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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition Brief
- **Published:** January 1, 1994
- **Citation:** 511 U.S. 1067

## Text

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

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IN THE FE
Supreme Court of the United $tatesor me can |
October Term, 1993 3

MARIO M. CUOMO, in his official Capacity as Governor of the State of New York; MARK CHASSIN, a
M.D., in his Official Capacity as Commissioner of Health of the State of New York; SALVATORE R. ey
CURIALE, in his Official Capacity as Superintendent of Insurance of the State of New York; MARY JO 4
BANE, in her Official Capacity as Commissioner of Social Services of the State of New York; and
ROBERT ABRAMS, in his Official Capacity as Attorney General of the State of New York; NEW
YORK STATE CONFERENCE OF BLUE CROSS & BLUE SHIELD PLANS and EMPIRE BLUE

ee ee ee
etitioners,

el a Ni eae gs 4 Ri i a, et

against

THE TRAVELERS INSURANCE COMPANY, THE HEALTH INSURANCE ASSOCIATION OF
AMERICA, AMERICAN COUNCIL OF LIFE INSURANCE, LIFE INSURANCE COUNCIL OF
NEW YORK, INC., AETNA LIFE INSURANCE COMPANY, AETNA HEALTH PLANS OF NEW
iz YORK, INC.. MUTUAL OF OMAHA INSURANCE COMPANY, UNION LABOR LIFE INSUR-
4, ANCE COMPANY, PROFESSIONAL INSURANCE AGENTS OF NEW YORK, INC. TRUST, NEW
YORK STATE HEALTH MAINTENANCE ORGANIZATION CONFERENCE and HEALTH
SERVICES MEDICAL CORPORATION, MVP HEALTH PLAN, WELLCARE OF NEW YORK,
MID-HUDSON HEALTH PLAN, OXFORD HEALTH PLAN, CAPITAL DISTRICT PHYSICIANS
: HEALTH PLAN, CHOICECARE LONG ISLAND, INDEPENDENT HEALTH, TRAVELERS OF
NEW YORK, PHYSICIANS HEALTH SERVICES, PREFERRED CARE and U.S. HEALTHCARE, 3
Respondents. a
ON PETITIONS FOR A WRIT OF CERTIORARI TO THE UNITED STATES f

COURT OF APPEALS FOR THE SECOND CIRCUIT

. ee 2 Ae

RESPONDENTS’ BRIEF IN OPPOSITION TO PETITIONS
FOR A WRIT OF CERTIORARI

HAROLD N., ISELIN*
WENDY L. RAviTz

Couch, WHITE, BRENNER, HOWARD & FEIGENBAUM
540 Broadway
P. O. Box 22222
Albany, NY 12201-2222
(518) 426-4600
E Attorneys for Respondents, New York State Health Maintenance Organization
-

2 genet.

Island, Inc., Health Services Medical Corporation of Central New York, Inc.,
i Independent Health Association, Inc., Mid-Hudson Health Plan, Inc., MVP
a Health Plan, Inc., Oxford Health Plans, Inc., Physicians Health Services of New E:
s York, Inc., Preferred Care, Inc., Travelers Health Network of New York, Inc., s
7 U.S. Healthcare, Inc., Welicare of New York, Inc.

i *Counsel of Record
Dated: April 8, 1994

Tue Rerorer Company, Inc.—Walton, NY 13856—800-252-7181
Syracuse Office, University Building, Syracuse, NY 13202—315-426-1235
NYC Office—30 Vesey Si., New York, NY 10007—212-732-6978—00-800-4264

(3901—1994)

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Counterstatement of Question Presented

Whether the Second Circuit Court of Appeals correctly
held that section 2807-c (2-a) of New York’s Public Health
Law, which increases the cost of health care coverage pro-
vided by a health maintenance organization (“‘HMO”’) to an
employee benefit plan if the HMO is unable to enroll a

targeted number of Medicaid recipients, is preempted by
ERISA?

*e
ll.

Supreme Court Rule 29.1 Statement

Pursuant to Supreme Court Rule 29.1, the respondents
listed below have the following parent companies and sub-
sidiaries (except wholly owned subsidiaries):

Oxford Health Plans (NY), Inc.
PARENT COMPANY: Oxford Health Plans, Inc.

Physicians Health Services of New York, Inc.
PARENT COMPANY: Physicians Health Services, Inc.

Preferred Care
PARENT COMPANY: Preferred Care Holding Co.

Travelers Health Network of New York, Inc.
PARENT COMPANIES: Travelers Health Network, Inc.;

Travelers Health Co., Inc.;

Travelers Employee Benefits
Co., Inc.;

Travelers Insurance Co.;

The Travelers Inc. (formerly
Primerica Corp., successor
to The Travelers Corp.);
Associated Madison
Companies, Inc.;

and

The Travelers Insurance Group,
Inc.

U.S. Healthcare, Inc.
PARENT COMPANY: U.S. Healthcare, Inc.

Wellcare of New York
PARENT COMPANY: Wellcare Management Group,
Inc.

The remainder of the respondents do not have any parent
companies or subsidiaries, other than wholly owned
subsidiaries.

iv.

Table of Contents

Page
Counterstatement of Question Presented............ i
Supreme Court Rule 29.1 Statement ............... ii
Wee GE PINE cs cc cccccccccccccscvcsvesevess vi
Counterstatement of the Case ............000ee0ees 2
Preliminary Statement ........cccccescsccccececes 2

HMOs And Their Role In New York’s Health Care
BI 0 0 nk00cnne0nneshsdscens Gece benncns< 3
HMOs And Employee Benefit Plans........... 4
The New York Statute ...........scccceecsees 5

The 9% Assessment Has a Substantial Economic
Impact on Employee Benefit Plans ............ 7
The District Court Decision .............++0.: 9

REASONS FOR DENYING THE WRIT:

I. There is no Conflict Between the Circuits as to
Preemption of a State Law that Increases an Em-
ployee Benefit Plan’s Cost of HMO Health Care
Coverage if the HMO is Unable to Enroll a Certain
Number of Medicaid Recipients ...............

Il. The Issues Presented by the 9% Assessment are
Neither Matters of National Importance Nor
MEY WOMENS co ccvahedccattes chbbedsctesc

Assessment is Preempted by ERISA ...........
SR Can kehbaededl ced wktiudwctcsincs

B. The Second Circuit Was Correct in Refusing to
Follow United Wire and Rebaldo ...........

12

15

17

17

TABLE OF AUTHORITIES

CASES:

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

GEG cud dnceeieenkds00shosssvusneenevekest 19
District of Columbia v. Greater Wash. Bd. of Trade,

BES Bi Eh EE cd cbcecdccnceesseoandte 17
E-Systems, Inc. v. Pogue, 929 F.2d 1100 (Sth Cir.),

cert. denied, 112 S. Ct. 585 (1991) ............ 19
FMC Corp. v. Holliday, 498 U.S. 52 (1990) ........ 21

General Electric Co. V. New York State Dep’t of La-
bor, 891 F.2d 25 (2d Cir. 1989), cert. denied, 496
U.S. DIZ (1IDBD) 2. nccvccccccccccccccccccess 19

Ingersoll-Rand Co. v. McClendon, 498 U.S. 133
OOO, [ii cick kisiieaaseans 17, 21, 22

TS aaa

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

Rebaldo v. Cuomo, 749 F.2d 133 (2d Cir. 1984), cert.
denied, 472 U.S. 1008 (1985)...........0+. passim

vii.

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

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

Travitz v. Northeast Department ILGWU Health and
Welfare Fund, 13 F.3d 704 (3d Cir. 1994) ...... 14

United Wire, Metal & Machine Health & Welfare Fund
v. Morristown Memorial Hosp., 995 F.2d 1179 (3d
Cir.), cert. denied, 114 S. Ct. 382 (1993).... passim

STATUTES
FEDERAL:
26 U.S.C.A. § 162(n) (West Supp. November 1993).. 16
29 U.S.C.A. § 1001 et seq. (West 1985 & Supp. 1993) 2
STATE:

N.Y. Ins. Law § 1109(a) (McKinney 1985 & Supp.
SPU wAdebve bo cdseeeebs bis 6b dbn6 teNdeebeees 22

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

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

viii.

Page
N.Y. Pub. Health Law § 4407 (McKinney 1985)..... 4
N.Y. Pub. Health Law § 4411 (McKinney 1985)..... 22
REGULATIONS
FEDERAL:
GB Cae § SET GHGS ED o cv ccccdvtbocdéevdvcsctese 4
STATE:

N.Y. Comp. Codes R. & Regs. tit. 10, § 98.6 (1992). 4
N.Y. Comp. Codes R. & Regs. tit. 10, § 98.11(1992) 9
N.Y. Comp. Codes R. & Regs. tit. 10, § 98.15 (1992).. 4, 18

OTHER

White House Domestic Policy Council, Working
Group Draft (September 7, 1993), reprinted in The
President's Health Security Plan -- The Complete
Draft Report of the White House Domestic Policy
Council 80 (Times Books) (1993) ...........+. 20

ie aa ee a nee nae ORES ee eae

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

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1993.

MARIO M. Cuomo, in his Official Capacity as Governor
of the State of New York, et al.,

Petitioners,
against

THE TRAVELERS INSURANCE COMPANY, THE HEALTH IN-
SURANCE ASSOCIATION OF AMERICA, AMERICAN COUN-
CIL OF LIFE INSURANCE, LIFE INSURANCE COUNCIL OF
New YorK, INC., AETNA LIFE INSURANCE COMPANY,
AETNA HEALTH PLANS OF New York, INC., MUTUAL OF
OMAHA INSURANCE COMPANY, UNION LABOR LIFE IN-
SURANCE COMPANY, PROFESSIONAL INSURANCE AGENTS
OF New York, INc. Trust, New York STATE HEALTH
MAINTENANCE ORGANIZATION CONFERENCE and HEALTH
SERVICES MEDICAL CORPORATION, MVP HEALTH PLAN,
WELLCARE OF New York, Mip-HuDSON HEALTH PLAN,
OXFORD HEALTH PLAN, CAPITAL DISTRICT PHYSICIANS
HEALTH PLAN, CHOICECARE LONG ISLAND, INDEPEN-
DENT HEALTH, TRAVELERS OF NEW YORK, PHYSICIANS
HEALTH SERVICES, PREFERRED CARE and U.S. HEALTH-

CARE,
Respondents.

Brief in Opposition to Petitions for a Writ of Certiorari

2
Counterstatement of the Case

Preliminary Statement

This brief is submitted on behalf of the respondents New
York State Health Maintenance Organization Conference
and twelve health maintenance organizations (collectively
referred to as the “‘HMOs’’)! in opposition to the petitions
for a writ of certiorari of Mario M. Cuomo et al. (collec-
tively referred to herein as “the State”), New York State
Conference of Blue Cross and Blue Shield Plans and Empire
Blue Cross and Blue Shield (collectively referred to herein
as “the Blues”) and the Hospital Association of New York
State (referred to herein as “HANYS”’). Petitioners seek
review of a judgment of the United States Court of Appeals
for the Second Circuit that affirmed the District Court’s
February 3, 1993 Opinion and Order of Judge Louis Freeh.
Judge Freeh held, inter alia, that the Employee Retirement
Income Security Act of 1974, 29 U.S.C.A. §§ 1001 et seq.
(West 1985 & Supp. 1992) (hereinafter ““ERISA’’), pre-
empts Section 2807-c (2-a) of the New York Public Health
Law, which imposes a penalty, calculated at 9% of the
HMOs’ aggregate cost of hospitalization, on HMOs that fail
to enroll a specified number of Medicaid patients.?

1The twelve HMOs are Health Services Medical Corporation of
Central New York, Inc., MVP Health Plan, Inc., Wellcare of New York,
Inc., Mid-Hudson Health Plan, Inc., Oxford Health Plans (NY), Inc.,
Capital District Physicians’ Health Plan, Inc., ChoiceCare Long Island,
Inc., Independent Health Association, Inc., Travelers Health Network
of New York, Inc. Physicians Health Services of New York, Inc.,
Preferred Care, Inc. and U.S. Healthcare, Inc.

2Although the disputed statute imposes surcharges of 9, 11 and
13%, the HMOs are subjected only to the 9% assessment and this brief
only addresses preemption of that assessment.

3

Although petitioners attempt to drape their arguments
equally over the 9%, 11% and 13% assessments, there are
critical differences between the 9% assessment levied on
HMOs and the 11% and 13% surcharges imposed on com-
mercial insurers. Similarly, petitioners gloss over the signif-
icant differences between HMOs, which actually provide
care, and fee-for-service indemnity insurance companies.
These differences make petitioners’ arguments in favor of
certiorari not only unpersuasive but also largely irrelevant
as applied to the 9% assessment.

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

The New York State Health Maintenance Organization
Conference is a not-for-profit corporation consisting of 27
health maintenance organizations licensed to operate in and
located throughout New York State. The HMOs in the Con-
ference currently provide health care to more than three
million people in New York.

HMO coverage differs from traditional health insurance.
By combining the provision and financing of comprehen-
sive health care, including primary and specialty physician
care, with i. patient hospitalization, HMOs are able to pro-
vide quality health care in a cost efficient manner. HMOs
accomplish this through a variety of contractual arrange-
ments with doctors, other providers and hospitals.

Unlike commercial insurance companies and the Blue
Cross/Blue Shield indemnity insurance plans, HMOs serve

3For example, some HMOs (group and staff models) employ their
own physicians. Other HMOs (individual practice associations) use
networks of physicians who agree to serve the HMO’s subscribers and

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

4

Medicaid recipients. Under the State’s Medicaid managed
care program, HMOs enroll Medicaid recipients into their
provider networks and receive a fixed monthly rate for each
individual. HMOs also ensure that Medicaid recipients and
their families have a primary physician to monitor their care
on a regular basis. The use of a primary care physician and
the availability of a health care network provide Medicaid
recipients with better access to primary and preventive care
than otherwise available under the traditional fee-for-serv-
ice system and helps reduce costly emergency room visits.
(JA 1550, ¥ 10)*.

HMOs And Employee Benefit Plans

HMOs are required by state and federal law to offer a
comprehensive health benefits package. 42 C.F.R. § 417
(1992); N.Y. Pub. Health Law § 4403 (McKinney 1985);
N.Y. Comp. Codes R. & Regs. tit. 10, § 98.6 (1992). Be-
cause of the State’s regulatory requirements, HMOs may not
revise their benefits packages at will and may not reduce
their core package beyond a certain level of benefits.

Under state law, employers generally are required to offer
HMOs as a health benefit option to their employees. N.Y.
Pub. Health Law § 4407 (McKinney 1985); N.Y. Comp.
Codes R. & Regs. tit. 10, § 98.15 (1992). Most HMO con-
tracts are with employee benefit plans.

When an employee benefit plan contracts with an HMO,
the employees and their dependents must each select a
primary care physician who has the responsibility to over-

«*(A—)” refers to the Appendix filed by Petitioners herein.
“(JA—)” refers to the Joint Appendix filed in the Court of Appeals.
“(R—)” refers to the Record on Appeal in the Court of Appeals.

5

see and coordinate the care that is provided. By designating
a single physician to coordinate care, there is one individual
who knows the medical history and needs of each employee
and the employee’s family. In most cases, members must
receive the approval of the primary care physician before
seeing a specialist. HMOs also work closely with their
members prior to and during hospitalization to ensure that
there is adequate preparatory work and to minimize the
length of the hospital stay. (JA 1551, 44 13, 14).

As noted above, in some cases the HMO’s physicians are
salaried employees of the HMO and are principally avail-
able only to serve the members of the HMO. Thus, if an
employee benefit plan terminates its contract with such an
HMO and switches to a different type of health care cover-
age, the employees and their families would not be able to
continue to use the physicians who they have been using and
who are most familiar with their medical history. (JA 1551,

q 15).
The New York Statute

Generally speaking, inpatient hospital care in New York
is reimbursed on a case-based system, rather than on the
charges that the hospital might otherwise impose. Upon
entering a hospital, a patient is placed into a category known
as a diagnosis-related group (“DRG”) based on the pa-
tient’s condition. The patient is then billed for the rate
assigned to the appropriate DRG rather than for the actual
cost of treatment incurred.

Since the inception of DRGs in 1988, the DRG rate has
been increased by 13% for patients covered by commercial
insurance or self-insured plans. N.Y. Pub. Health Law

747” ~

6

§ 2807-c(1)(b) (McKinney 1993). The 13% surcharge is
added to the patient’s DRG rate, billed by the hospital and
paid by the patient or insurer directly to the hospital. The
revenue generated by the 13% surcharge is retained by the
hospital.

On April 2, 1992, New York State adopted the Omnibus
Revenue Act of 1992 (the “‘statute’’) which amended the
Public Health Law to impose (1) an additional 11% sur-
charge on the DRG rates of patients insured by commercial
insurers; and (2) a penalty calculated at 9% of an HMO’s
aggregate cost of hospital care payable to the State by
HMOs that fail to enroll a target number of Medicaid
recipients.

Like the 13% surcharge, the 11% surcharge is added to
the patient’s hospital bill and paid directly to the hospital.
The funds generated by the 11% surcharge are forwarded by
the hospital to a pool established by the Commissioner of
Health and then deposited into the State’s General Fund.

The 9% assessment applies only to HMOs and directly
affects the employee benefit plans that HMOs serve. The
statute imposes a penalty, payable to the State and calculated
at 9% of an HMO’s aggregate cost of inpatient hospital care,
on HMOs that are unable to attain certain Medicaid enrollment
objectives set by the State. The 9% assessment is not an
increase in the actual DRG rates that HMOs pay hospitals.

Rather, it is a separate charge that is based on the aggregate
monthly cost of the inpatient hospitalization that is paid by the
HMO. In effect, the HMO calculates the cost of its inpatient
hospitalization, multiplies the total by 9% and pays this
amount into a statewide pool. The funds are then deposited by
a State-designated pool administrator into the State’s

7

General Fund. The funds are never paid to the hospital
providing the service.

Under the statute, an HMO can reduce or eliminate the
9% assessment if the HMO achieves certain Medicaid en-
roliment objectives. An HMO can eliminate the 9% assess-
ment if the HMO (1) has Medicaid contracts with every
county in which it operates and (2) enrolls a defined target
number of Medicaid recipients. Thus, unlike the 13% and
11% differentials, the 9% assessment can be reduced or
eliminated if the HMO achieves the State’s objective of
enrolling a sufficient number of Medicaid enrollees into the
HMO’s managed care network.

The 9% assessment at issue also differs sharply from the
13% differential and 11% surcharge because the 9% assess-
ment is not an increase in the rate of payment to hospitals.
The rate an HMO pays a hospital is unaffected by the 9%
assessment, and the 9% assessment produces no revenue for
hospitals.

The 9% assessment is not an attempt to regulate either the
hospital reimbursement system or the insurance system.
Rather, the primary purpose of the 9% assessment is to
encourage HMOs to enroll Medicaid patients (JA 482,
{ 27). A secondary purpose is to raise revenue for the State.

The 9% Assessment Has a Substantial
Economic Impact on Employee Benefit Plans

Although HMOs can reduce or eliminate the 9% assess-
ment if they fulfill the State’s Medicaid objectives, it has
been exceedingly difficult for some HMOs to do so. Indeed,

for any HMO that did not already have Medicaid contracts
in place and a substantial enrollment at the time the statute
was enacted, it was virtually impossible to satisfy the re-
quirements for eliminating the assessment in 1992. (JA 15,
q 21). Only ten HMOs qualified either for an elimination or
reduction of the 9% assessment for the 1992 rate period.
(JA 761, ¥ 15).

Moreover, while some HMOs were able to eliminate or
reduce the 9% surcharge for the 1992 year, (JA 761, ¢ 15),
there is no assurance that they will continue to be able to do
so because the enrollment target increases in succeeding
years. In addition, because there is no corresponding man-
date on Medicaid recipients to enroll in an HMO, some
HMOs with sufficient enrollment in one year may lack the
requisite snrollment in the next year and thereby become
subject to the 9% surcharge. (JA 1553, | 21). As the district
court recognized, ‘HMOs which do not or cannot meet the
Statutory requirements must pay the full amount.” (A 22).

The assessment has had an immediate and dramatic effect
on the rates that HMOs charge their subscribers, including
employee benefit plans. Because the cost of hospitalization
accounts for approximately 40% of the overall costs of an
HMO, the 9% surcharge translated into an immediate in-
crease of up to 3.5% in total costs for most HMOs.
(JA 1553, | 22).

HMOs cannot absorb this increase. (JA 1554, ¥ 23).
Many HMOs are not-for-profit, including seven of the re-
spondent HMOs. Some HMOs do not have large financial
reserves and cannot absorb major and unexpected costs such
as the cost of the 9% assessment. They cannot use reserves
to fund these increased costs because, in the rate setting

OP Pee et, ee el ee i a ee i ee pn te el ed ee ee ee, a

process, the State has placed limits on the size of an HMO’s
reserves and, more importantly, because the reserves must
be retained in the event that an HMO experiences unusually
heavy medical claims. N.Y. Comp. Codes R. & Regs. tit. 10,
§ 98.11 (1992).

The impact of the 9% assessment has been substantial.
For example, for the period July 1, 1992 through December
31, 1992, Independent Health of Western New York was
required to pay approximately $2.5 million and MVP Health
Plan was required to pay approximately $1.5 million as a
result of the assessment. In the face of such substantial
charges, the HMOs have had no recourse but to request rate
increases in order to transfer the cost of the assessment to
their subscribers. (JA 1550, ¢ 9).

The New York State Insurance Department, recognizing
that the cost of the 9% assessment was an expense that
HMOs could not absorb, has granted rate increases that
reflect the amount of the 9% assessment. (JA 1554, ¢4 24,
25; see Exhibit “B” annexed to R 32 [JA 16]). For example,
Oxford Health Plans was awarded a 2.6% increase for the
last three months of 1992 “to reflect the 9% inpatient
hospital surcharge it currently pays.” (Exhibit “B” annexed
to R 32 [JA 16)).

The District Court Decision

Respondents moved for summary judgment in the district
court on the grounds that the 11% and 13% surcharges are
preempted by the Federal Employees Health Benefits Act
(“FEHBA”) and that the 9%, 11% and 13% surcharges are
preempted by ERISA. Petitioners cross-moved for summary

judgment to dismiss the complaints.

10

By Opinion and Order dated February 3, 1993, Judge
Louis J. Freeh held, inter alia, that all of the surcharges
related to employee benefit plans and were preempted by
ERISA. Rejecting the Second Circuit’s then out-dated anal-
ysis in Rebaldo v. Cuomo, 749 F.2d 133 (2d Cir. 1984), cert.
denied, 472 U.S. 1008 (1985), Judge Freeh held that the
surcharges were preempted by ERISA because they im-
posed a substantial economic burden on employee benefit
plans that was likely to affect the structure and/or adminis-
tration of the plans. Specifically, Jag Freeh stated that the
9% assessment will force HMOs iw wansfer the cost of the
assessment, via an increase in rates, to employee benefit
plans. (A-71). Judge Freeh also noted that, in many cases,
the assessment could result in a 2.5%-3.5% increase in the
rates charged to subscribers. (A-71-72, nn. 6-7).

Significantly, Judge Freeh recognized that the additional
revenue generated by the assessment is not applied to any
use even remotely related to the health care of plan partici-
pants. (A-74). Thus, to the extent that the assessment diverts
plan resources by directing that they be paid to the State, it
has a substantial impact on ERISA plans—costing plan
sponsors and participants millions of dollars annually.

Judge Freeh also held that the surcharges were not pre-
served by the insurance savings clause, which exempts from
preemption laws regulating the business of insurance. As to
the 9% assessment, the court held that it “could not possibly
fall within the scope of the savings clause because HMOs
. . do not engage in the ‘business of insurance’ as a matter
of law.” (A-79).

11
The Second Circuit Decision

On January 14, 1994, the United States Court of Appeals
for the Second Circuit issued an amended opinion affirming
Judge Freeh’s decision that ERISA preempted all of the
challenged surcharges. The court held that the surcharges
were sufficiently “‘connected with” employee benefit plans
to justify preemption. Noting that the 9% assessment inter-
fered with an ERISA plan’s selection of the most effective
way to provide benefits, the court held that the surcharges
purposely interfered with the choices that such plans make
for health care coverage. Indeed, the court held that the
surcharges substantially increase the cost to ERISA plans of
providing beneficiaries with a given level of health care
benefits, thereby forcing ERISA plans “to increase either
plan costs or reduce plan benefits.”’ (A-23). Thus, the court

held that the surcharges also have an impermissible impact
on ERISA plan structure and administration. (A-24).

The court expressly declined to follow the Third Circuit's
decision in United Wire, Metal & Machine Health & Welfare
Fund v. Morristown Memorial Hosp., 995 F.2d 1179 (3d
Cir.), cert. denied, 114 S. Ct. 382 (1993), on the grounds
that it improperly relied on Rebaldo v. Cuomo and too

narrowly interpreted ERISA’s preemption provision.

Expressly adopting the district court’s holding that HMOs
are not, as a matter of law, insurance companies, the court
also rejected the claim that any of the surcharges were
preserved by the insurance savings clause.

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

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

, .,- —_ ——

12

On March 7, 1994, the Second Circuit denied the motion
of the Blues and HANYS that the court rehear the ERISA
preemption issue in banc.

REASONS FOR DENYING THE WRIT

I. There is no Conflict Between the Circuits as to Pre-
emption of A State Law that Increases an Employee
Benefit Plan’s Cost of HMO Health Care Coverage if
the HMO is Unable to Enroll a Certain Number of
Medicaid Recipients

Regardless of any conflict that petitioners claim exists
between the Second Circuit’s decision regarding the 11%
and 13% surcharges and the Third Circuit’s decision in
United Wire, there is no conflict regarding the 9%
assessment.

Petitioners do not deny that the 9% assessment has af-
fected employee benefit plans. They do not dispute that the
9% assessment has caused, and will continue to cause,
HMOs to increase the rates charged to their subscribers. Nor
do they deny that these increases will be substantial. They
also do not dispute that most HMO contracts are with em-
ployee benefit plans. Instead, they rely primarily on the
Third Circuit s decision in United Wire, which involved a
hospital rate statute far different from the one at issue here,
to support their claim that the 9% assessment is not pre-
empted by ERISA and that a conflict between the circuits
exists.

The statute at issue in United Wire (the ““New Jersey
statute”) concerned the rates actually charged by hospitals

13

for certain procedures and the discounts given by the hospi-
tals to particular categories of payors. The New Jersey
statute prospectively set hospital rates on the basis of DRGs
and required hospitals to include in the DRG rate a charge to
cover bad debt expenses and the cost of uncompensated care
provided to the indigent. The New Jersey statute also pro-
vided DRG discounts to high volume plans and plans with
open enrollment. At the same time, the New Jersey statute
authorized hospitals to charge patients who did not belong
to such plans an increased rate to allow hospitals to recover
the income lost by virtue of the discounts.

In contrast, the 9% assessment has nothing to do with
hospital rate reimbursement. The purposes of the 9% assess-
ment are to compel HMOs to enroll Medicaid recipients and
to raise revenue for the State. The statute attempts to accom-
plish this goal by imposing a penalty, calculated at 9% of its
aggregate hospitalization cost, on HMOs that fail to comply
with the State’s Medicaid objectives. That the 9% assess-
ment is connected to the cost of hospitalization is purely
arbitrary. The legislature could have selected any other
fixed or variable yardstick to determine the amount to be
paid by HMOs that were unable to comply with the State’s
Medicaid objectives.

Thus, the 9% assessment differs in many critical respects
from the hospital reimbursement scheme challenged in
United Wire. First, unlike the United Wire surcharge which
is added to the patient’s hospital bill and is kept by the
hospital, the 9% assessment does not increase the actual rate
that HMOs pay hospitals. Rather, it is a separate charge that
is imposed by the State on HMOs that fail to enroll a target
number of Medicaid recipients. As such, the 9% assessment

14

has no effect on the rate an HMO pays a hospital for the cost
of services provided to its subscribers. Second, unlike the
surcharges at issue in United Wire that were specifically
designed to reimburse hospitals for bad debts and uncom-
pensated care, the 9% assessment does not function as a tool
to reimburse hospitals. Indeed, the assessment produces no
revenue whatsoever for the hospitals. Third, unlike pay-
ments made directly to hospitals pursuant to the New Jersey
Statute, the 9% assessment is paid by the HMOs into a
Statewide pool and deposited directly into the State’s Gen-
eral Fund. Thus, the hospitals neither receive the funds nor
act as a conduit for their transfer to the State. Lastly, unlike
the United Wire payment scheme, the 9% assessment does
not regulate the cost of hospital care. Indeed, the primary
purpose of the 9% assessment is to encourage HMOs to
enroll Medicaid patients.®

Thus, the petitioners’ efforts to construct a conflict be-
tween the Third Circuit’s decision in United Wire and the
Second Circuit’s decision in this case fall apart when ap-
plied to the 9% assessment. There simply is no conflict and,
accordingly, no reason for this Court to grant certiorari on
the question of whether the 9% assessment is preempted by
ERISA.

‘Even if the statutes here were identical, there would not be a
conflict requiring review. United Wire relied principally on the Second
Circuit’s decision in Rebaldo v. Cuomo, whose analysis has now been
discredited by subsequent decisions of the Supreme Court and the
Second Circuit. See infra at 20-22. Indeed, the Third Circuit appears to
be retreating from its own decision. See Travitz v. Northeast Depart-
ment ILGWU Health and Welfare Fund, 13 F.3d 704, 710 (3d Cir. 1994)
(court declined to fullow United Wire distinguishing the facts of that
case from the one before it).

15

Il. The Issues Presented by the 9% Assessment are Nei-
ther Matters of National Importance Nor Likely to
Recur

The Second Circuit’s decision preempting the 9% assess-
ment will have no substantive effect beyond the confines of
this particular case. The 9% assessment is nothing more than a

tailored attempt by New York State to encourage

HMOs to enroll Medicaid recipients by imposing a penalty on
those that fail to achieve certain Medicaid targets. It does not

Second Circuit’s decision that the 9% assessment and other
surcharges are preempted is allowed to stand. Even if peti-
tioners’ arguments as to the 11% and 13% surcharges were
correct, they are inapplicable to the 9% assessment. The 9%
assessment does not regulate either the cost of hospital care or
the cost of goods used by hospitals. As such, its preemption
will have no effect whatsoever on the ability of New York, or
any other state, to regulate the operation of hospitals and the
cost of hospital care.®

7Although the State asserts that at least 22 other states have health
care regulations similar to “one or more of the disputed surcharges” (State
Petition at 14), it does not point to any state with a penalty like the one
imposed here.

®Indeed, none of the many cases cited by petitioners which purport
to involve similar hospital reimbursement schemes involve anything
like the 9% assessment at issue in this case.

16

Similarly, the Second Circuit’s decision preempting the
9% assessment will not impede federal cost containment
policies or the ability of states to enact comprehensive all-
payor hospital cost containment legislation. (See HANYS
Petition at 18). As previously discussed, the 9% assessment
is tied to the cost of hospitalization only because of an
arbitrary decision by the State to use that mechanism as a
way to impose a penalty on HMOs that do not enroll the
target number of Medicaid recipients. Neither the imposi-
tion nor the collection of the penalty itself is related to the
cost of hospitalization in any substantive fashion. Indeed, if
the 9% assessment was removed entirely from New York’s
hospital rate regulation scheme, there would be no effect on
hospitals.

Lastly, the decision of the lower court that the 9% assess-
ment is preempted by ERISA is simply not ripe for review at
this juncture. As noted by the State, the nation is on the
verge of health care reform (see State Petition at 16). As
part of the legislativ -rocess, Congress will have every
opportunity to revis nend the scope of ERISA’s pre-
emption provision if it. chooses. Thus, the pendency of
national healtn care reform argues in favor of this Court
deferring review of the Second Circuit’s 9%-preemption
decision.?

%Moreover, at the request of petitioners New York State and
HANYS, Congress enacted legislation that would cause businesses to
lose their ability to deduct the cost of their health care coverage if their
insurer, or HMO, does not reimburse hospitals in accordance with New
York State’s hospital reimbursement scheme. Section 13442 of the
Omnibus Budget Reconciliation Act of 1993, 26 U.S.C. § 162(n). Thus,
contrary to petitioners’ claims, a decision to deny certiorari will have
little immediate impact on hospitals or the State.

17

Ill. The Second Circuit Correctly Held That The 9%
Assessment is Preempted by ERISA

A. The 9% Assessment Relates to Employee Benefit Plans

The Second Circuit correctly interpreted governing Su-
preme Court precedent, which emphasizes the broad nature
of ERISA’s preemptive sweep, in concluding that the 9%
assessment is preempted by ERISA. As noted by the Second
Circuit and as this Court has long emphasized, a law relates
to an employee benefit plan for the purposes of preemption
if “‘it has a connection with or reference to such a plan”’.
District of Columbia v. Greater Wash. Bd. of Trade, 113 S.
Ct. 580, 583 (1992). Under the “broad common-sense
meaning” attributed to this phrase by the Supreme Court,
Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 47 (1987), “a
state law may ‘relate to’ a benefit plan, and thereby be
preempted, even if the law is not specifically designed to
affect such plans or the effect is only indirect.” Ingersoll-
Rand v. McClendon, 498 U.S. 133, 139 (1990).

Despite the Supreme Court’s broad interpretation of
ERISA’s preemptive reach, petitioners nonetheless assert that
the Second Circuit wrongly concluded that the 9% assessment
does not sufficiently “relate to” an employee benefit plan to
warrant preemption. Petitioners fail to acknowledge, however,
that the economic impact experienced by the HMOs is not
merely an incidental or indirect cost of doing business. In
essence, the cost of the 9% assessment had to be large enough
to persuade the HMOs that it was not economically feasible to
refuse to ¢ aroll the desired number of Medicaid patients. Thus,
Judge Freeh found that the effect was intended to be and was
in fact substantial. (A-73).

18

The HMOs submitted substantial evidence of this impact,
which was relied on by the District Court and the Second
Circuit in arriving at their conclusion that the economic
impact of the 9% assessment on employee benefit plans was
substantial. For example, in the 1993-1994 fiscal year, the
9% assessment was intended to raise approximately $30
million from HMOs and the employee benefit plans they
serve. (JA 1733). Thus, HMOs were required to pay mil-
lions of dollars to the State. The HMOs themselves simply
cannot absorb this cost. (JA 1554, 9 23). Because the re-
serves maintained by HMOs cannot be used to defray ad-
ministrative expenses like the 9% assessment, HMOs have
no choice but to pass the cost of the assessment on to the
ERISA plans.

Faced with the threat of increased fees and/or reduced
benefits, an ERISA plan cannot, as suggested by petitioner
HANYS (see HANYS Petition at 20-21), merely switch to
an alternative health insurance system. HMOs do not simply
reimburse independent providers of care; HMOs provide
access to care. Accordingly, an ERISA plan cannot select
alternative coverage without, in many cases, disrupting the
care that is being provided to its employees. Nor can em-
ployee benefit plans simply opt to avoid the assessment by
eliminating HMOs as a health care option. See N.Y. Pub.
Health Law § 4403 (McKinney 1985); N.Y. Comp. Codes
R. & Regs. tit. 10, § 98.15 (1992) (employers with more
than 25 employees must offer HMOs as a health care

option).

Moreover, because the 9% assessment forces ERISA
plans to either pay increased plan costs to provide the same
level of benefits or reduce plan benefits to offset the cost of
the assessment, the Second Circuit correctly found that the

19

9% assessment sufficiently “interfere[d] with the choices
that ERISA plans make for health care coverage” as to
constitute a “‘connection with” ERISA plans. (A-22-23). The
assessment thus imposes precisely the kind of burden on plan
administration that ERISA was designed to avoid. For exam-
ple, the Second Circuit relied on E-Systems, Inc. v. Pogue,
929 F.2d 1100 (Sth Cir.), cert. denied, 112 S. Ct. 585 (1991),
in which a state statute imposing a 2.5% tax on administra-
tive and service fees was preempted by ERISA. In E-Systems,
the Fifth Circuit held that

The cost of the plan must therefore increase for the
employer and/or employees or the benefits must be
adjusted downwards to offset the tax bite. This is the
type of impact Congress intended to avoid when it
enacted the ERISA legislation.

E-Systems, Inc., 929 F.2d at 1103. See also General Electric
Co. v. New York State Dep't of Labor, 891 F.2d 25, 28 (2d
Cir. 1989) (provision of New York labor law which required
particular employers to pay employees certain benefits was
preempted by ERISA because “private parties, not the Gov-
ernment, contro! the level of benefits”” under ERISA) (quot-
ing Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 511
[1981]), cert. denied, 496 U.S. 912 (1990).'°

10The case at hand is very different from Mackey v. Lanier Collec-
tion Agency & Serv., Inc., 486 U.S. 825 (1988), relied on by petitioners.
In Mackey, the Supreme Court based its decision that a state law
permitting the garnishment of welfare benefits was not preempted by
ERISA on the presence of a separate provision in ERISA which ex-
pressly forbid garnishment of a participant's pension benefits, rather
than on an analysis of the statute’s economic impact on the plan. The
Court held that once Congress was aware that ERISA plan benefits
could be attached or garnished, its decision to remain silent regarding
welfare plan benefits “acknowledged and accepted the practice, rather
than prohibiting it."” 486 U.S. at 837 (quoting Alessi, 451 U.S. at 516).

20

In addition, although not raised by petitioners, it is impor-
tant to note that the 9% assessment cannot function irrespec-
tive of ERISA plans. As a general matter, the Second Circuit
noted that eighty-eight percent of non-elderly Americans re-
ceive some form of private health care coverage through
ERISA plans. (A-6). The vast majority of the HMOs’ sub-
scribers are beneficiaries of ERISA plans.

Further evidence that ERISA was intended to preempt sur-
charges such as the 9% is found in President Clinton’s pro-
posed Health Security Plan. In that plan, the President ex-
pressly provides that the new plan will modify ERISA’s current
preemption provision to, inter alia, permit states more flex-
ibility in regulating health care. White House Domestic Policy
Council, Working Group Draft (September 7, 1993), reprinted
in The President's Health Security Plan—The Complete Draft
Report of the White House Domestic Policy Council 80 (Times
Books) (1993). Had the President and his health care council
believed that such laws were not already preempted by
ERISA, no such modification provision would have been
necessary.

B. The Second Circuit Was Correct in
Refusing to Follow United Wire and Rebaldo

The Second Circuit also properly rejected petitioners’
reliance on United Wire and Rebaldo. As noted by the
Second Circuit, the principle that to be preempted a state
law must “purport to regulate’’ an ERISA plan, emanating
from Rebaldo v. Cuomo, has now been expressly rejected by
the Supreme Court. (A-21).!! Because the United Wire deci-

In Rebaldo, the Second Circuit held that regulations governing
the right of self-insured employee benefit plans to negotiate discounts
with hospitals was not preempted by ERISA because the law did not
POROUS Se eRe cee See Olly ene ee Gayo Seniew prmee.
Rebaldo, 749 F.2d at 137.

21

sion relied heavily on Rebaldo and too narrowly interpreted
ERISA’s preemption clause, the Second Circuit declined to
follow it.

In 1990, the Supreme Court issued two decisions which
establish that in order to be preempted by ERISA, a state
law need not make express reference to nor purport to
regulate an ERISA plan. In the first, FMC Corp. v. Holliday,
498 U.S. 52 (1990), this Court held that its earlier ERISA
preemption decision of Shaw v. Delta Air Lines, 463 U.S.
85, 95 (1983), which held that a law related to an employee
welfare plan and is preempted by ERISA if it has ‘a connec-
tion with or reference to such a plan,”’ was not intended to
mean that only those state laws “specifically designed to
affect employee benefit plans” or concerning the subject
matter covered by ERISA, are preempted by ERISA. In-
deed, the Supreme Court further elaborated on this issue a
short time later in its decision in Ingersoll-Rand v. McClen-
don. In Ingersoll-Rand, the Court held that a law relates to a
benefit plan for preemption purposes “even if the law is not
specifically designed to affect such plans, or the effect is
only indirect.” 498 U.S. at 139.

Following those decisions, the Second Circuit shifted
gears and held that “‘a state law of general application, with
only an indirect effect on a pension plan, may nevertheless
be considered to ‘relate to’ that plan for preemption pur-
poses.”’ Smith v. Dunham-Bush, Inc., 959 F.2d 6, 9 (2d Cir.
1992). In the District Court’s decision here, Judge Freeh
adopted this analysis and concluded that the 9% assessment
is preempted by ERISA. (A-69, 75).

The Second Circuit here correctly adopted Judge Freeh’s
determination that Rebaldo’s fundamental premise, rejected
by the Supreme Court (and later Second Circuit precedent),
poisoned that decision’s entire analysis. (A-21). Thus, the

22

Second Circuit properly held that petitioners’ reliance on
Rebaldo was misplaced and refused to follow the decision of
United Wire which relied on it. The Second Circuit held
instead that the surcharges satisfied the less stringent “‘con-
nection with” standard of Ingersoll-Rand. (A-22).'2

!2There is no reason for this Court to review the Second Circuit's
decision that the 9% assessment is not saved from preemption by the
insurance savings clause. First, petitioners did not argue below and do
not appear to be arguing here that the 9% assessment is saved from
preemption. Second, and most importantly, the 9% assessment is di-
rected solely at HMOs. As the Second Circuit held, New York law does
not require HMOs to be state-licensed insurers. N.Y. Ins. Law § 1109(a)
(McKinney 1985 & Supp. 1993). Nor can HMOs include in their names
“words generally regarded as descriptive of the insurance function.”
N.Y. Public Health Law § 4411 (McKinney 1985). Thus, the court
correctly held that the 9% assessment does not fall within the scope of
the savings clause because HMOs do not engage in the business of
insurance. (A-26-27 n.5).

23
Conclusion

For the foregoing reasons, the petitions for a writ of
certiorari should be denied.

Dated: Albany, New York
April 8, 1994

Respectfully submitted,

HAROLD N. ISELIN*
WENDY L. RAVITZ

Couch, WHITE, BRENNER, HOWARD &
FEIGENBAUM
540 Broadway

P.O. Box 22222
Albany, New York 12201-2222
Telephone: (518) 426-4600

Attorneys for Respondents New York State
Health Maintenance Organization Conference,
Capital District Physicians’ Health Plan, Inc.,
Choicecare Long Island, Inc., Health Services
Medical Corporation of Central New York,
Inc., Independent Health Association, Inc.,
Mid-Hudson Health Plan, Inc., MVP Health
Plan, Inc., Oxford Health Plans, Inc.,
Physicians Health Services of New York, Inc.,
Preferred Care, Inc., Travelers Health
Network of New York, Inc., U.S. Healthcare,
Inc., Wellcare of New York, Inc.

* Counsel of Record

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385013_0498%3A05. Public record. Not legal advice.