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

‘ie Supreme Court int the United 2

out OcToBER TERM, 1994

a New York STATE CONFERENCE OF BLUE Cross &

3 BLUE SHIELD PLANS, ef al.,

a Petitioners

Ke TRAVELERS INSURANCE Co,, et al.

‘. Manio M. Cuomo, Governor of New York, et al.,

A " Petitioners

* TRAVELERS INSURANCE Co., et al.

As 41

a

ay

ae HOSPITAL ASSOCIATION OF NEW YorK STATE,

1a Vv.

ae TRAVELERS INSURANCE Co., et al.

ys On Writ of Certiorari to the

ae? United States Court of Appeals

moi >, for the Second Circuit

BRIEF AMICUS CURIAE OF

THE SELF-INSURANCE INSTITUTE OF AMERICA, INC,

m SUPPORT OF THE RESPONDENTS

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BEST AVAILABLE copy

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INTEREST OF THE AMICUS

SUMMARY OF ARGUMENT

ARGUMENT ......

TABLE OF CONTENTS

I. THE SECOND CIRCUIT PROPERLY REC-

II,

CONCLUSION

OGNIZED THAT ERISA PREEMPTS THE

CHALLENGED STATE LAW

A. ERISA Preemption Is Broad In Scope ........

B. The Challenged State Law Is Preempted Be-

cause It “Relates To” ERISA Plans ..............

C. The “Saving” Clause Is Not Applicable -.......

D. ERISA’s “Deemer” Clause Also Bars The

Challenged State Law .

THE HOSPITAL SURCHARGE LAW WILL

ADVERSELY AFFECT SELF-FUNDED

HEALTH PLANS AND THEIR PARTICI-

PANTS

A. Plan Choices of Arrangements For Provid-

ing Health Benefits Will Be Affected ............

B. Health Plan Costs Will Increase Or Benefit

Levels Will Be Reduced

C. The Administrative Burdens of Operating

ERISA Plans Will Increase

Page

18

15

|

‘

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ii

TABLE OF AUTHORITIES

CASES Page

Andrus v. Glover Construction Co., 446 U.S. 608

CRO) cccovinsunescninicitesnitsimasiinsiaiiaraeiiaiatie 10

Children’s Hospital v. Whitcomb, 778 F.2d 239 (5th

| RE 10

District of Columbia v. Greater Washington Board

of Trade, 113 S.Ct. 580 (1992) 6

Farmer v. Monsanto Co., 517 S.W. 2d 129 (Mo.

1974) ..... 9

FMC Corp. v. Holliday, 498 U.S. 52 (1990) .......... 5, 6, 8,9

Hewlett-Packard Co. v. Barnes, 571 F.2d 502 (9th

Cir.), cert. denied, 489 U.S. 881 (1978) ............ 11

Holland v. Burlington Industries, Inc., T72 F.2d

1140 (4th Cir. 1985), summarily aff’d, 477 U.S.

901 (1986) 5

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

CRD cxnicsiicssncinenennsiiasaaagtieiatiadis ee 5

Metropolitan Life Ins. Co. v. Massachusetts, 471

U.S. 724 (1985) 5, 6, 8,9

Pilot Life Ins. Co. v. Dedeauz, 481 U.S. 41 (1987).. 5,6

Powell v. Chesapeake & Potomac Tel. Co., 780 F.2d

419 (4th Cir. 1985), cert. denied, 476 US. 1170

) RRRSRES 10

Reilly v. Blue Cross and Blue Shield of Wisconsin,

846 F.2d 416 (7th Cir.), cert. denied, 488 U.S.

856 (1988) 10

Shaw v. Delta Air Lines, Inc., 463 U.S. 85 (1988). ‘passin

Standard Oil of California v. Agsalud, 688 F.2d

760 (9th Cir. 1980), aff'd mem., 454 U.S. 801

CD vaciideseddiiins 10

United Food & Commercial Workers & Employers

Arizona Health & Welfare Trust v. Pacyga, 801

F.2d 1157 (9th Cir. 1986) 8

STATUTES

15 U.S.C. § 1011 ..... ; 8

29 U.S.C. § 1001 .2, 6, 12

29 U.S.C. § 1144 passim

PRI TS MET! Ne eee Pe Gere | Ce ey

iii

TABLE OF AUTHORITIES—Continued

Page

New York Human Rights Law, §§ 290-301 (Mc-

Kinney 1982 and Supp. 1982-83) 7

New York Public Health Law, § 2807-c (McKinney

EE IE ES EE 2

MISCELLANEOUS

A. Foster Higgins & Company, Health Care Survey

TE 12,138

Activity Report of the Committee on Education

and Labor, Rpt. No. 91-1785 (January 3, 1977) .. 10

Employee Benefit Research Institute, Sources of

Health Insurance and Characteristics of the Un-

ee 6

Geisel, Health Care Law and Disorder, Business In-

surance, November 28, 1994 at 2 ........ 11

HCFA Review, Self-Insured Health Plans, Vol. 8

No. 2 (1986) ................. 12

Self-Insurance Institute of America, TPA Client

Composition Survey, January, 1998 .................... 4

©.

Ca

In THE

Supreme Court of the United States

OcToBER TERM, 1994

No. 93-1408

New YorK STATE CONFERENCE OF BLUE Cross &

BLUE SHIELD PLANS, ef al.,

e Petitioners

TRAVELERS INSURANCE Co., ef al.

No. 93-1414

Mario M. Cuomo, Governor of New York, et al.,

e. Petitioners

TRAVELERS INSURANCE Co. et al.

No. 93-1415

HOSPITAL ASSOCIATION OF NEW YORK STATE,

2. Petitioner

TRAVELERS INSURANCE Co. et al.

On Writ of Certiorari to the

United States Court of Appeals

for the Second Circuit

BRIEF AMICUS CURIAE OF

THE SELF-INSURANCE INSTITUTE OF AMERICA, INC.

IN SUPPORT OF THE RESPONDENTS

2

INTEREST OF THE AMICUS

The Self-Insurance Institute of America, Inc. (“SIIA”)

submits this amicus curiae brief with the consent of Peti-

tioners and Respondents.’

SIIA is a non-profit corporation composed of over 1500

members dedicated to the advancement and protection of

the self-insurance industry. It is the only association in the

United States which represents firms, professionals, and or-

ganizations which participate in the broad spectrum of self-

insurance. Its membership includes users of self-insurance

such as employers who sponsor group health plans, con-

tract third-party administrators who process claims for

self-insured health plans, stop-loss insurance companies,

and other entities engaged in the self-insurance business.

SITA’s members will be significantly affected by the prin-

cipal issue presented in this case—whether the Employee

Retirement Income Security Act of 1974 (“ERISA”), 29

U.S.C. § 1001, et seq. preempts sections of the New York

Public Health Law, § 2807-c (McKinney 1993), which

require that in-patient hospital rates covered by certain

payors, including ERISA regulated self-funded health

plans, be increased by prescribed percentage differentials.

The New York law requires commercial insurers to pay

24% more for hospital services and self-funded plans that

directly reimburse hospitals to pay 13% more than Blue

Cross/Blue Shield.

The issue presented is of major concern to the self-

insurance industry for three reasons. First, the state law

at issue clearly is designed to influence an ERISA health

plan’s decision as to how best to fund hospital benefits for

plan participants. Thus, the state-imposed assessments

will interfere with employer selection of the most effective

method of providing health benefits to employees and their

1 Original consent letters from Petitioners and Respondents have

been lodged with the Court.

3

dependents. By increasing the cost of obtaining health

services, the surcharges imposed on hospital bills directly

influence the choices that employer-sponsored plans may

make for health care coverage—precisely the type of im-

pact Congress intended to avoid when it enacted ERISA.

Second, SIIA members are concerned that the state-

imposed assessments will affect the structure and admin-

istration of self-funded plans, including the type and level

of benefits offered by such plans. As plan costs increase,

employers will be forced to adjust benefits to offset the

assessments. Higher costs will result either in reduced

health care benefits under such plans, or higher out-of-

pocket costs for plan participants in the form of higher

co-payments and deductibles, or both.

Third, the rising cost to employers of providing health

benefits will escalate further if states may impose sur-

charges on hospitals which in turn are passed along to

employer sponsored health plans, including self-funded

plans. Unless the court of appeals decision which held

that ERISA preempts the challenged hospital surcharges

is upheld, even the continued viability of self-insurance as

a cost-efficient alternative for providing health benefits to

millions of employees is threatened.

Accordingly, SIIA submits this amicus curiae brief in

support of the respondents.

SUMMARY OF ARGUMENT

In acknowledging that the New York Public Health

Law is preempted by ERISA, the court of appeals recog-

nized the expansive sweep and purpose of ERISA’s pre-

emption clause, which has been repeatedly noted by this

Court. By finding that the hospital surcharge provisions

have the effect of restricting the choices ERISA plans

make for health care coverage, the Second Circuit prop-

erly held that such provisions are preempted because

they have a clear “connection” with ERISA plans.

4

This finding is supportable in light of ERISA’s express

statutory preemption language and its legislative history

which prevent state statutes from impacting on the struc-

ture, administration, and benefit design aspects of ERISA

plans. Unless the Second Circuit's decision is upheld, the

New York statute will cause substantial economic injury

to ERISA plans and their participants by imposing on

them the obligation to pay for millions of dollars in fi-

nancial liabilities which are unrelated to specific benefits

provided under the terms of such plans. In turn, this

fiscal impact will impermissibly affect the structure and

administration of ERISA plans which are critical to the

sound functioning of the self-insurance system.

Failure to uphold the Second Circuit’s decision will have

severe detrimental implications for the continued growth

of self-funded health benefit programs because the sur-

charges will necessarily be passed along to employers and

ultimately to employees and their dependents who partici-

pate in such plans. Thus, the real losers will be employers

and plan participants, including the millions of employees

covered by self-insured plans who will bear the ultimate

cost-shifting burden of these costs.* There is nothing in

the statute or legislative history to suggest that Congress

intended these results. In sum, the Second Circuit’s read-

ing of ERISA preemption is consistent with this Court’s

prior decisions and should be upheld.

2 Over 70 million employees and their dependents are covered by

self-insured group health plans. Self-Insurance Institute of Amer-

ica, TPA Client Composition Survey, January, 1998.

5

ARGUMENT

I. THE SECOND CIRCUIT PROPERLY RECOGNIZED

THAT ERISA PREEMPTS THE CHALLENGED

STATE LAW.

A. ERISA Preemption Is Broad In Scope.

This Court has repeatedly noted the expansive sweep

of ERISA’s preemption clause. Pliot Life Ins. Co. v.

Dedeaux, 481 U.S. 41 (1987); Metropolitan Life Ins.

Co. v. Massachusetts, 471 U.S. 724 (1985); Shaw v.

Delta Air Lines, Inc., 463 U.S. 85 (1983). In finding the

challenged surcharges preempted, the Second Circuit recog-

nized the “unparalleled breath” attributed to ERISA’s

preemption clause by Congress. 29 U.S.C. § 1144(a),

Holland v. Burlington Industries, Inc., 772 F.2d 1140,

1147 (4th Cir. 1985), summarily aff'd, 477 U.S. 901

(1986). This clause states that ERISA “supersede[s] any

and all State laws insofar as they may now or hereafter

relate to any employee benefit plan” covered by ERISA.

29 U.S.C. § 1144(a) (emphasis added).

This Court has described ERISA preemption as “con-

spicuous for its breadth,” noting that “[i]t establishes as.

an area of exclusive concern the subject of every state

law that “relates to” an employee benefit plan governed by

ERISA.” FMC Corp. v. Holliday, 498 U.S. 52, 56-58

(1990) (emphasis added). ERISA preempts state law

even if it is of general application and has only an indirect

effect on employee benefit plans, and regardless of whether

it is consistent with ERISA’s substantive requirements.

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

Metropolitan Life, 471 U.S. at 739-41.

“Preemption may be either express or implied,” and

“is compelled whether Congress’ command is explicitly

stated in the Statute’s language or implicitly contained in

its structure and purpose.” FMC Corp., 498 U.S. at 57.

ERISA therefore preempts state law if it either (1) has

6

a direct or indirect “connection with” or reference to the

establishment or administration* of self-funded ERISA

plans within the meaning of § 1144(a), FMC Corp.,

498 U.S. at 57; or (2) conflicts with the accomplishment

of the full “purpose and objectives” of Congress to make

such plans “exclusively a federal concern” immune from

any direct or indirect state regulation. Shaw, 463 U.S.

at 96; FMC Corp., supra.

The New York law at issue is not a law of “general

application” that simply regulates hospital rates in a neu-

tral matter. The very purpose of the hospital surcharges

is to influence the users of commercial insurance, self-

insurance and HMOs, which are overwhelmingly

employer-sponsored ERISA plans.* Moreover, ERISA

preemption bars even a state law of general application

which involves the indirect regulation of self-funded em-

ployee benefit plans. Metropolitan Life, 471 U.S. at 739.

B. The Challenged State Law Is Preempted Because

It “Relates To” ERISA Plans.

ERISA preempts the challenged differentials because

plainly they “relate to” ERISA plans within the “broad

common-sense meaning” of having “a connection with or

reference to” such plans. 29 U.S.C. § 1144(a). Pilot

Life, 481 U.S. 41. In particular, this Court has empha-

sized that the preemption clause is not limited to “state

laws specifically designed to affect employee benefit plans.”

District of Columbia v. Greater Washington Board of

Trade, 113 S.Ct. 580, 583 (1992). Shaw, 463 US. at 98,

Pilot Life, 481 U.S. at 48. Even though the challenged

3 The Congressional findings and declaration of policy state that

ERISA was intended to control the “establishment” as well as the

“operation and administration” of employee benefit plans. 29 U.S.C.

§ 1001 (a).

4In 1992, 62.5 percent of non-elderly Americans were covered

by employment-based health plans. Employee Benefit Research

Institute, Sources of Health Insurance and Characteristics of the

Uninsured, January, 1994.

—_

New York statute does not expressly refer to ERISA

plans, under a broad reading of “relate to”, the Second

Circuit properly concluded that the hospital surcharges

have a clear connection with such plans because they af-

fect the choices of arangements by ERISA plans for the

payment of health care benefits: °

The 13% and 11% surcharges are designed to in-

crease hospital costs for patients covered by health

plans other than the Blues, and thus make these com-

peting plans less attractive than the Blues. Obviously,

the surcharges will affect ERISA plans’ health care

benefits. Likewise, the 9% assessment imposed on

HMOs will interfere with a plan’s selection of the

most effective method to provide benefits. Thus, the

surcharges purposely interfere with the choices that

ERISA plans make for health care coverage. Such

interference is suffient to constitute “connection with”

ERISA plans.

Pet. App. A-22 (emphasis added).°

Additionally, it is well settled that a state law “relates

to” an ERISA plan within the meaning of 29 U.S.C.

§ 1144(a) and therefore is preempted where, as here, it

interferes with the freedom of employers to structure the

specific benefits or other terms and conditions of their

health plans. For example, in Shaw, 463 U.S. at 96-97,

this Court held that the New York Human Rights Law,

§§ 290-301 (McKinney 1982 and Supp. 1982-83), “related

to” self-funded ERISA plans within the meaning of § 1144

(a) and therefore was preempted because it “prohibited

employers from strructuring their employee benefit plans

5 The purpose of the 18% surcharge is “to contain hospital costs

and to increase the availability of hospital insurance coverage to

needy New Yorkers” by making the Blues—traditionally the “in-

surance of last resort” for high risk individuals—more competitive

with commercial insurers. Appendix to the Petitioners Writ of

Certiorari in No. 93-1414.

* References to the joint appendix filed with Petitioner’s Brief

are cited as “Pet. App. ——”.

$

in a manner that discriminated on the basis of pregnancy,”

and required employers to pay specific benefits to em-

ployees. See United Food & Commercial Workers & Em-

ployers Arizona Health & Welfare Trust v. Pacyga, 801

F.2d 1157, 1160 (9th Cir. 1986) (Arizona anti-subroga-

tion law was preempted because it prohibited employers

from structuring plans to require reimbursement in the

event of recovery from third party). Thus, the New York

law is preempted unless it falls within the ambit of the

saving clause referred to in the ERISA preemption clause.

C. The “Saving” Clause Is Not Applicable.

The Second Circuit concluded that the “saving” clause

does not exempt the challenged state statutes because the

hospital surcharges expressly regulate hospital rates and

not any practice that constitutes the “business of insur-

ance.” ERISA’s “saving” clause preserves from preemp-

tion any state law which “regulates insurance, banking or

securities.” 29 U.S.C. § 1144(b)(2)(A). As construed

by the Court, the exemption for state regulation of insur-

ance is a narrow one, and it applies only if the state law

actually regulates the “business of insurance”, and even

then it applies only if the employee benefit plan is insured

instead of self-funded. Metropolitan Life, 471 U.S. at

746-48. As stated in FMC Corp., 498 U.S. at 64, “if the

plan is uninsured, the State may not regulate.” The Sec-

ond Circuit applied well settled law in finding that the

criteria established by the courts to determine whether a

practice constitutes the “business of insurance” within the

meaning of the McCarran-Ferguson Act were not met by

the challenged New York statute."

™In enacting McCarran-Ferguson, Congress declared that “the

continued regulation of the business of insurance is in the public

interest.” 15 U.S.C. § 1011 et seg. In enacting ERISA, Congress

reserved to exclusive federal authority the regulation of the field

of employee benefit plans. Shaw, 463 U.S. at 120. In drawing

upon the analysis of McCarran-Ferguson, the court of appeals

properly distinguished the hospital surcharge from the “business

$

Moreover, the District Court properly concl.uded—and

the court of appeals did not question—that those portions

of the 13% surcharge referring to self-funded plans could

not possibly fall within the scope of the “saving” clause

because self-funded plans do not engage in the “business

of insurance” as a matter of law.*®

D. ERISA’s “Deemer” Clause Also Bars The Chal-

lenged State Law.

The contention that the 13% surcharge is saved from

preemption even in the case of self-funded plans ignores

this Court’s recent ruling in FMC Corp., 498 U.S. at 61

(the “deemer clause” exempt[s] self-funded ERISA plans

from state laws regulating insurance). The “deemer

clause” limits the scope of the “saving” clause by requiring

that an employee benefit plan “shall [not] be deemed to

be an insurance company or other insurer . . . engaged

in the business of insurance . . . for purposes of any law

of any state purporting to regulate insurance companies

[or] insurance contacts.” 29 U.S.C. § 1144(b)(2)(B).

In explaining the “deemer” clause’s operation, this Court

has held that it exempts self-funded ERISA plans from

state laws that otherwise “regulate insurance” within the

meaning of the “saving” clause, FMC Corp., 498 U.S. at

61; Metropolitan Life, 471 U.S. at 724.°

of insurance,” stating that: 3]jecause the sucharges expressly

regulate hospital rates they relate only to the contractual obliga-

tions between hospitals and insurers or insureds, but do not directly

implicate the policy relationship between insurers and their in-

sureds.” Pet. App. A-29.

8 Indeed, even prior to the passage of ERISA, state courts

understood that an employer who self-funds health benefits is not

in the “insurance business” because the risk of loss for health

benefits is retained by the employer. Farmer v. Monsanto Co.,

517 S.W. 2d 129 (Mo. 1974).

® Petitioners all but ignore the likely consequences of the hospital

surcharges on self-funded plans, suggesting that since no self-

10

It is well settled that where, as in the deemer provision,

“Congress explicitly enumerates certain exceptions to a gen-

eral prohibition, additional exceptions are not to be im-

plied, in the absence of a contrary legislative intent.”

Andrus v. Glover Construction Co., 446 U.S. 608, 616-17

(1980). That contrary intent is not to be found in the

legislative history of ERISA. Instead, ERISA and its leg-

islative history explicitly—indeed, unqualifiedly—show that

Congress knew exactly what it wanted to accomplish in

29 U.S.C. § 1144(b)(2)(B) to prevent the savings clause

from leading to a characterization of employee benefit

plans as insurance companies—and used unmistakably

plain language to achieve that objective. Thus, any con-

tention that ERISA does not insulate self-funded plans

from state regulation not only ignores the plain language

of the “deemer” clause,° but also the great weight of

authority upon which the self-insurance industry has

relied.”

funded ERISA plan is among the plaintiffs in this action, questions

concerning the “deemer” clause are not presented by this case.

We disagree. As argued by the respondents in their brief, this case

does raise important questions concerning application of the N.Y.

statute to self-funded plans. SIIA, therefore, fully endorses the

respondents arguments on this issue. It will not, however, repeat

those arguments.

10 Faced with a conflicting and uncertain basis for regulation

among the states, the “deemer” language was utilized to create

an irrebuttable presumption that these plans are not insurance trust

companies, etc., for purposes of state regulation. The irrebuttable

presumption would not be overcome even if an employee benefit

plan engages in activities which bring it within the insurance...

activities generally regulated by a state. Activity Report of the

Committee on Education and Labor, Rpt. No. 91-1785 (January 3,

1977) (emphasis added).

11 See Reilly v. Blue Cross and Blue Shield of Wisconsin, 846

F.2d 416 (7th Cir.), cert. denied, 488 U.S. 856 (1988); Powell v.

Chesapeake & Potomac Tel. Co., 780 F.2d 419 (4th Cir. 1985),

cert. denied, 476 U.S. 1170 (1986); Children’s Hospital v. Whit-

comb, 778 F.2d 239 (5th Cir. 1985) ; Standard Oil of California v.

Agsalud, 633 F.2d 760 (9th Cir. 1980), aff'd mem., 454 U.S. 801

11

Il. THE HOSPITAL SURCHARGE LAW WILL AD-

VERSELY AFFECT SELF-FUNDED HEALTH

PLANS AND THEIR PARTICIPé.NTS.

A. Plan Choices of Arrangements For Providing

Health Benefits Will Be Affected.

The hospital surcharges will impact on the ability of

ERISA plans to select the form of health care arrange-

ments which are most appropriate for plan participants

and beneficiaries. ERISA plans have the choice of pro-

viding health coverage through: (1) the purchase of

commercial health insurance from an insurer; (2) self-

insurance, whereby the employer-sponsored plan is di-

rectly responsible for health care bills; (3) subscription

with a health maintenance organization; and (4) a non-

profit health service corporation, such as Blue Cross/Blue

Shield plans. The hospital surcharges affect ERISA plans

significantly and immediately—and not in a “remote and

tenuous” manner—because they directly affect plan

choices of the above options. The surcharges impact on

the price of hospital services paid by ERISA plans (mis-

takenly described by petitioners as “an indirect and solely

economic impact,”) and are designed to make these plans

less attractive than the Blues. As the Second Circuit

noted, the surcharges “were designed to induce ERISA

plans to switch their hospital coverage from commercial

insurers to the Blues.” (Pet. App. A-29.) Insofar as

the New York law is designed to “level the playing field”

between the Blues and competing plans it has the effect

(1981) ; Hewlett-Packard Co. v. Barnes, 571 F.2d 502 (9th Cir.),

cert. denied, 489 U.S. 831 (1987).

12The New York hospital surcharges on commercial insurers,

self-funded plans, and HMOs are designed to offset higher costs

in Blue Cross plans with higher risk enrollees. “[E]mployers

argue that such surcharges essentially make them pay twice for

health care benefits—once for their own employees and a second

time, through the surcharges, to subsidize uncompensated care.”

Geisel, Health Care Law and Disorder, Business Insurance, No-

vember 28, 1994 at 1.

"f2

of influencing the most fundamental choice to be made by

plans—selection of the most desirable and effective

method for providing and funding health benefits.

B. Health Plan Costs Will Increase Or Benefit Levels

Will Be Reduced.

In enacting ERISA, Congress helped foster the favor-

able legal regulatory environment“ that has resulted in

the phenomenal growth of self-funded plans.“ This

growth also reflects recognition of self-insurance as a

viable alternative to conventional insurance for funding

health benefits, and as a cost-efficient method of providing

expanded benefit coverage during a period of rapidly

escalating health costs.”

18 As reflected in the congressional findings and declaration of

policy, Congress drafted ERISA to carry forward public policy

interests which included the following: (1) encourage the growth

and development of a system of cost-effective employee benefit plans

and (2) protect interstate employers and plans from inconsistent

state and local regulation by providing for uniform federal law to

govern employee benefits. 29 U.S.C. §§ 1001(a) and (b).

14 According to a recent survey, 67 percent of employers of all

sizes surveyed in 1992 self-fund their group health plans, up from

52% in 1989. A. Foster Higgins & Company, Health Care Survey

(1992).

18 Self-insurance is an important—and often-used—option for

the thousands of employers who provide health benefits to their

employees. Self-funding of plans provides employers flexibility

to design and administer health plans to meet specific employee

needs. It also provides cash flow advantages and freedom from

costly state regulation. Moreover, employers who self-insure gain

the financial advantage of the time-value of their capital assets.

Since medical claims are paid by employers as they are submitted,

firm assets can ¥e retained by the employer. These unique charac-

teristics and the favorable legal regulatory environment fostered

by ERISA have contributed significantly to the dramatic expansion

of self-insured health plans in this country in recent years. More

than 50% of the U.S. workforce covered by group health plans

participate in self-funded plans. HCFA Review, Self-Insured

Health Plans, Vol. 8 No. 2 (1986).

‘13

important factor which has contributed to this

is

the flexibility of employers within the present

administer self-funded

i

He

é.

can be used to pay enhanced benefits.”*

The surcharges will, however, result in increased hos-

pital expenses for patients covered by employer sponsored

health plans other than the Blues, thus increasing the

cost of plans competing with the Blues. Requiring plans

choice but to restrict payments for expenses related to

hospital stays or to eliminate or restrict coverage for other

benefits such as vision and dental care. In other cases,

in order to maintain current benefit coverages and levels,

higher plan costs necessarily will be shifted to plan par-

ticipants in the form of higher co-payments and larger

deductibles. Thus, the hospital surcharges not only

interfere with the benefit structure of ERISA plans, but

also affect the financial basis upon which such plans are

established and maintained.

C. The Administrative Burdens of Operating ERISA

Plans Will Increase.

The New York hospital surcharge law currently affects

the administration of both insured and self-insured plans.

Based on plan terms and conditions, health plans cus-

1% In 1990, employees that self-insured health benefits reported

much smaller cost increases than employers who purchased health

plans from commercial insurers. Plan costs for self-funded em-

ployers rose 17.6% in 1990 to an average of $2,587 per employee

from $2,200 in 1989. By contrast, costs for insured health plans

jumped 22.7% in 1990 to an average of $2,608 per employee from

$2,125 in 1989. A. Foster Higgins, supra, note 14.

14

tomarily provide reimbursement for “medically necessary”

expenses such as the hospital stay, supplies, prescriptions,

and other services. Tax assessments and fees included on

hospital bills over and above the charge for covered ex-

penses are normally treated as “excluded” items and are

not reimbursable under plan terms. Since assessments

such as the New York surcharges are usually included as

a component of specific hospital expenses (i.e., a $250/

day hospital rate would generally include a 13% sur-

charge which is built into the rate), plan administrators

are required to incur substantial costs to process (i.e. to

recalculate) millions of hospital rate charges submitted

annually on benefit claims forms. For example, these

time consuming calculations—an integral component of

plan administration—require costly adjustments to com-

puter programs utilized by claims processors to handle

snatieth aia

Moreover, written notices and other communications

with plan participants which provide an explanation of

items excluded from hospital bills also affect plan admin-

istration, to say nothing of the resulting negative implica-

tions on relationships between plans and their partici-

pants. In sum, the imposed surcharges place significant

administrative costs and other burdens on plans which

must comply with the state statute.

Finally, another effect of allowing hospital surcharges

to be imposed on ERISA plans is the increased complex-

is customary for hospitals to require an assignment

by patients to third party payors for direct reimbursement of

expenses, this practice adds an additional administrative com-

the

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likely to enact such statutes, while others will choose not

to do so. Monitoring and compliance with varying and

often inconsistent state statutes will create significant new

administrative burdens. Instead of promoting order and

greater uniformity, greater fragmentation and confusion

will result, particularly for large employers which operate

in many states.

CONCLUSION

Inclusion of a broad preemption provision in ERISA

was designed by Congress to displace state laws, primarily

because of the increasingly interstate nature of employee

benefit plans and the often conflicting state standards

applicable to such plans. To limit the breadth of the

preemption provision in connection with state hospital

surcharge laws that significantly affect ERISA plans

would close an important chapter in the development of

ERISA’s preemption policy and open a new chapter with

adverse implications for employee benefit plans. In sum,

failure to uphold the Second Circuit’s decision will open

the door for state legislatures to enact statutes which sig-

nificantly affect ERISA plans in flawed reliance on a

“law of general application” standard which would

threaten the very viability of ERISA plans and self-

insurance as an attractive alternative for providing health

benefits to millions of employees and their families.

Respectfully submitted,

GEORGE J. PANTOS

VEDDER, PRICE, KAUFMAN,

KAMMHOLZ & DAY

1600 M Street, N.W.

Washington, D.C. 20036

(202) 828-5026

Counsel for Amicus Curiae