Amicus Curiae Brief — De Buono v. NYSA-ILA Medical and Clinical Services Fund

NOV 29 1996

In THE

Supreme Court of the Unite States

OcToser TERM, 1996 | we

BARBARA A. DeEBuONO, M.D., in her capacity as New

York State Commissioner of Health; KAREN SCHIMKE

in her capacity as New York State Executive Deputy

Commissioner of Health; Deputy Director, Division

of Health Care Financing, Office of Health Systems

Management, New York State Department of Health,

7 Petitioners,

NYSA-ILA MEDICAL AND CLINICAL SERVICES FUND, by

its Trustees, JoHN Bowers, James Capo, FRANK

LONARDO, WILLIAM P. LyncH, M. BRIAN MAHER

JAMES P. MALIA, GERALD OWENS, and PETER VICKERS,

Respondents.

On Writ of Certiorari to the

United States Court of Appeals

for the Second Circuit

BRIEF OF AMICI CURIAE HEALTHCARE

ASSOCIATION OF NEW YORK STATE AND

AMERICAN HOSPITAL ASSOCIATION

IN SUPPORT OF PETITIONERS

MARK THOMAS JEFFREY J. SHERRIN *

HEALTHCARE ASSOCIATION PHILIP ROSENBERG

OF NEw YORK STATE SHERRIN & GLASEL

74 North Pear! Street 74 North Pear! Street

Albany, NY 12207 Albany, NY 12207-2710

FREDERIC J. ENTIN (518) 465-1275

JAMES A. HENDERSON

AMERICAN HOSPITAL

ASSOCIATION

One North Franklin

Chicago, IL 60606 * Counsel of Record

Wison - Eras Pawrine Co., Inc. - 789-0096 - WASHINGTON, D.C. 20001

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I. THE DIRECT/INDIRECT DICHOTOMY IS

AN IMPROPER TEST FOR DETERMINING

ERISA PREEMPTION |.

HOSPITALS OPERATED BY ERISA PLANS

ARE SUBJECT TO THE SAME LAWS THAT

APPLY TO ALL OTHER HOSPITALS ..............

A. The Direct/Indirect Test Would Displace

General Health Care Regulation

B. Obtain & Wetbttel Te Met 0 Pian Fenction

or Benefit lett

ED diatetinensinmaitrecbindrintrunctenereecnpunsecs

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TABLE OF AUTHORITIES

CASES Page

Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 604

(1981) 7,12

BFP v. Resolution Trust Corp., 114 8. Ct. 1757

(1994) 7

Chassin v. NYSA-ILA Med. & Clinical Servs.

Fund, 115 S. Ct. 1819 (1995) 4

Cipollone v. Liggett Group, Inc., 505 U.S. 604

(1992) 5

District of Columbia v. Greater Washington Bd. of

Trade, 506 U.S. 125 (1992) 7,12,17

FMC Corp. v. Holliday, 498 U.S. 52 (1990)... 12, 18

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

CRUD nwiteineeeten i” 12, 16, 18

Grove City College v. Bell, 465 U.S. 555 (1984)... 8

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

(1990) 6, 7,12

Mackey v. Lanier Collection Agency & Serv., 486

U.S. 824 (1988) ...... 7,18,17

Metropolitan Life Ins. Co. v. Massachusetts, 471

U.S. 704 (1985) 7

New York State Conference of Blue Cross & Blue

Shield Plans v. Travelers Ins. Co., 115 8. Ct.

1671 (1995)

NYSA-ILA Med. & Clinical Servs. Fund v. Azelrod,

27 F.3d 828 (2d Cir. 1994) .. 4, 16

NYSA-ILA Med. & Clinical Servs. Fund v. Azelrod,

74 F.3d 28 (2d Cir. 1996) ; 4

Rebaldo v. Cuomo, 749 F.2d 188 (2d Cir. 1984) ....... 14

Russello v. United States, 464 U.S. 16 (1988)... 6

Shaw v. Delta Air Lines, 468 U.S. 85 (19838) ....6, 12, 18

Varity Corp. v. Howe, 116 8. Ct. 1065 (1996) 17

CONSTITUTIONAL AND STATUTORY

MATERIALS

Employee Retirement Income Security Act of 1974

(“ERISA”), 29 U.S.C. §§ 1001-1461 (1994)... passim

ERISA § 514(a), 29 U.S.C. § 1144(a) (1994)... passim

Health Maintenance Organization Act of 1973, Pub.

L. No. 98-222, 87 Stat. 914 § 2 sec. 1811 (codified

at 42 U.S.C. § 300e-10 (1994) ) 19

N.Y. Const. art. XVII, §8.00.00000000002

N.Y. Epuc. Law § 6522 (McKinney 1985)...

N.Y. Pus. HEALTH Law § 2801(1) (McKinney

1993)

N.Y. Pus. HeaLtu Law § 2801-a (McKinney 1998

& Supp. 1996)

N.Y. Pus. HEALTH Law § 2807-d (McKinney Supp.

1996)

New York Health Care Reform Act of 1996, 1996

N.Y. Laws ch. 689, §112-b (codified at N.Y.

Pus. HEALTH Law § 4408-a).. Cis

: RBEGULA-

TORY IssUEs For STATE PoLicy MATTERS (Na-

tional Academy for State Health Policy, Feb.

1996)

How one employer implemented on-site child care,

Employee Benefits Mgmt. Directions (CCH) No.

109, July 11, 1995, at 1 Pn

19

iv

TABLE OF AUTHORITIES—Continued In THE

Page Supreme Court of the United States

Leigh P. Perkins, Solo Wins Prepaid Contract, OctTosBer TERM, 1996

Creates Instant Firm, Law. WKLY. USA, May

22, 1995, at 7 10

James C. Robinson, Health Care Purchasing and |

Market Changes in California, HEALTH AFFAIRS, No. 95-1594

Winter 1995, at 117 10

Bruce Shutan, Higher learning for K through 3,

EMPLOYEE BENEFIT NEws, Feb. 1996, at 9 10

Respondents.

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with or reference to” a plan. Shaw v. Delta Air Lines,

463 U.S. 85, 96-97 (1983). Under the “connection with”

standard, this Court has cautioned that a state law may be

preempted even if it is not specifically designed to affect

ERISA plans. Ingersoll-Rand Co. v. McClendon, 498

U.S. 133, 139 (1990). Nevertheless, many laws of gen-

eral application are not preempted where they have only

a “tenuous, remote, or peripheral” connection with cov-

ered plans. Shaw, 463 U.S. at 100 n.21.

In Travelers, this Court recognized that prior attempts

to construe the phrase “relate to” did not provide much

help in drawing the preemption line, and that the phrases

“relate to” and “connection with” cannot be interpreted

too literally to define the measure of preemption. Travelers,

115 S. Ct. at 1676-77. Rather, the Court in Travelers

stated that it must “look instead to the objectives of the

ERISA statute as a guide to the scope of the state law

that Congress understood would survive.” Jd. at 1677.

This Court therefore conducted a comprehensive review of

the purposes of the ERISA preemption provision and its

legislative history, as well as congressional activity in the

field of health care regulation, to determine the reach of

ERISA preemption in connection with hospital rate regu-

lation. Id. at 1677-82. Considering the surcharges at is-

sue in Travelers, this Court distinguished laws with mere

indirect economic impacts on plans from laws which man-

date plan behavior. /d. at 1679.

What the Supreme Court has never said, and what Con-

gress also did not say, is that the determinative test for

ERISA preemption was to be merely whether the impact

of the state law was direct or indirect. It would have been

easy for Congress to have said so, and just as easy for this

Court to have so pronounced. Congress, however, simply

“did not write the statute that way,” Russello v. United

States, 464 U.S. 16, 23 (1983), and “{iJn a comprehen-

sive regulatory scheme like ERISA, such omissions are

7

significant ones.” Mackey v. Lanier Collection Agency &

Serv., 486 U.S. 825, 837 (1988). See also BFP v. Reso-

lution Trust Corp., 114 S. Ct. 1757, 1761 (1994). In-

stead, Congress used broad language, which this Court has

held necessitates resort to traditional rules of preemption

analysis to determine Congressional intent.

This Court has held that the preemption line is to be

drawn based on the compulsory nature of the law or its

effect upon plan administration, not on the directness of

its impact. In Mackey, for instance, the Court found that

ERISA did not preempt the direct application of a state

garnishment law to benefits earned under an ERISA wel-

fare plan. The Court explained that Congress simply never

intended to block the application of run-of-the-mill state

laws, such as garnishment statutes, to ERISA plans. If

direct economic impact were the test, the result in Mackey

should have been different.

The direct/indirect analysis employed by the Second

Circuit must also be rejected because this Court has made

clear that laws with indirect effects can also be preempted.

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

525 (1981), it was stated:

it is of no moment that New Jersey intrudes in-

directly, through a workers’ compensation law, rather

than directly, through a statute called ‘pension regula-

tion.” ERISA makes clear that even indirect state

action bearing on private pensions may encroach

upon the area of exclusive federal concern.

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

139 (1990); District of Columbia v. Greater Washington

Bd. of Trade, 506 U.S. 125, 129-30 (1992). In Metro-

politan Life Insurance Co. v. Massachusetts, 471 U.S. 704

(1985), this Court held that a mandated benefit law

related to plans even though it only bore indirectly on

such plans. And in Travelers, the decision concluded with

the observation that laws with “acute, albeit indirect”

economic effects might be preempted if they force plans

to behave in a certain manner. Travelers, 115 S. Ct. at

1683. If, as these cases teach, laws which bear indirectly

upon ERISA plans may relate to such plans, then the

determinative factor in Travelers could not have been

simply the indirectness of the economic impact. Likewise,

the question of preemption in NYSA-ILA cannot turn

simply on whether the law affects plans directly or

indirectly.*

B. The Test Is Impractical

A direct/indirect distinction not only has no support

in prior decisions of this Court, but it would also prove to

be too impractical to justify its adoption. The difficulty

in separating direct from indirect effects is evident from

the fact that the test was misapplied by the Second Circuit

in NYSA-ILA. The medical centers that are the subject

of this action and upon which the health facilities assess-

ment was imposed were incorporated as not-for-profit

corporations under special acts of the New York State

Legislature. (Joint Appendix at 98). These medical

centers are legal entities separate from the self-insured

plan that established them. The assessment was not

imposed upon the ERISA fund, but upon a separate hos-

pital. The impact upon the ERISA fund, therefore, was

not a function of the law itself, but rather of the relation-

ship voluntarily established between the fund and the

hospital. There did exist, therefore, the very “middleman”

between the tax and the Fund that the Second Circuit

Stated to be absent.

*In other contexts as well, this Court has refused to accept a

direct/indirect distinction as having any legal significance in deter-

mining congressional intent. Thus, in Grove City College v. Bell,

465 U.S. 555, 563-65 (1984), the Court rejected the argument that

the characterization of federal assistance as direct or indirect would

determine the application of a federal statute prohibiting sex dis-

crimination in any education program or activity receiving Federal

financial assistance. Instead, the Court in Grove City conducted a

comprehensive review of congressional history and intent to discern

the intended reach of the statute, much as this Court did in

Travelers.

9

The line between direct and indirect impacts is far

harder to discern than the Second Circuit perceived. As

the health care system becomes more complex and payers

sota, HEALTH CaRE Momrt. REV., Fall 1995, at 42-56.

New York recently enacted the Health Care Reform Act

of 1996, which will create a new category of managed

care licensure known as Integrated Delivery Systems.

1996 N.Y. Laws ch. 639, § 112-b (codified at N.Y. Pus.

HEALTH Law § 4408-a).

As NYSA-ILA shows, ERISA plans, employers and in-

surance companies are setting up their own health care

®In 1994, the Hospital Trustees of New York State reported that

45% of acute care facilities surveyed nationwide had formed an

integrated delivery system in the preceding twelve months, and

that another 25% indicated that they would enter into some form

of integrated care in the coming six months. HOSPITAL TRUSTEES

Or NEw YorK STATE, AN INTRODUCTION To HEALTH CARE NET-

WORKS (1994). In New York City, hospital system and network

formation has been so great that another 1994 survey conducted

by the Greater New York Hospital Association reported that 82%

of respondents were already in at least one network or system, more

than 1 in 8 reported being in two or more networks, and almost

half were part of a system in which they had equity or ownership

in a managed care organization. Jd. at 6. While there are many

reasons for the formation of networks, “the most pressing is the

clear indication that the healthcare reform discussions will result

in some financing system that will reward the efficiencies suggested

by streamlining and integrating care through networks.” Id. at i.

Just two years later, virtually all hospitals in New York State are

now integrated with other hospitals, providers or payers in health

care networks. See also PATRICIA A. BUTLER & ELIZABETH MITCHELL,

HEALTH CARE PROVIDER NETWORKS; REGULATORY ISSUES FoR STATE

POLICY MATTERS (National Academy for State Health Policy, Feb.

1996).

10

delivery systems. Recently reported examples include an

occupational health clinic being built by Delta Air Lines

in cooperation with its health insurer, CIGNA Health Care

Inc., to be staffed by Emory University doctors. Robert

Kazel, Onsite clinic expected to cut Delta comp tab, Bus.

Ins., Jan. 29, 1996, at 6. Deere & Co. has set up its own

clinics and opened them to other companies. Louise Ker-

tesz, Employers, insurers center attention on primary care,

Mop. HEALTHCARE, June 19, 1995, at 136 (describing the

“rush” of companies to build their own facilities). Quad/

Graphics Inc. is planning to build its second onsite medi-

cal facility in five years, this time jointly with a Milwau-

kee-based system of 1,500 doctors, four hospitals and var-

ious other medical facilities. Robert Kazel, Lowering

costs onsite, Bus. INs., October 23, 1995, at 2, 104.° It is

also common for bospitals and unions to be establishing

their own health maintenance organizations, or for insur-

ance companies, HMOs, hospitals and other providers to

form partnerships, sharing capital investments and finan-

cial risks."

The implications of the Second Circuit decision in light

of the revolutionary changes in health care are profound.

If the impact of the HFA in NYSA-ILA was direct upon

the plan because the plan owned the medical center, there

should be no reason that the same result would not be

* Employers are also setting up their own child care centers (see,

é.g., Bruce Shutan, Higher learning for K through 3, EMPLOYEE

BENEFIT NEws, Feb. 1996, at 9; How one employer implemented

on-site child care, Employee Benefits Mgmt. Directions (CCH) No.

109, July 11, 1995, at 1, 4; Robert N. Kazel, New York Life sets up

backup care center, Bus. INS. Nov. 18, 1995, at 58), and legal

services plans (see, ¢.g., Leigh P. Perkins, Solo Wins Prepaid Con-

tract, Creates Instant Firm, LAW. WKLY. USA, May 22, 1995, at

7-9), two of the other benefits that ERISA plans may provide

in kind.

tSee James C. Robinson, Health Care Purchasing and Market

Changes in California, HEALTH AFFAIRS, WINTER 1995, at 117-30

(describing how previously autonomous organizations are consoli-

dating into complex networks).

11

reached if the plan was a 75%, 50% or just 25% owner

—the tax would still fall directly on the plan. A hospital,

indeed an entire integrated delivery system, could im-

munize itself from state taxes and other costly regulation

merely by transferring a minority ownership or operational

interest to an ERISA plan. Similarly, it would appear that

the 9% assessment in Travelers would have been pre-

empted if the HMOs had been established by ERISA

plans, or if the plans were part owners of the HMO.

The entanglement between plans and providers can

occur in numerous other ways. If a hospital has a con-

tract to provide care to a plan’s members, and the plan

agrees to share in the hospital’s costs, would the HFA on

the hospital be preempted as having a direct impact on

the plan?* If not, how is that substantively different from

the facts in NYSA-ILA? And if it is not substantively dif-

ferent, then a very easy solution has been found for pro-

viders to avoid state regulation—simply affiliate with an

ERISA plan. If the NYSA-ILA hospitals establish a

wholly-owned nursing home as a subsidiary, would the

HFA applied against this nursing home be considered a

direct or indirect assessment on the NYSA-ILA Fund?

The health care delivery and payer systems that are

developing could not have been envisioned by Congress

when it enacted ERISA in 1974. At that time, HMOs

were in their infancy, managed care was a concept for

the future, and integrated delivery systems and alliances

were nonexistent. Health care delivery systems have been

revolutionized since 1974, and the distinctions between

employers, payers and providers are rapidly disappearing.

Union, pursuant simply to a contract between the PPGU’s E -

covered plan and the Fund. nee

12

If a direct/indirect test could have had viability in 1974,

it cannot now.

C. The Proper Analysis

The proper inquiry is not whether a state law that

causes an economic impact upon plans does so directly or

indirectly, but whether the law mandates an employee

benefit plan’s structure or administration. If it does, it

does not matter whether it does so directly or indirectly.

It is now well-established that Congress’s purpose in enact-

ing ERISA’s preemption provision was to ensure that the

field of employee benefit plans would be exclusively a

federal concern. Alessi v. Raybestos-Manhattan, Inc.,

451 U.S. 504, 523 (1981). Specifically, Congress in-

tended to eliminate the threat of conflicting and inconsist-

ent state or local regulation of ERISA plans so that such

plans could be structured and operated under a

uniform set of rules. Fort Halifax Packing Co. v. Coyne,

482 U.S. 1, 9 (1987). See also Ingersoll-Rand Co. vy.

McClendon, 498 U.S. 133, 142 (1990) (ERISA’s pre-

emption provision “was intended to ensure that plans and

plan sponsors would be subject to a uniform body of

benefits law”); FMC Corp. v. Holliday, 498 U.S. 52, 60

(1990) (ERISA ensures that plan providers would not

have “to design their programs in an environment of dif-

fering state regulations [thereby] complicat[ing] the ad-

ministration of nationwide plans.” )

This Court, therefore, has distinguished state laws that

impair an ERISA plan’s ability to maintain a uniform

structure and/or administration from other types of state

laws that merely brush against such plans. In Alessi,

supra, this Court ruled that ERISA preempted a New Jer-

sey law that prohibited pension plans from offsetting

workers’ compensation benefits because it interfered with

a plan’s right to determine its pension benefits. Similarly,

in Greater Washington Bd. of Trade, supra, and Shaw,

supra, the Court found the respective state laws at issue

anti-subrogation law could not prevent ERISA plans from

being structured to seek reimbursement of certain medical

benefits it pays to participants who recover from a third

Party.

. . at

1678), the Court explained that the economic nature of

the impact was a “far cry” from the conflicting state direc-

tives that Congress was concerned about when it enacted

as a regulation of an ERISA plan itself.” Id. Similarly,

the mandatory nature of a law, and not the directness of

it, impact, was the concern of the Court when it cautioned

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no different from how the surcharges in Travelers affected,

but did not determine, the coverage decision.

The judgment of the United States Court of Appeals

for the Second Circuit should be reversed.

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