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

NEW YORK STATE CONFERENCE or

‘BLUE —- BLUE SHIELD PLANS, et al.,

Petitioners

vz.

TRAVELERS INSURANCE CO., ét al.,

Respondents.

MARIO CUOMO, et ai.,

Petitioners

v.

ge ass cued INSURANCE CO., et al.,

Respondents.

‘Hoserral ASSOCIATION OF NEW YORK,

Petitioner

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TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES .........cccccccese ii

INTEREST OF AMICUS CURIAE............... 2

SUMMARY OF ARGUMENT.................-- 3

REIT oh oc bbES heed bse dedccesccceseccces 5

I. THE DEVELOPMENT AND GROWTH

OF THE HMO CONCEPT OF COORDI-

NATED CARE IN THE UNITED

A. THE HMO ALTERNATIVE AND

THE FEDERAL POLICY PROTECT-

SPU EES ee spins veuseccccccecccces 5

II. ERISA PROHIBITS THE STATES FROM

INTERFERING WITH EMPLOYEE

HEALTH PLANS THROUGH REGULA-

TION WHICH SINGLES OUT HMO

PLANS FOR DISPARATE ECONOMIC

CSUs oc eo ctitdcotosonerovséocceveescs 21

he. |

TABLE OF AUTHORITIES

Statutes: Page

Employee Retirement Income Security Act of 1974,

29 U.S.C. §§ 1001, et seg. (1985 & Supp.

IDDS). occ cocccvesevsccescceeeeneueeean passim

Federal Health Maintenance Organization Act of

1973, 42 U.S.C. $§ 300e, et seg. (1987). 5, 7, 9, 17

Health Maintenance Organization Amendments of

1978, P.L. 95-559, 92 Stat. 2131 (codified as

amended at 42 U.S.C. §§300e, ef seq.

(1GB7)). .ccccccccccesdeeseseusSeneeeneenen™ 6

Health Maintenance Organization Amendments of

1987, P.L. 100-517, 102 Stat. 2578 (codified as

amended at 42 U.S.C. §§300e, eft seq.

(1DBT)). « ocvccccccctocsesseesseseeeneeenees 7

N.Y. Pub. Health Law §§ 2807-c(2)(a) through (e)

(McKinney 1998) ..cccscccccccvcesesscusese 12

Legislative History:

20 Cong. Rec. 29197, 29933 (1974) ........-++5- 17

S. Rep. No. 93-129, 93d Cong., 1st Sess., reprinted

in 1973 US.C.CALN. BESS cccccvicccccsesss 5

S. Rep. No. 95-837, 95th Cong., 2d Sess. , reprinted

de 1978 US.C.CAB GED oscccceutvvsustes 7

S. Rep. No. 100-304, 100th Cong., 2d Sess., re-

printed in 1988 U.S.C.C.A.N. 3231 .......... 7

Cases:

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

(19GB). oc cccccevecedésdseeeneneueeneneeen 13, 15

American Medical Ass’n, 94 F.T.C. 701 (1979), aff'd

as modified, 638 F.2d 443 (2d Cir. 1980), aff'd

per curiam, 455 U.S. 676 (1982) .........+.. 5

TABLE OF AUTHORITIES — (Continued)

Cases: Page

American Medical Ass'n v. United States, 317 U.S.

DTT db66 6engecbbasedececesooeseceess 5

Arkansas Blue Cross and Blue Shield v. St. Mary’s

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

denied, US. , 112 S. Ct. 2305

DT Merit binhdnevedes ebsoee6e dese ceccce 13

FMC Corp. v. Holliday, 498 U.S. 52 (1990)....... 17

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

Dsitendepededesbeoosecacocececes oe 13, 17

General Elec. Co. v. Department of Labor, 891 F.2d

25 (2d Cir. 1989), cert. denied, 496 U.S. 912

DPS haseeeueedbebesoessecocecoceccess 13

OSI a a 13, 15

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

i i eke sbeesecteedceesécesce 16

Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1986). 15

Shaw v. Delta Airlines, Inc., 463 U.S. 85

EPP PTT TITTLE EL TTT ET TEEPE 13, 15

Travelers Ins. Co. v. Cuomo, 14 F.3d 708 (2d Cir.

DERG GRS606000600s Cocccccccoececcoess 13

Miscellaneous:

A. Foster Higgins, Health Care Benefits Survey:

Report I Medical Plans (1992) ............... 11

GHAA, 1994 HMO Performance Report (1994)... 8, 10

GHAA, HMO Industry Profile: 1994 Edition

ee Ae ceciucvescdccceccs 9

TABLE OF AUTHORITIES — (Continued)

Miscellaneous: Page

Interstudy, National HMO Census: June 30, 1983

CIGD cc ccccnvcecccccesccccosoecesenesssee

KPMG Peat Marwick, Trends in Health Insurance:

HMOs Experience Lower Rates of Increase

than Other Plans (1993) .......2-00eeeeeeee-

U.S. Department of Health, Education and Welfare,

Public Health Service, Office of Health Mainte-

nance Organizations, National HMO Census of

U.S. Department of Labor, Bureau of Labor Statis-

tics, Employee Benefits in Medium and Large

Establishments, 1991, Bulletin 2422 (May

BIDE 0 ccccccccececcccecescccceccoceseesees

10

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

IN THE

SUPREME COURT OF THE UNITED STATES

October Term, 1994

NEW YORK STATE CONFERENCE OF

BLUE CROSS & BLUE SHIELD PLANS, ef ai.,

Petitioners

v.

TRAVELERS INSURANCE CO.., ef al,

Respondents.

MARIO CUOMO, ef al,

Petitioners

v.

TRAVELERS INSURANCE CO., ef al,

Respondents.

HOSPITAL ASSOCIATION OF NEW YORK,

Petitioner

Vv.

TRAVELERS INSURANCE CO., ef al,

Respondents.

On Writ of Certiorari to the United States

Court of Appeals for the Second Circuit

BRIEF OF THE GROUP HEALTH

ASSOCIATION OF AMERICA, INC. AS

AMICUS CURIAE IN SUPPORT

OF RESPONDENTS

This brief of Group Health Association of America,

Inc. (“GHAA”), as amicus curiae, is filed in support of

respondents and in favor of affirmance of the ruling of

the United States Court of Appeals for the Second

Circuit on the preemption questions presented under

the Employee Retirement Income Security Act of 1974,

1

2

as amended (“ERISA”). GHAA submits this brief with

the written consent of the parties, as provided in Rule

37.3 of the Rules of this Court.

INTEREST OF AMICUS CURIAE

The Group Health Association of America, Inc.,

founded in 1959, is the oldest and largest national

association for health maintenance organizations

(“HMOs”). GHAA has more than 375 HMO member

plans nationwide. Together, these members enroll about

40 million people. More than 50 million Americans, one-

fifth of the total population of the United States, receive

their health care coverage through HMOs.

HMOs provide integrated, coordinated, high-quality

health care coverage, with an emphasis on preventive

care, at predictable and affordable costs to consumers.

HMO members are highly satisfied, and HMOs have

received high enrollment renewal rates. For these rea-

sons, many employers, including multi-state employers,

offer benefit plans using the HMO approach to health

care delivery.

GHAA has a strong interest in the ERISA preemp-

tion questions presented by this case because permitting

the states to regulate through laws that interfere with

the design and structure of employee benefit plans

offering HMO coverage would severely compromise the

ability of HMO plans to maintain the cost efficiencies

they have achieved. HMOs’ ability to provide more

affordable, comprehensive coverage and to limit out-of-

pocket costs has significantly reduced the financial

barriers to accessible health care that exist with other

forms of health care coverage. This enables HMOs to

emphasize a philosophy of prevention, which means

that HMO members are able to seek care for small

health problems before they become serious ones. If

allowed to stand, the states’ disparate economic treat-

ment of HMOs will undermine the ability of employers,

and ultimately their employees, to choose the HMO

3

approach — the most cost-efficient system of health care

available today.

The State of New York, through the imposition of a

9% assessment on the cost of inpatient hospitalization

services to HMO plans, has severely limited the efficien-

cies HMO plans have achieved through a comprehen-

sive system of benefits and preventive care. The effect of

the State’s assessment is to disrupt the benefits of a high

quality, cost-efficient HMO plan sought by employers

with employees in New York. The Second Circuit’s

conclusion that New York’s 9% assessment is pre-

empted by ERISA because it “relates to” ERISA plans

that select HMO coverage protects HMO plans from

such interference by the states. It further ensures that

employers who offer such plans will not be subject to a

differing scheme of regulation across the states in which

they have employees.

SUMMARY OF ARGUMENT

With increasing frequency, sponsors of employee

health benefit plans are choosing to structure their plans

around the cost competitiveness of HMOs, seeking the

benefits of a high quality, coordinated care system both

for the participants in the plan and the sponsors them-

selves. The HMO option provides employee benefit

plans with quality health care coverage and comprehen-

sive benefits at an affordable price.

In response to the historical obstacles to the devel-

opment of HMOs imposed by the states, Congress

established a federal policy, through the enactment of

the Federal Health Maintenance Organization Act, to

shield HMOs from unfair treatment. This federal law

has provided HMOs with the necessary protection to

develop and flourish without state interference.

The Federal HMO Act was enacted in 1973, one

year before Congress passed ERISA, another federal law

intended to protect employee benefit plans from state

interference. ERISA’s expansive preemption clause has

4

been interpreted by this Court to prevent the states from

interfering with the operation and structure of ERISA

health benefit plans and from disrupting the uniform

federal regulation of such plans.

New York’s 9% assessment singles out HMO plans

for disparate economic treatment. The impact of the

assessment on HMO plans is direct and substantial

because it forces plans either to raise costs by a factor of

up to 3.5% or to reduce benefit levels, or some combi-

nation of the two. Moreover, by singling out HMOs to

the exclusion of other health care delivery systems, the

9% assessment disrupts the balance of inceritives estab-

lished when plan sponsors emphasize HMO coverage

over more costly indemnity insurance. Such disruption

intrudes upon the structure of ERISA benefit plans.

ERISA prohibits such disruption to the design and

administration of employee benefit plans by the states,

particularly where, as here, the disruption is targeted at

one particular form of health care delivery system.

In construing ERISA’s preemption clause, this

Court has turned to federal policy as a guide to Congress’

intent in removing employee benefit plans from the

realm of state regulation. Finding that the 9% assess-

ment interferes with the choices made by employee

benefit plans in providing health care coverage to their

members is consistent with the purpose of the Federal

HMO Act — to prevent the states, which traditionally

have favored indemnity insurance, from singling out

HMOs through disparate regulation.

For these reasons, the Second Circuit’s decision

finding that the 9% assessment is preempted because it

“relates to” ERISA plans should be affirmed.

5

ARGUMENT

I. THE DEVELOPMENT AND GROWTH OF THE HMO

CONCEPT OF COORDINATED CARE IN THE

UNITED STATES.

A. THE HMO ALTERNATIVE AND THE FEDERAL

POLICY PROTECTING IT.

Fifty years ago, the concept of prepaid health care

coverage was a novelty. HMOs historically have faced

difficulty in entering and competing in health care

markets dominated by health plans and insurers operat-

ing on an indemnity basis and have struggled with the

long-ingrained hostility to prepaid, closed-panel medical

practice among segments of the medical community.

See, e.g., American Medical Ass'n v. United States, 317

U.S. 519 (1943); American Medical Ass'n, 94 F.T.C. 701

(1979), aff'd as modified, 638 F.2d 443 (2d Cir. 1980),

affd per curiam, 455 U.S. 676 (1982).

In 1973, Congress took steps to remove impedi-

ments to the development and growth of HMOs by

enacting the Federal Health Maintenance Organization

Act of 1973, 42 U.S.C. $§ 300e, et seg. (1987). Some of

the Act’s provisions created authorizations for appropri-

ations for HMO feasibility, planning and development,

and others barred the states from restricting HMO

activities through legislation.

The Congressional findings that resulted in the

HMO Act include “substantial evidence” to establish

that HMOs provide high quality care to their members at

a lower cost — as much as one-fourth to one-third lower

than traditional care. S. Rep. No. 93-129, 93d Cong., 1st

Sess., reprinted in 1973 U.S.C.C.A.N. 3033, 3034.

Thus, in order to permit HMOs to continue their growth

and development, and to continue to fill their niche in

the national health care system, Congress enacted a

federal law protecting HMOs from interference by the

states:

6

First, and most important, the development of

HMOs throughout the country will provide consum-

ers with the opportunity to choose the manner in

which they will pay for and receive health care

services. At the present time, no such choice exists

in most parts of the United States. Therefore, in

excess of 95% of all health services are rendered on

a fee-for-service basis. The goal of this legislation is

to increase the options from the point of view of the

consumer.

Id., at 3039-40.

Since the enactment of ERISA, Congress has

amended the Federal HMO Act several times. The

amendments extended the authorizations for appropria-

tions for HMO feasibility, planning and development,

and provided HMOs flexibility in meeting consumer

needs. In passing the 1978 amendments, Health Main-

tenance Organization Amendments of 1978, P.L. 95-

559, 92 Stat. 2131 (codified as amended at 42 U.S.C.

§§ 300¢e, et seg. (1987)), Congress expressly emphasized

the important role played by the reforms generated by

the HMO delivery system, particularly in terms of their

cost efficiency:

Few health care delivery reforms enjoy the deep

support and broad appeal of the Health Mainte-

nance Organization concept. One of the major ad-

vantages of HMOs is their cost containment poten-

tial. The skyrocketing cost of health care is one of

the most pressing issues facing the nation today.

While HMOs are not the final answer to the health

care cost problem they do give providers strong

incentives to reduce unnecessary expenditures; and

they create much-needed competition for the health

care dollar.

7

S. Rep. No. 95-837, 95th Cong., 2d Sess. 8, reprinted in

1978 U.S.C.C.A.N. 4925, 4942.1

The 1987 amendments provided greater flexibility

in the way HMOs are organized and operated. Health

Maintenance Organization Amendments of 1987, P.L.

100-517, 102 Stat. 2578 (codified as amended at 42

U.S.C. §§ 300e, et seg. (1987)). In enacting these

amendments, Congress again emphasized the important

role that HMO plans play in American health care

delivery systems:

The HMO law has proven to be one of our most

important public health statutes. ... The law has

helped to develop hundreds of prepaid health care

organizations that have changed the face of medical

care in this country. HMOs have successfully con-

trolled health care costs and, by their very presence,

forced other providers and insurers to become more

efficient and less costly.

S. Rep. No. 100-304, 100th Cong., 2d Sess. 8, reprinted

in 1988 U.S.C.C.A.N. 3231, 3232 (emphasis added).

When the Federal HMO Act was passed, there were

only 39 prepaid health care plans in existence in the

1. As part of the 1978 amendments, Congress specifically

acted to abrogate certain state practices that were designed to

interfere with the operation of HMOs while simultaneously favoring

indemnity insurance. Under then existing provisions of the law,

HMOs were required to meet state certificate-of-need requirements

relating to the provision of basic health services to members.

However, state agencies were employing unobjective appraisals for

HMOs’ certificates because HMOs competed with indemnity insur-

ers, which frequently were given objective appraisals or were not

required to file certification-of-need applications at all. S. Rep. No.

95-837, 95th Cong., 2d Sess. 13, reprinted in 1978 U.S.C.C.A.N.

4925, 4947-48. In order to further HMOs’ “exceptional capacity to

serve the overall goals of the planning process when allowed to

Operate properly,” Congress amended the Federal HMO Act to

establish more objective certificate-of-need standards that would be

subject to less interpretation and variation at the state level. 42

U.S.C. § 300e(b)(4), (5) (1987).

8

United States, serving approximately 3.5 million enroll-

ees. A mere five years later, the number of prepaid

health care plans had increased five-fold to 198 plans,

serving 7.3 million enrollees in 37 states. Interstudy,

National HMO Census: June 30, 1983, 38-39 (1984);

U.S. Department of Health, Education and Welfare,

Public Health Service, Office of Health Maintenance

Organizations, National HMO Census of Prepaid Plans,

1 (1978). This dramatic increase in the number of

HMOs and the consumers served is perhaps the best

evidence that the Federal HMO Act has been effective in

achieving Congress’ goal of encouraging the growth and

development of HMOs.

B. THE HMO TODAY.

The HMO industry has continued to grow tremen-

dously. Over the past 14 years, the number of people

cared for by HMOs has grown more than five-fold to

50.5 million, up from 9.1 million people in 1982. GHAA,

National Directory of HMOs, 22 (1993); GHAA, 1994

HMO Performunce Report, 3 (1994). A large proportion

of American employers offer HMO coverage, and their

employees are selecting HMO coverage at an increasing

rate. By year-end 1995, 56 million Americans are ex-

pected to have selected HMOs for their health care

coverage. GHAA, 1994 HMO Performance Report, 1

(1994).

HMUs provide or arrange for the provision of health

care services to their members in various ways. Some

employ staff physicians. Some contract with individual

physicians as independent contractors. Others contract

with medical group practices or with associations of

individually practicing physicians. Some HMOs may use

a combination of these methods. However, all HMOs, by

whatever method adopted, provide or arrange for the

provision of health care services to members through

integrated networks of select health care providers.

9

HMOs offer comprehensive coverage, including

preventive care, on a prepaid basis. In contrast, tradi-

tional indemnity health benefit plans generally indem-

nify policyholders only for designated, medically-

necessary health care services without regard to the

provider of those services.

Covered basic health services under an HMO plan

generally include physician services and referral ser-

vices to specialists, inpatient and outpatient hospitaliza-

tion, emergency care, diagnostic laboratory and thera-

peutic radiologic services, inpatient and outpatient

rehabilitation services, recuperative therapy services

(e.g., physical, occupational and speech), outpatient

mental health services, detoxification services and refer-

rals for addiction and home health care. Most HMOs

also provide coverage for prescription drugs. See, e.g., 42

U.S.C. §§ 300e-1(1) (1987) (basic health services for

federally qualified HMOs); see also GHAA, HMO Indus-

try Profile: 1994 Edition, 3-7 (1994). HMOs also pro-

vide preventive care coverage, including immunizations,

well-child care from birth, periodic health evaluations

for adults, voluntary family planning services, infertility

services and children’s eye and ear examinations. See,

e.g., 42 U.S.C. § 300e-1(1)(H) (1987) (preventive health

services for federally qualified HMOs). As a rule, HMOs

cover more services than indemnity insurance plans,

typically with no deductibles and with minimal, if any,

co-payments.

HMO coverage also is more comprehensive than

indemnity insurance coverage in financial terms. For

example, HMOs impose no lifetime limits on benefit

coverage, and they cover pre-existing conditions with no

waiting period. 42 U.S.C. § 300e(b) (1987) (HMO basic

health services must be provided without limitation as to

time or cost). Indemnity insurance coverage, in contrast,

typically has a lifetime cap of $1 million and imposes a

waiting period for coverage of pre-existing conditions.

10

HMOs set high standards for quality assurance and

consumer satisfaction. HMOs promote health care qual-

ity in many ways, including careful selection of provid-

ers based on professional qualifications and interest in

working within a coordinated care system. GHAA’s most

recent survey revealed that 85% of all HMO physicians

are board certified. According to the latest data from the

American Medical Association, only 61% of practicing

physicians nationwide are board certified. GHAA, 1994

HMO Performance Report, 11-12 (1994).

In addition, HMOs have quality assurance and

improvement programs that are not available through

indemnity insurance. HMOs utilize state-of-the-art

practice guidelines and standards developed by indepen-

dent accreditation organizations (e.g., National Commit-

tee for Quality Assurance), monitor quality-of-care indi-

cators and outcomes, identify and pursue areas for

necessary improvements and measure improvements in

performance over time. HMOs make available to the

physicians and medical professionals who participate in

their networks information regarding member referrals

to participating specialists and medical facilities. HMOs

also provide participating physicians and medical profes-

sionals with practice standards and utilization manage-

ment data to ensure that patients receive medically

necessary and appropriate care. These programs and

sources of information enable HMOs to provide the

employer-sponsor of an HMO plan with quality, effective

and efficient health care for their employees.

The explosive growth of HMO plans is due in large

part to the fact that employers have experienced annual

premium increases averaging 13.4% for traditional in-

demnity health plans in recent years. KPMG Peat Mar-

wick, Trends in Health Insurance: HMOs Experience

Lower Rates of Increase than Other Plans, 4 (1993).

Faced with the untenable choices of reducing contribu-

tions to the cost of employee health coverage or impos-

ing new coverage limitations, adding or raising deduct-

ibles and coinsurance, reducing the benefits covered or

11

eliminating health coverage altogether, plan sponsors

understandably have turned to HMOs as a more afford-

able means of providing comprehensive health care

coverage to their employees.

It is these unique characteristics of quality assur-

ance, comprehensive benefits and affordability that dis-

tinguish HMO plans from other health care coverage

options, including indemnity insurance. Moreover, as a

result of these attributes, HMOs bring cost efficiency to

the health care market. In 1992, the cost of traditional

indemnity plans averaged $4,080 per employee, 23.2%

more than the average cost of HMOs ($3,313 per

employee). A. Foster Higgins, Health Care Benefits

Survey: Report 1 Medical Plans, 12-13 (1992). This cost

differential does not take into account the greater differ-

ential that would result if the indemnity plans offered

the same comprehensive level of benefits that HMOs

offer. See U.S. Department of Labor, Bureau of Labor

Statistics, Employee Benefits in Medium and Large

Establishments, 1991, Bulletin 2422, 38-39 (May 1993)

(most indemnity plan participants face average annual

deductibles of approximately $200 and coinsurance

rates of 20% for all basic services).

Simply stated, HMOs are typically the best value for

health care coverage. HMO coverage is especially attrac-

tive to a multi-state employer because such coverage

offers comprehensive benefits to its employees while

simultaneously ensuring the employer that its employ-

ees have a coordinated system of health care coverage

which is subject to quality assurance review — often at

the lowest priced option for health care coverage.

The HMO approach — comprehensive benefits,

preventive care coverage, continuity of service and qual-

ity assurance, all of which result in significant cost

savings — has elevated HMOs to a singularly unique

status in America’s health care coverage system.

12

II. ERISA PROHIBITS THE STATES FROM INTER-

FERING WITH EMPLOYEE HEALTH PLANS

THROUGH REGULATION WHICH SINGLES OUT

HMO PLANS FOR DISPARATE ECONOMIC

TREATMENT.

In 1992, the State of New York imposed a 9%

assessment on the cost of inpatient hospitalization paid

by HMOs. The assessment bears no relation to the

actual cost of services provided to HMO members;

rather, it is assessed by the State on the aggregate

monthly cost of inpatient hospitalization. With the ex-

ception of HMOs, no other type of carrier or provider of

health care services in the State of New York must pay

the 9% assessment. N.Y. Pub. Health Law §§ 2807-

c(2)(a) through (e) (McKinney 1993).

The State adopted the 9% assessment for the pri-

mary purpose of encouraging HMOs to enroll Medicaid

eligible recipients. The State acknowledges that the 9%

assessment is intended as a direct economic penalty for

those HMOs that fail to meet the State’s target enroll-

ment levels of Medicaid eligible recipients. JA 156. The

secondary purpose of the assessment is to raise revenue

for the State. Notably, the funds paid by HMOs under

the 9% assessment are deposited in the State’s general

fund and are not specifically earmarked to provide

health care coverage to the medically uninsured or

underserved.

The 9% assessment interferes with the structure

and interstate operation of ERISA health benefit plans

that select HMO coverage, thereby establishing the

requisite “connection with” such plans for purposes of

triggering ERISA preemption. With limited exceptions,

ERISA preempts any and all state laws that “relate to”

employee benefit plans. 29 U.S.C. § 1144(a) (1985).

The clear intent of ERISA’s preemption clause, as

recognized by this Court, is to

ensure that plans and plan sponsors would be sub-

ject to a uniform body of benefits law; the goal was

13

to minimize the administrative and financial burden

of complying with conflicting directives among

States or between States and the Federal Govern-

ment. Otherwise, the inefficiencies would work to

the detriment of plan beneficiaries.

Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 134

(1990).? ERISA, therefore, preempts any state law that

has a “connection with or reference to”” ERISA plans.

Id., 498 U.S. at 139, quoting Shaw, 463 U.S. at 96-97.

The Second Circuit, in striking down New York’s

9% assessment on HMOs, ruled that the assessment

“relates to” ERISA plans because it “purposely interferes

with the choices that ERISA plans make for health care

coverage.” Travelers Ins. Co. v. Cuomo, 14 F.3d 708, 719

(2d Cir. 1994). The court reasoned that the 9% assess-

ment interferes with plan design by forcing ERISA plans

either to increase the cost of benefits or to reduce the

level of benefits available to participants. Jd., 14 F.3d at

720.

Other circuit courts have recognized that state leg-

islation which increases the costs of health benefits

coverage disrupts the structure of ERISA plans. See, e.g.,

Arkansas Blue Cross and Blue Shield v. St. Mary’s Hosp.

Inc., 947 F.2d 1341, 1348 (8th Cir. 1991), cert. denied,

— U.S. , 112 S. Ct. 2305 (1992) (state law affecting

insurer's costs has impact on benefit structure); cf

General Elec. Co. v. Department of Labor, 891 F.2d 25,

29 (2d Cir. 1989), cert. denied, 496 U.S. 912 (1990)

2. See also Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 11

EE ae ae

on employers’ administration of benefit plans); Shaw v. Delta

Airlines, Inc., 463 U.S. 85, 105 n.25(1983) (state disability law

burdening administration of nationwide plan preempted); Alessi v.

Raybestos Manhattan, Inc., 451 U.S. 504, 524-25 (1981) (ERISA

preempts state law prohibiting offset of workers’ compensation

payments against pension benefits because it would burden em-

ployer plans with conflicting regulatory schemes).

14

(state law regulating payment of benefits preempted

because private parties, not states, control level of ben-

efits).

The 9% assessment has a substantial impact on

ERISA plans that select HMO coverage. As a direct

result of the 9% assessment on the cost of inpatient

hospital services, it is estimated that the cost of HMO

coverage in New York has increased by a factor of up to

3.5%. JA-265. Because HMOs must maintain reserves

for unexpected medical expenses, this increase in costs

must be passed on to the ERISA plans that have selected

HMO coverage. JA-262, 265-66. Thus, the 9% assess-

ment, in reality, functions as an assessment on the

ERISA plans themselves.

When faced with an increase in the costs of health

care coverage, an HMO plan has two options: pay the

increase or reduce benefit levels. To absorb the cost

increase without reducing benefit levels, HMO plans

must raise the premiums that employees pay and/or

increase employee cost-sharing through higher

co-payments or deductibles. However, the payment of

higher premiums and the addition of greater

cost-sharing provisions embody the precise afflictions

that the plan sponsor sought to avoid by selecting HMO

coverage over indemnity insurance. The other option,

reducing benefit levels, is equally offensive insofar as it

also involves a departure from the HMO concept of

providing comprehensive benefits and preventive care

coverage. Most significant, however, is the fact that

either option has the same result — the ERISA plan is

forced to modify its structure and way of doing business.

In the face of these facts, it is undisputed that the

9% assessment and its attendant cost increase to HMO

plans affect the administration and design of ERISA

health benefit plans that offer HMO coverage. Petition-

ers Mario M. Cuomo, ef al, acknowledge that “[t]he

health care assessments may influence plan content or

administration because they do not affect all payors

equally. State regulation does not affect every aspect of

15

plan administration or benefits identically and, there-

fore, a wide range of state regulation may influence

ERISA plan activity.” Brief for Petitioners Mario M.

Cuomo, et al., at 11. Similarly, the AFL-CIO, as amicus

curiae in support of petitioners, recognizes the impact of

the assessments on plan administration and design:

“Multi-state ERISA health plans must take these market

differences from state to state into account in determin-

ing what kind of payment system to adopt or maintain.”

Brief for the American Federation of State County and

Municipal Employees, AFL-CIO as Amicus Curiae in

Support of Petitioners, at 14.

Petitioners attempt to minimize the assessment’s

effect as merely an indirect economic impact. Their

arguments, however, ignore the fact that economics are

inextricably linked to plan choices.? In addition, the

characterization of the New York assessment law, on the

whole, as the “indirect” regulation of health care plans is

misleading in the specific context of the 9% assessment.

As a preliminary matter, it is well settled that the

singling out of ERISA plans through state action runs

afoul of the preemption clause, regardless whether the

impact is indirect or direct. See Ingersoll-Rand, 498 U.S.

at 139 (“state law may ‘relate to’ a benefit plan . . . even

if the law is not specifically designed to affect such

plans, or the effect is only indirect”); Pilot Life Ins. Co.

v. Dedeaux, 481 U.S. 41, 47-48 (1986), quoting Shaw,

463 U.S. at 98 (“preemption clause is not limited to

‘state laws specifically designed to affect employee ben-

efit plans”); Alessi, 451 U.S. at 525 (“even indirect state

3. The important role played by economics in the design and

structure of employee benefits has become even more evident from

the reductions in employer sponsored benefits in recent years,

many of which have resulted in the proliferation of costly and

protracted litigation, such as that involving retiree health coverage.

Moreover, the recent efforts to develop a national health care system

and the debate that ensued over how such a program would be

funded reinforced the importance of the role that costs play in

defining the structure of health care benefit plans.

16

action bearing on private pension plans may encroach

upon the area of exclusive federal concern”).

Moreover, the impact of the 9% assessment on

ERISA plans that select HMO coverage is “direct”

because the assessment specifically is directed only at

HMOs. This is not a law of general application, such as

a utility rate or sales tax, which impacts equally all

health care delivery systems. It is an assessment that, by

its terms, singles out HMOs. Though the impact of a law

of general application on one form of health care delivery

system might be characterized as “indirect,” the impact

of a law premised on the disparate treatment of one

health care delivery system, to the exclusion of others,

such as the 9% assessment, is hardly indirect. It is

directed at the cost of HMO coverage, and, therefore, its

impact on HMO plans clearly is direct.*

Federal policy has been used by the Court as a

touchstone to interpret the preemptive scope of ERISA.

In Mackey v. Lanier Collection Agency & Serv., Inc., 486

U.S. 825 (1987), this Court held that a Georgia garnish-

ment statute was not preempted by ERISA because,

based on the statements of federal policy in ERISA’s civil

enforcement provisions and the “sue and be sued”

clauses of other federal statutes, the Court concluded

that Congress did not intend to preempt the state

garnishment law. In discerning Congress’ intent, the

Court concluded that the Georgia law withstood the

preemption challenge because it was consistent with

these sources of federal policy. Mackey, 486 U.S. at

831-34 & n.9.

Applying the Mackey approach to New York’s 9%

assessment, it is clear that federal policy does not favor

state interference with the competitive market choices

of ERISA plans for health coverage. Just one year before

4. If truly a law of general application, such as a state sales tax,

the 9% assessment would affect equally all ERISA health care

plans, regardless of their choice of delivery system. Thus, a state

sales tax is not preempted by ERISA.

17

enacting ERISA in 1974, Congress passed the Federal

HMO Act of 1973, 42 U.S.C. §§ 300e, et seg. (1987),

declaring its intent that the states cease interfering with

the development of HMOs as a desirable alternative to

costly indemnity insurance in the health care coverage

market. The Federal HMO Act is a pertinent source of

federal policy that must be considered in determing the

scope of the ERISA preemption of state laws regulating

the health care coverage market for ERISA plans.

Cognizant of the historical treatment of HMOs by

the states, Congress enacted a federal law designed to

shield HMOs from unfair treatment by the states and to

enable HMOs to develop and grow as an alternative to

indemnity insurance. The federal policy reflected in the

Federal HMO Act leaves little room for doubt that

Congress recognized that state action directed at HMOs

can have a detrimental and adverse impact on the

competitive health care coverage market to which many

ERISA plans look for the cost-effective coverage offered

by HMOs. To read ERISA’s preemption clause so nar-

rowly to exclude state laws specifically directed at

HMOs and intended to have an adverse economic im-

pact on them would ignore entirely the federal policy

contained in the HMO Act.

ERISA was intended to ensure that the employer’s

choice of delivery of a uniform health care coverage

system across state lines would not be disrupted. 20

Cong. Rec. 29197 (1974) (remarks of Rep. Dent)

(ERISA sponsors designed preemption clause to elimi-

nate threat of inconsistent state and local regulations);

id., at 29933 (remarks of Sen. Williams) (same); see also

FMC Corp. v. Holliday, 498 U.S. 52, 60 (1990) (“To

require plan providers to design their programs in an

environment of differing state regulations would com-

plicate the administration of nationwide plans . . . .”);

Fort Halifax, 482 U.S. at 11 (patchwork scheme of state

regulation of ERISA benefit plans would introduce con-

siderable inefficiencies in benefit program operation).

18

The economic impact of the 9% assessment has the

effect, contrary to the intent of ERISA, of disrupting the

uniform choices of plans sponsored by multi-state em-

ployers to provide health care coverage to their employ-

ees. When the states are permitted to engage in dispar-

ate economic treatment of one form of health care

delivery system, as New York has done to HMOs under

the 9% assessment, it affects the balance of incentives

established by multi-state employers and interferes with

the structure of the ERISA plan premised on that

balance. Accordingly, the assessment interferes with the

ability of multi-state employers to offer uniform health

coverage to their employees, including the HMO plan.

The HMO approach is unique because HMOs pro-

vide high quality, comprehensive and preventive health

care coverage at an affordable price. Indeed, HMO

coverage frequently will be the lowest priced option for

health care coverage. Thus, HMO coverage is attractive

to a multi-state employer that sponsors a health care

plan for its employees because such coverage offers

comprehensive benefits to employees while simulta-

neously providing the employer with a health care

delivery system that coordinates the care through a

network of physicians, emphasizes the prevention of

serious health problems, oversees appropriate standards

of care and monitors the quality of the services rendered.

Only an HMO offers this unique combination of features

and benefits in one health care delivery system.

The multi-state employer relies upon the competi-

tive price of HMO coverage, as compared to more costly

indemnity insurance, to attract participants to the HMO

plans offered in each state where employees are located.

Moreover, where the employer uses its lowest-priced

health care option, often an HMO, as the benchmark for

its contribution to the cost of employee health care

coverage, an employee’s incentive to select HMO cover-

age is further enhanced insofar as it is the only health

care option that will be fully paid by the employer. This

incentive is reinforced because virtually all HMO plans

19

have no deductibles and nominal, if any, co-payments

for covered services. In short, the more attractive the

HMO pian is to employees, the more likely it is that they

will select the HMO plan for their health coverage.

When employees select HMO coverage over more

costly indemnity insurance, the multi-state employer

sponsoring the plans also obtains the sought-after ben-

efits of HMO coverage. The employer is the beneficiary

of the HMO’s philosophy of prevention and quality

assurance mechanisms, which are superior to those

available under indemnity insurance. The employer

knows that its employees are receiving care through a

coordinated network of medical professionals, that the

quality of the care will be enhanced by the application of

practice guidelines and standards and that the care will

be subject to ongoing monitoring and improvement.

Most significantly, the HMO coverage offers employees

comprehensive benefits, including preventive services.

All of these aspects of HMO care have the effect of

lowering the overall cost of health care coverage while

providing enhanced quality.

The 9% assessment disrupts this careful balance of

incentives established by the employer sponsoring the

HMO plan by appropriating the cost efficiency of HMO

coverage. Such legislation erodes the cost effectiveness

of the HMO plan, thereby frustrating the incentive that

the multi-state employer established to encourage its

employees, regardless of the state where they work, to

enroll in the HMO. The loss of this incentive, in turn,

reduces the likelihood that the employer will realize the

benefits of the HMO plan, including the quality assur-

ance and improvement mechanisms that are available

only under that plan. Thus, the multi-state employer is

deprived of the full pricing incentive to encourage HMO

enrollment and of the benefits that flow from its choice

to exercise that incentive.

When the states pass legislation that has the direct

effect of appropriating the cost effectiveness of an HMO

plan, they undermine both the incentive chosen by the

20

plan sponsor to encourage employee enrollment in the

plan and the resulting benefits that flow from that

choice — a comprehensive level of high quality benefits.

If such laws are not preempted, the states would be free

to divest dollar by dollar the choices made by plan

sponsors to offer HMO coverage. ERISA, however, is

intended to prevent the states from disrupting the de-

sign and structure of ERISA plans. The 9% assessment

has just such a disruptive effect, and, therefore, it is has

a “connection with” ERISA plans. For these reasons, the

Second Circuit correctly held that the 9% assessment is

preempted.‘

5. Petitioners do not assert that the 9% assessment is a law

regulating the business of insurance that is saved from preemption

under ERISA’s “insurance savings” clause, 29 U.S.C. §

1144(b)(2)(A) (1985). See also Brief of the United States as Amicus

Curiae Supporting Petitioners, at 19 n.8 (mo party argues that the

9% assessment is saved as a law regulating insurance). GHAA

concurs that the 9% law is not saved from preemption.

CONCLUSION

For the foregoing reasons, the decision and judg-

ment of the United States Court of Appeals for the

Second Circuit in this case should be affirmed.

Respectfully submitted,

Alan J. Davis*

Brian D. Pedrow

BALLARD SPAHR ANDREWS

& INGERSOLL

1735 Market Street, 51st Floor

Philadelphia, PA 19103

(215) -8500

Alphonso O’Neil-White

Garry Carneal

GROUP HEALTH ASSOCIATION

OF AMERICA, INC.

1120 20th Street, NW

Suite 600

D.C. 20036

nr

(202) 778-3200

Counsel for Amicus Curiae

Group Health Association of America, Inc.

*Counsel of Record

Dated: December 13, 1994