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

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

In The

Supreme Court of the United

October Term, 1994

+

NEW YORK STATE CONFERENCE OF BLUE CROSS

AND BLUE SHIELD PLANS AND EMPIRE

BLUE CROSS AND BLUE SHIELD,

Petitioners,

vs.

THE TRAVELERS INSURANCE COMPANY, ET AL.,

Respondents.

(For Continuation Of Caption See Reverse Side Of Cover)

*

On Writ Of Certiorari To The

United States Court Of Appeals

For The Second Circuit

7

BRIEF FOR THE STATES OF MINNESOTA,

CONNECTICUT, MARYLAND, ILLINOIS, INDIANA,

MASSACHUSETTS, MISSOURI, MONTANA,

PENNSYLVANIA, TEXAS, WEST VIRGINIA AND

WYOMING ‘S AMICI CURIAE IN

SUPPO)} OF PETITIONERS

+

RICHARD BLUMENTHAL Husert H. Humpnrey III

Attorney General of Attorney General

Connecticut State of Minnesota

Puytus E. HyMAn

; RicHARD S. SLOWEsS

Assistant Attorney General Assistant Solicitor General

J. Josep Curran, Jr. Counsel of Record

oo o> ga of 1100 NCL Tower

St whens a 445 Minnesota Street

St. Paul, Minnesota 55101

EuizABETH M. KAMEEN

Assistant Attorneys General

(Additional Counsel Listed On Inside Cover)

(612) 282-5712

COCRNEOR CALL (aoa) 92a

fe - 5s - ~ye 7 .

¥en ty. LT et ae nek she - os ec, oo — So

iat {3 .: 7 ; Sy ie bl OG tae

MARIO M. CUOMO, ET AL.,

Petitioners,

THE TRAVELERS INSURANCE COMPANY, ET AL.,

Respondents.

HOSPITAL ASSOCIATION OF NEW YORK STATE,

Petitioner,

THE TRAVELERS INSURANCE COMPANY, ET AL.,

Respondents.

Additional Counsel For Amici States

RoLaANpD W. Burris

Attorney General

State of Illinois

PAMELA CARTER

Attorney General

State of Indiana

Scott HARSHBARGER

Attorney General

Commonwealth of

Massachusetts

JEREMIAH W. (Jay) Nixon

Attorney General

State of Missouri

JoserpH P. MazurRek

Attorney General

State of Montana

Ernest D. PReate, Jr.

Attorney General

Commonwealth of

Pennsylvania

Dan Morales

Attorney General

State of Texas

Darrett V. McGraw, Jr.

Attorney General

State of West Virginia

JoserH B. MEYER

Attorney General

State of Wyoming

-——s Uc Cae eT ere eee ee

i

TABLE OF CONTENTS

Page

STATEMENT OF INTEREST ....................05. 1

SUMMARY OF ARGUMENT................0.0000: 3

Re 4 )

I.

THE SECOND CIRCUIT’S INDIRECT ECO-

NOMIC IMPACT STANDARD FOR ERISA PRE-

EMPTION SHOULD BE REJECTED IN FAVOR

OF A MORE BALANCED TEST THAT BETTER

REFLECTS THE PURPOSE OF ERISA PREEMP-

We FS ds BICC ADN ce CIR B Si oo BARS S 4 ween

A. The Indirect Economic Impact Standard Is

Contrary To The Purpose Of ERISA Preemp-

tion Intended By Congress ................

1. The purpose of ERISA preemption was

to facilitate operation of multi-state

ERISA plans, not to exempt them from

ordinary costs of doing business.......

id

The Travelers indirect economic impact

standard threatens hospital rate-setting

and other state health care measures that

Congress specifically authorized .......

B. The Court’s Precedent Supports A More Bal-

anced ERISA Preemption Inquiry That Does

Not Focus On Economic Impact Alone.....

C. The Travelers Economic Impact Standard Has

Already Been Extended To Further Curtail

Legitimate State Regulation................

11

TABLE OF CONTENTS - Continued

Page

Il. THE TRAVELERS INDIRECT ECONOMIC

IMPACT STANDARD WILL PRESENT A

MAJOR IMPEDIMENT TO STATE REGULA-

TION IN THE HEALTH CARE ARENA AND

DE MDOURED: pucderddcecewhersccconecedecsdces 16

A. States Have An Enormous Financial And

Social Stake In Their Health Care Systems

That Cannot Be Addressed Without Some

Impact On ERISA Plans................... 16

B. Preemption Under The Travelers Standard

Threatens Substantial Amounts Of State

Funding For Health Care Access, Much Of

Which Is Generated Through Taxes Autho-

NG Tae FORE EP ccc e iS eeconassieces 18

C. Even State Health Care Laws With A De

Minimis Effect On ERISA Plans May Be Pre-

empted Under Travelers ................... 24

D. The Indirect Economic Impact Standard Is

Likely To Affect Other Areas Of State Regu-

kien 64.04% cob bke abet ee eiebikes cd 26

E. Should The Court Reach A Decision In This

Case That The Surcharges Are Or

Are Otherwise te, Such on

Should Not The Facts Of The

Gen ontne dbs sPeneebodamehchetindund tesa ves 27

CED a din vn: bn cde dees whine talented 29

- o-* . a he - ‘

ee et Fe i ti ek a i i ee. eT a ee

iii

TABLE OF AUTHORITIES

FEDERAL DscIsIONS

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

Gace bk cncesonce 60aseresbes .cccccnsgaccpespers 29

Arkansas Blue Cross & Blue Shield v. St. Mary's

Hospital, Inc., 947 F.2d 1341 (8th Cir. 1991), cert.

denied, 112 S. Ct. 2305 (1992)...........- cece eeeee 13

Boyle v. Anderson, 849 F. . 1307 (D. Minn.),

appeal pending, No. 94- (8th Cir. 1994).. 13, 22, 25

FMC Corp. v. Holliday, 498 U.S. 52 (1990) .......... 11

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

GREE 06.04 cone cc duces es coveceesvcceteunmeqes 7, 11, 29

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

Cee oneccccccpooceccesansevececnacstehoeae 6, 12, 14

Jordan v. Reliable Life Ins. Co., 694 F. Supp. 822

fF SS FSPPOTUUTTIVTTTTITITTL TT TTT T eter 2

Mackey v. Lanier Collection Agency & Service,

Inc., 486 U.S. 825 (1988) ............-- 2 eee 11, 12, 14

Metropolitan Life Ins. Co., Inc. v. Massachusetts,

GE. WEB FEB CAGE oon cc ccccccccwepecscsescesss 22, 29

New England Health Care eX Union v

Mount Sinai Hospital, 846 F.

Conn.), appeal ding, Nos. 94-7264 and

94-7906 (2d Cir. 1994) ............-055. 10, 13, 14, 21

NYSA-ILA Medical and Clinical Services Fund v.

Axelrod, 27 F.3d 823 (2d Cir. 1994) .... 14, 15, 24, 26

NYSA-ILA Medical and Clinical Services Fund v.

Axelrod, No. 92 Civ. 2779, 1993 WL 51146

GEDDIN.Y. Fam. ZB, WTS). occ cccccccccccccccccvces 15

iv

TABLE OF AUTHORITIES - Continued

Page

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

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

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

1980), cert. denied, 454 U.S. 801 (1981)............ 17

The Health Maintenance anization of New Jer-

sey v. Whitman, No. 93-5775, 1994 WL 549626

ee RN Rr) Peer ee 23

The Travelers Insurance Co. v. Cuomo, 14 F.3d 708

GAS GON BED bo Svcktcecscdecbsteccddicicie Wee passim

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

Gs SOND obeb bes cdsbuncsdcdicbscddédedavoecyed 8

United Wire, Metal & Machine Health and Welfare

Fund v. Morristown Memorial Hospital, 995

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

Co er eer 12, 13, 23, 25

FEDERAL STATUTES

RR TS Eee 8

42 U.S.C. §§ 1396(a)(13), 1396r-4 ....... eee eee ees 10

Ge Ce BD ohn cet oc res genes c dovuce ceteeddes 9

Se a BH BD oo detec ctn dcdcdc icdcetee. 8

GB DBR Ae Fes oc bo vb cb civ ieccicecvotdes 4

Ge Pes Be nd reid otto pocccccpcececdsipesves 10

GB Gara Oe MT 06s cn cbondiccisnckdaceksaVarda 10

TABLE OF AUTHORITIES - Continued

Page

State STATUTES

Act of May 24, 1993, ch. 345, 1993 Minn. Laws

De Atthecsdekdestescessevevogendannewesecnceeaass 22

Be SRG TE OGD pp vi cccccvepeccccecccbhsccesocceses 19

Ark. Code Ann. §§ 26-52-1401 to -1406 (Michie

Sepp. 1GPB) .nnccccccccsccccvcccccessvenccevesoees 19

Cal. Health and Safety Code § 1254 (Deering

Sepp. BODE) 2... ccccccccccccccvcevcccvececcssseces 24

Cal. Health and Safety Code § 25015 et seq. (West

Seapp. TGPE) 2... nc rccccccccccccccesccvssccccecseces 24

D.C. Code Ann. §§ 47-1221 to -1232 (Supp. 1994) .... 19

Fla. Stat. Ann. § 381.0098, et seq. (1993 and Supp.

GUS bs vc bevcccnvvsrdhs couedicvevetepecedssvoe 25

Fla. Stat. Ann. § 395.7015 (West 1994)............... 19

Haw. Rev. Stat. §§ 346E-1 to -16 (Supp. November

Si Tec cate e chin ta ade wsee Hutddicdbeeece 19

HealthRight Act, ch. 549, 1992 Minn. Laws 1487 .... 22

Ill. Ann. Stat. ch. 210, para. 85/1 et seq. (1993) ..... 24

Ill. Ann. Stat. ch. 305, para. 35-1/2 (Smith-Hurd

Bem. BODE 2.0. cccccccsccccccsccccsnserscvcssecess 19

Ky. Rev. Stat. Ann. §§ 142.301, 142.303, 142.307,

Aidt cdsnde bUNEd cd cnerdedighenebecascccs 19

Mass. Gen. L. ch. 118F, § 15 (1990 ed.).............. 19

Me. Rev. Stat. Ann. tit, 22, §§ 396-F to 396-I (West

cbs decdpnkccdcrnsatpnessacnpatepsapesave gives 19

Minn. Stat. 256.9657, subds. 1 and 2 (1992 and

Ba FIFE. bins ccccccoccccscccscvcnnceshesbocesoe 19

vi

TABLE OF AUTHORITIES - Continued

Page

Minn. Stat--§ 295.52 (1992).........cceceeeeeeeeeeees 22

Miss. Code Ann. § 43-13-141 et seq. (1972).......... 19

Mo. Ann. Stat. § 208.453 (Vernon Supp. 1994)....... 20

Mont. Code Ann. § 15-60-102 ......... 6. cece eee eens 20

N.H. Rev. Stat. Ann. § 84-A:1 to -A:12 (Supp. 1993) .... 20

N.Y. Public Health Law § 2807-a(23) to (27)

GERM TIPE occ cccccccccccscccccconconneceses 20

oe B&B 20

R.I. Gen. Laws § 23-19.12-1 et seq. (Supp 1993) ..... 25

S.C. Code Ann. S 44-7-250 (Law. Co-op. Supp.

nao 0 cesar kresecescecnsenbscescssvepecnsaece 24

S.C. Code Ann. § 44-93-10 et seq. (Law. Co-op.

BUR. TOUED oo cc svccccccccncvccccsctesesesscesoess 25

S.C. Code Ann. § 12-23-810 et seq. (Supp. 1994)..... 20

Utah Code Ann. § 26-36-101 et seq. (Supp. 1994) .... 20

Vt. Stat. Ann. tit. 33, §§ 1950-1958 .................. 20

W. Va. Code §§ 11-27-1 to -35 (Supp. 1994) ......... 20

Wash. Rev. Code Ann. § 82.65A.010 (West Supp.

BODE). cc voccccoccctvicevicdderddecdtivcubeccoseees 20

OrHerR AUTHORITIES

American Hospital Association, Hospital Statistics

Ce Bs ie a ote 965 9 0 eVenperavsnhtnheneney cee ot 7

American tal Association, Hospital Statistics

COS GED cn cic vondsccuvvcacdesstowesgdebsesds 7, 28

P ‘

ee ee ae ee a Le en Pe ee eee

vii

TABLE OF AUTHORITIES - Continued

Page

Patricia A. Butler, National Governors Ass'n Road-

block to Reform, ERISA Implications fer State

Health Care Initiatives (1994). ..........0cccceeeeecee 2

Mary Anne Bobinski, Unhealthy Federalism: Bar-

riers to Increasing Health Care Access for the Unin-

sured, 24 U.C. Davis L. Rev. 255 (1990)............. 2

Congressional Budget Office, Economic Implica-

tions of Rising Health Care Costs (1992).......... 16

Employee Benefit Research Institute, Sources of

Health Insurance and Characteristics of the Unin-

sured — Analysis of the March 1993 Current Popu-

lation Survey, EBRI Issue Brief Number 145

HORT, DOPE) vides cc cecececscsedccssccecccees 17, 26

Vicki Gottlich, ERISA Preemption: A Stumbling

Block to State Health Care Reform, Clearinghouse

Review 1469 (March 1993) ...........6ccceeeeeeeeee 2

Health Systems Review, Vol. 27, No. 5, Septem-

SE SEs cddrcccceceernevccscosccsescces 18

H.R. Rep. No. 102-310, 102d Cong., 1st Sess. 3

(1991), reprinted in 1991 U.S.C.C.A.N. 1413........ 18

Human Resources Div., U.S. General Accounting

Office, Access to Health Care, States Respond to

Growing Crisis (June 1992) .........cccceeeeeeeecces 2

Human Resources Div., U.S. General Accounting

Office, Health Insurance Regulation (Dec. 1993)..... 22

Fernando R. LaGuarda, Note, Federalism Myth:

States as Laboratories of Health Care Reform,

SS I oe eS See 16

Viii

TABLE OF AUTHORITIES —- Continued

Robert Pear, Health Changes as Congress Fails, N.Y.

Times, September 16, 1994 at Al, A22............ 16

Prospective Payment Assessment Comm'n, Anal-

ysis of Medicaid Disproportionate Share Payment

Adie Wes TE coca ccna cncceséacccesstecdéa 17

STATEMENT OF INTEREST

The amici curiae states, through their attorneys gen-

eral, respectfully submit this brief in support of Peti-

tioners. Amici support reversal of the decision of the

Second Circuit Court of Appeals holding that New York’s

hospital rate surcharges are preempted by ERISA.

The amici states have a strong interest in the ERISA

preemption issues presented by this case. The states have

an interest in assuring that the scope of ERISA preemp-

tion is maintained within the ambit of congressional pur-

pose and that the states’ remaining sphere of regulatory

power is not improperly undermined. Although the lan-

guage of the ERISA preemption provision is broad, Con-

gress did not intend to preclude all state regulation that

indirectly has an economic effect on ERISA plans, as the

Second Circuit has held.

On a more specific level, the amici states have a

critical interest in this case because the Second Circuit's

ruling significantly impinges on their ability to imple-

ment legislative solutions in an area of traditional state

power, the regulation of health care. States have played a

long-standing role in both the overall regulation of the

health care system and the provision of health care to the

indigent. The extensive public debate on health care of

the past two years has made well-known the enormous

and challenging tasks of containing skyrocketing costs

and at the same time providing adequate, quality care to

all those in need.

The states cannot afford to leave these issues unad-

dressed. As pointed out by the GAO:

State governments have a major stake in financ-

ing and providing health care. States are con-

cerned about the growing proportion of their

1

2

budgets devoted to health - they already spend

an average of 20 percent of their total budgets

on health-related programs. Yet in some states,

almost one-quarter of the population is unin-

sured.

Human Resources Div., U.S. General Accounting Office,

Access to Health Care, States Respond to Growing Crisis 2

(June 1992).

It is widely recognized that ERISA preemption serves

as a major obstacle to many of the reforms that states

would like to enact to address these pressing issues of

health care cost containment and the expansion of access °

to health care. See, e.g., id.; Patricia A. Butler, National

Governors Ass’n, Roadblock to Reform, ERISA Implications

for State Health Care Initiatives (1994); Mary Anne Bob-

inski, Unhealthy Federalism: Barriers to Increasing Health

Care Access for the Uninsured, 24 U.C. Davis L. Rev. 255

(1990); Vicki Gottlich, ERISA Preemption: A Stumbling

Block to State Health Care Reform, Clearinghouse Review

1469 (March 1993).

The Second Circuit’s adoption of an indirect eco-

nomic impact basis for ERISA preemption is thus of great

concern to the amici states because it is a significant

expansion of already broad ERISA preemption. The

approach to ERISA preemption embraced in this case and

its progeny threatens effectively to block appropriate

state regulation in the health care area. ERISA preemp-

tion has in the past been referred to as a quicksand. Jordan

v. Reliable Life Ins. Co., 694 F. Supp. 822, 827 (N.D. Ala.

1988). The amici states fear that unless the decision below

is reversed, the application of the indirect economic

impact standard will necessarily intensify the force of

ERISA preemption, and the states will be faced not with a

quicksand, but with an inescapable black hole.

3

SUMMARY OF ARGUMENT

The Second Circuit Court of Appeals erroneously

concluded that the indirect economic effect of state stat-

utes on ERISA plans, in and of itself, is sufficient to

preempt operation of state statutes, in this case sur-

charges on amounts charged for hospital services. This

simplistic test is contrary to Congress’ intent in enacting

the ERISA preemption provisions. Consistent with the

Commerce Clause authority under which ERISA itself

was enacted, the core purpose of ERISA preemption is to

enable ERISA plans to operate on a multi-state basis,

without interference by a patchwork of differing state

regulation. Congress did not intend for ERISA to preempt

traditional areas of state concern, such as hospital rate-

setting and regulation of health care, where they have no

impact on interstate operation of ERISA plans. Federal

law enacted subsequent to ERISA specifically approves of

states establishing their own hospital reimbursement sys-

tems and authorizes the establishment of health care-

related taxes by the states to generate income that will

then be redistributed back to the hospitals. The Second

Circuit’s expansive approach to ERISA preemption

threatens the very measures enacted by states pursuant to

these congressional authorizations.

The Court should reject the narrowly-focused eco-

nomic impact standard of Travelers in favor of an inquiry

that includes the factors this Court has employed. This

analysis should examine whether the state law singles out

ERISA plans for different treatment and whether the state

law dictates the manner in which ERISA plans structure

themselves or conduct their business, all factors that bear

on the recognized core purpose of ERISA preemption.

The states are in serious jeopardy of being forced to

abdicate responsibilities and powers to regulate health

care if the Travelers standard is upheld. With health care

4

reform now squarely up to the states, it is critical that

states have flexibility to establish new programs to

spread the burden of uncompensated care experienced by

hospitals and to improve access to health care for unin-

sured individuals.

Many states rely on congressionally-approved health

care-related taxes to reimburse hospitals for the uncom-

pensated care they provide to low-income patients and to

take advantage of millions of dollars of matching federal

revenue available through the Medicaid program. Under

Travelers, however, these state taxes are in danger of being

preempted.

The quality of health care is also at risk if Travelers is

upheld. State laws that ensure proper sanitary conditions

and adequate patient/nurse ratios in hospitals may

increase hospital charges to patients. Even these laws,

therefore, may be invalidated under the indirect eco-

nomic impact test in Travelers.

The Second Circuit’s indirect economic impact stan-

dard is a significant expansion of an already broad pre-

emption provision. Congressional intent and principles of

federalism that govern preemption analysis require that

this expansion be rejected.

ARGUMENT

I. THE SECOND CIRCUIT’S INDIRECT ECONOMIC

IMPACT STANDARD FOR ERISA PREEMPTION

SHOULD BE REJECTED IN FAVOR OF A MORE

BALANCED TEST THAT BETTER REFLECTS THE

PURPOSE OF ERISA PREEMPTION.

A. The Indirect Economic Impact Standard Is Con-

trary To The Purpose Of ERISA Preemption

Intended By Congress.

In the decision below, The Travelers Insurance Co. v.

Cuomo, 14 F.3d 708 (2d Cir. 1994) (“Travelers”), the Second

5

Circuit held that mere indirect economic impact alone,

such as that which results from the purchase of goods or

services by an ERISA plan, is enough to trigger ERISA

preemption of state laws. It is this central holding that is

of primary concern to the amici states and to which this

amicus brief is addressed.

In Travelers, three state-imposed surcharges on hospi-

tal rates were challenged by plaintiffs consisting of com-

mercial health insurers and a trade association of such

insurers. The Second Circuit held that the surcharges are

preempted under ERISA because they “force the ERISA

plans to either increase plan costs or reduce plan bene-

fits.” Travelers, 14 F.3d at 720-21 (footnote omitted). The

court reasoned that because the surcharges imposed a

significant economic burden on commercial insurers and

HMOs, “[t]hey therefore ha[d] an impermissible impact

on ERISA plan structure and administration.” Id.

Thus, the court ruled that any state regulation that

significantly increases the costs incurred by an ERISA

health benefit plan, whether directly or indirectly, is pre-

empted. No inquiry is necessary under the Second Cir-

cuit’s standard to determine whether or how the

structure or administration of the ERISA plan will be

affected, because an impermissible effect is presumed

from the the economic impact itself. No inquiry is neces-

sary into the effect on the multi-state operation of the

plan. Increased cost to the plan is enough.

This indirect economic impact standard for ERISA

preemption embraces an analysis that permits state law

to be preempted based on a superficial finding of connec-

tion with ERISA plans. The approach is flawed because it

fails to consider the real purpose for which Congress

enacted the ERISA preemption provision and ignores the

fact that some of the very regulations that are being

6

invalidated have been authorized and encouraged by

Congress in other statutes.

1. The purpose of ERISA preemption was to

facilitate operation of multi-state ERISA

plans, not to exempt them from ordinary

costs of doing business.

The Second Circuit’s indirect economic impact stan-

dard bears no relationship to the purpose of the ERISA

preemption provision repeatedly identified by this Court.

Congress did not intend to create a charmed existence for

ERISA plans that would exempt them from any state

regulation that increases the cost of goods and services

they purchase. Rather, the ERISA preemption provision

was meant to preserve the ability of ERISA plans to

function on a multi-state basis. As the Court recently

explained:

Section 514(a) [the ERISA preemption provision]

was intended to ensure that plans and plan

sponsors would be subject to a uniform body of

benefit law; the goal was to minimize the admin-

istrative and financial burden of complying with

conflicting directives among States or between

States and the Federal Government.

Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 142 (1990)

(citations omitted; emphasis added). Clearly, the core

congressional purpose was to avoid a patchwork of dif-

fering state regulation that would interfere with efficient

multi-state administration of ERISA benefit plans. This

concern for the ability of multi-state ERISA plans to oper-

ate free of conflicting state regulation is consistent with

the Commerce Clause authority under which ERISA was

enacted. Preemption based on indirect economic impact

does not further that purpose.

Given this repeatedly-acknowledged goal of ERISA

preemption, the proper inquiry is whether the challenged

7

state regulation will interfere with the goal of uniformity.

In upholding a Maine statute against an ERISA preemp-

tion challenge, the Court used precisely that analysis:

The Maine statute therefore creates no

impediment to an employer’s adoption of a uni-

form benefit administration scheme. Neither the

possibility of a one-time payment in the future,

nor the act of making such a payment, in any

way creates the potential for the type of conflict-

ing regulation of benefit plans that ERISA pre-

emption was intended to prevent. As a result,

pre-emption of the Maine law would not serve

the purpose for which ERISA’s preemption pro-

vision was enacted.

Fort Halifax Packing Co., Inc. v. Coyne, 482 U.S. 1, 14-15

(1987) (footnote omitted).! The Second Circuit ignores

this crucial inquiry about the potential for conflicting

regulation and substitutes a simplistic test of increased

cost that has no basis in congressional intent.

2. The Travelers indirect economic impact stan-

dard threatens hospital rate-setting and

other state health care measures that Con-

gress specifically authorized.

Congress, as evidenced in the Medicare and Medi-

caid programs, contemplated the existence of state health

' Although ERISA preemption was intended to prevent

conflicting state regulation of ERISA plans, the purpose was not

to require uniformity in the sense that all hospital payment rates

must be the same in every state. They were not when ERISA was

enacted, and they are not now. For example, charges per case in

1974 varied from $494 in Wyoming to $1356 in New York. Amer-

ican Hospital Association, Hospital Statistics (1975 ed.). Sim-

ilarly, in 1992, charges per case ranged from $3807 in Mississippi

to $8218 in the District of Columbia. American Hospital Asso-

ciation, Hospital Statistics (1993-94 ed.).

8

care regulation, both to contain hospital costs and to

ensure access to health care for low-income people.

Another indication that the Second Circuit has carried

ERISA preemption beyond the bounds Congress intended

is that these state measures, specifically envisioned by

federal law enacted subsequent to ERISA, cannot survive

the Travelers indirect economic impact standard.?

The federal Medicare statute, 42 U.S.C.

§ 1395ww(c)(1), enacted in 1983, expressly gives the Sec-

retary of the United States Department of Health and

Human Services (“Secretary”) discretion to reimburse

hospitals “in accordance with a hospital reimbursement

control system in a State” - a provision specifically

designed to encourage states to enact cost containment

measures in the field of hospital care. One of the condi-

tions a state system must meet is that the state-estab-

lished rates must be applicable to at least 75% of all

revenues or expenses in the particular state for inpatient

hospital services. 42 U.S.C. § 1395ww/(c)(1)(A). Thus, the

general authority given states to establish hospital cost

containment systems is inconsistent with a broad-based

ERISA exclusion. Indeed, if charges to ERISA plans or

their insurers are excluded from hospital rate-setting, it is

difficult to see how the 75% minimum target could be

achieved.

Another condition for an all-payor state hospital rate

system to qualify for Medicare reimbursement is that the

state must provide “satisfactory assurances as to the equi-

table treatment under the system of all entities (including

2 The district court Travelers decision acknowledged that its

ruling would mean the demise of states’ efforts to regulate and

control hospital costs. See Travelers Ins. Co. v. Cuomo, 813 F. Supp.

996, 1006 (S.D.N.Y. 1993).

9

federal and state programs) that pay hospitals for inpa-

tient hospital services, of hospital employees, and of hos-

pital patients.” 42 U.S.C. § 1395ww(c)(1)(B) (emphasis

added). It is not reasonable to believe that Congress

would have required equity among all payors of hospital

charges in the Medicare law, while simultaneously

intending to insulate ERISA plans from the reach of hos-

pital rate-setting.

Finally, under provisions enacted in 1983 and most

recently amended in 1990, Congress has waived standard

Medicare principles of reimbursement in favor of a state's

reimbursement system, provided the state system meets a

performance test and also provided that not only Medi-

care, but all third party payors, reimburse hospitals in the

particular state on the basis of that state’s system.’ 42

U.S.C. § 1395f(b). Nothing in this legislation even

remotely suggests that the term “payors” was intended to

exclude ERISA plans.

Therefore, states that engage in hospital rate-setting

consistent with authority conferred by federal law are

effectuating the intent of Congress. Congress clearly did

not intend an ERISA preemption standard of indirect

economic impact that strikes down those same rate-set-

ting systems. As Judge Van Graafeiland commented in

Rebaldo v. Cuomo, 749 F.2d 133, 140 (2d. Cir. 1984), cert.

denied, 472 U.S. 1008 (1985): “When Congress gives

authority with one hand, it ordinarily does not take it

away with the other hand.”

3 Maryland is one state with a genuinely “all-payor” sys-

tem. All payors pay hospitals on the basis of the state’s system.

Maryland has retained its Medicare waiver since 1977 without

interruption. Other states that have been granted waivers in the

past have included Massachusetts, New Jersey, and New York,

although these waivers are no longer in effect.

10

Similarly, federal Medicaid law specifically autho-

rizes states to impose health care-related taxes that are

jeopardized by the expanded scope of ERISA preemption

adopted in Travelers. As part of its 1991 amendments to

the federal Medicaid Act, Congress explicitly authorized

states to use taxes of general applicability, such as a sales

tax extended to hospital charges, 42 U.S.C. § 1396a(t), and

health care provider taxes, 42 U.S.C. § 1396b(w), as a

means of raising revenue that qualifies for federal match-

ing funds, and which can be redistributed to hospitals to

reimburse them for care they provide to low-income

patients. 42 U.S.C. §§ 1396(a)(13), 1396r-4.

Like the Medicare hospital rate-setting authorization,

Medicaid authorization of these taxes, which requires

that they be broad-based and uniform, is directly incon-

sistent with an economic impact standard for ERISA pre-

emption that would preclude those taxes from being

applied in the manner required by Congress. Neverthe-

less, these very taxes that Congress has granted states

authority to impose have already been held to be pre-

empted in reliance upon the Travelers analysis. See New

England Health Care Employees Union v. Mount Sinai Hospi-

tal, 846 F. Supp. 190 (D. Conn.), appeal pending, Nos.

94-7264 and 94-7906 (2d Cir. 1994) (hereinafter “New Eng-

land Health Care”). Using the Travelers analysis, the district

court decided that the Connecticut statute was preempted

by ERISA because the uniform sales tax and provider

taxes had a substantial economic impact on ERISA plans

and because a large percentage of the revenue generated

came from ERISA plans. Therefore, the state’s taxes were

preempted, despite the fact that they were specifically

authorized by Congress and despite, indeed because of,

the fact that they were applied uniformly to all patients

and all hospital revenues as required by Congress.

11

The Second Circuit’s indirect economic impact stan-

dard is in conflict with congressional intent to encourage

states to enact hospital rate-setting laws and uniformly-

applied health care-related taxes. It should, therefore, be

rejected.

B. The Court’s Precedent Supports A More Bal-

anced ERISA Preemption Inquiry That Does

Not Focus On Economic Impact Alone.

The Second Circuit's willingness to rest a determina-

tion of ERISA preemption on indirect economic impact

alone is also contrary to the teaching of this Court. The

Court has consistently relied on other factors that enable

it to assess the impact of the challenged state law on the

congressional goal of unimpeded interstate operation of

ERISA plans, rather than the narrow focus on economic

impact utilized in Travelers.

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

486 U.S. 825 (1988), the Court rejected an ERISA challenge

to Georgia garnishment laws despite claims of substantial

economic impact. Id. at 831; see also id. at 842 (Kennedy, J.,

dissenting). Not only did the Court refuse to find pre-

emption in Mackey despite significant economic impact,

none of the decisions in which the Court has found

ERISA preemption is based on economic impact alone.

Instead, the Court has relied on factors that reflect

congressional intent that states not impede multi-state

operation of ERISA plans. Thus, in Fort Halifax Packing

Co., the Court explicitly addressed lack of impact of the

Maine law on multi-state operations. 482 U.S. at 8-14. In

FMC Corp. v. Holliday, 498 U.S. 52, 60 (1990), the Court

found that the state antisubrogation law would affect the

structure of the plan and the administration of benefits in

a way that would impair multi-state operation. In other

12

cases, the Court has found preemption where the chal-

lenged law made specific reference to ERISA plans or was

premised on their existence. See Mackey, 498 U.S. at 830

(express exception for ERISA plans from garnishment law

preempted); Ingersoll-Rand, 498 U.S. at 140 (cause of

action for unlawful discharge to defeat ERISA benefits

claim preempted because premised on existence of ERISA

plan). State statutes that single out ERISA plans for dif-

ferential treatment are likely to defeat the goal of unim-

peded multi-state operation that Congress sought.

ERISA preemption analysis should reflect these fac-

tors used by this Court, rather than the narrow economic

impact focus of the Second Circuit. The Third Circuit in

United Wire, Metal & Machine Health and Welfare Fund v.

Morristown Memorial Hospital, 995 F.2d 1179, 1994 (3d

Cir.), cert. denied, 114 S. Ct. 382 (1993), used a balanced

approach that assesses the impact in a manner more

suited to the purpose of ERISA preemption and is more

consonant with this Court’s decisions. Echoing the lan-

guage of Ingersoll-Rand, 498 U.S. at 139-40, the Third

Circuit described the statute before it in a manner that

articulated the proper factors for assessing ERISA pre-

emption:

In summary, we, too, have before us a gen-

erally applicable law which (1) is not intended

to regulate the affairs of ERISA plans, (2) neither

singles out such plans for special treatment nor

predicates rights or obligations on the existence

of an ERISA plan, and (3) does not have either

the effect of dictating or restricting the manner

in which ERISA plans structure or conduct their

affairs or the effect of impairing their ability to

operate simultaneously in more than one state.

13

United Wire, 995 F.2d at 1195.4 These criteria soundly

evaluate the impact of state regulation on ERISA plans

and ensure the proper freedom from state interference

while preserving the state’s permissible role.

C. The Travelers Economic Impact Standard Has

Already Been Extended To Further Curtail

Legitimate State Regulation.

In assessing the impact of the Travelers economic

impact standard, the Court has the benefit of two subse-

quent cases that follow and expand on the Travelers rul-

ing. Thus, it is not necessary to rely on conjecture about

where the Second Circuit’s path will lead.

Following on the heels of Travelers, the federal dis-

trict court in Connecticut adjudicated an ERISA preemp-

tion challenge to a six percent sales tax on hospital

services and an additional assessment on hospital reve-

nues for patient care services, both of which complied

with federal Medicaid law because they were applied

uniformly to all patients and to hospital revenue from all

services. New England Health Care Employees Union v.

Mount Sinai Hospital, 846 F. Supp. 190 (D. Conn.), appeal

pending, Nos. 94-7264 and 94-7906 (2d Cir. 1994). The

taxes were used to fund a pool from which hospitals were

compensated for the cost of providing care to those

unable to pay. The court reiterated the Travelers conclu-

sion that economic impact on ERISA plans that could

* Alternatively, the similar multi-factor analysis employed

by the Eighth Circuit would be preferable to the singular indi-

rect economic impact standard. See Arkansas Blue Cross & Blue

Shield v. St. Mary’s Hospital, Inc., 947 F.2d 1341 (8th Cir. 1991),

cert. denied, 112 S. Ct. 2305 (1992); see also Boyle v. Anderson, 849 F.

Supp. 1307 (D. Minn.), appeal pending, No. 94-2237 (8th Cir.

1994).

14

require the plans to either increase costs or reduce bene-

fits “almost by definition” has an effect on the structure

and administration of the plans that warrants preemp-

tion. Id. at 197.

Moreover, the court in New England Health Care

expanded the scope of ERISA preemption even further. In

addition to the Travelers indirect economic impact ratio-

nale, the court based its preemption ruling on the ground

that the Connecticut law “depends on ERISA plans to

accomplish its purpose.” Id. at 195. This fatal dependence

was established merely by the fact that, according to the

court, 70% of the revenues generated by the law would

come from ERISA plans.

The Second Circuit adopted a similar approach in

another post-Travelers case, NYSA-ILA Medical and Clinical

Services Fund v. Axelrod, 27 F.3d 823 (2d Cir. 1994) (here-

inafter “NYSA-ILA”). In that case, the Second Circuit

ruled that a New York hospital gross receipts tax (the

Health Facilities Assessment or “HFA”) was preempted

because the tax was directed only at the health care

industry. The court stated: “Because this industry is, by

definition, the realm where ERISA welfare plans must

operate, the HFA was bound to affect them.” Id. at 827.

On this basis, the court ruled that the HFA was not a law

of general application, distinguishing it from laws that

apply to ERISA plans and to all other segments of society

as well. The Second Circuit implicitly declined to follow

this Court’s approach that examines whether the law is

one of general applicability or whether it specifically

refers to or is premised on the existence of ERISA plans.

See Mackey, 486 U.S. at 830; Ingersoll-Rand, 498 U.S. at 140.

Although couched in different language, this ratio-

nale in NYSA-ILA is premised on the same foundation as

the “dependence on ERISA plans” reasoning in New Eng-

land Health Care. Essentially, these courts have held that

15

because a significant percentage of the benefits in the

health care field are provided through ERISA plans, state

regulation in that field is preempted because it either

“necessarily affects” those plans or is dependent on them

for its success. No decision of this Court has taken ERISA

preemption to that extreme, nor should it.

The Second Circuit in NYSA-ILA also expanded the

reach of its Travelers economic impact approach. In Trav-

elers, the court held that a “substantial” economic impact

would result in preemption. In NYSA-ILA, the court held

that in some circumstances, the impact need not even be

substantial. The tax at issue in NYSA-ILA was only 0.6%,

imposed on hospital gross receipts. The district court

held this did not create a substantial economic impact

warranting preemption:

The impacts on benefit plans are incidentally

economic resulting only in the need for adminis-

trative and accounting procedures to comply

with the law.

The fact that the tax will leave less money

for benefits is not decisive here... . The tax is

not great enough to pose a serious economic

threat to the plan which might trigger preemp-

tion.

NYSA-ILA Medical and Clinical Services Fund v. Axelrod,

No. 92 Civ. 2779, 1993 WL 51146, at *4 (S.D.N.Y. Feb. 23,

1993).

Reversing the district court, the Second Circuit ruled

that “[a] statute that ‘relates to’ ERISA plans cannot

escape preemption simply because the magnitude of the

impact is thought to be insubstantial.” NYSA-ILA, 27 F.3d

at 828. The court apparently found the requisite connec-

tion between the state law and ERISA plans bas<d on two

factors. First, the tax was imposed only on the health care

industry. Id. at 827. Second, the plaintiff plan actually

operated medical centers that were directly subject to the

16

tax. If the first factor, by itself, is sufficient to eliminate

the substantiality requirement for economic impact pre-

emption, any state regulation in the health care field that

incidentally imposes any additional cost on an ERISA

plan would be preempted. Alternatively, if the second

factor is enough to warrant preemption, hospitals and

other health care facilities owned by ERISA plans would

be insulated from the broad range of state economic,

professional and safety regulation to which such facilities

are now subject. See p. 26, infra.

Il. THE TRAVELERS INDIRECT ECONOMIC

IMPACT STANDARD WILL PRESENT A MAJOR

IMPEDIMENT TO STATE REGULATION IN THE

HEALTH CARE ARENA AND ELSEWHERE.

A. States Have An Enormous Financial And

Social Stake In Their Health Care Systems

That Cannot Be Addressed Without Some

Impact On ERISA Plans.

The responsibility for regulating health care and

ensuring that health care services remain available and

affordable to everyone in need of them continues to ?est

with the states. Congress has not enacted substantial

national health care reform. Therefore, the states have

devised means to increase access to health care for their

uninsured and underinsured populations.5

States have a crucial stake in the success of these

efforts. States spent about $100 billion on health care in

1991. Fernando R. LaGuarda, Note, Federalism Myth:

States as Laboratories of Health Care Reform, 82 Geo. L.J.

159, 170 n.62 (citing Congressional Budget Office, Eco-

nomic Implications of Rising Health Care Costs 7 (1992)). As

5 Robert Pear, Health Changes as Congress Fails, N.Y. Times,

September 16, 1994 at Al, A22.

a Beet

17

noted at p. 1, supra, states spend an average of 20 percent

of their budgets on health-related programs. Despite

these enormous expenditures, many people remain unin-

sured. See n.12, infra. Moreover, costs continue to esca-

late. For example, from 1990 to 1993, state Medicaid

program spending for in-patient hospital services grew

from $17.4 billion to $40.4 billion. Prospective Payment

Assessment Comm'n, Analysis of Medicaid Disproportionate

Share Payment Adjustments 2 (Jan. 1994).

When states attempt to contain the costs of or assure

fair access to health care, they are faced with the increas-

ingly formidable hurdle of ERISA preemption. The ERISA

preemption clause has properly been interpreted to pro-

hibit state laws that require employers to offer health

insurance or specific health benefits to their employees or

to pay a portion of health care insurance premiums. See,

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

1980), cert. denied, 454 U.S. 801 (1981). Even when ERISA

preemption is limited to its proper boundaries, it is a

significant obstacle to effective state action in the health

care area. See citations at p. 2, supra. When courts give

ERISA preemption an overly expansive scope, as in Trav-

elers, it can make the states’ task an impossibility.

The reality facing states as they try to keep health

care accessible and affordable is that most people in the

United States obtain health care benefits through their

employment or the employment of a family member.® The

Second Circuit in Travelers stated that 88% of “non-elderly

© According to the Employee Benefit Research Institute,

62.5% of the non-elderly population have employment-based

health insurance coverage. Employee Benefit Research Institute,

Sources of Health Insurance and Characteristics of the Uninsured -

Analysis of the March 1993 Current Population Survey, EBRI Issue

‘Brief Number 145 at 1 (January, 1994) (hereinafter “EBRI Issue

Brief”).

18

Americans have private health insurance through their

employee welfare benefit plans.”7 Travelers, 14 F.3d at 711.

It is also true that r ost of these employee benefit plans

are governed by ERISA.® If state laws in the health care

field are preempted simply because they affect ERISA

plan participants along with all other citizens of a state,

no state health care law will survive ERISA preemption.

So sweeping a result was not what Congress intended in

enacting ERISA, nor what this Court envisioned in its

decisions construing the ERISA preemption clause.

B. Preemption Under The Travelers Standard

Threatens Substantial Amounts Of State Fund-

ing For Health Care Access, Much Of Which Is

Generated Through Taxes Authorized By Fed-

eral Law.

Approximately half of the states have enacted taxes

on health care provider revenues in accordance with fed-

eral Medicaid law.? These states acted for the dual

7 It is likely that the court meant that 88% of the non-elderly

who have private health insurance have it through employee

plans.

8 With certain limited exceptions, all private employers that

offer health insurance benefits to their employees are governed

by ERISA.

° As of September 15, 1991, 27 states used revenues from

health care provider taxes, typically based on a percentage of

the revenues paid to providers, to help fund their Medicaid

programs. See H.R. Rep. No. 102-310, 102d Cong., Ist Sess. 3

(1991), reprinted in 1991 U.S.C.C.A.N. 1413, 1416. Based on data

received from the Department of Health and Human Services,

Health Care Financing Administration, and the 1994 State Leg-

islative Survey conducted by the Federation of American Health

Systems and published in Health Systems Review, Vol. 27, No. 5,

September/October 1994, approximately the same number of

states continue to use some form of a health care-related tax as a

ae Pe ee ee OT ee ee ee ee ee ae ee, ee ee ae SS ee ee ee ee Se ee ae eee re, oF ee, AP

‘(ice ="

19

purpose of increasing access to health care services for

low-income people and obtaining matching federal revenue

vehicle for funding payments to hospitals for the uncompen-

sated care they provide to low-income people and obtaining

matching federal revenue for their states. See, e.g., Ala. Code

§ 22-6-30 (taxes levied on providers of medical services); Ark.

Code Ann. §§ 26-52-1401 to -1406 (Michie Supp. 1993) (6% tax on

total gross receipts derived from all persona! care services pro-

vided by a personal care services provider; 2.8% tax on total

gross receipts derived by long-term care facilities or nursing

facilities; 4.78% on total gross receipts derived by intermediate

care facilities for the mentally retarded); D.C. Code Ann.

§§ 47-1221 to -1232 (Supp. 1994) (1.5% assessment on hospitals,

assessment equal to $11.88 per patient day on nursing homes,

assessment equal to $15.29 per patient day on intermediate care

facilities for the mentally retarded); Fla. Stat. Ann. § 395.7015

(West 1993) (1.5% assessment on annual net operating revenue

for certain health care entities); Haw. Rev. Stat. §§ 346E-1 to -16

(Supp. November 1993) (4% assessment on all hospital income,

6% assessment on all nursing facility income); Ill. Ann. Stat. ch.

305, para. 35-1/2 (Smith-Hurd Supp. 1994) (assessments on hos-

pital, nursing homes and intermediate care facilities for the

mentally retarded); Ky. Rev. Stat. Ann. §§ 142.301, 142.303,

142.307, 142.311 (2.5% tax on gross revenues of hospitals; 2% tax

on gross revenues of nursing facilities, intermediate care facili-

ties for the mentally retarded, physician services, licensed home

health care services and HMO services; $0.25 prescription tax on

pharmacies or any other provider dispensing or delivering out-

patient prescription drugs); Me. Rev. Stat. Ann. tit. 22, §§ 396-F

to 396-1 (West 1992) (hospitals transmit percentage of net patient

service revenues to hospital payments fund from which pay-

ments are made to hospitals for uncompensated care costs);

Mass. Gen. L. ch. 118F, § 15 (1990 ed.) (hospital assessments

calculated by State Department of Medical Security); Minn. Stat.

§ 256.9657, subds. 1 and 2 (1992 and Supp. 1993) (assessment of

1.4% of net patient revenues on hospitals, assessment of $535

per licensed nursing home bed, 0.6% surcharge on health main-

tenance organization total premium revenues); Miss. Code Ann.

§ 43-13-141 et seg. (1972) (with amendments through 1993)

es aa

ee

20

for payments made to hospitals to assist them with their

uncompensated care costs. For the states that have

enacted these taxes, as authorized by federal law, the

ramifications of the Travelers decision are particularly

disastrous.

As discussed at p. 10, supra, in order to qualify for

matching federal funds, the state tax laws must apply

uniformly to revenue received from all payors for ser-

vices, except government benefit programs. These laws

typically tax health care providers, such as hospitals,

(assessments on nursing facilities and intermediate care facili-

ties for the mentally retarded); Mo. Ann. Stat. § 208.453 (Vernon

Supp. 1994) (hospitals pay a federal reimbursement allowance

for the privilege of engaging in the business of providing in-

patient health care in the state); Mont. Code Ann. § 15-60-102

(assessment of $2.00 per nursing facility bed day for fiscal year

1994 and $2.80 per bed day for fiscal year 1995); Nev. Rev. Stat.

§ 422.383 (tax on hospitals not to exceed 6% of the net revenue

from in-patients); N.H. Rev. Stat. Ann. §§ 84-A:1 to -A:12 (Supp.

1993) (Medicaid Enhancement Tax on gross patient services

revenue of every hospital to be established by legislation each

biennium); N.Y. Public Health Law § 2807-a(23) to (27) (McKin-

ney 1994) (assessments on hospitals’ gross earnings for inpa-

tient services pooled and redistributed); S.C. Code Ann.

§ 12-23-810 et seq. (Supp. 1994) (hospital tax based on total

expenditures of each hospital as percentage of total hospital

expenditures statewide); Utah Code Ann. § 26-36-101 et seq.

(Supp. 1994) (Medicaid Hospital Provider Temporary Assess-

ment imposed on each hospital, hospital-based ambulatory sur-

gical facility, and free-standing ambulatory surgical facility); Vt.

Stat. Ann. tit. 33, §§ 1950-1958 (assessment of 2% of gross in-

patient revenues on hospitals, assessment of $725 per licensed

nursing home bed, assessment of 6% of total direct and indirect

expenses of intermediate care facilities for mentally retarded);

Wash. Rev. Code Ann. § 82.65A.010 (West Supp. 1994) (tax on

intermediate care facilities for the mentally retarded); W. Va.

Code §§ 11-27-1 to -35 (Supp. 1994) (health care tax on wide

variety of health care services and entities).

21

based on revenues they receive on behalf of patients. In

order to comply with the “broad-based” and “uniform”

requirements of the Medicaid law, the taxes are imposed

irrespective of the patients’ status as ERISA plan partici-

pants or beneficiaries. See n.9, supra.

The consequences of the Travelers indirect economic

impact standard for states with these taxes are severe.

ERISA preemption of these taxes will strike at the heart of

states’ ability to provide health care for those of limited

means. For instance, nearly one-fifth of West Virginia’s

citizens are dependent upon Medicaid to provide essen-

tial health care services. Over one-third of West Virginia’s

total Medicaid revenues are generated by the collection of

Health Care Provider Taxes imposed on hospitals and

other institutions, as well as on physicians and other

individual providers of health care services.!° The pro-

vider tax on hospitals alone (plus associated federal

match) funded nearly one-sixth of the State’s Medicaid

Program in Fiscal Year 1994. Thus, in excess of fifty

thousand West Virginia residents (one-sixth of the active

Medicaid-eligible population) are dependent on the pro-

vider tax on hospitals for essential health care services.

Nor is this threat hypothetical. The New England

Health Care decision, which relied on the sweeping indi-

rect economic impact test to strike down Connecticut's

uncompensated care pool taxes, demonstrates the inevita-

ble, expanding impact of the Travelers case on state health

care measures. 846 F. Supp. at 197. As a result of the New

10 West Virginia, due to its low per capita income, enjoys a 3

to 1 federal match ratio. Thus, every dollar raised by its pro-

vider tax results in four dollars of funding for its Medicaid

Program. Its provider tax revenues of approximately $106 mil-

lion annually therefore support in excess of $425 million of its

$1.24 billion Medicaid Program.

‘

a

ee - sf P of —

22

England Health Care decision, Connecticut is in jeopardy

of losing approximately $150 million in matching federal

funds. Other states that have enacted taxes in accordance

with federal Medicaid law will also be forced to forfeit

substantial amounts of federal dollars if their taxes are

similarly preempted. For example, Massachusetts stands

to lose $140-150 million; Vermont would lose approx-

imately $23.1 million; and Montana is at risk of losing

approximately $17 million.

In addition to Medicaid-related taxes, other state

efforts to finance the cost of comprehensive health care

reform will be hampered by an indirect economic impact

test for ERISA preemption. For example, the Minnesota

health care reform program is a multi-faceted approach

that includes cost containment measures as well as a

program to provide care to the uninsured. See Health-

Right Act, ch. 549, 1992 Minn. Laws. 1487; Act of May 24,

1993, ch. 345, 1993 Minn. Laws 1535. It is funded in part

by a 2% tax on gross receipts of health care providers.

Minn. Stat. § 295.52 (1992). That tax is the subject of an

ERISA preemption challenge by several self-insured

ERISA plans.'! Boyle v. Anderson, 849 F. Supp. 1307 (D.

1 Over half of all U.S. workers are covered by health plans

that are self-insured. Human Resources Div., U.S. General

Accounting Office, Health Insurance Regulation 5 (Dec. 1993).

ERISA preemption has generally provided self-insured plans

greater insulation from state regulation than insured plans. See,

e.g., Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724

(1985). An indication of the expansive effect of the Travelers

indirect economic impact standard is that the New York hospital

santeaiyt AEE weet a ene

and the impact at issue was necessarily

assim on tdbemel Malan adeen Hensieanien eet ae

there are no self-insured plans as plaintiffs in this action does

not mean that self-insured plans are not subject to this Court's

ERISA analysis. Nor does it mean that the indirect economic

‘ ——

eae aes. we ee a eee eS ee)

23

Minn.), appeal pending, No. 94-2237 (8th Cir. 1994). The

federal district court in Minnesota upheld the tax, reject-

ing an indirect economic impact argument based on Trav-

elers. If this Court holds that indirect economic impact

alone is sufficient to warrant preemption, the Minnesota

provider tax will fall, as will the ability of all states to use

one of the few mechanisms available for funding expan-

sion of health care access.

Another example of a state health care law that

would be jeopardized if the indirect economic impact

standard is embraced by this Court is New Jersey's

Health Insurance Reform Act, challenged in The Health

Maintenance Organization of New Jersey v. Whitman, No.

93-5775, 1994 WL 549626 (D.N.J. Oct. 3, 1994). The New

Jersey legislature found that a number of commercial

health insurers were not issuing individual policies

because they tended to cover poor risks. The result was

that Blue Cross and Blue Shield, with state-mandated

open enrollment, were incurring extensive losses. The Act

was intended to distribute those losses more equitably

among all health insurance carriers in the state. The Act

imposes an assessment, based on annual premiums, on all

health insurance carriers. An exemption from the assess-

ment is available for carriers who agree to write a certain

number of individual policies on an open enrollment

basis. An HMO subject to the assessment challenged the

Act on ERISA preemption grounds. The federal district

court recently upheld the law, relying on United Wire's

rejection of the economic impact standard. However, if

this Court embraces the Travelers standard, the New Jer-

sey plan, like so many other state efforts, will succumb to

ERISA preemption.

impact standard of ERISA preemption is any less flawed as

regards self-insured plans.

24

C. Even State Health Care Laws With A De Min-

imis Effect On ERISA Plans May Be Preempted

Under Travelers.

The indirect economic impact test established in the

Travelers decision also creates an unavoidable “slippery

slope.” If any state law with an indirect economic effect

on ERISA plans is preempted, all state laws regulating

health care services are at risk of preemption. States

cannot possibly address even the basic regulation of

health care, let alone health care reform, if state health

care laws that may result in health care facilities increas-

ing their charges to patients are preempted. Because of

the way some lower courts have applied Travelers, all

state laws that are in the health care field could be pre-

empted. See NYSA-ILA, 27 F.3d at 827 (uniform assess-

ment of 0.6% on health care facilities preempted because

ERISA plans operate in the health care arena).

The result is that the quality of care provided by

medical facilities is at risk as a consequence of the Trav-

elers decision. States assume responsibility for providing

their residents with quality medical care. For example,

most, if not all, states maintain extensive licensing laws

that require health care facilities to meet minimum stan-

dards for ratios of patients to registered nurses, infection

control activities, sanitary conditions, dietary and laun-

dry services, maintenance of medical records, etc. See,

e.g., Cal. Health and Safety Code § 1254 (Deering Supp.

1994); Ill. Ann. Stat. ch. 210, para. 85/1 et seq. (1993)

(Hospital Licensing Act); S.C. Code Ann. § 44-7-250 (Law.

Co-op. Supp. 1993). States also impose vigorous stan-

dards concerning the disposal of medical waste to protect

both patients and the general public from unsanitary and

dangerous conditions. See, e.g., Cal. Health and Safety

Code § 25015 et seq. (West Supp. 1994) (Medical Waste

25

Management Act); Fla. Stat. Ann. § 381.0098, et seq. (1993

and Supp. 1994); R.I. Gen. Laws § 23-19.12-1 et seq. (Supp

1993); S.C. Code Ann. § 44-93-10 et seq. (Law. Co-op.

Supp. 1993) (South Carolina Infectious Waste Manage-

ment Act).

All of these regulations carry a price tag for medical

providers. Under the Travelers test, these provisions could

be preempted. Health care facilities typically include

their costs of compliance in charges to patients, and many

patients are ERISA plan participants and beneficiaries.

The absurd result, therefore, is that states will not be

permitted to protect the public health.

Both the Third Circuit and the federal district court

in Minneso\. have recognized that such a result is unten-

able. See United Wire, 995 F.2d at 1194; Boyle, 849 F. Supp.

at 1313-17. In both of these decisions, the courts rejected

the legal argument that indirect economic impact alone,

absent other factors that interfere with the operation of

ERISA plans, is sufficient to preempt state health care

statutes.

If this Court allows the Travelers economic impact

standard to be applied to state laws that apply uniformly

to health care providers and/or patients regardless of

their ERISA status, it is difficult to conceive of any state

laws aimed at health care regulation and reform that

could withstand an ERISA challenge. This Court must

preserve states’ authority to regulate their health care

systems, consistent with both legislative intent and com-

mon sense. Congress did not intend to strip the states of

their authority to regulate health care and institute health

care reform. Certainly, in the absence of federal regula-

tion, states must be permitted to continue their efforts to

26

preserve the quality of health care and reduce the sub-

stantial number of their citizens who are without access

to necessary health care.'?

D. The Indirect Economic Impact Standard Is

Likely To Affect Other Areas Of State Regula-

tion.

ERISA plans provide benefits in other areas besides

health care, including education, day care and legal ser-

vices. State regulation in each of these fields inevitably

costs ERISA plans, like everyone else, more than they

would otherwise pay for those services. For example, in

the day care field, building codes and staffing ratios that

seek to ensure the safety of the children and the quality of

the program unquestionably increase costs. Under the

Travelers indirect economic impact standard, states con-

ceivably could be preempted from imposing such quality

and safety requirements. Moreover, if an employer or

union runs a day care program directly through an

ERISA-covered plan, conceivably the Second Circuit, fol-

lowing its decision in NYSA-ILA, would hold that the

economic impact need not even be substantial to warrant

ERISA preemption. Once again the charmed existence

12 In 1992, 17.4% of the nonelderly population — 38.5 million

people — were not covered by private health insurance and did

not receive publicly financed health assistance. This figure rep-

resents an increase of 0.8% over 1991 figures (36.3 million

ple).

In 12 states and the District of Columbia, more than 20% of

the population was uninsured in 1992. These states and their

uninsured rates were Nevada (26.6%), Oklahoma (25.8%), Loui-

siana (25.7%), Texas (25.7%), the District of Columbia (25.5%),

Florida (24.2%), Arkansas (23.5%), Mississippi (22.7%), New

Mexico (22.5%), Georgia (22.4%), California (22.2%), South Car-

olina (20.8%) and Alabama (20.1%). See EBRI Issue Brief, supra, at

1,

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i Pr ee AS ee Re ee ee ee ee ee ee ee a

27

created by the economic impact standard would have a

consequence that exceeds both congressional intent and

common sense.

E. Should The Court Reach A Decision In This

Case That The Surcharges Are Preempted Or

Are Otherwise Inappropriate, Such Decision

Should Not Extend Beyond The Facts Of The

Case.

Like New York, other states have engaged in hospital

rate-setting activity. Unlike New York, however, whose

surcharges treated patients differently based on the iden-

tity of the insurer, other states, such as Maryland, for

example, do not impose any surcharges.’ In Maryland,

approved rate structures are comprised of various cost

elements, and charges are applied uniformly among all

payors, including Medicare and Medicaid. In Connecti-

cut, under the Uncompensated Care Pool statute, the

costs of uncompensated care were spread more equitably

among the state’s hospitals. The system taxed all patients

the same amount and taxed hospitals on the revenue they

received from all patients. It did not differentiate in any

way on the basis of the type of insurance coverage that

was involved. Similarly, Massachusetts’ uncompensated

3 The New York surcharges were designed to “level the

playing field for the Blues in their competition with commerc ial

insurers.” Travelers, 14 F.3d at 712. Thus, the Second Circuit

noted that the New York surcharges had a “connection with”

ERISA plans because they were intended to influence the

choices that ERISA plans made for health care coverage by

increasing the costs of the less favored alternatives. Id. at 719.

The court’s indirect economic impact standard does not appear

to be dependent on this factor. To the extent the Court believes

this factor is determinative of the case, the decision should be

narrowly limited to similar circumstances of differential treat-

ment.

28

care pool spreads the costs of uncompensated care more

equitably among its hospitals without differentiating on

the basis of insurance coverage.

Because hospital rate-setting programs across the coun-

try differ significantly from the New York surcharges, and

because many states are engaging in other forms of properly

authorized health care-related activities on behalf of their

citizens, it is respectfully requested that if a decision herein

invalidates the surcharges, such decision not be so broad-

based as to extend beyond the characteristics presented

solely by the New York system.’

14 The Court should also note that in Travelers, the Court of

Appeals concluded that the three surcharges imposed a “signifi-

cant economic burden” based solely on an examination of the

surcharges standing alone and not on an analysis of the overall

impact of the regulatory scheme in New York. Because hospital

rate-setting comprises consideration of many elements, it is not

reasonable, or even possible, to evaluate the net effect of a

hospital rate-setting system solely on the basis of one element of

that system.

The State of Maryland, for example, provides a good exam-

ple of why a rate system should be evaluated as a whole to

arrive at its net impact on ERISA plans. Before hospital regula-

tion in Maryland, Blue Cross plans were the beneficiaries of an

approximately 14% discount. Today, under rate regulation, Blue

Cross (and any other insurer or HMO that satisfies certain crite-

ria) receives a 4% discount from rates that have been certified as

reasonable. Further, although the Maryland system, like others,

includes various elements, taken as a whole, hospital costs per

admission in Maryland have moved from a level of 25% above

the national average in 1976 to a level of 11% below the national

average in 1993. As a result of lower than average costs and

lower than average mark-up of charges over costs, charges per

case in Maryland were less than 64% of the average charges

nationally per case in 1992, the last year for which data were

available. American Hospital Association, Hospital Statistics

(1993-94 ed.)

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li i i "oe sy > oe ae ee ee: SS ee | ee ee

29

CONCLUSION

ERISA’s preemption provision was not intended to

eviscerate our principles of federalism. “ERISA pre-emp-

tion analysis ‘must be guided by respect for the separate

spheres of governmental authority preserved in our fed-

eralist system.’ ” Fort Halifax Packing Co., 482 U.S. at 19

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

522 (1981)). “We also must presume that Congress did not

intend to pre-empt areas of traditional state regulation.”

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

724, 740 (1985). Thus, the well-established presumption

against preemption that ensures the proper respect for

federalism concerns is applicable even in ERISA preemp-

tion analysis, and particularly so where, as here, a tradi-

tional area of state regulation such as health care is

involved. The Second Circuit’s indirect economic impact

standard for ERISA preemption fails to give these princi-

ples their due.

For the foregoing reasons, indirect economic impact

alone should be rejected as a basis for ERISA preemption,

and the decision of the Second Circuit Court of Appeals

should be reversed.

Dated: November, 1994

Respectfully submitted,

RicHARD BLUMENTHAL Husert H. Humpurey III

Attorney General of Attorney General

Connecticut State of Minnesota

Puyitus E. Hyman

. RicHarpD S. SLOWES

Assistant Attorney General Assistant Solicitor General

J. JoserpH Curran, Jr. Counsel of Record

wp so Same of 1100 NCL Tower

Seattle itenines 445 Minnesota Stre

St. Paul, Minnesota 55101

EuizasetH M. KAMEEN

Assistant Attorneys General

(Additional Counsel Listed On Inside Cover)

(612) 282-5712