# Amicus Curiae Brief — New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385013_0498%3A21 ## Record - **Collection:** Supreme Court brief - **Document type:** Amicus Curiae Brief - **Published:** January 1, 1994 - **Citation:** 511 U.S. 1067 ## Text 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 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 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385013_0498%3A21. Public record. Not legal advice.