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

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Nos. 93-1408, 93-1414, 93-1415] wow a6 1994 |

IN THE OFFICE OF THE CLE... |

Supreme Court of the United States —

Ocroser Term, 1994

NEW YORK STATE CONFERENCE OF BLUE CROSS

& BLUE SHIELD PLANS, et al.,

Petitioners,

vs.

TRAVELERS INSURANCE CO., et al..

Respondents.

(Caption Continued on Reverse Side of Cover)

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT

OF APPEALS FOR THE SECOND CIRCUIT

BRIEF OF THE AMERICAN HOSPITAL ASSOCIATION.

THE MARYLAND HOSPITAL ASSOCIATION, INC., AND

THE MASSACHUSETTS HOSPITAL ASSOCIATION, INC.

AS AMICI CURIAE IN SUPPORT OF PETITIONERS

Of Counsel: PeTrer F. NADEL

FReDRIC J. ENTIN Counsel Of Record

James A. HENDERSON Davin A. FLORMAN

Marcaret J. Harpy JoserpH V. WILLEY

AMERICAN HospPITAL BARBARA QUACKENBOS

ASSOCIATION ROSENMAN & COLIN

One North Franklin 575 Madison Avenue

Chicago, Illinois 60606 New York, New York 10022

(312) 422-3000 (212) 940-8800

(Counsel Continued on Attorneys for the American

Reverse Side of Cover) Hospital Association, the

Maryland Hospital

Association, Inc., and the

Massachusetts Hospital

Association, Inc.

Oca - - em meh -_

MARIO CUOMO, GOVERNOR OF NEW YORK. et al..

Petitioners.

VS.

TRAVELERS INSURANCE CoO., et al.,

Respondents.

HOSPITAL ASSOCIATION OF NEW YORK STATE.

Petitioner.

VS.

TRAVELERS INSURANCE CoO., et al.,

Respondents.

Of Counsel:

JEROME G. GERAGHTY

FRANCINE R. STRAUSS

BLADES & ROSENFELD, P.A.

1200 Sun Life Building

200 South Charles Street

Baltimore, Maryland 2120]

(410) 539-7558

WILLIAM T. McGralIL

DorotHy GRANDOLFI Wacc

Amy L. STAMPFER

MASSACHUSETTS HospPITAL

ASSOCIATION, INC.

5S New England Executive Park

Burlington, Massachusetts 01803

(617) 272-8000

o i” | My) uy a) Da wy

wa 1 © a

> ee

TABLE OF CONTENTS

Page

NT iii

Interest of the Amici Curiae ................ccccccececesesecceseceseeees l

. Introduction and Summary of Argument......................... l

| ARGUMENT

I. ERISA WAS NOT INTENDED TO PREEMPT

| STATE LAWS THAT AFFECT THE PRICE OF

| SERVICES TO PLAN PARTICIPANTS................... 3

Il. ERISA DOES NOT PREEMPT A STATE’S

POWER TO ESTABLISH UNIFORM

| i 7

A. ERISA Does Not Preempt Common Law

| Causes of Action Against Plan Participants ..... 8

| S . SD 1]

fa] 1. Maximum Charges..................:.:cccceceeseeeseees 12

)

; nD 13

C. The Indirect Economic Impact of State Rate-

Setting Systems Is Alone Insufficient to

Result im Preemption .............0.c.ccececceressesesserees 15

| 1. Indirect Economic Impact, National

. Uniformity, and Administrative Burdens... 16

4 2. Indirect Economic Impact and Plan

| EE SL 17

D. Congress Did Not Intend to Limit States’

Control of Hospital Costs and Rates................. 21

| Ii]. ERISA DOES NOT PREEMPT A STATE’S

| POWER TO ESTABLISH DISPARATE

| a 23

At he

Page

A. Disparate Rates and the Goals of State Rate-

ae See 23

B. The Differentials Do Not Relate to ERISA

Will siniirsinindansgsecuhidtepdnedatitiasbias tebe ti sais 26

|. “Reference To” and “Depend Upon”.......... 26

2. Structure, Administration and Economic

i asse-cisneinitiiapiiniiatiniepinighebeaisthtiadig a iia 28

CD cccidinntindiiccindidit te i a 30

iii

TABLE OF AUTHORITIES

Cases

Aetna Life Ins. Co. v. Borges, 869 F.2d 142 (2d Cir.),

cert. denied, 493 U.S. 811 (1989).............cccccccceeeee. 5

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

RII a Ui chcicdaieinaitaleiliadbdonaianaibaaansinabiiiuemlbsbdasiiinbaisticcbecees

Beth Israel Med. Ctr. v. Sciuto, 1993 WL 258636

RI CEE Sa Ae

Connecticut Gen. Life Ins. Co., et al. v. Cuomo, No.

a cietliamimnenecnsenes

Connecticut Hosp. Ass'n v. Pogue, et al., No. 3:94

eg TT SR

Diduck v. Kaszycki & Sons Contractors, Inc., 974

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

a! ee

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

cert. denied, ___ U.S.__, 112 S. Ct. 585 (1991).. 15n

Firestone Tire & Rubber Co. v. Neusser, 810 F.2d 550

EE RE SP Ce Te er a

Forbus v. Sears Roebuck & Co., 30 F.2d 1402 (11th

Fort Halifax Packing Co. v. Coyne, 482 U.S. 1 (1987)... 6, 10n,

Gaston Mem. Hosp. Home Health Serv. Inc. v.

Bridgestone/Firestone, Inc., 830 F. Supp. 287

Sas te adinctnannneatnnsechdnbibinbqnansinneteneniencenees

General Electric Co. v. New York State Dep't of

Labor, 891 F.2d 25 (2d Cir. 1989) ..0.0........ccccceeeeees

Page

Hillsborough County v. Automated Medical Lab. Inc..

ok Ee ee 13

Hospice of Metropolitan Denver, Inc. v. Group Health

Ins., 944 F.2d 752 (10th Cir. 1991) (per curiam)... 9, 11

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

ea ee aCe ae ee 10, 18n

Lane v. Goren, 743 F.2d 1337 (9th Cir. 1984).............. 18

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

I cctichitinniatiieninniiiatiatditeee 9, 13,

19,21, 27n

Malone v. White Motor Corp., 435 U.S. 497 (1978)... 5

McGuire v. Hughes, 207 N.Y. 516, 101 N.E. 460

ee sanaiineneinedisiinieaieiiie se ee 8n

Medical Society v. Cuomo, 976 F.2d 812 (2d Cir.

ESS Ree PR Li) Heel 13

Memorial Hosp. System v. Northbrook Life Ins. Co.,

904 F.2d 236 (Sth Cir. 1990) .......cccccccccccesceseeeeeees 9n, 11

Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S.

SERENE ST 5 5, 13

In re Michigan Carpenters Counsel Health & Welfare

Fund, 933 F.2d 376 (6th Cir.), cert. denied, sa

iF we , 15n

Monarch Cement Co. v. Lone Star Industries, 982

F.2d 1448 (10th Cir. 1992) 0000. ccccccecccceccecee ee. 10n

Morgan Guaranty Trust Co. v. Tax Appeals Tribunal

of Dep't of Taxation & Finance, 80 N.Y.2d 44,

SE Wee Ea Ie CED ccccnceccccnsesssnsinictilbidesenatetenen 15n

Mount Sinai Hosp. v. Burns, 138 Misc. 2d 381, 527

N.Y.S.2d 678 (N.Y. App. T. 1988) .0......0...cccccceceseee. 8n

National Carriers Conf. v. Heffernan, 440 F. Supp.

1280 (D. Conn. 1977)

National Elevator Indus., Inc. v. Calhoun, 957 F.2d

1555 (10th Cir.), cert. denied, U.S. _, 1135S.

Ct. 406 (1992)

New England Health Care Employees Union, Dist.

1199 v. Mount Sinai Hosp., 846 F. Supp. 190 (D.

Conn. 1994) (appeal docketed #94-7264) 7n, lin,

24n

NYSA-ILA Medical ¢ Clinical Serv. Fund v. Axelrod,

27 F.3d 823 (2d Cir. 1994)

Perkins v. Time Ins. Co., 898 F.2d 470 (Sth Cir. 1990). 10n

Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987) 9n, 13

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

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

20-21, 23n

Sanson v. General Motors Corp., 966 F.2d 618 (11th

Cir. 1992), cert. denied, U.S. _, 113 S. Ct.

1578 (1993)

St. Peter's Hosp. v. Hall, 102 Misc. 2d 73, 422

N.Y.S.2d 628 (N.Y. Sup. Ct. Albany Co. 1979)

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

Standard Oil Co. v. Agsalud, 633 F.2d 760 (9th Cir.

1980), summarily aff'd, 454 U.S. 801 (1981)

The Meadows v. Employers Health Ins., 826 F. Supp.

1225 (D. Ariz. 1993)

Page

Travelers Ins. Co. v. Cuomo, et al., 813 F. Supp. 996

(S.D.N.Y.), aff'd, 14 F.3d 708 (2d Cir. 1993), cert.

granted, 1994 WL 82909, and granted sub nom.

N.¥.S. Conf. of Blue Cross & Blue Shield Plans v.

Travelers Ins. Co., 1994 WL 82902, and granted

in part sub nom. HANYS yv. Travelers Ins. Co.,

1994 WL 82910 (Oct. 7, 1994)... ccccccccccecceeeeees 2, 7n,

15, 15n, 18n,

21, 28-30n

Trustees Of & The Pension Hospitalization Benefit

Plan, et al. v. Cuomo, et al., 92 Civ. 5589

United Wire, Metal & Machine Health & Welfare

Fund v. Morristown Mem. Hosp., 995 F.2d 1179

(3d Cir.), cert. denied, 114 S. Ct. 382 and 114 S.

ae a Me pe a 2, 16-19,

Constitution and Statutes

ele te Mera A 12

ERISA § 2(b) (29 U.S.C. § 1001 (D)) oocceccccccccccccccees. 5

§ 514(a), (b) (29 U.S.C. § 1144)... 2, 4, 6,

10, 20,

and passim

2 Se ee LL ee 8n-9n,

18n

ES I AR ee ae 23n

Se ee teh athe 22

N.Y. Pub. Health L. § 2807-€(1)(b).......ccccccceccoccoceoeecess 26

I 29n

Interest of the Amici Curiae

Amici curiae the American Hospital Association (“AHA”),

Hospital Association, Inc., respectfully submit this brief in

support of the Petitioners. A!l parties have given written consent

to the filing of this brief, and the letters so stating have been filed

with the Clerk of the Court.

Founded in 1898, the AHA is the primary organization of

hospitals in the United States. Its institutional members include

approximately 80% of the nation’s hospitals, and nearly 50,000

health care professionals hold individual membership.

The AHA’s corporate mission is to promote the quality of

American health care ¢ for all people through leadership and

assistance to hospitals and other health care organizations. To

fulfill this mission, the AHA regularly participates in the judicial

and legislative arena to address important issues concerning

federal and state health care reform in general and hospital

regulation in particular. The Maryland Hospital Association and

the Massachusetts Hospital Association are the leading organiza-

tions of hospitals in their respective states and are independent

associations whose missions, goals, and concerns are allied with

those of the AHA in this matter.

As leaders in the health care field, and as representatives of

health care institutions whose continued survival and service to

society depend on equitable regulation, apportionment, and

reimbursement of necessary costs, amici are vitally concerned

that states retain the flexibility to assure equal access to afford-

able high-quality health care, a goal that will be seriously

undermined if the decision of the Second Circuit Court of

Appeals is permitted to stand.

Introduction and Summary of Argument

In light of the recent failure to enact comprehensive federal

health care reform legislation, and uncertainties as to the future

of such federal initiatives, it is likely that the states will be the

primary venue of continued reform efforts. New York State has

long been an innovative leader in attempting to provide

affordable and quality health care to all of its residents.

States’ efforts to implement comprehensive reform legisla-

tion, and their efforts to spread health care costs over the widest

possible base, have been significantly frustrated by the breadth

of ERISA’s preemption provision. State laws that, for example,

require employers to offer or pay for health benefits, or impose

mandated benefits on self-funded plans, or directly tax plans or

benefits, have all been held preempted.

The Court is not here called upon to read ERISA § 514(a)

more narrowly than heretofore. But this appeal does seek to

reverse a judicial extension of ERISA’s preemptive sweep that

erodes the states’ remaining flexibility to regulate and equitably

apportion the costs of hospital care among all payors without

reference or regard to their status as ERISA plans. An affir-

mance of the decision below could well leave states essentially

powerless to act in the health care field, a result that Congress

could not conceivably have intended and is, indeed, lirectly

contrary to its express intent.

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

denied, 472 U.S. 1008 (1985), New York’s statutory hospital

reimbursement system, which regulated the rates of all payors,

was upheld against a claim of ERISA preemption. Expressly

agreeing with Rebaldo’s analysis and reasoning, the Third

Circuit likewise held that New Jersey’s comprehensive

reimbursement statutes were not preempted. United Wire, Metal

& Machine Health & Welfare Fund v. Morristown Mem. Hosp.,

995 F.2d 1179 (3d Cir.), cert. denied, 114 S. Ct. 382 and 114 S.

Ct. 383 (1993). In the present case, the Second Circuit

invalidated the challenged portions of New York’s reim-

bursement statute and, in so doing, disagreed with United Wire

and disavowed its prior reasoning in Rebaldo. 14 F.3d 708, 714,

719-20.

The Petitions for Certiorari herein stressed this conflict in the

Circuit Courts and the national importance of the issue

presented. That issue is whether states have the power, in

general, to set hospital rates for patients who happen to be

ERISA plan participants. If all such state laws are preempted, it

is unnecessary to reach the question whether the particular New

York rate differentials invalidated below are lawful. It will,

however, become necessary in the future for the courts to

entertain innumerable ERISA challenges to a wide variety of

state laws that indirectly affect plans simply because they

potentially increase plans’ costs of doing business or potentially

decrease contributions to the plans.

We show below that a state’s exercise of its inherent police

powers to provide for the health and welfare of its citizens

through the establishment of mandatory hospital rates is not

preempted. First, the purpose of ERISA was not to regulate or

preempt generally applicable state laws that affect the price of

services to plan participants. Second, state hospital reimburse-

ment systems that establish uniform rates are not superseded

because (i) they do no more than substitute for the rights and

obligations between patient and hospital that exist under

common law; (ii) they do not impact upon ERISA plans other

than in a tenuous and remote manner; and (iii) Congress has

expressly encouraged states’ efforts to control costs through the

adoption of all-payor systems. Third, state reimbursement

systems that produce disparate rates — such as those resulting

from the differentials at issue — stand in no different position

vis-a-vis ERISA preemption than uniform rate systems; neither

relate to ERISA plans.

ARGUMENT

ERISA WAS NOT INTENDED TO PREEMPT

STATE LAWS THAT AFFECT THE PRICE OF

SERVICES TO PLAN PARTICIPANTS

Congress purposefully preempted broadly and this Court has

insisted upon an expansive reading of the statutory text. In

District of Columbia v. Greater Washington Board of Trade,

_US._ , 113 S. Ct. 580, 583 (1992), this Court summarized its

prior description of the breadth of ERISA § 514(a) as follows:

“We have repeatedly stated that a law ‘relate[s] to’ a

covered employee benefit plan for purposes of § 514(a)

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

Shaw, supra, 463 U.S. at 97. E.g., Ingersoll-Rand Co. v.

McClendon, 498 U.S. 133, 139 (1990); FMC Corp. v.

Holliday, 498 U.S. 52, 58 (1990); Mackey v. Lanier

Collection Agency & Service, Inc., 486 U.S. 825, 829

(1988); Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 47

(1987); Metropolitan Life Ins. Co. v. Massachusetts, 471

U.S. 724, 739 (1985). This reading is true to the ordinary

meaning of ‘relate to,’ see Black’s Law Dictionary 1288

(6th ed. 1990), and thus gives effect to the ‘deliberately

expansive’ language chosen by Congress. Pilot Life, su-

pra, 481 U.S. at 40. See also Morales v. Trans World

Airlines, Inc., 504 U.S. _, _ (1992). Under § 514(a),

ERISA pre-empts any state law that refers to or has a

connection with covered benefit plans (and that does not

fall within a § 514(b) exception) ‘even if the law is not

specifically designed to affect such plans, or the effect is

only indirect,’ Ingersoll-Rand, supra, 498 U.S. at 139,

and even if the law is ‘consistent with ERISA’s substan-

tive requirements, Metropolitan Life, supra, 471 U.S. at

739.

e ' Pre-emption does not occur, however, if the state law has only a

‘tenuous, remote, or peripheral’ connection with covered plans.

Shaw, 463 U.S., at 100, n.21, 103 S. Ct., at 2901, n.21, as is the case

with many laws of general applicability, see Mackey, 486 U.S. at

830-838, and n.i2, 108 S. Ct. at 2185-2190, and no. 12; cf. Ingersoll-

Rand, 498 U.S. at 139, 111 S. Ct. at_.”

In the present case, the Second Circuit has, in turn, given an

expansive reading to this Court’s pronouncements and has

reached a conclusion that is not only unsupported by any

holding or analysis of this Court, but produces a result that

Congress did not and, as a matter of “common sense,” could not

intend.

Because everything in the cosmos has, in some fashion, an

indirect “connection with” everything else, including New

York’s differentials and ERISA plans, the question in each case

is where the line should be drawn between those state actions

that do or do not affect plans in too tenuous a “manner.” It is the

nature of the relationship that is significant. “[A]s in any

preemption analysis, ‘the purpose of Congress is the ultimate

touchstone.’ ” Metropolitan Life Ins. Co. v. Massachusetts, 471

U.S. 724, 747 (1985), quoting Malone v. White Motor Corp.,

435 U.S. 497, 504 (1978).

The purpose of ERISA is set forth in the statute itself:

“[protecting] participants in employee benefit plans and

their beneficiaries, by requiring the disclosure and report-

ing to participants and beneficiaries of financial and other

information with respect thereto, by establishing stan-

dards of conduct, responsibility, and obligation for fiduci-

aries of employee benefit plans, and by providing for ap-

propriate remedies, sanctions and ready access to the

Federal courts.” [ERISA § 2(b), 29 U.S.C. § 1001(b).]

The object of protecting plan participants and the two means

by which such protection is to be afforded — disclosure and

fiduciary standards — are thus clear. But the fullest protection

accorded to plan participants was not intended to confer on them

some special advantage that nonparticipants do not enjoy in

matters unrelated to the operation and administration of plans.

Participants do not enjoy a “charmed existence that was never

contemplated by Congress.” Aetma Life Ins. Co. v. Borges, 869

F.2d 142, 145 (2d Cir.), cert. denied, 493 U.S. 811 (1989)

(quoting Rebaldo v. Cuomo, supra).

This Court has not limited ERISA’s preemptive sweep to

state laws that relate to the subject matters regulated by ERISA:

disclosure requirements or fiduciary standards. Also superseded

are those laws that impair the efficient operation of plans

through burdensome and potentially conflicting administrative

requirements. As explained in Fort Halifax Packing Co. v.

Coyne, 482 U.S. 1, 11 (1987), a “patch-work scheme of

regulation would introduce considerable inefficiencies in benefit

program operation, which might lead those employers with

existing plans to reduce benefits, and those without such plans to

refrain from adopting them.”

In precluding state interference with the operation and

administration of plans, it is significant that ERISA itself

imposes no substantive requirements on the content of plans.

Employers are free to establish and fund such plans at any level,

and plans are free to determine what type and extent of benefits

they will provide to their paruicipants. There are no maximum or

minimum requirements.

Although ERISA § 514(a) preempts state laws only “insofar

as” they relate to “plans,” as opposed to benefits, and the statute

does not mandate that any particular benefits must be offered,

Fort Halifax also held that such laws are preempted “if they

attempt to dictate what benefits shall be paid under a plan.” Jd. at

13 n.8. The Dissenting Opinion (id. at 26) did not disagree on

this point. It relied on Standard Oil Co. v. Agsalud, 633 F.2d

760, 766 (9th Cir. 1980), summarily aff'd, 454 U.S. 801 (1981),

as establishing that ERISA’s concern was not only with

uniformity in the administration of plans, but with “state statutes

which require employers to provide particular employee

benefits.”

The New York laws at issue here neither interfere with plan

administration nor require any particular benefits to be provided.

They are yet a further step removed and affect only the price of

hospital services to plan participants, which plans may choose to

cover in whole or in part. Even if such laws may indirectly

influence plans’ decisions as to the level of benefits, they indir-

ectly connect to plans in too tenuous a manner to result in

preemption.

ERISA DOES NOT PREEMPT A

STATE’S POWER TO ESTABLISH

UNIFORM HOSPITAL RATES

Respondents assert (Br. in Opp. 1, 4, 13, 18) that the State’s

general power to set hospital rates is neither challenged nor

undermined by the Second Circuit’s decision herein.' This

“concession” is made for two strategic purposes: First, they wish

to retain all of the benefits of State limitations on hospital costs

and rates while excising three provisions they find disagreeable

— the differentials — from the extensive and unified regulatory

scheme. More importantly, they seek to avoid an examination of

the issue of ERISA’s preemption of the State’s rate-setting

power because such an analysis dooms the challenge to the

differentials. The very reasons why the rate-setting power is not

preempted also demonstrate that when that power is exercised to

produce disparate rates, the same result obtains.

Accordingly, in order to determine whether Congress

intended to preempt the New York rate differentials here at

issue, we first address (i) the rights and obligations of the

' The District Court in the instant case observed in a dictum (813 F. Supp.

996, 1006) that preemption of the State’s rate-setting power was a

necessary consequence of its decision, but the Second Circuit did not

expressly comment on that view. However, in New England Health Care

Union v. Mount Sinai Hosp., 846 F. Supp. 190 (D. Conn. 1994) (appeal

docketed #94-7264), the District Court, adhering to its reading of the

Travelers Decision, invalidated Connecticut's statutory Uncompensated

Care Assessments (uniformly applicable to all nongovernmentally insured

patients) to the extent that such patients were plan participants. As a result

of that decision, Connecticut revised its statutes and the revisions are also

being challenged as preempted. Connecticut Hosp. Ass'n v. Pogue, et al.,

No. 3:94 CV 01224 (D. Conn.). In addition, other aspects of New York's

reimbursement system are under attack on preemption grounds in

Connecticut Gen. Life Ins. Co., et al. v. Cuomo, No. 93 Civ. 3648

(S.D.N.Y.) (balance billing law), and Trustees Of & The Pension

Hospitalization Benefit Plan, et al. v. Cuomo, et al., 92 Civ. 5589

(S.D.N.Y.) (bad debt and charity care funding provisions).

hospital and patient in the absence of any state regulation and (ii)

state reimbursement systems that establish uniform rates. In

Point III, we discuss reimbursement systems that, as in New

York, produce disparate rates.

In New York, and nationally, patients typically agree to pay

the hospitals’ charges pursuant to an agreement that is express or

implied by law. A hospital will usually accept assignment of a

patient’s health insurance, if any and from whatever source, but

the patient remains personally liable for whatever portion of the

hospital's bill remains unpaid by the insurer for any reason — be

it a deductible, coinsurance requirement, denial of coverage, or

an outright refusal to pay on any basis.

A state’s common law will provide the hospital with a cause

of action to recover against the patient for any unpaid portion of

the bill. In the absence of state regulation of charges, the courts

will enforce express contracts to pay the hospital’s self-

determined charges or allow recovery in quantum meruit for

implied contracts. In the latter case, the courts will determine the

“reasonable value” of services provided.”

Are these common law remedies unenforceable when the

patient happens to be an ERISA participant? Does it make a

difference that the state legislature establishes the hospital’s

charges rather than leaving that determination to the hospital

itself, or for a judge to determine on an ad hoc basis?

A. ERISA Does Not Preempt Common Law

Causes of Action Against Plan Participants

Although a state’s common law is as fully within ERISA’s

preemptive reach as are its statutes,’ there is no evidence that

? E.g., McGuire v. Hughes, 207 N.Y. 516, 519, 521, 101 N.E. 460 (1913);

Mount Sinai Hosp. v. Burns, 138 Misc. 2d 381, 527 N.Y.S.2d 678 (N.Y.

App. T. 1988); see St. Peter's Hosp. v. Hall, 102 Misc. 2d 73, 422

N.Y.S.2d 628 (N.Y. Sup. Ct. Albany Co. 1979) (“the charges are

commensurate with those of other area hospitals”).

> “State laws” preempted by ERISA include “all laws, decisions, rules,

regulations, or other State action having the effect of lav, of any State.”

(Footnote continued)

Congress intended to preempt state common law remedies

against patients for breach of their implied or express agree-

ments to pay the hospital simply because they happen to be plan

participants. To the contrary, suits against ERISA plans

themselves for “run-of-the-mill state-law claims such as unpaid

rents, failure to pay creditors, or even torts” are not preempted.

Mackey v. Lanier Collection Agency & Serv., Inc., 486 U.S. 825,

833 (1988). It has been repeatedly held that when plans

mistakenly confirm insurance coverage of a participant, and the

hospital provides services in reliance thereon, the state law claim

against the plan is not preempted. In Hospice of Metro Denver,

Inc. v. Group Health Ins., 944 F.2d 752 (10th Cir. 1991), the

Court found that the impact on the plan of permitting recovery

was too “tenuous, remote, or peripheral”; did not “affect the

structure, the administration or type of benefits” of the plan

(citing Rebaldo), did not threaten inconsistent State and local

regulation; and the Congressional purpose in enacting ERISA

was not transgressed. /d. at 754-55. “Preemption in this case

would stretch the ‘connected with or related to’ standard too

far.” Id. at 756.‘

If “run-of-the-mill” common law claims against plans for

misrepresentations of coverage are not preempted, a fortiori the

same result must apply when a plan participant is sued on his

express or implied agreement to pay for hospital services. The

rights and liabilities that inhere in the hospital-patient relation-

ship exist independently of the patient’s insurance, if any, or the

patient's relationship, if any, with an ERISA plan.

ERISA § 514(cX1), 29 U.S.C. § 1144(c\1). Common law causes of

action and remedies are thus included. See, ¢.g., Pilot Life ins. Co. v.

Dedeaux, 481 U.S. 41, 48 (1987).

* Accord Memorial Hosp. Sys. v. Northbrook Life Ins. Co., 904 F.2d 236

(Sth Cir. 1990); Beth Israel Med. Ctr. v. Sciuto, 1993 WL 258636

(S.D.N.Y. 1993); Gaston Mem. Hosp. Home Health Serv. Inc. v.

Bridgestone/Firestone, Inc., 830 F. Supp. 287 (W.D.N.C. 1993); The

Meadows v. Employers Health Ins., 826 F. Supp. 1225 (D. Ariz. 1993).

In Ingersoll-Rand v. McClendon, 498 U.S. 133, 139-40

(1990), the Court reasoned that a state common law claim will

be preempted if the “existence of a pension plan is a critical

factor in determining liability”; if the “cause of action relates not

merely to pension benefits, but to the essence of the pension

plan itself”; and if “a plaintiff must plead, and the court must

find, that an ERISA plan exists” to establish liability.

This analysis has consistently been applied to determine

whether a state cause of action is preempted and is entirely in

keeping with the plain meaning of the statute. State laws are

preempted “insofar as they may now or hereafter relate to any

employee benefit plan.” ERISA § 514(a) (emphasis added).°

The hospital's common law cause of action has no

“connection with” ERISA plans because the existence of any

type of insurance, whether provided by a plan or otherwise, or

its absence, is wholly irrelevant to the patient’s individual

obligation to pay. The hospital need not plead and the court need

* See, ¢.g., Fort Halifax Co. v. Coyne, supra, 482 U.S. at 23 (state sever-

ance payment law did not speak to plans and was not preempted); Diduck

v. Kaszycki & Sons Contractors, Inc., 974 F.2d 270, 287-88 (2d Cir. 1992)

(fraud claim preempted because it concerns the conduct of a fiduciary and

third party “in relation to the plan. . . . A state common law action which

merely amounts to an alternative theory of recovery for conduct actionable

under ERISA is preempted”); Perkins v. Time Ins. Co., 898 F.2d 470 (Sth

Cir. 1990) (fraud claim against insurance agent not preempted because he

was not an ERISA entity); Monarch Cement Co. v. Lone Star Industries,

982 F.2d 1448, 1453 (10th Cir. 1992) (contract claim not preempted

because defendant, who agreed to fund pension plan, was liable as a seller

of a business rather than a principal ERISA entity); Compare Sanson v.

General Motors Corp., 966 F.2d 618, 621 (11th Cir. 1992), cert. denied,

_US._ , 113 S. Ct. 1578 (1993) (claim of fraudulently inducing

employees to resign so as to forego retirement benefits preempted because

existence of a plan was “critical” to claim) with Forbus v. Sears Roebuck

& Co., 30 F.3d 1402, 1406-07 (11th Cir. 1994) (misrepresentation claim

concerning elimination of jobs, not plan benefits, not preempted; state

fraud claim functions irrespective of an ERISA plan and “it would defy

common sense to allow ERISA to preempt”).

not find that an ERISA plan exists to establish liability. The

patient is being sued in his or her capacity as a patient who has

agreed to pay, not as a plan participant.

Preemption of state common law causes of action to enforce

express or implied contracts would confer a “charmed exis-

tence” on plan participants (Rebaldo at 139) and lead to absurd

results that Congress could never have intended. If a hospital

simply refused to provide care to ERISA plan participants unless

payment were received in advance, there would be no state law

to apply or preempt. But requiring such “up front” payment

“does not serve, but rather defeats, the purpose of Congress in

enacting ERISA.” Memorial Hosp. Sys. v. Northbrook Life Ins.

Co., supra, 904 F.2d at 247; see Beth Israel Med. Ctr. v. Sciuto,

supra, 1993 WL 258636 at *4; Hospice of Metro Denver, Inc. v.

Group Health Ins., supra, 944 F.2d at 754-56.

Accordingly, the hospital’s common law right to collect its

charges from a patient subsists notwithstanding the patient’s

Status as a plan participant and notwithstanding a plan’s decision

to indemnify the patient for all or part of his liability to the

hospital.° The same is equally true when the hospital’s charges

are determined by a state.

B. State Rate-Setting

Codifying the common law, a state statute could simply

provide that, “in the absence of an express contract, patients are

liable for the reasonable value of the services provided.” There

can be no difference, for preemption purposes, between the

* In New England Health Care Employees Union v. Mount Sinai Hosp.,

supra, the District Court, on the basis of the Second Circuit's decision

here, not only invalidated the State’s Uncompensated Care Assessments,

but also enjoined the hospitals from collecting the assessments from the

pay whatever portion of the hospital's bill that was not paid by the insurer.

846 F. Supp. at 199-200. This unwarranted preemption of common law

rights is more than an analytical tool, but has become a reality in

Connecticut.

common law and its statutory embodiment. Nor can there be a

difference, if “common sense” illuminates Congressional intent,

that the “reasonable value” is legislatively determined pursuant

to a detailed statutory reimbursement formula rather than by a

judge on an ad hoc basis.

New York’s reimbursement system, unlike the common law,

precludes enforcement of express contracts to pay a negotiated

rate (except in the case of HMOs). The statute limits the

hospital’s right to receive more, and the patient’s right to pay

less, than the established rate. The result is similar to that

obtaining under quantum meruit, where a court fixes the

maximum and minimum payment at the reasonable value based

on costs.’ Does ERISA preempt either (or both) of these

limitations?

l. Maximum Charges

In discharge of its Constitutional duty to enact laws that

protect and promote “the health of the inhabitants of the State”

(N.Y. Const., Art. XVII, § 3), the New York State Legislature

has engaged in the most extensive regulation of hospitals,

specifying permitted, mandatory and/or prohibited activities,

costs and charges in the fullest exercise of its police powers.

The regulation of hospitals’ activities has among its goals the

control of costs so as to make health care affordable. States’

efforts to control rising health care costs is a national phenome-

non, and “the regulation of public health and the cost of medical

care are virtual paradigms of matters traditionally within the

” New York’s statutory reimbursement formula takes a fundamentally

different approach. In an effort to coerce hospitals to reduce and control

costs, the prospective rate represents what the State determines the

services should cost, and the actual or reasonable costs incurred are only

tangentially implicated. If hospitals incur costs higher than the prospective

rate, they are financially penalized; if below, they are rewarded for their

efficiency. Beyond these incentives, the State regulates what costs

hospitals are permitted to incur: the capital costs of an unauthorized MRI

machine are not reimbursable.

police powers of the state.” Medical Soc’y v. Cuomo, 976 F.2d

812, 816 (2d Cir. 1992), citing Hillsborough County v.

Automated Medical Lab. Inc., 471 U.S. 701, 719 (1985). Cost

control results in the establishment of the maximum amounts

hospitals can charge. Hospitals in a strong bargaining position

cannot insist on more. Does ERISA preempt such state

limitations on what hospitals can charge?

It is no answer, for ERISA preemption purposes, that a state

law benefits, rather than burdens, a Plan. All state laws that

“relate to” a plan are preempted, “even including state laws that

are consistent with ERISA’s‘ substantive requirements.”

Metropolitan Life Ins. Co. v. Massachusetts, supra, 471 U.S. at

739; see Mackey v. Lanier Collection Agency & Serv., Inc.,

supra, 486 U.S. at 829 (statute that exempted ERISA Plans from

garnishment “to help effectuate ERISA’s underlying purposes”

held preempted).

The only argument that can be made in support of preemp-

tion of state limitations on charges is that Congress intended to

preempt broadly. But if there must also be an “unmistakable”

Congressional intent to intrude on the states’ police powers

(Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 522 (1981)),

and “relate to” must be given its “common sense” meaning (Pilot

Life Ins. Co. v. Dedeaux, supra, 481 U.S. at 47), then it is im-

possible to conclude that Congress actually intended to preclude

state limitations on hospital charges. Not only would such a

result not bolster Congress’s purpose in enacting ERISA, it is

diametrically opposed to decades of Congressional action en-

couraging state control of health care costs (see pp. 21-23, infra).

2. Minimum Charges

The affordability of health care is but one goal of state

regulation. Access to quality health care is another. Also in the

exercise of its police powers, a state attempts to assure access to

and the delivery of quality care by precluding payment of less

than the established rate. Hospitals must be financially viable to

provide quality care and meet the niagara of regulatory mandates

imposed on them — from emergency care to staffing levels to

infectious waste disposal. Can a state forbid express contracts to

pay /ess than the reasonable value of the services or some other

amount that reflects the state’s judgment of what is a necessary

payment to make quality health care accessible and affordable?

Can a state protect those hospitals that are without competitive

bargaining power from being coerced into accepting less than

may be necessary to fund their operations ”*

If a state, without offending ERISA, can establish maxi-

mums that hospitals may charge, then it must be that it can fix

minimums that patients must pay. Wherever the line is to be

drawn between what does and does not “relate to” an ERISA

Plan, there is no evidence of a Congressional intent to place it

between a state’s power to establish a ceiling and its power to

prescribe a floor.”

If there is no preemption of “run-of-the-mill” state law

causes of action to enforce implied or express contracts (see p. 9,

supra), there is no preemption of state hospital rate-setting

statutes. Both the common law and statutory rights would “relate

to” and have a “connection with” an ERISA Plan in like

measure. Enforcement of the maximum/minimum charge

established by a state’s judges or its legislators equally serves or

disserves Congress's purpose in enacting ERISA.

* All hospitals are economically compelled to maximize occupancy so as

to cover their fixed costs, which approximate 80% of their total costs.

Many hospitals could not survive in a competitive environment because of

their enormous and disproportionate costs in providing care to the

uninsured poor, running teaching programs for interns and residents, and

capital expenditures to replace aging plant and equipment.

* If, somehow, only the State’s minimum charge were preempted,

presumably the maximum would have to increase so as to offset the loss

of revenue and permit the hospital to survive. New York's hospital rate

regulation is not only comprehensive but integrated: the ceilings depend

on the floors. The freedom of some plans with substantial bargaining

power to pay less at the expense of other plans would seem to be an

obscure objective of the ERISA legislation.

Cc. The Indirect Economic Impact of State Rate-Setting

Systems Is Alone Insufficient to Result in Preemption

The Second Circuit held the New York differentials

preempted because (i) they forced plans to either increase costs

or reduce benefits “and this substantial economic impact could

be enough to result in preemption,” and (ii) they purposely

interfere with the choices that ERISA plans make for health

coverage. 14 F.3d at 719-21. Putting aside the specific

differentials for the moment (see Point III, infra), the proposition

that the indirect economic impact of a state rate-setting system is

sufficient to trigger preemption is insupportable, unsupported by

any decision of this Court, and plainly contrary to Congressional

intent.

'© After summarizing the general ERISA preemption jurisprudence

established by this Court, the Second Circuit did not rely, directly or by

analogy, on any decision of this Court as support for its conclusion.

Instead, it relied on a series of lower court cases that provide no support

for the proposition that an indirect economic impact alone is sufficient to

preempt. In each case, a tax or other legal obligation was imposed directly

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

denied, _ U.S. _, 112 S. Ct. 585 (1991) (tax imposed on administrative

fees directly based on benefits paid by ERISA plan; plan itself liable if

administrator does not pay; specific Congressional intent found to preempt

state taxes on plans); National Carriers Conf. v. Heffernan, 440 F. Supp.

1280 (D. Conn. 1977) (tax on plan benefits paid out); Morgan Guaranty

Trust Co. v. Tax Appeals Tribunal of Dep't of Tax. & Finance, 80 N.Y .2d

44, 587 N.Y.S.2d 252 (1992) (direct gains tax on sale of ERISA property);

National Elevator Indus., Inc. v. Calhoun, 957 F.2d 1555 (10th Cir.), cert.

denied, _ U.S. _, 113 S. Ct. 406 (1992) (minimum wage law uniquely

affecting plans, imposing requirements directly on plans and favoring one

plan over another); Jn Re Michigan Carpenters Counsel Health & Welfare

Fund, 933 F.2d 376 (6th Cir.), cert. denied, _U.S._, 112 S. Ct. 585 (1991)

(corporate reorganization law allowing employers unilaterally to alter their

obligations to plans in direct conflict with ERISA’s substantive

provisions); General Electric Co. v. New York State Dep't of Labor, 891

F.2d 25 (2d Cir. 1989) (law mandating employers to pay particular

benefits).

1. Indirect Economic Impact, National Uni-

formity, and Administrative Burdens

As Fort Halifax concluded, Congress’s purpose was to

exempt plans from a conflicting patchwork of inconsistent state

regulations that would impose increased administrative costs and

burdens upon plans. (See p. 6, supra.)

Lack of uniformity in the costs of hospital services is, of

course, an immutable fact of life. There is variation nationally:

some state systems are cost-based; some are charge-based; some

are prospective and based on DRGs; and in some states rates are

completely unregulated. Medicaid and Medicare have different

systems that recognize geographic differences. Within a state,

hospitals’ charges and rates differ, depending on a wide variety

of factors. Within a hospital, each patient will be charged

differently in accordance with the kind and extent of the services

rendered.

In the absence of any state rate regulation, uniformity in the

costs of doing business — if, indeed, that were a goal of ERISA

— would still be unattainable: the hospitals’ self-determined

charges, or as established on a quantum meruit basis, will

produce disparate results across state lines and within a state.

And the administrative burden upon a plan of paying different

prices for each of its participants’ hospital bills is unavoidable

and slight: a different amount is entered on each check issued.

In United Wire (995 F.2d at 1194), the Third Circuit agreed

with Rebaldo’s conclusion that there “is no valid reason why

employee benefit plans cannot be subject to national uniformity

despite dissimilarities in their costs of doing business,” and that

in the absence of state regulation rates will still not be “uniform,

even as between hospitals in the same locality.” 749 F.2d at 139.

It cannot seriously be contended that lack of uniformity and

the administrative burdens that result therefrom are sufficient to

preempt a state’s rate-setting system. Indeed, that was not the

basis for the decision below. Rather, the Court below based its

decision on the relationship between price and plan benefits.

2. Indirect Economic Impact and Plan

Benefits

State-regulated hospital rates have a “connection with”

commercially insured ERISA plans as follows: patients are

charged (and are liable for) the established price; the plan

assumes, through its insurer, whatever portion of the patient’s

liability it chooses; increases in hospital prices may lead to

increased insurance premiums; the greater a plan’s costs, the

fewer benefits may be available unless the employer increases

funding. This connects with plans in “too tenuous, remote or

peripheral a manner” to result in preemption. Shaw v. Delta Air

Lines, Inc., 463 U.S. 85, 100 n.21 (1983).

First, while ERISA preempts laws relating to “plans” and

not “benefits,” it is now established that states may not prescribe

the types of benefits that plans must pay. (See p. 6, supra.) But

this Court has never held that a law is preempted simply because

it affects the price of benefits — as does a state-reimbursement

system — and thereby may influence a plan’s decision as to its

selection of benefits and the extent of coverage.

Second, if the indirect economic impact of state-mandated

rates is enough to preempt, then the common law remedies to

enforce an unregulated price must fall as well: requiring the

patient to pay anything will have a substantial economic impact;

exemption from liability or prepayment before services is the

only solution (p. 11, supra).

Third, if indirect economic impact is the test, the scope of

preemption cannot be limited to regulation of hospital prices, but

must also encompass all other state laws that increase, directly or

indirectly, the plans’ cost of doing business. In United Wire (995

F.2d at 1193-94), the Third Circuit quoted Rebaldo’s analysis as

follows:

“A preemption provision designed to prevent state inter-

ference with federal control of ERISA plans does not

require the creation of a fully insulated legal world that

excludes these plans from regulation of any purely local

transaction.

* * *

The purchase of hospital service is like the purchase of

public utility service, or of any other service or com-

modity whose price is controlled by the State. Insofar as

the regulation of hospital rates affects a plan’s cost of

doing business, it also may be analogized to State labor

laws that govern working conditions and labor costs, to

rent control laws that determine what employee benefit

plans pay or receive for rental property, and even to

such minor costs as the Thruway, bridge and tunnel tolls

that are charged to plans’ officers or employees. In

short, if ERISA is held to invalidate every State action

that may increase the cost of operating employee benefit

plans, those plans will be permitted a charmed existence

that never was contemplated by Congress. Where, as

here, a State statute of general application does not af-

fect the structure, the administration, or the type of

benefits provided by an ERISA plan, the mere fact that

the statute has some economic impact on the plan does

not require that the statute be invalidated.”

See also Lane v. Goren, 743 F.2d 1337, 1340 (9th Cir. 1984)

(“state laws and municipal ordinances regulating zoning, health,

and safety increase the operational costs of ERISA trusts, but no

one could seriously argue that they are preempted”).

Rebaldo’s observations are self-evidently true and remain

“good law,” notwithstanding that a different portion of its

analysis was later rejected by this Court.'' If economic impact is

"' Rebaldo concluded that, on the basis of ERISA § 514 (c)(2), a state law

must “purport to regulate” a plan to be preempted. This interpretation was

rejected in Ingersoll-Rand Co. v. McClendon, supra, 498 U.S. at 484.

United Wire concluded that Rebaldo’s reasoning otherwise “remains

persuasive,” and would have been decided the same way post-/ngersoll-

Rand. 995 F.2d at 1194. In the instant case, the Second Circuit disagreed,

erroneously finding that its “fundamental premise” was undermined and

(Footnote continued)

the preemptive trigger, there is no end to the laws that must fall.

Beyond direct state regulation of hospital rates, there are

innumerable state laws that result in increased hospital costs that

must be passed on to patients — minimum staffing require-

ments, adherence to sanitary standards, and the like. As United

Wire observed, state regulation of the disposal of medical wastes

“can significantly increase a hospital’s cost of doing business

and, accordingly, its billing to plan participants.” The Court

nevertheless concluded that “ERISA was not intended to

foreclose a state regulation of this kind.” 995 F.2d at 1196.'”

Similarly, because laws that give an advantage to plans are

equally subject to preemption (Mackey, supra, 486 U.S. at 829),

the “economic impact” of state laws limiting rates or even hospi-

tals’ costs — e.g., disallowing reimbursement for an unauthor-

ized MRI machine — would also be unlawful. After all, as the

logic of the “economic impact” theory goes, the lower hospital

costs might enable a plan to increase the level of benefits to its

participants.

Nor, if the test for preemption is economic impact, can the

inquiry logically be confined to those laws that influence the

price of what plans purchase. An equal impact on the plan

results from those generally applicable state laws that affect

contributions to plans. Taxes, environmental compliance

requirements, safety standards, and the like, all have a strong

impact on employers’ profits and derivatively on contributions

“jts analysis is poisoned by its discredited belief” that a law must “purport

to” regulate plans.

'? Indicative of the Second Circuit's view of ERISA preemption and the

scope of the instant decision, is that Court’s recent Opinion in NYSA-ILA

Medical & Clinic Serv. Fund v. Axelrod, 27 F.3d 823 (2d Cir. 1994). The

Court there invalidated New York’s 0.6% tax on the gross receipts of all

health care facilities because it was applied to two facilities that were

owned and operated by ERISA plans. If “economic impact” alone were

sufficient to preempt, it would follow that these facilities would be exempt

from costly requirements, for example, that only licensed physicians could

perform surgery.

that they can and/or will make to fund their plans. Rebaldo

spoke to such laws as directly applied to plans, but the same

economic impact influences plan benefits when consideration is

given to contributions by employers — or even by employees.

In Firestone Tire & Rubber Co. v. Neusser, 810 F.2d 550

(6th Cir. 1987), a municipal income tax was challenged to the

extent that employees’ contributions to ERISA plans were made

subject to the tax. The Court rejected the claim that the tax’s

influence on employees’ contribution decisions required

preemption. It concluded that the tax “affects Firestone

employees in their capacity as employees, without regard to their

status as participants in an ERISA plan,” and any effect on plans

is incidental and remote. Jd. at 556. The Second Circuit's

economic impact rationale would apparently dictate a different

result.

The statute itself provides helpful guidance in discerning

Congress’s intent as to the preemption of laws solely on the basis

of their indirect economic impact on plans. In 1983, Congress

amended ERISA so as to exempt portions of Hawaii’s Prepaid

Health Care Act, but made clear that this exemption did not

shield state tax laws from preemption. The amendment provided

that nothing in the Hawaii exemption shall be construed to

exempt from the general § 514(a) preemption provision “any

State tax law relating to employee benefit plans.” §

514(b)(5)(B\(i) (emphasis added) [29 U.S.C. § 1144(6)(5)(B)(i)).

Assuming that “relating to” in § 514(b) has the same

meaning as “relate to” in § 514(a); that Congress intended to

preempt equally expansively with respect to “laws” and “any

State tax law”; and that Congress did not intend to preempt state

income taxes on employers or employees, notwithstanding their

indirect economic effect on plans — it is therefore difficult to

see how state laws that affect the price of what plans purchase

are preempted. Tax laws affect employers and employees

without regard to their status as plan sponsors or participants.

Rate-setting laws affect patients (and derivatively their plan or

non-plan insurers) in their capacity as patients without regard to

their participation. Both costs and revenues may affect plan

benefit levels, and the economic impact of state laws on each

side of the ledger has an equal — and equally tenuous —

connection with plans.

The problem that inheres in finding indirect economic

impact, standing alone, a sufficient “connection with” plans to

warrant preemption is that there is essentially no limit to state

laws that impact — positively or negatively — on plans’ costs of

doing business or contributions to plans. Difficulties of

application aside, such a test for preemption has never been

adopted by this Court and was never intended by Congress. The

economic impact of a state law — even a substantial economic

impact — without more, is insufficient to preempt, just as this

Court held in Mackey, supra, 486 U.S. at 832. In the case of a

state hospital rate reimbursement system there is no more.

D. Congress Did Not Intend to Limit States’

Control of Hospital Costs and Rates

That Congress intended to preempt broadly in connection

with ERISA plans is not the end of analysis, because Congress

also intended to accord states wide latitude and flexibility in

devising reimbursement systems so as to control and equitably

apportion the costs of health care.

Rebaldo examined at length Congressional intent with

respect to both subjects (749 F.2d at 135-38), but the Court

below did not. If the quest is to discern an “unmistakable”

Congressional intent to preempt (Alessi, supra, 451 U.S. at 522),

that examination cannot ignore 25 years of Congressional

encouragement of state cost control and rate-setting systems.

And such a review precludes the conclusion that Congress

actually intended to preempt state rate-setting systems that

establish the rates paid by plan participants. The broadest

reading of “relate to,” the most expansive view of “connection

with,” and the fullest appreciation of the effect of “economic

impact,” cannot lead to that conclusion.

If Congress intended to preclude states from regulating

hospital rates for nongovernmental payors, then Congress has

repeatedly wasted its time in 1967, 1980, 1983, and 1990

conducting hearings, writing reports, and enacting provisions

concerning the authority of the Secretary of Health and Human

Services to waive federal Medicare requirements so as to allow

Medicare payments to be set by state reimbursement systems. If

such state reimbursement systems became unlawful in 1974

with the enactment of ERISA, it is impossible to explain why

Congress would continue thereafter to refine the waiver

authority in minute detail.

As more fully shown in the Brief of Petitioner Hospital

Association of New York State (to which we respectfully refer

the Court), Congress recognized that all-payor systems served to

control costs, first encouraging and later mandating the Secretary

to include Medicare in such systems upon a state’s request.

Indeed, New York’s all-payor system was itself reviewed in

1983 in connection with an expansion of the Secretary’s

authority. Moreover, it is impossible to reconcile a supposed

Congressional intent to preempt states’ rate-setting power with

its enactment of a “Special Rule” that specifically approved New

York’s uncompensated care reimbursement system — pursuant

to which all payors were required to contribute — as satisfying

the Medicaid “disproportionate share” requirement. 42 U.S.C.

§ 1396r-4[e].

In light of Congress’s specific approval of New York’s

requirement that all payors share in the costs of uncompensated

care, it simply cannot be that Congress intended, sub silentio, to

exempt ERISA participants and their insurers from participation.

It cannot be that Congress’s 25-year review and modification of

the Secretary’s authority to participate in state all-payor reim-

bursement systems was an exercise in futility because Congress

intended all-payor systems to be unlawful. Congress’s extensive

post-ERISA initiatives for state all-payor rate-setting systems

make it impossible to conclude that it intended to preempt state

hospital rate-setting.'*

ERISA DOES NOT PREEMPT A

STATE’S POWER TO ESTABLISH

DISPARATE HOSPITAL RATES

If state laws that establish mandatory and uniform hospital

rates for patients do not have a sufficient connection with an

ERISA plan to result in preemption, does a system with

disparate rates somehow cross the line? Such disparate rates

result from the application of the differentials here at issue.

Unlike the 11% and 9% differentials (as to which amici take no

position), the revenue generated by the 13% differential is

retained by the New York hospitals and applied to meet their

costs of operation.

A. Disparate Rates and the Goals of State Rate-

Setting

As noted above, the basic goal of state rate-setting is to

assure access to quality health care at a reasonable cost for all of

the state’s inhabitants. States must retain regulatory flexibility in

devising reimbursement systems that will not only control costs,

but will produce sufficient revenue for hospitals that are required

to meet ever-increasing demands for medically intensive and

'’ Beyond evidence of a Congressional intent not to preempt a state's rate-

setting power, the Secretary's waiver authority would save an all-payor

system from preemption by virtue of ERISA § 514(d), which provides that

no ERISA provision shall “impair or supersede any law of the United

at 139-40, that a finding of preemption would impair the Secretary's

authority. (The remainder of the Court took no position on the issue.) The

point is that if states’ rate-setting power is preempted, if “all-payor”

systems cannot lawfully exist, there is no system that the Secretary could

choose to adopt in lieu of standard Medicare reimbursement principles

The authority to waive becomes a fiction. The concept of impairment is

certainly broad enough to encompass nullific tion.

expensive services for a growing geriatric population, for AIDS

and TB patients, and for drug abusers and their victims.

In the absence of state regulation, a hospital's self-

determined charges will be set to attempt to generate sufficient

revenue to meet its needs. Whatever costs are unmet by virtue of

inadequate Medicare and Medicaid rates, and by serving the

uninsured, they will be shifted to paying patients — at least by

those hospitals with a strong competitive bargaining position.

The lack of a strong incentive to control costs by such hospitals

was a principal basis for Congress’s er..»:"agement of all-payor

systems. For many hospitals that serve a high volume of

Medicaid and uninsured patients, such as urban hospitals, cost-

shifting is not a realistic alternative funding source. Without

State regulation, their continued existence would be threatened

and the goal of access to quality care for all citizens would be

undermined.“

The history and purpose of the 13% differential are fully

described in Petitioners’ Briefs and demonstrate that the provi-

sion of lower rates for Blue Cross patients is an appropriate

exercise of the State’s power to establish rates generally because

the differential touches upon the goals of both cost control and

access. As to cost control, the initial purpose of the 13%

differential was to limit and make uniform the shifting of costs to

commercially insured patients, and to recognize the Blues’

prepayments to hospitals for working capital. As to access, the

financial stability of the Blues is essential to produce sufficient

hospital revenues: without such coverage of otherwise

‘* In New England Health Care, supra, 846 F. Supp. at 196 n.9, the

District Court invalidated Connecticut's Uncompensated Care Assess-

ments and observed that, without state rate-setting, ERISA plans would be

free to encourage their participants to avoid urban hospitals that incurred

relatively large uncompensated care costs. It seems unlikely that the

destruction of hospitals that principally serve the poor was Congress's

intent in preempting state laws that relate to plans.

uninsurable patients, hospitals’ uncompensated care would rise

dramatically.

By establishing lower rates for the Blues (and continuing the

historic discount), New York has made appropriate provision for

the higher costs incurred by the Blues’ high-risk and high-cost

patients that result from the State-mandated open enrollment

policy, has attempted to provide financial stability for this vital

insurer so as to make affordable insurance available through the

community rating requirement, and, in the process, has neither

transgressed any legitimate ERISA concern, nor crossed the line

between tenuous and proscribed state action.

In terms of the goals of rate-setting, New York's reim-

bursement system operates as a unified whole. The challenge

here to the 13% differential is, however, highly selective: the

commercial insurers seek to excise one tree from the forest of

regulatory provisions while retaining the benefits of state control

of hospital costs and permitted charges — here, the base DRG

rate. But if, for ERISA preemption purposes, a state can lawfully

establish uniform rates, there can be no difference when it sets

disparate rates so as to generate sufficient hospital revenue to

provide access to quality care. Cost control and access cannot be

so easily separated by ritual incantations of the breadth of

ERISA’s preemptive sweep — particularly in light of Con-

gress’s recognition of payor differentials within all payor

systems.

As shown in the Brief of Petitioner Hospital Association of

New York State, Congress reviewed and specifically approved

New York’s all-payor reimbursement system in connection with

the 1983 Medicare Amendments. And that New York system did

not provide for uniform rates. Blue Cross received a discount of

12%-15% as compared to commercial insurers. N.Y. Pub.

Health L. § 2808-c(1) & (6).

B. The Differentials Do Not Relate to ERISA

Plans

1. “Reference To” and “Depend Upon”

The patients subject to the 13% differential include:

“patients eligible for payments pursuant to the workers’

compensation law, the volunteer firefighters’ benefit

law, the volunteer ambulance workers’ benefit law or

the comprehensive motor vehicle insurance reparations

act; or enrolled in a self-insured fund which provides for

reimbursement directly to general hospitals on an ex-

pense incurred basis, . . . or insured under a commercial

insurer licensed to do business in this state and author-

ized to write accident and health insurance and whose

policy provides inpatient hospital coverage on an ex-

pense incurred basis, and the insurer makes payments

directly to the general hospital .. . .” [N.Y. Pub. Health

L. § 2807-c(1)(b)).

The statute, on its face, does not refer to an ERISA plan

or accord different treatment to plan participants in the same

category as nonparticipants. Nor does the statute in its operation

accord different treatment: commercially insured patients are

liable for, and the insurer will pay, 113% of the DRG rate,

regardless of their participation in an ERISA plan. Patients with

Blue Cross or HMO coverage will not pay the differentials,

regardless of their participation.

The result oi the Decision below is to require different

treatment: those patients eligible for benefits, for example, under

the workers’ compensation law and who are plan participants

will pay less than similarly eligible nonparticipants. Congress

did not intend to confer such a “charmed existence” on these

patients

'S Ironically, if the New York statute expressly incorporated the result

below — “all ERISA plan participants are exempt from the differentials”

(Footnote continued)

Accordingly, the statute does not depend upon the existence

of an ERISA plan for its operation. That conclusion is not

altered by the fact that many plans are commercially insured or

that it is anticipated or desired that plans might choose to switch

coverage. In that connection, the Third Circuit observed in

United Wire, supra, 995 F.2d at 1192 n.6, that it disagreed

“that a statute should be preempted solely because

the participation of ERISA plans is required as a

matter of economics in order for the statute to meet

its social goals. This is not what we understand the

Supreme Court to have meant in Greater Washington

Board of Trade when it held that statutes predicated

on the existence of ERISA plans ‘relate to’ such

plans. The statute in that case could not be applied

without reference to the ‘coverage levels set forth in

ERISA plans.’ As we understand it, it is of no legal

consequence if removing ERISA plans from the

scene would diminish the likelihood that the statute

would meet its social goals. Rather, the test for pre-

emption in this regard is whether the existence of

ERISA plans is necessary for the statute to be mean-

ingfully appiied. Greater Washington Board of

Trade, _ U.S. at __, 113 S. Ct. at 583-84.”

If the New York statute is found to depend upon the

existence of an ERISA plan, difficult questions arise in terms of

future application of such a standard. Does preemption hinge

upon the market share of Blue Cross vs. commercial insurance?

— it would be preempted because it referred to an ERISA plan. Mackey,

supra. The result would be that plan participants would have to pay the

same rate as other commercially insured patients who are not participants.

But the statute's silence as to ERISA participation does not save it from

preemption, according to the Couri beiow, because the only lawful result

is, indeed, that participants pay less than nonparticipants. And, implicitly,

the only way to accomplish that is to have the result published in F.3d

rather than in McKinney's New York Statutes. This is the necessary

consequence of the ruling below.

That is to say, if 90% of all ERISA plans within a state had

chosen the Blues for coverage — and benefitted from its lower

rates — would the differential be barred because 10% of the

plans elected commercial insurance with higher rates? Would

the preemption consequences differ from state to state depend-

ing on market share? The point is that the differentials may

make commercial insurance companies unhappy, but they do not

restrict a plan’s freedom of choice as to coverage, much less its

choice of the type of benefits offered.'®

2. Structure, Administration and

Economic Impact

Ignoring the discrimination that its holding produces within

the category of patients subject to the differential, the Second

Circuit focussed instead on the differences between commercial

rates and Blue Cross rates. It held that because the differential

increased the costs of commercial insurance and made such

insurance less competitive with the Blues, an ERISA plan’s

health care benefits and its choices of coverage are purposely

interfered with. Accordingly, it held that the “indirect economic

impact upon ERISA plans was substantial and impermissibly

affected the structure, the administration, or the type of benefits

furnished by a plan.” 14 F.3d at 708. This analysis and its

conclusion are unsustainable for several reasons.

To the extent the reference to “structure” and “adminis-

tration” of plans means to reflect a concern for administrative

burdens flowing from lack of national uniformity, no such

for uniform rates (if that power is not preempted), but the need to provide

sufficient revenue to the hospitals could well lead to an increase in the

Blue Cross rate. ERISA plans that have chosen such lower-cost coverage

will be disadvantaged. If, as the Second Circuit concluded, making Blue

Cross coverage more attractive is preempted, would a new law making

such coverage relatively less attractive similarly be preempted? After all,

plans with Blue Cross coverage will face increased costs, which might

result in a reduction of benefits.

burdens result from the differentials and national uniformity is

not an issue. There are no differences in this regard between

State rate-setting statutes that mandate uniform rates and those

that produce disparate rates. (See p. 16, supra.)

Similarly, if economic impact is insufficient to preempt

mandatory uniform rates, it is insufficient to preempt disparate

rates. (See pp. 17-21, supra.) It cannot make a difference, for

ERISA preemption purposes, that a hospital bill is $1,000 or

$1,130. Both bills — among countless other factors ... .ermining

price — may affect a plan’s choice as to the level of benefits it

will provide, but how either price affects “the type of benefits

furnished by a plan” (14 F.3d at 708, emphasis added) is a

mystery.

The commercial insurers have asserted that the higher costs

imposed upon them by virtue of the differentials will cause them

to pass such costs onto ERISA plans. /d. at 720. But wholly

apart from the many factors that establish hospital prices, and the

many choices that plans have for their insurance coverage,'’

there are countless state laws that impose requirements upon

commercial insurers — if that is the plan’s choice — and affect

the premiums they charge. It would appear to be difficult to

distinguish between the differentials (which favor the Blues) and

State income taxes (from which the nonprofit Blues are exempt)

in terms of the economic impact on commercial insurers and

derivative impact on plans that choose commercial insurance for

coverage. Both laws create costs that may be passed on to plans

(and non-plan insureds) and, it can be argued with equal fervor,

'’ Plans may insure with Blue Cross at the DRG rate, obtain commercial

insurance at 113% of the DRG rate (or 111% for prompt payment), insure

through an HMO which pays either a negotiated rate or 113% of the DRG

rate, self-insure and pay either 113% of the DRG rate for direct payment

or hospital charges (higher or lower than the DRG rate) for indirect

payment. N.Y. Pub. Health L. § 2807-c(11\e).

that plan benefits may thereby be reduced.'* If the “connection

with” such income taxes and plans is too tenuous to trigger

preemption, so too is the case of the differentials.

Conclusion

In the end, if the states’ power to establish mandatory

hospital rates, including disparate rates, is preempted, if the

Second Circuit’s analysis is correct, the issue before the courts

would no longer be whether a law “relates to” an ERISA plan,

but whether there is any state law that does not.

However broadly Congress intended to preempt state laws

that interfered with the efficient operations and choices of

ERISA plans, it did not mean to restrict states in their efforts to

provide full and equal access to health care services for all of

their inhabitants through the equitable regulation and apportion-

ment of hospital costs. And it did not intend the result below.

For all of the foregoing reasons, the American Hospital

Association, the Maryland Hospital Association, Inc., and the

Massachusetts Hospital Association, Inc., as Friends of the

Court, respectfully urge this Court to reverse the decision of the

Second Circuit Court of Appeals.

'S As noted above (p. 15n), the Second Circuit relied on several lower

court decisions holding state tax laws that directly applied to plan

operations or income to be preempted. Whatever the validity of those

cases, state tax laws imposed on commercial insurers are one step

removed and the connection is one step more tenuous. The differentials,

reflected in bills to patients that inay or may not be covered by

commercial insurance, are two steps more tenuous.

Dated: November 16, 1994

Of Counsel:

FREDRIC J. ENTIN

JAMES A. HENDERSON

MARGARET J. HARDY

AMERICAN HOSPITAL

ASSOCIATION

One North Franklin

Chicago, Illinois 60606

(312) 422-3000

JEROME G. GERAGHTY

FRANCINE R. STRAUSS

BLADES & ROSENFELD, P.A.

1200 Sun Life Building

200 South Charles Street

Baltimore, Maryland 21201

(410) 539-7558

WILLIAM T. MCGRAIL

DOROTHY GRANDOLFI W AGG

AMY L. STAMPFER

MASSACHUSETTS HOSPITAL

ASSOCIATION, INC.

5 New England Executive Park

Burlington, Mass. 01803

(617) 272-8000

Respectfully submitted,

PETER F. NADEL

Counsel Of Record

DAVID A. FLORMAN

JOSEPH V. WILLEY

BARBARA QUACKENBOS

ROSENMAN & COLIN

575 Madison Avenue

New York, New York 10022

(212) 940-8800

Attorneys for the American

Hospital Association, the

Maryland Hospital

Association, Inc., and the

Massachusetts Hospital

Association, Inc.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.