos[ing] the problem that

the preemption provision was intended to address”:

These statements reflect recognition of the admin-

istrative realities of employee benefit plans... . The

most efficient way to meet these responsibilities is

to establish a uniform administrative scheme, which

provides a set of standard procedures to guide proc-

essing of claims and disbursement of benefits. Such

17

a system is difficult to achieve, however, if a benefit

plan is subject to different regulatory requirements in

differing States. A plan would be required to keep

certain records in some States but not in others; to

make certain benefits available in some States but

not in others; to process claims in a certain way in

some States but not in others; and to comply with

certain fiduciary standards in some States but not in

others. ...

ERISA’s pre-emption provision was prompted by

recognition that employers establishing and main-

taining employee benefit plans are faced with the

task of coordinating complex administrative activ-

ities. A patchwork scheme of regulation would in-

troduce considerable inefficiencies in benefit program

operation. . . . Pre-emption ensures that the admin-

istrative practices of a benefit plan will be governed

by only a single set of regulations. [482 U.S. at

9-11 (emphasis supplied ).]

See also id. at 10-11 (reviewing the earlier cases in

which ERISA preemption was found, and concluding

that “[w]je have not hesitated to enforce ERISA’s pre-

emption provision where state law created the prospect

that an empivyer’s administrative scheme would be sub-

ject to conflicting requirements”) (emphasis supplied).

Consistent with these legislative materials, this Court

in Ingersoll-Rand stated the rationale for ERISA pre-

emption as follows:

Section 514(a) was intended to ensure that plans

and plan sponsors would be subject to a uniform

body of benefits law; the goal was to minimize the

administrative and financial burden of complying

with conflicting directives among States or between

States and the Federal Government [498 U.S. at

142.]

That rationale for preemption defines the outer limits

of the “relate to” concept in § 514(a). State laws that

impose no “requirements,” directly or indirectly, on

ERISA plans are outside those limits. By definition such

state laws cannot impose requirements contrary to the

18

requirements of ERISA or threaten ERISA plans with

the possibility of being subject to different or conflicting

requirements in other states.*

CONCLUSION

For the foregoing reasons, the decision and judgment

of the United States Court of Appeals for the Second

Circuit in this case should be reversed.

Respectfully submitted,

ROBERT M. WEINBERG LARRY P. WEINBERG *

IAN D. LANOFF JOHN C, DEMPSEY

ANDREW D. ROTH General Counsel

BREDHOFF & KAISER AMERICAN FEDERATION OF

1000 Connecticut Ave., N.W. STATE COUNTY AND

Washington, D.C. 20036 MUNICIPAL EMPLOYEES,

AFL-CIO

1101 17th Street, N.W.

Washington, D.C. 20086

(202) 775-5900

NANCY E. HOFFMAN ROBERT PEREZ-WILSON

CIVIL SERVICE EMPLOYEES’ RICHARD J. FERRERI

ASSOCIATION DISTRICT COUNCIL 87

143 Washington Avenue 125 Barclay Street, Room 510

Albany, New York 12210 New York, New York 10007

* Counsel of Record

*If, contrary to what we have argued, New York’s statutory

scheme is found to “relate to” ERISA plans within the meaning

of ERISA §514(a), the Court would then have to consider the

second question presented. That question is whether the New York

statutory scheme is saved from ERISA preemption by ERISA

§ 514(b) (2) (A), which provides, in pertinent part, that “nothing

in this subchapter shall be construed to exempt or relieve any

person from any law of any State which regulates insurance.” 29

U.S.C. §1144(b)(2)(A) (emphasis supplied). Given the sub-

stance and the purpose of the New York statutory scheme at issue

here, see supra pp. 4-8, it is our submission that the New York

scheme is one that “regulates insurance” within the plain “common

sense” meaning of that term. See Metropolitan Life, 471 U.S. at

740; Pilot Life, 481 U.S. at 48. We thus fully embrace the position

of petitioners and the United States on this issue.