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

Supreme Court brief1994

Ask Donna

What actually matters in this document.

Text

OO). An Ly

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

a aT ae

me (Gti

In the Supreme Court of the United ‘tutes >

OcToBER TERM, 1994 | jy 16 1994

HE CLERK

New York STATE CONFERENCE OF BLUE\GKOSS & |

BLUE SHIELD PLANS, ET AL., PETITIONERS

TRAVELERS INSURANCE CoO., ET AL.

Mario M. CuoMo, GOVERNOR OF NEw YORK, ET AL.,

PETITIONERS

TRAVELERS INSURANCE CO., ET AL.

HosPITAL ASSOCIATION OF NEW YorRK STATE,

PETITIONER

TRAVELERS INSURANCE CoO., ET AL.

ON WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

BRIEF FOR THE UNITED STATES

AS AMICUS CURIAE SUPPORTING PETITIONERS

Drew S. Days, III

Solicitor General

OLIVER B. QUINN EDWIN S. KNEEDLER

Deputy Solicitor of Labor Deputy Solicitor General

ALLEN H. FELDMAN JAMES A. FELDMAN

Associate Solicitor Assistant to the Solicitor

NATHANIEL I. SPILLER General

Counsel for Appellate Department of Justice

Litigation Washington, D.C. 20530

(202) 514-2217

JUDITH D. HEIMLICH

Attorney

Department of Labor

Washington, D.C. 20210

Employee

Act of 1974 (ERISA), are preempted by ERISA insofar

as the hospital charges are covered by an ERISA plan.

(1)

from preemption in this case as laws which regu-

late insurance

Conclusion .

Appendix . a

TABLE OF AUTHORITIES

Cases:

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

(1981) 11, 13, 15

Anderson V. Humana, Inc., 24 F.3d 889 (7th Cir.

1994)

Distriet of Columbia v. Greater Washington Bd.

of Trade, 113 8. Ct. 580 (1992) 10, 11, 18,14

Estate of Medcare HMO, In re, 998 F.2d 486 (7th

Cir. 1998)

FMC Corp. V. Holliday, 498 U.S. 52 (1990) ...6, 10, 18, 14,

19, 20, 21

Fort Halifax Packing Co. v. Coyne, 482 U.S. 1

(1987)

Fugarino v. Hartford Life & Accident Ins. Co.,

969 F.2d 178 (6th Cir. 1992), cert. denied, 113

S. Ct. 1401 (1998)

(mit)

Cases—Continued: Page

General Motors Corp. v. California State Bd. of c

Equalization, 815 F.2d 1805 (9th Cir. 1987),

cert. denied, 485 U.S. 941 (1988) 22

Group Life & Health Ins. Co. v. Royal Drug Co.,

440 U.S. 205 (1979) 21, 28, 25, 26, 27

Hartford Fire Ins. Co. v. California, 118 8. Ct.

2891 (1993) 21, 25

Ingersoll-Rand Co. v. McClendon, 498 U.S. 188

(1990) 11, 15

Klamath-Lake Pharmaceutical Ass’n v. Klamath

Medical Serv. Bureau, 701 F.2d 1276 (9th Cir.),

cert. denied, 464 U.S. 822 (1983) 26

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

486 U.S. 825 (1988) 15,17

Metropolitan Life Ins. Co. v. Massachusetts, 471

U.S. 724 (1985) 5, 16, 19, 20, 21, 23, 24

NYSA-ILA Medical & Clinical Serve. Fund v.

Azelrod, 27 F.3d 828 (2d Cir. 1994), petition

for cert. pending, No. 94-745 (filed Oct. 21, ;

1994) . 17

New England Health Care Employees Union Dist.

1199 V. Mount Sinai Hosp., 846 F. Supp. 190

(D. Conn. 1994), appeal pending, Nos. 94-7264

& 94-7906 (2d Cir.) 17

Ocean State Physicians Health Plan, Inc. v. Blue

Cross & Blue Shield, 888 F.2d 1101 (ist Cir.

1989), cert. denied, 494 U.S. 1027 (1990) 26

Pilot Life Ins. Co. v. Dedeauz, 481 U.S. 41 (1987) .. 8, 15,

SEC v. National Sec., Inc., 398 U.S. 458 (1969)... 21, 23

Schweiker v. Gray Panthers, 458 U.S. 34 (1981)... 3

Shaw V. Delta Air Lines, Inc., 463 U.S. 85 (1983) .. 10, 11,

15, 18

Stuart Circle Hosp. Corp. v. Aetna Health Man-

agement, 995 F.2d 500 (4th Cir.), cert. denied,

114 S. Ct. 579 (1998) 26

Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119

(1982) .20, 21, 28, 24, 25, 27

United States Department of Treasury Vv. Fabe,

118 S. Ct. 2202 (1998) 28, 25, 27

United Wire, Metal & Machine Health & Welfare

Fund Vv. Morristown Memorial Hosp., 995 F.2d

1179 (3d Cir.), cert. denied, 114 S. Ct. 382

(19938) 13

Statutes:

Employee Retirement Income Sosurtiy Act of

1974, 29 U.S.C. 1001 et seq.:

Tit. I, 29 U.S.C. mtetenee (1988 & Supp. V

McCarran-Ferguson Act, 15 U.S.C. 1011-1015.__.

§ 2, 15 U.S.C. 1012

§ 2(a), 15 U.S.C. 1012(a)

§ 2(b), 15 U.S.C. 1012(b)

Social Security Act, Tit. XIX, 42 U.S.C. 1896 et

seq.

1998)

§ 3(1), 29 U.S.C. 1002(1)

§ 3(4)-(6), 29 U.S.C. 1002(4)-(6) _....

§ 3(13), 29 U.S.C. 1002(13)

§ 3(37), 29 U.S.C. 1002(87) (1988 &

Supp. V 1993)

§ 4(a), 29 U.S.C. 1008 (a)

§ 4(b), 29 U.S.C. 1008 (b)

§ 506(b), 29 U.S.C. 1136 (b)

§ 514, 29 U.S.C. 1144

§ 514(a), 29 U.S.C. 1144(a) _.... 45, 7,10, 11, 12,

19, la

§ 514(b) (2) (A), 29 U.S.C. 1144(b) (2)

(A) 5, 7, 19, 21, la

§ 514(b) (2) (B), 29 U.S.C. 1144 (b) (2)

(B) 6, 19, 21, 22, la

§ 514(b) (5), 29 U.S.C. 1144(b) (5) (1988

& Supp. V 1998)

noweoaka Wog

26 U.S.C. 414(f)

N.Y. Ins. Law (McKinney Supp. 1994) :

§ 8231 (a)

§ 4817 (a)

§ 4318

Statutes—Continued:

N.Y. Pub. Health Law (McKinney 1993) :

§ 2807-c(1) (a)

§ 2807-c(1) (b)

§ 2807-c(1) (c)

§ 2807-c(2-a) (c) (i) .....

§ 2807-c(2-a) (a)-(e)

§ 2807-c(11) (i)

Miscellaneous:

Employee Benefit Research Institute Issue Brief

No. 145: Special Report: Sources of Health In-

surance and Characteristics of the Uninsured

PR Set eee 18

BS co co m 00 oo

2 x _—— -

ES Se ee: Tee oe Oe eee ae ee

Iu the Supreme Court of the United States

OcTOBER TERM, 1994

No. 93-1408

New York STATE CONFERENCE OF BLUE Cross &

BLUE SHIELD PLANS, ET AL., PETITIONERS

v. <i

TRAVELERS INSURANCE Co., ET AL.

No. 93-1414

Mario M. Cuomo, GOVERNOR OF NEW YORK, ET AL., .

PETITIONERS |

TRAVELERS INSURANCE Co., ET AL.

No. 93-1415

HospiTaAL ASSOCIATION OF New York STATE,

PETITIONER

Vv.

TRAVELERS INSURANCE CO., BT AL.

ON WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

BRIEF FOR THE UNITED STATES

AS AMICUS CURIAE SUPPORTING PETITIONERS

(1)

INTEREST OF THE UNITED STATES

This case presents questions concerning the scope of

the preemption provision of the Employee Retirement

Income Security Act of 1974 (ERISA), 29 U.S.C. 1001-

1169 (1988 & Supp. V 1993). See 29 U.S.C. 1144. The

Secretary of Labor is primarily responsible for enforcing

and administering Title I of ERISA. See 29 U.S.C.

1002(13), 1136(b). The United States therefore has a

substantial interest in the resolution of the question pre-

sented. In response to the Court’s invitation, the United

States filed a brief at the petition stage of this case urg-

ing that certiorari be granted.

STATEMENT

1. New York State has a “comprehensive statutory

scheme for the regulation of in-patient hospital rates.”

Pet. App. A64-A65.’ For each of 794 diagnostic ~elated

groups (DRGs), a uniform rate is set that reflects the _

average cost of treating a patient with a particular condi-

tion, adjusted for each hospital to

* All references to “Pet. App.” are to the appendix to the peti-

tion for a writ of certiorari in No. 98-1414.

eel eee Pe ee el ee Fe a Pp eee eee

tained by it. Ps

Second, an additional surcharge of 11% was imposed

on hospital bills paid by commercial insurers, raising the

total surcharge for such payors to 24%. N.Y. Pub.

Health Law § 2807-c(11)(i) (McKinney 1993) (re-

at Pet. App. Al04). That surcharge was to be

by hospitals, which were then to pay it into the

11% surcharge was in effect

The

only for a one-year period ending on March 31, 1993.

prescribed target

enrollment of Medicaid recipients? N.Y. Pub. Health

Law § 2807-c(2-a)(a)-(e) (McKinney 1993) (repro-

at Pet. App. A106-A113). The 0% to 9% sur-

is paid by the HMO directly into a statewide pool,

ices rendered to all other patients, including those patients

who pay their own bills or who are reimbursed directly

by self-insured funds or commercial insurers, are subject to

the hospital’s charges (not the DRG rate), with a statu-

tory limit higher than that charged to commercial insur-

ers. N.Y. Pub. Health Law § 2807-c(1)(c) (McKinney

1993) (reproduced at Pet. App. A103).

The purpose of the 13% surcharge is “to contain hos-

pital costs and to increase the availability of hospital in-

surance coverage to needy New Yorkers” by making the

Blues—traditionally the “insurer of last resort” for high-

risk individuals, see Pet. App. A28—more competitive

with commercial insurers. Id. at A7-A8. The 11% sur-

charge has a similar purpose, and also was designed to

increase state revenues. Jd. at A8, A22, A72-A73 & n.8.

“(T]he primary purpose of the [0% to] 9% assessment

is to encourage HMOs to enroll Medicaid recipients,

thereby lowering the costs of the Medicaid program.” I/d.

at A7-A8.

ERISA welfare plans pay for a large percentage of

hospital bills in New York State. Pet. App. A6. “ERISA

plans provide health coverage to employees in various

ways, including: (1) the purchase of commercial health

insurance from an insurer; (2) self-insurance, whereby

the plan is directly responsible for health care bills * * *;

(3) subscription to a heaith maintenance organization

* * *: and (4) coverage through non-profit health service

corporations, such as Blue Cross/Blue Shield plans.” Jd.

at A6-A7. Thus, ERISA plans that provide hospitaliza-

tion benefits either are purchasers of hospitalization cov-

erage from commercial insurers or other payors, or are

themselves payors of hospital bills.

2. This case presents the question whether the 13%,

11%, and 0% to 9% surcharges are preempted by

ERISA. ERISA generally governs employee benefit plans,

see 29 U.S.C. 1003(a), A ato any employee welfare

benefit plan “established or maintained by an employer

* * * for the purpose of providing for its participants or

their beneficiaries, through the purchase of insurance or

eS a en a

otherwise, * * * medical, surgical, or hospital care or

benefits.” 29 U.S.C. 1002(1).

ERISA plans that provide benefits for participants by

purchasing medical coverage—such as from commercial

insurers, the Blues, or HMOs—are “insured plans.” Plans

that pay for participants’ benefits out of the general as-

sets of an employer’s business are “self-insured plans,”

see Metropolitan Life Ins. Co. v. Massachusetts, 471

U.S. 724, 732 (1985), as are many multiemployer health

plans. See 29 U.S.C. 1002(37) (1988 & Supp. V 1993);

26 U.S.C. 414(f). But not every arrangement by which

an individual or group obtains health coverage is an

ERISA covered plan. A plan subject to ERISA must be

established by an “employer” or “employee organization”

for the purpose of providing certain benefits to its “em-

ployee[s].” 29 U.S.C. 1002(1), (4)-(6). Health cover-

age obtained through arrangements that are unrelated to

employment or based on an employment relationship that

does not satisfy ERISA’s coverage provisions is not cov-

ered by ERISA. See 29 U.S.C. 1003(b) (exclusion for

governmental, church, and some other plans); cf. Fuga-

rino V. Hartford Life & Accident Ins. Co., 969 F.2d 178

(6th Cir. 1992) (sole proprietor), cert. denied, 113 S.

Ct. 1401 (1993).

Section 514(a) of ERISA is an express preemption

provision, which states that ERISA “shall supersede any

and all State laws insofar as they may now or hereafter

relate to any employee benefit plan” covered by

ERISA. 29 U.S.C. 1144(a). The insurance savings

clause of ERISA, Section 514(b)(2)(A), 29 U.S.C.

1144(b)(2)(A), however, limits the reach of the pre-

emption clause. The savings clause states that, except

as provided in the “deemer clause,” described below,

ERISA does not “exempt or relieve any person from

any law of any State which regulates insurance, banking,

or securities.” See App., infra, 1a. Thus, a law that

“relates to” an ERISA-covered plan is not preempted if

it is a law “which regulates insurance.”

Finally, the savings clause is, in turn, limited by the

“deemer clause” of ERISA, Section 514(b)(2)(B), 29

U.S.C. 1144(b)(2)(B). That clause distinguishes be-

tween “an insurance company or other insurer * * * en-

gaged in the business of insurance,” to which the savings

clause applies, and “an employee benefit plan,” which

shall not be “deemed” to be an insurance company or

engaged in the business of insurance for preemption pur-

poses. See App. infra, la. Thus, a state law that “relates

to” an employee benefit plan that self-insures is pre-

empted, even if such a law would otherwise be saved from

preemption as a law “which regulates insurance.” See

FMC Corp. v. Holliday, 498 U.S. 52, 61-63 (1990).

3. In two actions later consolidated, respondent in-

surance companies and their trade associations sought

to invalidate and enjoin enforcement of the three New

York surcharges on grounds that the surcharges are pre-

empted by ERISA. The other respondents (including the

New York State Health Maintenance Organization Con-

ference and several HMOs) intervened in support of the

insurers, and the New York State Conference of Blue

Cross and Blue Shield Plans, Empire Blue Cross and

Blue Shield, and the Hospital Association of New York

State intervened in support of the state defendants.

On cross-motions for summary judgment, the district

court held that ERISA preempts all three surcharges,

Pet. App. A63-A90, and it enjoined their enforcement

“against any commercial insurers or HMOs in connection

with their coverage of any ERISA plans.” Id. at A89-

A90. The court reasoned that the surcharges “relate

to” ERISA plans because they impose “a substantial eco-

nomic burden on the commercial insurers and HMOs,”

which affects the behavior of ERISA plans when it is

passed on to them in the form of increased costs for

health coverage. Id. at A71, A73. The court also con-

cluded that none of the surcharges is saved as a law that

regulates insurance under ERISA’s insurance savings

clause. Id. at A79-A80.

ee Se ee ee ee ee ee ee en ee a ee

- *

{

4. The court of appeals affirmed the district court’s

ruling that ERISA preempts all three surcharges. Pet.

App. Al7-A29, A34. The court held that, although the

surcharge statutes “do not refer to ERISA plans,” they

“relate to” ERISA plans within the meaning of Section

514{a) because they “satisfy the less stringent ‘connection

with’ standard embraced in Ingersoll-Rand [Co. v. Mc-

Clendon, 498 U.S. 133 (1990)].” Pet. App. A22. The

court found the requisite connection in the fact that,

because the surcharges were designed to increase hos-

pital costs for patients not covered by the Blues, “the

surcharges purposely interfere with the choices that ERISA

plans make for health care coverage.” Ibid. Additionally,

the court observed that “[t]he surcharges substantially

increase the cost to ERISA plans of providing benefici-

aries with a given level of health care benefits,” forcing

them “to increase either plan costs or reduce plan bene-

fits.” Id. at A23. The court rejected the argument that

indirect economic impact alone does not suffice to justify

a finding of preemption. Jd. at A23-A24.

The court also ruled that the 11% and 13% sur-

charges are not saved from preemption under Section

514(b)(2)(A) of ERISA, 29 U.S.C. 1144(b)(2)(A),

as laws “which regulate[] insurance.” Reasoning as did

the district court, the court held that the surcharges are

not insurance laws as a matter of “common-sense” be-

cause they regulate hospital rates and are not directed at

the insurance industry. Pet. App. A26-A27. The court

rejected the argument that laws “designed to affect the

insurance marketplace by giving the Blues a competitive

advantage over * * * other players in the marketplace”

amount to regulation of the “business of insurance,”

which the court believed to be the exclusive focus of

ERISA’s insurance savinys clause. Jd. at A27.

The court reached the same result applying the three

factors considered under the McCarran-Ferguson Act, 15

U.S.C. 1011-1015, which this Court has held relevant to

the determination whether a state law is saved under

ERISA’s insurance savings clause. See, e.g., Pilot Life

Ins. Co. v. Dedeaux, 481 U.S. 41, 48-49 (1987). The

court found that the 11% and 13% surcharges spread

risk, and thus satisfy the first factor, by encouraging cus-

tomers to shift to the Blues. Pet. App. A28. In the

court’s view, however, the second factor is not satisfied,

because the surcharges “do not regulate any practice that

is integral to the insurer-insured relationship.” Jbid. The

court reasoned that the surcharges “relate only to the

contractual obligations between hospitals and insurers or

insureds,” rather than the relationship between the insur-

ers and insureds. Id. at A29. Fina'ly, the court held that

the third factor is not satisfied, reasoning that the sur-

charges are not “limited to entities within the insurance

industry” because the 11% and 13% surcharges affect

non-insurance entities such as “the State, hospitals, pa-

tients, HMOs, and self-insured funds.” Jbid. In two foot-

notes, the court approved the district court’s holding that

the 0% to 9% surcharge affecting only HMOs is not

saved because HMOs do not engage in the business of

insurance “as a matter of law.” Jd. at A26 n.5, A29 n.6.

SUMMARY OF ARGUMENT

New York State’s surcharges do not “relate to” ERISA

operation of such plans. Each of the surcharges is a law

of general applicability, because it applies to broad cate-

gories of payors, each of which was intended to and does

include both ERISA plans and participants and non-

ERISA plans and participants. The impact of the sur-

id =" 2 —— a Te, * ss a =< Saas * «oS ee PS ae.

i tal i tg tl Mel he

A ee Ak) oe nT ee ae

on the interstate operation of ERISA plans, since hospital

rates in any event vary widely within New York State

and between New York and other States.

The court of appeals held that the surcharges were

preempted, primarily because they “impose a significant

economic burden on commercial insurers and HMOs * * *

[and] therefore have an impermissible impact on ERISA

plan structure and administration.” Pet. App. 24. ERISA,

however, does not preempt a state law simply because

it causes the marketplace to provide certain economic

incentives to ERISA plans to provide certain types of

benefits to employees. Any form of regulation of hos-

pital costs provides an incentive to purchasers of hospital

care to tailor their conduct accordingly. A state regula-

tion does not relate to plans so long as its only effect

is to subject all buyers in a broad-based market in which

ERISA plans and others substantially participate to a

single set of marketplace incentives.

Even if the court of appeals were correct that the

surcharges “relate to” ERISA plans, the court nonethe-

less erred in holding that the 11% and 13% surcharges

are not saved by ERISA’s insurance savings clause. The

language of that clause is somewhat broader than the cor-

responding language of the McCarran-Ferguson Act. It is

therefore appropriate to read the ERISA savings clause

to save a somewhat broader range of state insurance

regulation.

In this case, as a matter of “common sense,” the sur-

charges on commercial insurers and HMOs are laws that

regulate insurance. Although the surcharges are collected

through the mechanism of hospital rates, their incidence

is determined entirely by reference to the payor’s status

in the insurance industry. In addition, they are designed

to give the Blues a rate advantage in the marketplace,

thereby encouraging more customers to purchase coverage

from the Blues and helping maintain the solvency of the

Blues. The intended effects of the surcharges are there-

fore the traditional effects of insurance regulation—

spreading risk, setting rates, and maintaining the solvency

of insurers.

The same conclusion follows from an analysis of the

three factors used to determine whether state regulation

falls within the McCarran-Ferguson Act. As noted above,

the surcharges serve a vital function in spreading risk.

In addition, they affect the contract between insurer

and insured because they are premised on the open-

enrollment and community-rating policies of the Blues

and HMOs, and their intended effect is on contract for-

mation—to make hospitalization coverage more widely

available at lower cost. Finally, the surcharges are gen-

erally limited to entities within the insurance industry,

since their primary effect is on such entities.

ARGUMENT

A. THE SURCHARGE STATUTES DO NOT “RELATE

TO” THE ERISA PLANS IN THIS CASE UNDER

SECTION 514(a) BECAUSE THEY ARE GENER-

ALLY APPLICABLE LAWS HAVING AN INDI-

RECT AND SOLELY ECONOMIC EFFECT ON

ERISA PLANS

ERISA supersedes all state laws that “relate to” an

ERISA plan. 29 U.S.C. 1144(a). A law “relates to”

such a plan for purposes of Section 514(a) if it “has a

connection with or reference to such a plan.” District of

Columbia v. Greater Washington Bd. of Trade, 113 S. Ct.

580, 583 (1992) (quoting Shaw v. Delta Air Lines, Inc.,

463 U.S. 85, 97 (1983)). Section 514(a)’s preemptive

reach is “conspicuous for its breadth.” FMC Corp. v.

Holliday, 498 U.S. 52, 58 (1990). Thus, a state law

may “relate to” an ERISA plan “even if the law is not

specifically designed to affect such plans, or the effect is

only indirect.” Greater Washington Bd. of Trade, 113

S. Ct. at 583 (quoting Ingersoll-Rand Co. vy. McClendon,

— ee eS a ee ee ae, ewe el le ee ee eee eee oe ee

498 U.S. 133, 139 (1990)); see Alessi v. Raybestos-

Manhattan, Inc., 451 U.S. 504, 525 (1981). The pre-

emptive reach of Section 514(a) is not, however, un-

limited. The fact that the operation of a state law “might

burden the administration of a plan [does] not, by itself,

compel pre-emption.” Ingersoll-Rand, 498 U.S. at 139.

addition, “[s]ome state [laws] may affect employee

plans in too tenuous, remote, or peripheral a

to warrant a finding that the law ‘relates to’”

plans, Shaw, 463 U.S. at 100 n.21, “as is the

many laws of general applicability.” Greater

Bd. of Trade, 113 S. Ct. at 583 n.1. In this

a generally applicable statute” is one “that

reference to, or indeed functions irrespective of,

of an ERISA plan.” Ingersoll-Rand, 498

_CEES=

aHat

Spec

on hospital bills paid by HMOs and commercial insurers

is a law “that makes no reference to, [and] indeed func-

tions irrespective of, the existence of an ERISA plan,”

benefit plans to “relate to” them within the meaning of

{

EFEE

;

payors, as well as the Blues, in fact provides health

coverage for both ERISA and non-ERISA plans and

participants.

The only impact that the surcharges have on ERISA

plans is indirect (because the surcharges do not apply to

fact, the complaints filed in this case may be read to allege that

one or more of the plaintiffs is a self-insured plan, see J.A. 93,

at 18, and the complaints allege that several of the insured-

plaintiffs in this case are fiduciaries for self-insured funds that

are ERISA plans, see J.A. 69, 91-93. )

The injunction in this case precludes enforcement of the sur-

charge “against any commercial insurers or HMOs in connec-

tion with their coverage of any ERISA plans.” Pet. App. A89-

A90. It is not clear that the district court’s injunction, which bars

at self-insured plans generally. As we explained in our brief at the

petition stage of this case at 14 n.5), “[a]pplication of the 138%

from preemption, but stating that provision shall not be construed

claims on benefits); Alessi, supra (preempting law pro-

hibiting plans from applying certain offsets to benefits).

chine Health & Welfare Fund v. Morristown Memorial

Hosp., 995 F.2d 1179, 1196 (3d Cir.), cert. denied,

114 S. Ct. 382 (1993).

HEHE) SUG TT NDE

i i flaetilh uf i Ht

leedall gactiathlegagy aq

wag a8 Hs : i HEE ar F HHT

Wey TT Rarer

TRU ian | ite,

Tia ae ah eae : Le

litba ATi |

ili;

ay issuers

: tpl

Hine ca

ATU

Haley

dating insurers to include mental health benefits in their

policies “clearly ‘relate[s] to’ welfare plans governed by

ERISA.” Metropolitan Life Ins. Co. v. Massachusetts,

471 U.S. 724, 739 (1985). In that case, the Court

implicitly recognized a legally significant difference be-

tween a law that substantially dictates an ERISA plan’s

choice of which benefits to provide participants by com-

pelling insured plans to “purchase the * * * benefits

specified in the statute when they purchase a certain kind

of common insurance policy,” ibid., and a law that

affects a plan’s choice of benefits only by affecting the

price of insurance purchased both by ERISA plans and

by others in the State, see id. at 741 (“laws that reg-

ulate only the insurer, or the way in which it may sell

insuranée, do not ‘relate to’ benefit plans in the first

instance” ).

b. The consequence of adopting the court of appeals’

theory of preemption based on mere indirect, economic

impact would be both substantial and unwarranted. The

App. A22. But they do so in only one way: by increasing

the relative cost of purchasing hospitalization coverage

medical costs.* For

the breadth of its preemption theory. The court explained that a

gories themselves increase the costs of treatment for a

particular medical condition, they provide a disincentive

regulation increases the costs of some procedures, or of

some hospitals, or of hospital costs generally. State regu-

lation of ERISA plans is preempted whether it favors or

disfavors such plans. See Mackey, 486 U.S. at 829-830.

court of appeals’ theory, to “relate to” ERISA plans, since

such regulation would provide an incentive for ERISA

tion” is “the realm where ERISA * * * plans must operate,” is

“bound to affect” ERISA plans and thus “relate to” them. NYSA-

ILA Medical & Clinical Servs. Fund vy. Axeirod, 27 F.3d 828, 827

(2d Cir. 1994), petition for cert. pending, No. 94-745 (filed Oct. 21,

1994). The district court too acknowledged that, under this test,

Union Dist. 1199 ¥. Mount Sinai Hosp., 846 F. Supp. 190, 195-198

(D. Conn, 1994) (relying on the Second Circuit’s decision

plans to alter their benefits packages and thus would inter-

fere with the choices that ERISA plans make. Pet. App.

A22.

Insofar as the surcharges at issue in this case affect

plan choice, they do so only by subjecting ERISA plans

to the same sort of marketplace incentives to which all

other purchasers of health coverage are subject. So long

as ERISA plans are subject to the same marketplace in-

centives as other purchasers of health coverage in New

York, the fact that those incentives stem to some degree

from generally applicable laws passed by the State—

rather than from an entirely hypothetical free market in

health care—is insufficient to preempt those state laws.

There is nothing in the text of the ERISA preemption

clause, its legislative history (see Shaw, 463 U.S. at

99-100), or this Court’s decisions construing the clause,

to support a broad exemption for ERISA plans from the

indirect and solely economic effects of generally applica-

ble state laws on the health care marketplace. It is true

that a large portion of the State’s hospital bills are ulti-

mately paid for by ERISA plans.’ But the fact that

ERISA plans are among the major participants in the

health care marketplace does not convert regulation of

that marketplace (for legitimate purposes unrelated to

ERISA plans) into regulation that “relates to” ERISA

plans.

7 The court of appeals noted that “[elighty-eight percent of non-

elderly Americans have private health care insurance through their

employee welfare benefit plans.” Pet. App. A6. That figure is

overstated and appears in any event to exclude non-elderly Ameri-

cans who are uninsured. Nationwide, the percentage of nonelderly

covered by employer-provided plans in 1992 (the most recent year

for which figures are available) was 62.5%; that percentage, which

includes participants in non-ERISA covered governmental and

church plans, drops to 58.8% if the elderly are included. Employee

Benefit Research Institute Issue Brief No. 145: Special Report:

Sources of Health Insurance and Characteristics of the Uninsured

5 (Table 1) (Jan. 1994). In addition, because of deductibles, copay-

ments, exclusions, and limitations, participants in ERISA-covered

plans pay for a portion of their own hospital bills.

ee es SY eee ene a ee

B. THE SURCHARGE STATUTES ARE IN ANY

EVENT SAVED FROM PREEMPTION IN THIS

CASE AS LAWS WHICH REGULATE INSURANCE

Having concluded that the 11% and 13% surcharges

“relate to” ERISA plans, the court of appeals concluded

that those surcharges are not saved by the ERISA in-

surance savings clause. In our view, the court erred in

reaching that conclusion as well.*

1. ERISA’s insurance savings clause, Section 514(b)

(2)(A), 29 U.S.C. 1144(b)(2)(A), “substantially quali-

fie[s}” Section 514(a)’s otherwise broad preemption of

state laws that “relate to” ERISA covered plans. Metro-

politan Life, 471 U.S. at 733. The savings clause states

that, except as provided in the “deemer clause,” 29 U.S.C.

1144(b)(2)(B), ERISA does not “exempt or relieve any

person from any law of any State which regulates insur-

ance.” 29 U.S.C. 1144(b)(2)(A). Thus, a law that

regulates insurance is saved from preemption even if it

“relate[s] to” ERISA plans. FMC Corp., 498 U.S. at 61.

a. The determination of whether a state law regulates

insurance within the meaning of ERISA’s savings clause

is largely a matter of “common-sense.” Metropolitan Life,

471 U.S. at 740. “A common-sense view of the word

‘regulates’ would lead to the conclusion that in order to

regulate insurance, a law must not just have an impact

8 The court of appeals found—incorrectly, in our view—that

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

of law.” Pet. App. A29 n.6. It therefore did not reach the further

question of whether the particular characteristics of the 0% to 9%

surcharge, which has a stated purpose different from that of the

other surcharges (see p. 4, supra), render it a “law * * * which

regulates insurance” within the meaning of the insurance savings

clause. In our view, a law regulating HMOs can constitute a “law

* * * which regulates insurance” under some circumstances. See

pp. 25-26, infra. We understand, however, that no party argues in

this case that the 0% to 9% surcharge is saved as a law that

regulates insurance. This Court accordingly need not address that

issue.

on the insurance industry, but must be specifically directed

toward that industry.” Pilot Life, 481 U.S. at 50 (gen-

eral tort law applicable to, but not specifically directed

toward, insurance industry not saved from preemption) ;

accord FMC Corp., 498 U.S. at 61 (state law must be

“aimed at” the insurance industry, “not merely have an

impact on” it).

Because “[t]he ERISA saving clause * * * appears to

have been designed to preserve the McCarran-Ferguson

Act’s reservation of the business of insurance to the

States,” Metropolitan Life, 471 U.S. at 744 n.21, the

three criteria used to determine the “business of insur-

ance” under the McCarran-Ferguson Act, 15 U.S.C. 1012

(discussed at pp. 7-8, supra, and 24-27, infra), are also

relevant in determining whether a law “regulates insur-

ance” under ERISA. Metropolitan Life, 471 U.S. at 743.

As in a McCarran-Ferguson Act case, however, “[nJone

of these criteria is necessarily determinative in itself,”

Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 129

(1982), and indeed, a law may be found to be an insur-

ance law under ERISA’s savings clause without resort at

all to the Pireno factors. See FMC Corp., 498 US.

at 61 (finding that a law precluding subrogation is an

insurance law, without mention of the Pireno factors).

b. Although this Court has recognized the relevance

of analysis under the McCarran-Ferguson Act to questions

regarding the scope of ERISA’s insurance savings clause,

it does not follow that the analysis is precisely the same

under both statutes. Above all. consideration of whether

a law “regulates insurance” under ERISA, while guided

by “common sense” and the Pireno factors, must also

be informed by “the role of the savings clause in ERISA

as a whole.” Pilot Life, 481 U.S. at 51. Indeed, the lan-

guage of ERISA’s insurance savings clause (as illumi-

nated by the deemer clause) suggests that its sweep is

somewhat broader than that of the McCarran-Ferguson

Act.

"oS reas, Ta ee SSS Te | Te ll ler eC

The McCarran-Ferguson Act distinguishes between the

“business of insurance,” which it exempts from federal

preemption, and the “business of insurance companies,”

which it does not exempt from federal preemption. Hart-

ford Fire Ins. Co. v. California, 113 S. Ct. 2891, 2901

(1993); SEC v. National Sec., Inc., 393 U.S. 453, 459

(1969). Under traditional McCarran-Ferguson Act analy-

sis, not everything an insurance company does is within

the “business of insurance.” See Pireno, supra (use of

Life & Health Ins. Co. v. Royal Drug Co., 440 U.S. 205

(1979) (cost-saving arrangements with pharmacists).

In contrast, the ERISA savings clause is best read as

encompassing insurance regulation generally. By its terms,

the savings clause broadly states that ERISA does not

exempt “any person from any law of any State which

regulates insurance.” 29 U.S.C. 1144(b)(2)(A) (em-

phasis added). That language suggests a broader sweep

than the McCarran-Ferguson Act, whose grant of author-

ity to the States to regulate and tax insurance is restricted

to “[t]he business of insurance, and every person engaged

therein.” 15 U.S.C. 1012(a) (emphasis added).

The deemer clause further illuminates the scope of the

savings clause. The deemer clause makes specific refer-

ence to state laws “purporting to regulate insurance com-

panies [or] insurance contracts.” 29 U.S.C. 1144(b)

(2)(B). As stated i in Metropolitan Life, 471 U.S. at 741,

22:

insurance contracts, even if the McCarran-Ferguson Act

would not exempt those laws from federal preemption.

The deemer clause also makes specific reference to “an[y]

insurance company or other insurer,” 29 U.S.C. 1144

(b)(2)(B) (emphasis added), a phrase that encompasses

entities in addition to traditional insurance companies.

Reading the savings clause in light of this portion of the

deemer clause, then, the state laws that “regulate[] insur-

ance,” and are therefore saved from preemption, must

include those applicable not only to traditional insurance

companies, but also to “other insurer[s].”

2. The 11% and 13% surcharge statutes are laws

that regulate insurance within the common-sense meaning

of that term. The court of appeals mistakenly believed

that the surcharges regulate hospital rates and therefore

cannot be regarded as regulating insurance. Pet. App.

A26-A27.. To the contrary, however, both surcharges are

“specifically directed” toward the insurance industry for

purposes of ERISA’s insurance savings clause. See Pilot

Life, 481 U.S. at 50.

First, the surcharges constitute insurance regulation

because the determination whether a payor must pay

them turns wholly on the payor’s status as a participant

in the insurance marketplace, and not on any factor con-

cerning the nature of the hospital, the patient, his or her

medical condition, or the medical treatment provided. To

be sure, hospital bills provide the mechanism through

which the surcharges are collected or distributed.* But

that fact is insufficient to place the surcharges outside the

* To the extent the 11% surcharge raised revenues for the State,

see N.Y. Pub. Health Law § 2807-c(11)(i) (McKinney 1993)

(reproduced at Pet. App. A104), that fact does not diminish its

status as an insurance regulation. Otherwise, a tax on insurance

premiums could not be considered insurance regulation. See Gen-

eral Motors Corp. Vv. California State Bd. of Equalization, 815 F.2d

1305, 1309-1310 (9th Cir. 1987) (sustaining, under savings clause,

tax assessment against insurer but calculated on basis of benefits

paid), cert. denied, 485 U.S. 941 (1988).

ae ee a

ERISA savings clause; nothing in ERISA’s savings clause

“purports to distinguish between traditional and innova-

tive insurance laws.” Metropolitan Life, 471 U.S. at

741.

In addition, the surcharges serve traditional objectives

of insurance law. Their primary function is to reduce

the rate advantage enjoyed by commercial insurers and to

account for the greater costs the Blues and some HMOs

incur as a result of their open-enrollment and community-

rating policies.” That function is related to traditional

objectives of insurance regulation, such as risk spread-

ing,” regulating rates,” and ensuring the solvency of in-

surers.” It speads the higher risks (which are now con-

centrated among the Blues) over a larger pool by en-

couraging a broadening of the Blues’ customer base, at

the expense of commercial insurers (and certain special-

experience.” N.Y. Ins. Law §§ 8281(a), 4817(a), 4818 (McKinney

Supp. 1994). “[C]ommunity rat{ing]” means that the insurer em-

ploys “a rating methodology in which the premium for all persons

covered by a policy or contract form is the same, based on the

experience of the entire pool of risks covered by that policy or

contract form without regard to age, sex, health status or occupa-

tion.” Id. §§ 83281(a), 4817(a).

1! See, e.g., Royal Drug, 440 U.S. at 211-212 (the “spreading

and underwriting of a policyholder’s risk” is one “indispensable

characteristic of insurance’) ; Pireno, 458 U.S. at 127-128.

12 See, ¢.g., Metropolitan Life, 471 U.S. at 728 n2 (“{llaws

regulating aspects of transacting the business of group insurance

include, for example, those regulating * * * rates”); Royal Drug,

440 U.S. at 224 n.32; National Sec., 398 U.S. at 460 (“[{cJertainly

the fixing of rates is part of th[{e] [insurance] business”).

% See, ¢.g., Metropolitan Life, 471 U.S. at 728 n.2; see United

States Department of Treasury v. Fabe, 118 8. Ct. 2202, 2209-2210

(1998).

«a

ized funds).** The surcharges are designed to affect the

calculation of insurance rates by reducing the cost differ-

ential that existed between the Blues and the other in-

surers. And by countering the effects of the commercial

insurers’ practice of selecting lower-risk individuals, the

surcharges are intended to maintain the solvency of the

Blues by alleviating the financial stress they have experi-

enced as insurer of last resort.

3. The 11% and 13% surcharges also satisfy all three

Pireno factors in this setting. As discussed above—and

as the court of appeals correctly held, see Pet. App. A28

—the surcharges satisfy the first factor of “transferring

or spreading a policyholder’s risk.” Metropolitan Life,

471 U.S. at 743 (quoting Pireno, 458 U.S. at 129).

Contrary to the holding of the court of appeals, Pet.

App. A28, the 11% and 13% surcharges also satisfy the

second Pireno factor, because they regulate “an integral

part of the policy relationship between the insurer and

the insured.” Metropolitan Life, 471 U.S. at 743 (quot-

ing Pireno, 458 U.S. at 129). The surcharges are pre-

mised on the open-enrollment and comm

policies of the Blues and HMOs—policies that are directly

reflected in the formation of insurance contracts—and

their purpose is to make hospitalization coverage avail-

able to more individuals, at an overall lower price. In

addition, the surcharges establish “different payment

rates” for different categories of payors, Pet. App. A27,

with the specific intent of influencing the rates each cate-

gory of payor charges.

Finally, the 11% and 13% surcharges satisfy the third

Pireno factor because they are, in relevant respects,

“limited to entities within the insurance industry.” Metro-

politan Life, 471 U.S. at 743 (quoting Pireno, 458 U.S.

14 Indeed, the surcharge statutes are nearly identical in purpose

and effect, albeit not method, to the law upheld in Metropolitan

Life as a risk-shifting insurance regulation. See 471 U.S. at 731,

743.

a ee ee

Hieis 82 %

Harta]

S57 953 int

393 afi 23

2 ; : tat

pie a

4 E a? !

af AHL

ahs? ie Hee

piSiHEE (tatat

ill ie (

ea ih

ile

iy 4 HAE : gas

gs Hye

3 |FHER He al

Pee be

able

clause of yom 2(b)

Aur

Pet. App. A6. See p. 18 n.7, supra. As the context makes clear, the

court was including those who have HMO coverage among those who

“have private health care insurance” (emphasis added).

18 Many appellate courts have held that HMOs are insurers for

certain purposes. E.g., Anderson v. Humana, Inc., 24 F.3d 889,

891-892 (7th Cir. 1994) (ERISA); In re Estate of Medcare HMO,

ee a ae Somnae See a

ie i

=> Aetna Health M.

iia

nt i

— a ii

dustry. An important rationale for that limitation is that

the McCarran-Ferguson Act provides an exemption from

the federal antitrust laws.” Such exemptions are narrowly

construed, Royal Drug, 440 U.S. at 231, and in the in-

surance setting a broad construction could create “the

potential to restrain competition in noninsurance markets.”

Pireno, 458 U.S. at 133; see also Royal Drug, 440 U.S.

at 231 (“an exempt entity forfeits antitrust exemption

by acting in concert with nonexempt parties”); United

States Department of Treasury v. Fabe, 113 S. Ct. 2202,

2209-2210 (1993). By contrast, ERISA’s insurance sav-

ings clause preempts any state law that “regulates irsur-

ance,” not merely the “business of insurance,” and the

policy of narrowly construing exemptions from the anti-

trust laws is inapplicable here.

4. For the foregoing reasons, even if this Court con-

cludes (contrary to our submission in Point A) that

application of the 11% and 13% surcharges to commer-

cial insurers and HMOs “relates to” the ERISA plans to

which they sell coverage, those surcharges are preserved

from preemption by the insurance savings clause.

%® Section 2(b) of the McCarran-Ferguson Act, 15 U.S.C. 1012(b),

provides:

No Act of Congress shal! be construed to invalidate, impair,

or supersede any law enacted by any State for the purpose of

regulating the business of insurance, or which imposes a fee

or tax upon such business, unless such Act relates

to the business of insurance: Provided, That * * * [the federal

antitrust statutes) shal! be applicable to the business of in-

surance to the extent that such business is not regulated by

The second clause is the portion following the word “Provided.”

CONCLUSION

The judgment of the Second Circuit should be re-

versed.”

Respectfully submitted.

General

Solicitor

EDWIN 8S. KNEEDLER

Deputy Solicitor of Labor Deputy Solicitor General

Drew S. Days, IIT

OLIVER B. QUINN

shall be construed to

grote bed mraediage ati: lngpallyatlen |

mo bee

insurance, banking, or

benefit plan

this title, which is not

(b) of this title (

for the purpose

trust

deemed to be an

bank, trust

be in the

for purposes of any

sed mg wratncdimayd

banks, trust

tl i:

ral | ul _

Po ghd

or to

of tealiton

Suto pecpevling to

contracts,

(la)

514(a) of ERISA, 29 U.S.C. 1144(a),

subsection (

Sane

eA ces

This

2. Section 514(b)(2) of ERISA, 29 U.S.C. 1144(b)

| , SEog Rete

: rr lal

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.