Petition for Writ of Certiorari — Rebaldo v. Cuomo

~

October Term, 1984

SEBASTIAN REBALDO, as Chairperson of the Board of

Trustees of the UNITED OPTICAL WORKERS INSURANCE

FUND,

Petitioner,

vs.

MARIO CUOMO, GOVERNOR OF THE STATE OF NEW

YORK; and DAVID AXELROD, COMMISSIONER OF

HEALTH OF THE STATE OF NEW YORK,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE SECOND

CIRCUIT

I. PHILIP SIPSER

SIPSER, WEINSTOCK, HARPER,

DORN & LEIBOWITZ

Attcrneys for Petitioner

380 Madison Avenue

New York, New York 10017

(212) 867-2100

BELLE HARPER

RICHARD DORN

JEROME TAUBER

SUSAN MARTIN

Of Counsel

QUESTION PRESENTED

Whether a state statute that prohibits the continuation. or

negotiation of discount rate agreements between self-insured

employee benefit plans and hospitals, while mandating discount

rates for state regulated not-for-profit health insurance

corporations, ‘‘relates to’’ an employee benefit plan within the

meaning of Section 514(a) of the Employee Retirement Income

Security Act of 1974, 29 U.S.C. §1144(a) and is therefore pre-

empted by that Act.*

* The caption of the case in this Court contains the names of all parties

in the United States Court of Appeals for the Second Circuit. Blue Cross and

Blue Shieid of Greater New York (‘*Blue Cross’) and the Hospital Association

of New York participated in the court below as Aynici Curiae in support of

respondents.

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TABLE OF CONTENTS

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Constitutional and Statutory Provisions Involved ........

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The Proceedings in the District Court ..............

The Proceedings and Opinion Below ...............

Reasons for Granting the Writ:

I. This case involves important questions of federal law

presently under consideration by this Covrt.......

Il. The decision below is in conflict with decisions of this

Court and with the decisions of other federal courts

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Page

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ii

Contents

TABLE OF CITATIONS

Cases Cited:

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

See eee eee 08 698948 6488 00488 6868888 O28 O46 8 6 6 8

American Telephone Company v. Merry, 592 F.

ES en cihs Pea CGhhDS bt on peenesess

Baker v. Caravan Moving Corporation, 561 F.

DC ME eGescaccasksocessnessas

Blue Cross and Blue Shield of Alabama v.

Apothecary, 567 F. Supp. 1258 (N.D. Ala.

Page

504 (1981)

padcacat 15, 21

Peacock’s

| Se

Brown v. Hotei and Restaurant Employee’s Local 54, 104 S.

eS aan ti ca ie oe 6a e bdntescedes bee 17

Cartledge v. Miller, 457 F. Supp. 1146 (S.D.N.Y. 1978)

EE EES rr 20

Dawson v. Whaland, 529 F. Supp. 626 (D.N.H. 1982)... 23

Garcia v. San Antonio Metropolitan Transit Auth., Nos.

82-1913 and 82-1951 (February 19, 1985) ........... 24

General Split Corporation v. Mitchell, 523 F. Supp. 427 (E.D.

A Shi: ein wakes cank age sgeie vk Kuten 23

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

1978), cert. denied, 429 U.S. 831 (1979)........... 16, 21

Lane v. Goren, No. 83-6496 (Sept. 27, 1984) ........... ll

ail

iv

Contents

Page

M’Culloch v. Maryland, 14 U.S. (4 Wheat.) 431 (1819)

Metropolitan Life Insurance Company v. Commonwealth of

Massachusetts, No. 84-325, argument scheduled .....

be bod OCS SRE URNE CNA wkd ReeR RN eee 1, 11, 12, 13

National Carrier’s Conference Committee v. Hefferman, 454

FP. Se. FOS Gd. GOR. BOGE ccc cccusccccccns 20, 21, 22

Pervel Industries Inc. v. Connecticut Commission on Human

Rights and Opportunities, 468 F. Supp. 490 (D. Conn.

1978), aff'd mem., 603 F. 2d 214 (2d Cir. 1979), cert.

Gees, SE5 Wak Se Se cade seesecmebaiesccccs 20, 23

St. Paul Electrical Workers Welfare Fund v. Markman, 490

Fa es Se Gs a PEE anes ncecsasesoesess 23

Shaw v. Delta Airlines, 462 U.S. ___., 103 S. Ct. 2890 (1983)

eacdeueehesbss0eebe6beectenesene 9, 10, 15, 18, 20, 25

Standard Oil of California v. Agsulud, 633 F. 2d 760 (9th

Cir. 1980), aff'd mem., 454 U.S. 801 (1981) ........

Stone v. Stone, 450 F. Supp. 919 (N.D. Cal. 1978), aff'd,

632 F. 2d 740 (9th Cir. 1980), cert. denied sub. nom.,

Seafarer’s Int’l. Union v. Stone, 453 U.S. 922 (1981)

Stone v. Webster Engineering Corp. v. Isley, 690 F. 2d 323

(2d Cir. 1982), aff'd. sub. nom., Arcudi v. Stone &

Webster Engineering Corportation, ___. U.S. ___., 103

ie See Eo U066 0 60 6.4u6s 0b n0cdeeeaceeuedce 23

Statutes Cited:

ee IIS, b's does VANES rekbbe kes Lakes souas |

Section 514(a) of Employee Retirement income Security

Pat GF BPG, ZO UG. SERGGERD occ cc cccscccsscce passim

Section 2807-a.6(b) of New York Public Health Law

(McKinney Supp. 1984-85)... .. 2.0... ccc cece ees passim

United States Constitution Cited:

nn Ts eansbiuasaneauune 6

Other Authorities Cited:

Department of Labor Advisory Opinion:

No. 79-40A (December 12, 1979) .................. 23

No. 80-60A (October 10, 1980) ..................5.. 23

I a a ee ees oun ak amet wae 23

H.R. Rep. No. 1785, 94th Cong. 2d Sess. 47-48 (1977)

Kilberg and Inman, Preemption of State Laws Relating to

Employee Benefit Plans: An Analysis of ERISA

Section 514, 62 Texas L.R. 1313 (1984)... ....... 18, 24

120 Cong. Rec. 29,948-49 (1974)... 0... cee cee 19

vi

Contents

Page

APPENDIX

Opinion of the United States Court of Appeals for the Second

Circuit Decided November 26, 1984. ............... la

Opinion and Order of the United States District Court,

Southern District of New York Dated March 12, 1984

nob c 06 mbes 0 obwed 0 ce pelsc bo 06 Gebees Ubbecbédotscces 17a

Order of Judgment of the United States District Court for

the Southern District of New York Dated March 30, 1984

Order of the United States Court of Appeals for the Second

Circuit Dated November 26, 1984... ......0...000005. 47a

ES Pe a eee Tt «ee 494

OPINIONS BELOW

The November 26, 1984 opinion of the United States Court

of Appeals for the Second Circuit is reported at 749 F.2d 133

and is reptinted at Appendix (“‘App’’.) 1-16 to this petition. The

March 12, 1984 opinion of the United States District Court for

the Southern District of New York is not officially reported and

is reprinted at App. 17-43 to this petition.

JURISDICTION

The judgment of the United States Court of Appeals for the

Second Circuit was entered on November 26, 1984. This Courf

has jurisdiction pursuant to 28 U.S.C. §1254(1).

CONSTITUTIONAL AND STATUTORY

PROVISIONS INVOLVED

Relevant portions of Section 514 of the Employee Retirement

Income Security Act of 1974, as amended, (“‘ERISA*’), 29 U.S.C.

§1144 and Section 2807-a.6(b) of New York Public Health Law

(McKinney Supp. 1984-1985), are reprinted at App. 49-52 to this

petition.

STATEMENT OF THE CASE

This case involves the extent to which a State may, through

regulation, influence the form and operation of employee benefit

plans. The issues presented are related closely to those before the

Court in Metropolitan Life Insurance Company v. Commonweaith

of Massachusetts, No. 84-325, argument scheduled.

tl

Petitioner is the Chairperson of the Board of Trustees of

a small self-administered employee welfare benefit plan' (‘the

Fund’’) that provides health, hospitalization and other benefits

to approximately 1500 employees and their dependents. The Fund's

participan’ work for 180 contributing employers located in five

states: New York, New Jersey, Connecticut, Massachusetts and

Florida.’ .

The employee participants in the Fund receive modest salaries.

Without the benefits provided by the Fund, these participants

would be “‘medically indigent’’ because they could not afford to

purchase health insurance from Blue Cross and other commercial

insurers, yet they earn too much to qualify for federal medical

assistance under Medicaid. But for the Fund, hospitals that provide

care to this group would often be unable to collect their fees.

By providing hospital coverage to groups otherwise medically

indigent, the Fund serves an important public interest.

The Fund provides benefits to its participants and their

dependents regardless of past medical experience or health risk.

1. Section 1) of ERISA, 29 U.S.C. §1002(1), defines an “employee

welfare benefit plan’’, in part, as one that is “established or is maintained for

the purpose of providing for its participants or their beneficiaries, through the

purchase of insurance or otherwise, (A) medical, surgical or hospital care or

benefits."’ Section 3) of ERISA, 29 U.S.C. §1002(3), defines the terms

“employee benefit pian"’ and “plan” to mean either an employee welfare benefit

plan or an employee pension benefit plan. As used herein the terms “ERISA

fund" and “‘plan"’ mean an employee welfare benefit plan.

2. The facts as set forth were contained in the complaint and papers

submitted in the district court in support of a motion for a preliminary injunction.

At the suggestion of the district court the parties and amicus curiae Blue Cross

agreed to treat the motion as one for summary judgment on the issue of pre-

emption under ERISA and further agreed that there were no material facts in

dispute. Accordingly, for the purposes of this petition, the material facts as

asserted by the Fund must be deemed uncontested.

It is the primary provider under Medicare for workers aged 65-69,

who are entitled to the same benefits offered under the pian to

younger workers. The Fund also provides benefits for pensioners

and laid off employees. Benefits are provided to all participants

without reference to their income or the rate at which each

member's employer contributes.

The Fund's primary source of funding consists of the

contributions made by employers pursuant to collective bargaining

agreements with United Optical Workers Local 408, IUE, AFL-

CIO (“‘Union’’). Those agreements fix the rate of contributions

for a period of three years, the duration of the contracts. Because

of depressed economic conditions in the optical industry during

the past few years, the Union experienced great difficulty in

negotiating increases in Fund contributions. At the same time,

the cost of providing benefits to the participants increased

dramatically. As a result, the Fund suffered serious losses in its

assets since 1980. Among the major escalating costs faced by the

Fund prior to 1983, were the charges to the Fund for Blue Cross

In 1982, in order to reduce losses and enable the Fund to

keep the hospitalization benefits for its embers intact, the trustees

of the Fund decided to end its relationship with Blue Cross effective

January 1, 1983. Instead of insuring with Blue Cross, the Fund

became self-insured and continued to provide the same hospital

benefits previously provided under contracts with Blue Cross.

ERISA leaves the decision of whether to insure or self-insure a

welfare plan to the discretion of the trustees. Section 3(1) of ERISA

States that a welfare plan may be maintained “‘through the

purchase of insurance or otherwise’’. Accordingly, so long as the

trustees are acting “‘for the exclusive purpose of (i) providing

benefits to participants and their beneficiaries; and (ii) defraying

reasonable expenses of administering the plan’’, Section 404 of

ERISA, 29 U.S.C. §1104, the decision about how to structure

the plan is theirs to make. Here, after careful review of the

alternatives, the trustees concluded they could best provide benefits

and conserve fund assets by turning to self-insurance.

Self-insurance represented a major step toward defraying

expenses and conserving assets, primarily because the Fund was

able to negotiate directly with hospitals for hospital charges.

Through its agent, the Fund obtained agreements with over 100

area hospitals, calling for charges at rates 5% above the rate paid

by Blue Cross. Coupled with more effective claim and billing

practice review, increased administrative efficiency and the cash

flow benefit derived from paying claims rather than insurance

premiums (which require a 3 to 4 month reserve account) during

the first 8 months of 1983 under self-insurance, the Fund reaped

substantial savings. The Fund’s actuary projected that for the

first 12 months under self-insurance the Fund would save

approximately $120,000, without reduction of benefits.

The State Statute at Issue

New York Public Health Law Section 2807-a.6(b) went into

effect on January 1, 1984. As of that date, all discount agreements

between self-insured ERISA funds and hospitals governing in-

patient hospita. charges were prohibited. In place of the outlawed

agreements, the statute compels ERISA funds to reimburse

hospitals for services rendered to their members at mandatory

rates set at 12-15% above those charged to subscribers of not-

for-profit health insurance companies incorporated under Article

9-C of the New York Insurance Law, of which Blue Cross is by

far the largest. Hospitals are directed to grant the mandatory

discounts to Blue Cross and are prohibited from accepting less

than the statutory maximum from employee benefit plans. A

statutory exception was created for employee benefit plans with

discount contracts in effect on May 1, 1982, permitting them to

continue. Thus, not only did the legislature consider ERISA plans

when it enacted the statute, the State actually created separate

classes of ERISA plans by carving out an exemption for plans

with contracts in existence before May, 1982.

The opinion below implies that a finding of pre-emption

would endanger a state interest. While such considerations are

irrelevant under ERISA, the fact is that pre-emption of the

provision of the statute relating to ERISA plans would have no

discernible impact on the goal of containing hospital costs.’

The Proceedings in the District Court

Although pre-emption would have no impact on the State’s

cost containment goals, the impact of the statute on self-insured

employee benefit plans would be devastating. For petitioner, who

had recently left Blue Cross and turned to self-insurance as a means

of minimizing expenses and preserving benefits in the face of

serious financial problems, the loss of its discount agreements

with hospitals spelled financial disaster. Without the ability to

continue to pay hospitals for services provided to Fund members

at rates competitive with those provided to subscribers of Blue

Cross, the Fund would have to reduce benefits, forego self-

insurance and return to Blue Cross.

3. The Deputy Director of the Office of Health Systems Management

conceded that at the time Section 2807-a.6(b} was enacted, the State was unaware

of the ‘‘nature and extent of [self-insured ERISA fund] discount charges

agreements.’’ Joint Appendix (*‘J.A.’’) filed in the Second Circuit at 391. Thus,

it was also unaware of the number of agreements preserved by the provisions

exempting discount agreements entered into prior to May 1, 1982. By the State’s

own admission, the exemption for plans with contracts in effect in 1982 could

have preserved 99.9% of ERISA fund contracts and outlawed only .1% of such

contracts. In fact, in opposition to the State’s motion for a stay pending appeal,

the Fund disclosed that the number of self-insured ERISA funds whose contracts

were abrogated by this statute accounted for under 1% of total hospital in-

patient revenues. Hence, pre-emption of the offending provision could make

no appreciable difference on the statute’s effectiveness. Rather, as shown in

(Cont'd)

Because the state statute posed a serious threat to the

structure, operation and plan of benefits provided by the Fund,

it comme xced this suit for injunctive and declaratory relief, alleging

pre-emption under Section 514(a) of ERISA, 29 U.S.C. §1144(a).

That section provides in relevant part:

**... the provisions of this subchapter and

subchapter III of this chapter shall supersede any

and all State laws insofar as they may now or

hereafter relate to any employee benefit plan

described in section 1003(a) of this title and not

exempt under section 1003(b) of this title... .”’

The Fund moved for a preliminary injunction in the district

court.‘ That motion was converted with the consent of the parties

to a motion for summary judgment on the question of pre-emption

under ERISA. In opposition, the State and amicus Blue Cross

conceded that the statute regulated and related to ERISA funds,

but argued that it was saved from pre-emption by the exception

(Cont'd)

the district court, its inclusion in the statute was the apparent result of a successful

lobbying effort by Blue Cross to put an end to self-insured and self-administered

employee benefit plans in New York State. The State itself conceded that one

of the goals of the legislation was: ‘‘Keeping Blue Cross competitive in the

marketplace.’’ (Appellant’s Memorandum in Support of Motion for a Stay

Pending Appeal filed in the Second Circuit at p. 17). In seeking a stay from

the district court judgment the State also admitted that one of the perceived

**danger|s]’’ of that judgment was: ‘‘the possibility that the March 30 judgment

will encourage large numbers of currently non self-insured ERISA funds to

become self-insured.’’ (J.A. 391).

4. The Fund also claimed that the statute violates the antitrust laws, the

commerce, contracts and supremacy clauses of the United States Constitution

and the Equal Protection Clause of the Fourteenth Amendment. The basis for

federal jurisdiction in the district court was Section 502 of ERISA, 29 U.S.C.

§1132; 28 U.S.C. §1331(a); 28 U.S.C. §1337 and 15 U.S.C. §15.

for laws regulating insurance (Section 514(b)(2)) (App. 50), and

by Section 514(d) (App. 51), which preserves federai laws from

ERISA pre-emption.

Neither the State nor Blue Cross ever suggested in the district

court that the state statute does not ‘‘relate to’? ERISA funds.

As the district court found:

‘‘Neither defendants nor amicus argues that

- §2807-a.6(b) does not relate to ERISA plans, and

such an argument would not prevail. Section

2807-a.6(b) adversely affects the administration of

such plans in at least two ways. It is obvious that

if the Fund is required to pay the higher

reimbursement rates set for charge payors, it will

not be able to provide the same breadth of coverage

for its beneficiaries. Its other alternative is to return

to the previous arrangement of purchasing

insurance through Blue Cross, but the Fund asserts

that its experience has shown this arrangement to

still be more expensive than the present system,

and that some reduction in benefits would still be

necessary to cover increased costs.

In addition, by imposing a local condition on

the administration of covered funds, §2807-a.6(b)

runs afoul of ERISA’s goal of facilitating the

operation of uniform multi-state plans. In order

to best conserve assets, the Fund might well find

it practical to operate separate plans in different

states; it might find that it could provide benefits

most efficiently by insuring through Blue Cross

in New York and by self-insuring in states without

similar restrictions. This would result in higher

administrative costs, and, as the Supreme Court

noted in Shaw, would eventually necessitate a

decrease in benefits.

It should be noted, as well, that §2807-a.6(b)’s

impact on ERISA plans is not incidental; it is

apparent from the express exclusion of discount

contracts entered into by ‘self insured and self-

administered groups’ before May 1, 1982 that the

legislature considered ERISA plans and fully

intended to curtail their ability to negotiate or

receive discounts after January 1, 1984. This

conclusion is further supported by direct references

to ‘self-insured groups [that] have negotiated

payment rates with individual hospitals’ in a report

by the statutorily-created Council on Health Care

Financing, which was charged with devising a plan

for financing hospital inpatient care, and also by

statements attributed to Edwin Werner, the

President of Blue Cross and a member of the

Council on Health Care Financing.

* . *

I am convinced, based upon the foregoing,

that §2807 a.6(b) ‘pertains to’ and ‘refers to’

ERISA funds, and that it has a direct ‘bearing on’

and ‘connection with them.’ ’’ (App. 25-27).

The Proceedings and Opinion Below

On appeal, the State for the first time claimed that the statute

did not ‘‘reiate to’” ERISA funds. Although not argued at the

district court level, the Court of Appeals determined to entertain

the argument noting the ‘‘broad legal ramifications’’ of the

decision in this case (App. 8).

In urging affirmance of the district court’s opinion, the Fund

pointed out that the obvious and conceded purpose of the state

law to regulate employee benefit plans was dispositive.’ However,

the Fund also discussed at length the impact of the statute as

further evidence that it ‘‘relates to’’ employee benefit plans. The

Fund showed that:

1. The state law impermissably interfered with the

right of employee benefit plans to be structured and

operate through self-insurance;

2. The statute imposed an onerous economic burden

on self-insured employee benefit plans that would force

the Fund to reduce benefits; and

3. The statute undermined the Fund’s ability to

maintain uniform interstate administration.

Acting under the erroneous premise that it should rule against

pre-emption unless an opposite result was ‘‘unavoidable’’ (App.

11), the court below held that the state law did not ‘‘relate to’’

ERISA funds. It reached its conclusion in reliance on footnote

21 of this Court’s opinion in Shaw v. Delta Air Lines, 462 U.S.

——, —__ 21, 103 S.Ct. 2890, 2901 n.21 (1983), regarding state

actions that affect employee benefit plans ‘‘in too tenuous, remote

or peripheral a manner to warrant a finding that the law ‘relates

to’ the plan’’.

The opinion made no mention of petitioner’s claims and the

district court’s findings with respect tc the clear purpose and effect

of the state law to regulate and curtail the rights and activities

of employee benefit plans and discourage self-insurance. Although

the court held (App. 9) that the phrase ‘‘relate to’’ under Section

5. The Fund noted other legislative history in addition to that which was

cited by the district court in which the State’s purpose to regulate ERISA plans

was disclosed. (See J.A. 162 No. 11, 141 No. 2).

10

514(a) was limited to actions which reguiate the ‘“‘terms and

conditions’” of an employee benefit plan (ERISA Section

514(c)(2)),° it failed to consider whether the statute regulated any

‘*terms and conditions’? of employee benefit plans.’

The Second Circuit predicated its decision on its .onclusion

that contracts or arrangements for the provision of hospital care

are merely incidental aspects of the plan’s ‘‘cost of doing

business’’, no different from ‘‘rent control laws’’ or ‘‘bridge and

tunnel tolls’? (App. 12).* But, the sole function and purpose an

employee welfare benefit plan is to provide hospital care or

benefits. 29 U.S.C. §1002(1). Contracts fixing the terms governing

the cost of those benefits are not remote or peripheral but rather

6. 29 U.S.C. §1144(c)(2). That section defines the term ‘‘State’’ following

the definition of ‘‘State Law’’ as follows: ‘‘The term ‘state’ includes a State,

any political subdivisions thereof, or any agency or instrumentality of either,

which purports to regulate, directly or indirectly, the terms and conditions of

employee benefit plans covered by this subchapter.”’

7. The Fund pointed out that Shaw interpreted the phrase ‘‘relate to’’

without any reference to the phrase ‘“‘terms and conditions’’ contained in Section

$14(c)(2) presumably because there, as here, it was not disputed that the law

in question was the enactment of a ‘‘State’’. The Fund also cited H.R. Rep.

No. 1785, 94th Cong. 2d. Sess. 47-48 (1977) (a report cited by this Court in

Shaw, 103 S.Ct. at 2901 n.20), for the view that the phrase ‘“‘terms and

conditions”’ was not intended ‘‘to limit the preemptive effect of Section 514(a).”’

That report concluded that ‘‘the phrase ‘terms and conditions’ . . . has a very

broad scope .. ."’ and that “‘any activity by a state or political subdivision

thereof, which relates to employee benefit plans, qua benefit plans, is preempted

by Section 514(a).”’

8. If a state rent control law outlawed all leases entered into between

employee benefit plans and landlords and directed that plans pay rent at rates

15% higher than that charged to state regulated health insurance companies,

the law would ‘“‘relate to’” ERISA funds within the meaning of Section $14(a).

Like the statute here, any regulation directed specifically at ERISA plans would

per se ‘relate to’” such plans.

*

li

have a direct and substantial impact on the basic operation and

structure of such plans. A statute abrogating the Fund’s contracts

and mandating that employee benefit plans pay the maximum

hospital charges permitted, is hardly analogous to the ‘‘tangential’’

laws cited by the court below, i.e., those incidentally affecting

some individual employees, garnishment of pension benefits to

collect child support, etc.

This statute is also quite different from the human rights

law considered by the Ninth Circuit in Lane v. Goren (No. 83-6496

Sept. 27, 1984), decided after oral argument in the court below

and cited twice in the court’s opinion (App. 10, 11-12). The ban

on racial discrimination in that statute did not in any way purpoft

to regulate employee benefit plans gua employee benefit plans.

Nor was that the intent of the California legislature. Moreover,

the prohibition against a fund’s treatment of its employees in a

racially discriminatory manner affected no essential purpose or

function of the fund.

In ruling that the instant statute survived ERISA pre-emption,

the Second Circuit misconstrued the decisions of this Court,

employed an analysis of pre-emption inappropriate under ERISA

and opened the floodgates to precisely the kind of patchwork

and conflicting state legislative enactments that ERISA’s broad

pre-emption provision was designed to prevent.

REASONS FOR GRANTING THE WRIT

I.

This case involves important questions of federal law presently

under consideration by this Court. mn

This case involves important federal questions affecting the

structure and operation of employee benefit plans that parallel

closely those the Court has undertaken to consider in Metropolitan

eae ie

12

Life Insurance Company v. Commonwealth of Massachusetts,

No. 84-325. In both cases, state statutes designed with employee

benefit plans in mind, have survived pre-emption challenges, by

an expansive interpretation of the exceptions to pre-emption. In |

both cases the courts have employed an analysis that is

inappropriate in view of the explicit pre-emption provision

contained in ERISA, its legislative history, and this Court’s |

determination that Congress intended to achieve the broadest |

|

possible ouster of state action in the employee benefit plan area.

Considered together, these cases highlight how state action

can erode ERISA’s goals of promoting the growth, financial

soundness and opportunity for uniform multistate administration

of employee benefit funds.’ The statute before the Court in \

Metropolitan purports to confine its regulatory impact to those

funds purchasing insurance. The lower court there eliminated the

requirement that self-insured ERISA funds provide certain benefits

required of insurance companies. Therefore, to avoid the

restrictions imposed by the statute, employee benefit plans in

Massachusetts must self-insure. In contrast, the statute at issue

here operates as a dis-incentive to self-insurance by employee

benefit plans. Although the statute does not directly forbid self-

insurance or compel plans to insure through Blue Cross, that is

its clear effect.'®

9. In fact, the New York statute’s requirement that Funds pay the maximum

rates chargeable by hospitals will have a more devastating impact on ERISA

funds than could the Massachusetts mandated benefit statute. The New York

statute requires this Fund to pay at least 10% more for all hospital services

than it is obliged to pay under its discount contracts prohibited by the state

law. The increased expense for the mental health coverage at issue in Metropolitan

is slight by comparison. )

10. The impact of the conflicting state pressures on this Fund are startling.

This Fund has employees and benefit programs in both New York and

Massachusetts. It is pressured to self-insure in Massachusetts and to abandon

(Cont'd)

13

Because of the similarity of issues raised by the two cases,

the Court’s decision in Metropolitan will affect the judgment in

this case. If this Court adopts the analysis of pre-emption

advocated by the appellants in Metropoiitan,'' it will rule that

laws that have the effect of regulating ERISA plans must be pre-

empted regardless of whether they also purport to regulate

insurance. In that event, the Second Circuit will have decided

a federal question in a way in conflict with a decision of this Court.

In any event, consideration of this case along with Metropolitan

will enable the Court to provide needed guidelines for the lower

courts in applying the pre-emption provision of ERISA.

Moreover, this case presents important federal questions thaf

go beyond the issues in Metropolitan. The decision below permits

a state with an acknowledged purpose and intention to regulate

employee benefit plans, to do so. It permits a state to restrain

the growth and financial soundness of self-insured employee

benefit plans because of some perceived state benefit in enhancing

the competitive status of Blue Cross. However, Congress made

clear that the decision of whether to fund and administer a plan

(Cont'd)

self-insurance in New York. Adapting to the conflicting requirements of the

two statutes becomes virtually impossible under a uniform system of

administration. Even without the contradictory pressures of the Massachusetts

law, maintenance of self-insurance in the other states obviously will be more

expensive administratively if the Fund must forego self-insurance in New York.

A reversion to Blue Cross in order to take advantage of its statutory discount,

would require the Fund to relinquish control over the administration of claims

in New York. Premiums the Fund would be charged by Blue Cross would include

payment to the insurance company to administer those claims. Retention of

Fund personnel solely to administer the self-insured claims in other states would

obviously be less cost-effective and, depending on the ratio of such claims to

New York claims, might require abandonment of self-insurance on a multi-

state basis altogether.

ll. Brief for appellant in- Metropolitan, p. 34, 35.

14

through insurance or self-insurance was a matter left to the

discretion of the fiduciaries administering the plans. The trustees

of the Fund are charged under ERISA to act solely in the best

interests of the participants and beneficiaries and for the ‘‘exclusive

purpose of providing benefits’’ and ‘“‘defraying reasonable

expenses, of administering the plan.’ ERISA Section 404(a)(1)(A),

29 U.S.C. $1104 (a)(1)(A). They are obliged therefore to provide

the maximum benefits to the participants at the least possible

expense. The New York statute interferes directly with the duties

of the trustees. In so doing it effectively forecloses a method of

plan operation expressly permitted by Congress.

The Fund does not dispute that rising hospital costs are a

matter of national concern.'? Indeed, the Fund has been in the

forefront of efforts to control hospital costs by undertaking

stringent billing practice and claim review following its conversion

to self-insurance. The opinion below was, in effect, based on the

court’s view of the importance of the state law. The court implicitly

balanced the goals of the State against the Fund’s rights under

ERISA. Yet, however attractive state efforts to control hospital

costs may appear, absent amendment by Congress, regulation

under the guise of cost containment in the health care field should

not be permitted to thwart the clear mandate of ERISA to pre-

empt state laws relating to employee benefit plans.

The ruling below was inappropriate and unless reviewed will

serve as authority for further significant erosion of pre-emption.

12. Obviously the Fund does not contend that ail state hospital cost

containment efforts are pre-empted. Concededly, there are many state laws

controlling hospital costs that do not run afoul of the pre-emption provision.

15

The decision below is in conflict with decisions of this Court

and with the decisions of other federal courts of appeals.

There is no room after Shaw for an analysis which precludes

a finding of preemption under ERISA unless a contrary conclusion

is ‘‘unavoidable.”’ In fact, the opposite is the case. This Court

held that ‘“Congress used the words ‘relate to’ in §514(a) in their

broad sense”’, Shaw at 2900, “‘creating only very limited exceptions

to pre-emption.’’ Shaw at 2903. Hence, it was the duty of the

court Setow 00 epgly He term expanmvey sather Gen ie the

strained and narrow manner that it did.

Rulings calling for pre-emption of state law in the health

care field prevailed even prior to Shaw. Thus this Court affirmed

summarily the Ninth Circuit's holding in Standard Oil of

California v. Agsulud, 633 F.2d 760, 766 (9th Cir. 1980), aff'd

mem., 454 U.S. 801 (1981), that the Hawaii Pre-Paid Health Care

Act was pre-empted by ERISA. The Ninth Circuit explicitly took

‘“*a broad view of the pre-emption of federal law over state law

in the health insurance field... .’’ The court in Agsulud

specifically endorsed Judge Renfrew’s pertinent comments that:

“*ERISA shall supersede any and all state laws and that does not

mean ‘some but not all state laws.’ ’’ 633 F. 2d at 765, citing

442 F. Supp. 655 at 707 (N.D. Cal. 1977). Judge Renfrew also

had remarked: “‘[{t}o hold that a state health insurance law does

not regulate directly or indirectly the terms and conditions of

employee benefit plans would distort the meaning of those words

beyond recognition.’’ /d. Similarly, the opinion in Alessi v.

Raybestos-Manhattan, Inc., 451 U.S. 504, 524 (1981), noted that

although the workers compensation awards there were

“obviously . . . subject to the State’s police power,"’ even indirect

interference with an employee benefit plan could not escape

pre-emption:

ed inns nes b

16

“*It is of no moment that New Jersey intrudes

indirectly through a workers compensation law,

rather than directly through a statute called

‘pension regulation.’ ERISA makes clear that even

indirect state action bearing on private pensions

may encroach upon the area of exclusive federal |

concern . . . ERISA’s authors clearly meant to |

preclude the States from avoiding through form |

|

the substance of the pre-emption provision."’ 451

U.S. at $25.

The decision below is also in conflict with the Ninth Circuit’s |

decision in Hewlett-Packard Company v. Barns, $71 F. 2d $02

(9th Cir. 1978), cert. denied, 429 U.S. 831 (1979). There, the court

ruled that an analogous California statute regulating health |

maintenance organizations'’ was pre-empted to the extent it applied |

to employee benefit plans. The Ninth Circuit again adopted (571

F. 2d at 504) the reasoning of.Judge Renfrew who held:

“Effective since July 1, 1976, Knox-Keene governs

the delivery of health care services to California

residents who participate in health care service

plans. In enacting Knox Keene, the California

legislature intended to promote the delivery of low

cost, quality health care through financially sound

plans to participants well informed of the benefits

of various available plans.

Although defendant finds the phrase ‘relate to’ |

“vague and ambiguous,’ the Court doubts that

13. The statute here grants mancatory discounts to health maintenance

organizations as weil.

17

Congress could have chosen any more precise

language to express its intent to preempt a state

statute such as Knox-Keene insofar as it seeks to

regulate ERISA-covered employee benefit plans

such as those maintained by plaintiffs.’’ 425 F.

Supp. 1294, 1297 (N.D. Cal 1977). (Footnote

omitted).

As this Court noted recently in Brown v. Hotel and Restaurant

Employees Local $4, 104 S.Ct. 3179, 3185 (1984):

**When federal pre-emption is invoked under the

directive of the Supremacy Clause, it falls to this

Court to examine the presumed intent of Congress.

See Fidelity Federal Savings & Loan Assn. v. De

La Cuesta, 458 U.S. 141, 152-153 (1982). Our task

is quite simple if, in the federal enactment,

Congress has explicitly mandated the pre-emption

of state law, see Shaw v. Delta Air Lines . . .”’

Having reviewed the analysis applied by the courts in Section

$14 cases, one commentator stated:

“The goal of an express pre-emption analysis...

should be to prevent subtle or incremental state

encroachment into a field that Congress has chosen

expressly to reserve for federal law. Yet, courts

have mistakenly applied pre-emption doctrines

fashioned in implied pre-emption cases to section

$14 cases, in which the issue is whether the federal

law — by its express terms — pre-empts the state

law in question. Once Congress has declared its

express intent to pre-empt or to save a state law,

it has largely obviated judicial inquiry into

considerations other than those concerning the text

18

of the pre-emption provision.’’ Kilberg and Inman,

Preemption of State Laws Relating to Employee

Benefit Plans: An Analysis of ERISA Section 514

(‘‘Kilberg’’) 62 Texas L.R. 1313, 1316 (1984).

Criticizing the same kind of analysis as that employed by

ine Second Circuit here, Kilberg continued:

*“*The first approach, which calibrates the extent

of ERISA pre-emption to reflect the importance

of the relevant state law, contravenes Congress’

unmistakabie intent. Congress sought to pre-empt

all state laws that relate to employee benefit plans

except for those it exempted specifically. Neither

marital property laws, nor antidiscrimination laws,

nor any other state laws that courts have found

to merit special scrutiny are on the statutory list.

Once Congess has decided to disrupt the federal-

state balance to a given degree, the courts have

no legitimate basis for reweighting that balance.

To focus on the traditional role of the state in a

particular field or the importance of a given law

to the state is to circumvent the analysis of whether

the law in question relates to employee benefit

plans within the meaning of Section 514(a).’’ 62

Texas L.R. at 1326 (Footnotes omitted).

The only narrow reading of ERISA pre-emption permitted

under Shaw respects the scope of the exceptions to pre-emption,

not the other way around. The opinion below permits the

exceptions to pre-emption under ERISA to swallow the rule and

distorts the meaning of Section 514(a) beyond recognition.

Even if the narrow standard‘employed below could somehow

be reconciled with the cited opinions, the lower court’s actual

19

treatment of the statute’s relation to employee benefit plans was

entirely inadequate. The Second Circuit implied that preemption

is limited to those State laws requiring or prohibiting benefits

(App. 11).'* That is not the case. In Agsalud, the opposite

argument was made by the State of Hawaii, namely, that ERISA

pre-empts only state laws dealing with plan administration and

exempts all laws dealing with benefits. This Court affirmed the

opiztion of the Ninth Circuit which noted: ‘‘There is, however,

nothing in the statute to support such a distinction between the

state laws relating to benefits as opposed to administration.’’ 633

F. Za 760 at 765.

In an analogous situation involving legal services plans,

Senator Javits, one of the leading sporisors of ERISA, emphasized

that pre-emption could not be avoided by indirect state action

regulating form rather than content:

“*the State, directly or indirectly through the bar,

is pre-empted from regulating the form and content

of a legal service plan, for example, open versus

closed panels, in the guise of disciplinary or ethical

rules or proceedings.’’ 120 Cong. Rec. 29,948-49

(1974).

Similarly, ‘‘in the guise’’ of regulating hospital costs, the State

may not affect the self-insured as against the insured ‘‘form’’

of an employee benefit plan.

14. The statement below that the statute did not affect the structure,

administration or type of benefits provided (App. 12) completely ignores the

uncontested facts. As the matter of the statute’s ‘‘relation to’” ERISA funds

was never litigated in the district court, the Second Circuit was bound to accept

the Fund’s contentions as true. It was certainly not free to ignore the record

or make implied factual findings contrary to the record on an issue 1.- ver raised

in the trial court.

20

Equally unacceptable under Shaw was the Second Circuit’s

reliance on the purported ‘‘general’’ character of the state law

(App. 12 and n.2). Shaw specifically emphasized that the generality

of the law was irrelevant under Section 514(a): ‘‘It wouid have

been unnecessary to exempt generally applicable state criminal

statutes from pre-emption under §514(b), for example, if §514(a)

applied only to state laws dealing specifically with ERISA plans.”’

103 S.Ct. at 2900.'*

The Second Circuit concluded that the state law’s effect on

employee benefit plans was peripheral, apparently because it found

that the statute’s economic impact was indirect (App. 12).

However, the equation of “‘peripheral’’ with ‘‘indirect’’ runs afoul

of the express language of ERISA and ignores a wealth of judicial

authority that has interpreted it.'*

It has long been recognized that the power to impose costs

is the equivalent of the ‘‘power to destroy [and] that the power

to destroy may defeat and render useless the power to create.’’

15. See Pervel Industries Inc. v. Connecticut Commission on Human Rights

and Opportunities, 468 F. Supp. 490, 492 (D.Conn. 1978), aff’d mem., 603

F.2d 214 (2nd Cir. 1979), cert. denied, 443 U.S. 1031 (1980); Baker v. Caravan

Moving Corporation, 561 F. Supp. 337 (N.D. Ill. 1983); National Carriers’

Conference Committee v. Heffernan, 454 F. Supp. 914 (D. Conn. 1978).

16. In noting that some state actions may affect employee benefit plans

so peripherally that they do not relate to them, the Shaw opinion cited American

Telephone Company v. Merry, 592 F. 2d 118 (2nd Cir. 1979), as illustrative.

That case premised its holding on the theory enunciated in Stone v. Stone, 450

F. Supp. 919, 924 (N.D.Cal. 1978), aff’d, 632 F.2d 740 (9th Cir. 1980), cert.

denied sub nom., Seafarers Int’! Union v. Stone, 453 U.S. 922 (1981), that

ERISA should not be construed as infringing sub silentio ‘‘the power to make

rules to establish, protect and strengthen family life . . .’’, and a similar statement

by Judge Weinfeld in Cartiedge v. Miller, 457 F. Supp. 1146, 1154 (S.D.N.Y.

1978), finding that no inference should be made ‘‘that Congress meant to preclude

the ancient family law right of maintenance and support and the issuance of

process to enforce that right.” (Cont’d)

21

M’Culloch v. Maryland, 14 U.S. (4 Wheat.) 431 (1819). Surely,

Congress did not intend that through a law regulating hospital

reimbursement methods States could place an economic

stranglehold on the very plans they were forbidden to regulate.

Merely because a state law has an indirect economic impact

on an employee benefit fund does not render it peripheral. Where

as here, the State is regulating the purchase of health care, the

very business of the Fund, it cannot be said that such regulation

is peripheral and therefore does not ‘‘relate to any employee benefit

99

plan’’.

This and other courts have been careful to scrutinize state

action, however categorized, which impacts on employee benefit

plans, to prevent by indirection as well as by direct action, erosion

of the pre-emption mandated by Congress. A/essi involved a state

law prohibiting certain offsets in pension benefits. This Court’s

opinion reviewed carefully Congress’ goal of containing costs of

employee plans and quoted extensively from reports expressing

concern over practices that would increase the costs of providing

pension benefits. 451 U.S. 514-516. Likewise, Shaw acknowledged

that pre-emption of a state law requiring the provision of

pregnancy benefits, furthered Congress’ desire to prohibit state

laws that would increase plan expenses. 103 S.Ct. 2904 n.25.

Closely analagous to the type of economic impact of the statute

here is that involved in the state tax law considered in National

(Cont’d)

The distinctions between this case and the marital support cases are self-

evident. A marital support order affects a single individual and has no impact

on a plan’s ability to fulfill its basic statutory purpose. The legislation at hand

deals with the lifeblood of the plan and affects the purpose for which it exists.

Similar attempts by states to analogize to the Merry line of cases have been

rejected. Stone & Webster, supra, 690 F.2d 323 at 329; Standard Oii Company

of California v. Agsalud, supra, 633 F.2d 760, 766 (9th Cir. 1980), aff’d mem.,

454 U.S. 801 (1981) and Hewlett-Packard Company v. Barnes, 571 F.2d 502

(9th Cir. 1978), cert denied, 439 U.S. 831 (1979).

a Nii eb

22

Carriers’ Conference Committee v. Heffernan, 454 F. Supp. 914

(D. Conn. 1978). That law required plans to pay a tax on benefits

and at rates higher than those set for insurance companies. That

court’s rejection of the claimed exception for tax laws applies

with equal force to this case:

‘‘The phrase ‘any and all’ plainly indicates an

intention to reach every state statute that fits the

description of ‘relating to’ an employee benefit

plan. Just as plainly the tax imposed by §12-21lc

is such a statute. The statute is not merely a general

taxing provision that catches employee benefit

plans within its wide sweep. On the contrary, the

tax is specifically directed at such plans exclusively,

and is distinct from the tax applied to insurance

company premiums. See Conn. Gen. stat. §12-202

(Supp. 1978). Clearly it ‘relates to” ERISA covered

plans.”’

** . . .where Congress has not excluded even

general tax statutes from pre-emption, a statute

specifically directe? at an ERISA-covered plan

must certainly come within the pre-emption

provision.’’ 454 F.Supp. at 915, 916.

‘*In the present action the challenged statute

imposes a 2.75% annual tax on benefits paid by

employee benefit plans. This contrasts with

Connecticut’s tax on the premiums received by

insurance companies, which is only 2%. Conn.

Gen. Stat. §12-202. This tax structure may operate

as an incentive to use traditional insurance, rather

than ERISA-covered plans. Although the impact

of the tax discrepancy may be only nominal at

present, its economic impact is not the measure

of its significance. Rather, the discrepancy is

23

illustrative of the potential use of taxation as a

means of regulation. Because of that potential, pre-

empting state taxation of ERISA-covered plans is

necessary to effectuate Congressional objectives.’’

454 F. Supp. at 918. (emphasis supplied).'’

The fact is that Congress considered carefully the kind of

state laws it desired to preserve from pre-emption and this statute

falls within none of the exemptions.'* There is simply no basis

17. In creating, post Agsulud, a limited exception to pre-emption for the

Hawaii Pre-Paid Health Care Act, Congress specifically directed that it no?

be construed to exempt from pre-emption ‘‘any state tax law relating to employee

benefit plans . . ."” ERISA Section 514(b)(5)(B){i), 29 U.S.C. §1144(6)(S)(B\i).

See also, Pervel, supra, 468 F.Supp. at 493 (State law ‘‘can only add to the

cost of administration and ultimately impose costs on plan beneficiaries.’’);

Stone & Webster Engineering Corp. v. Ilsiey, 690 F. 2d 323, 326 (2nd Cir. 1982),

aff'd, sub nom. Arcudi v. Stone and Webster Engineering Corporation,

U.S. , 103 S.Ct. 3564 (1983); Blue Cross and Blue Shield of Alabema

v. Peacock’s Apothecary, 567 F. Supp. 1258 (N.D. Ala. 1983) (State law

regulating discount pharmacy rate contracts pre-empted); Dawson v. Whailand,

$29 F. Supp. 626, 632 (D.N.H. 1982) (New Hampshire statute, compliance with

which represented only additional estimated $23,000 in administrative expenses

to plaintiff funds held pre-empted); General Split Corporation v. Mitchell, 523

F. Supp. 427 (E.D. Wis. 1981) (Wisconsin’s attempt to require employee benefit

plans to participate in health insurance risk sharing plans (similar to the bad

debt and charity pools established under the law in issue) which created

administrative and other expenses for plan held pre-empted); St. Pau/ Electrical

Workers Welfare Fund v. Markman, 490 F.Supp. 931 (D. Minn. 1980). Advisory

Opinions from the Department of Labor finding that laws increasing plan

expenses are pre-empted abound. See DOL Advisory C.. nion No. 80-60A (Oct.

10, 1980) (California’s Confidentiality of Medical Information Act pre-empted);

DOL Advisory Opinion No. 81-70A (Illinois Law restricting the rate of interest

which may be charged individuals in loan transactions pre-empted); DOL

Advisory Opinion No. 79-40A (December 12, 1979) (State of California tax

levies on plans for unpaid taxes or unpaid unemployment insurance contributions

pre-empted).

18. If the State of New York feels strongly that it has a valid need to regulate

or restrain self-insured ERISA funds in order to promote hospital cost

(Cont'd)

24

to conclude that a law directly aimed at and intended to proscribe

the transactions of emplovee benefit plans is not pre-empted.

Kilberg urged:

**In the state law context,-an apparent purpose to

regulate, manifested by a reference to employee

benefit plans in the text of the law, invariably

reflects an actual regulatory purpose. Hence, any

law expressly directed toward employee benefit

plans ‘purports’ to regulate the plans within the

meaning of section 514.

Congress meant to pre-empt such state laws,

however, whether or not they are styled as

employee benefit plan regulations. In light of this

congressional intent, ‘purports’ must be construed

in its ‘normal sense’ of ‘to have in mind.’ ’’ 62

Texas L.R. at 1328, 1329. (Footnotes omitted).'*

(Cont’d)

containment then it is frec to present its case to Congress as the State of Hawaii

did in achieving a limited exception to pre-emption for its health care law. See

ERISA Section 514{6)(5), 29 U.S.C. §1144(b)(5).

19. While the Fund does not agree that a finding of purpose is necessary

under Section 514(a), of course, if a state’s purpose is to regulate employee

benefit plans, its action unquestionably ‘‘relates to’’ such plans. As recognized

by both the majority and dissenting opinions in Garcia v. San Antonio

Metropolitan Transit Authority, Nos. 82-1913 and 82-1951 (February 19, 1985),

attempts to draw boundaries and identify organizing principles governing broad

concepts of federalism are difficult. Congress eliminated this need in Section

$14(a) by providing the ‘‘relate to’’ standard of pre-empiion. Under it, there

is no need to construct rules that would limit the impact of pre-emption. It

does not matter whether the relation arises from the purpose of a statute, its

impact on employee plans in general, or its application to a particular plan.

Any one or all of these examples can give rise to the kind of state action Congress

intended to foreclose.

25

In a footnote to the quoted passage, the article cited with approval

the district court opinion in this case.

The conclusion that the state law here does not ‘‘relate to’”’

ERISA plans, above all, ignores this Court’s unanimous

determination in Shaw that Congress intended the plain English

meaning of the term to control:

‘“*The breadth of §514(a)’s pre-emptive reach is

apparent from that section’s language. A law

‘relates to’ an employee benefit plan, in the normal

sense of the phrase, if it has a connection with

or reference to such a plan.’’ 103 S.Ct. 2890,

2899-2900 (1983).

The opinion below is directly at odds with the opinions of

this Court and should be reviewed.

laa a i i iia ae ii a |

26

CONCLUSION

For these reasons, a writ of certiorari should be granted.

Dated: New York, New York

February 22, 1985

Respectfully submitted,

I. PHILIP SIPSER

Counsel of Record

SIPSER, WEINSTOCK,

HARPER, DORN & LEIBOWITZ

Attorneys for Petitioner,

Sebastian Rebaido, as Chairperson

of the Board of Trustees of the

United Optical Workers Insurance

Fund

380 Madison Avenue

New York, New York 10017

(212) 867-2100

Of Counsel:

BELLE HARPER

RICHARD DORN

JEROME TAUBER

SUSAN MARTIN

OPINION OF THE UNITED STATES COURT OF APPEALS FOR

THE SECOND CIRCUIT DECIDED NOVEMBER 26, 1984

UNITED STATES COURT OF APPEALS

FoR THE SECOND CIRCUIT

Cal. No. 1466— August Term, 1983

(Argued: June 14,1984 Decided: November 26, 1984)

Docket No. 84-7388

SEBASTIAN REBALDO, as Chairperson of the Board of

Trustees of the UNITED OPTICAL WORKERS INSURANCE

FUND,

Plaintiff-Appellee,

Vv.

MARIO CuoOMO, Governor of the State of New York;

and DAVID AXELROD, Commissioner of Health of the

State of New York,

Defendants-Appellants.

Before:

FRIENDLY, VAN GRAAFEILAND and NEWMAN, Circuit

Judges.

Appeal from a judgment of the United States District

Court for the Southern District of New York (Conner, J.)

declaring N.Y. Pub. Health Law § 2807-a(6) (b) partially

invalid and enjoining its enforcement insofar as it affects

hospital charges to self-insured employee benefit plans

covered by the Employee Retirement Income Security Act,

29 U.S.C. §§ 1001-1461.

2a

Opinion

Vacated and remanded.

>

JupITH A. GORDAN, Assistant Attorney Gen-

eral, New York, N.Y. (Robert Abrams,

Atty Gen. of the State of New York, New

York, N.Y., of Counsel), for Defendants-

Appellants.

SUSAN MARTIN, New York, N.Y. (Sipser,

Weinstock, Harper, Dorn & Leibowitz, I.

Philip Sipser, Richard Dorn and Jerome

Tauber, New York, N.Y., of Counsel), for

Plaintiff-Appellee.

Ropert A. BiIcKs, New York, N.Y. (Breed,

Abbott & Morgan, Alan C. Drewsen and

Daphne E. Telfeyan, New York, N.Y., of

Counsel), for Amicus Curiae Blue Cross

and Blue Shield of Greater New York.

Wood, Lucksinger & Epstein, New York, N.Y.

(George Kalkines, Fredrick I. Miller

and William S. Bernstein, New York,

N.Y., of Counsel), for Amicus Curiae

The Hospital Association of New York

State.

VAN GRAAFEILAND, Circuit Judge:

This is an appeal from a judgment of the United

States District Court for the Southern District of New

York (Conner, J.), which invalidated section 2807-a (6)

(b) of New York’s Public Health Law to the extent it

prohibits a hospital from establishing inpatient charges

for self-insured employee benefit plans that are other

the charges authorized by the section. The provi-

of the statute thus invalidated precluded self-

insured employee benefit plans such as the United Optical

Workers Insurance Fund (United) from negotiating dis-

count rates with hospitals similar to the rates permitted

for payors such as Blue Cross, which operates under

Article IX-C of New York’s Insurance Law.

In holding as it did, the district court adopted ap-

pellee’s contention that New York's right to set hospital

rates chargeable to employee benefit plans was preempted

by section 514(a) of the Employee Retirement Income

Security Act (ERISA), 28 U.S.C. §1144(a), which

states with certain exceptions that the provisions of

ERISA shall supersede State laws insofar as they “relate”

to any employment benefit plan. For reasons hereafter

stated, we believe that appellee’s contention should have

been rejected.

During the past several decades, the cost of hospital

care has spiraled. See Greater New York Hospital Asso-

ciation v. Blum, 634 F.2d 668, 669 (2d Cir. 1980);

California Welfare Rights Organization v. Richardson,

348 F. Supp. 491, 496 (N.D. Cal. 1972). In 1983, ap-

proximately $8 billion was spent on inpatient hospital

care in the State of New York alone. Because approxi-

mately two-thirds of this amount was paid by Medicaid

and Medicare, both the federal and state governments

have sought to develop systems of cost control. However,

since Medicaid controls have been more exacting than

those of Medicare, administrative attempts to contain

hospital costs have been more successful in the former

than in the latter.

Medicaid is a joint state and federal program de-

signed to provide medical care to those who otherwise

da

Opini

could not afford it. Hospital Association of New York,

Ine. v. Toia, 577 F.2d 790, 792 (2d Cir. 1978). New

York State is one of the voluntary participants in this

plan, which it administers in compliance with applicabie

federal statutes and regulations. In return for such

compliance, the federal government has obligated itself

to fund up to 60% of the cost of New York’s program.

42 U.S.C. § 1396a(a)2.

970, New York reimbursed hospitals on the

costs.

Sa

Dpini

As early as 1967, however, Congress realized that

“the rigid commitment to a cost basis of reimbursement

may provide insufficient incentive for participating pro-

viders of services to furnish health care economically and

efficiently”, and concluded that bases of Medicare reini-

bursement other than the cost method should be explored

experimentally. S. Rep. No. 744, 90th Cong., Ist Sess.

reprinted in 1967 U.S. Code Cong. & Ad. News 2834, 2905.

This realization led to the enactment of Pub. L. No.

90-248, tit. IV, $402(a), (b), 81 Stat. 930, 931, the

precursor of 42 U.S.C. §1395b-1. In substaace, section

402(a),(b) authorized the Secretary of Health, Educa-

tion and Welfare to develop and engage in experiments

under which hospitals would be reimbursed im a manner

leading to increased efficiency without any impairment

of quality. Section 402(c) of the 1967 statute amended

section 1875(b) of the Social Security Act, now 42 U.S.C.

$ 13950 to provide that the Secretary should submit an

annual report to Congress concerning the experiments and

demonstration projects authorized by Section 402 (a),(b).

Section 222 of Pub. L. No. 92-603, tit. TI, 86 Stat.

1390, enacted in 1972, continued and enlarged upon the

Secretary's authority to conduct experiments and demon-

stration projects. Anticipating that Medicaid and private

insurers might participate in these experiments, Congress

expressed its intent that “Medicaid and private funds

would also be used proportionately when medicaid and

private programs participate in the project.” H.R. Rep.

No. 231, 92d Cong., 2d Sess., reprinted in 1972 U.S. Code

Cong. & Ad. News 4989, 5068. See 42 U.S.C. § 1395b-1

(a) (2).

By the time Congress decided in 1983 to convert

Medicare substantially to a system of predetermined

6a

Opinion

prospective rates, see Pub. L. No. 98-21, tit. VI, § 601,

97 Stat. 149 (1983), codified at 42 U.S.C. § 1895ww/(d),

(e),(£), demonstration projects had been established in

Maryland, Massachusetts, New Jersey, and New York.

Section 603(b) of the 1983 Act, which may be found in

the Historical Note following 42 U.S.C. § 1395b-1, pro-

vided that “the amendments made by this title shall not

affect the authority of the Secretary to develop, carry

out, or continue experiments and demonstration projects.”

In commenting on section 603(b), the report of the House

Ways and Means Committee stated:

Your Committee believes that State cost contain-

ment systems have proven effective in reducing the

cost of hospital care and that such systems should

be encouraged. It is the intent of this provision that

the Secretary continue medicare waivers for States

which currently have effective demonstration projects

and provide an opportunity for new States to develop

sound approaches to cost containment. State sys-

tems covering all payors have proven effective in

reducing health costs and should be encouraged. Such

State programs may be useful models for our national

system.

H.R. Rep. No. 25, 98th Cong., 1st Sess. 147-48, reprinted

im 1983 U.S. Code Cong. & Ad. News 219, 366-67.

The Committee’s report continues:

Your Committee bill provides that, upon the request

of the State, the Secretary is required to modify the

terms of the New York and Massachusetts waivers

to eliminate the requirement that the State rate of

increase in medicare hospital costs be below the

national rate.

*

la

Opinion

Under your Committee’s bill and under the current

demonstration authority of the Secretary, State sys-

tems are required to meet a savings test that is

related to medicare.

Id.

The statute invalidated below is part of New York’s

experiment and demonstration project, a three-year pro-

gram beginning January 1, 1983. The program was

approved by the Secretary on December 21, 1982, pur-

suant to the authority granted by section 402(a). In

pertinent part, this plan provides that the State Com-

missioner of Health shall establish for each hospital an

“inpatient revenue cap”, i.e., the maximum amount of

inpatient revenue the hospital will be authorized to re-

ceive for services during a twelve-month period, N.Y.

Pub. Health Law § 2807-a(1), with additional allowances

being made for bad debts and charity care, id. at (4).

Each general hospital is required to establish a charge

schedule sufficient to generate the inpatient revenue au-

thorized by the revenue cap, with a proviso that the rate

for Article IX-C corporations such as Blue Cross shall

be at a discount of from 12% to 15% below that of other

non-governmental payors such as United. The statute

excepts from this rate differential health maintenance

organizations certified under Article 44 of New York’s

Public Health Law and self-insured and self-administered

groups that had hospital rate contracts in effect on May

1, 1982. Jd. at (6). Because United is not an Article

44 health maintenance organization and had no rate con-

tract in effect on May 1, 1982, it did not fall within the

excepted group.

Appellee commenced this action on December 1, 1983.

In addition to his claim of preemption under ERISA,

8a

Opinion

appellee alleged that subsection 6(b) unconstitutionally

impaired the obligation of contracts, burdened interstate

commerce, denied United equal protection of the law, was

void and preempted by the Constitution’s supremacy

clause, and established anti-competitive price discrimina-

tion in violation of the federal antitrust laws. Because

the district court held that the rate setting provisions of

the statute, as they applied to self-insured employee bene-

fit plans, were preempted by ERISA, the court found it

unnecessary to reach appellee’s other contentions. The

sole issue before this Court, therefore, is whether Con-

gress, in enacting ERISA, intended to preclude the subse-

quent adoption of experimental and demonstration proj-

ects, such as the one at issue herein, to the extent that

those plans prescribe hospital rates chargeable to self-

insured employee benefit plans.

Appellants’ principal argument on appeal is that the

setting of rates that hospitals must charge private payors,

a group that includes employee benefit plans, does not

“relate” to United’s plan within the meaning of section

514(a). Appellee’s initial response to this argument,

albeit a response made almost in passing, is that it was

not made in the district court and therefore should not

be heard herew Although generally this Court will not

consider an issue not passed on below, Singleton v. Wulff,

428 U.S. 106, 120 (1976), we may, under proper circum-

stances, make exceptions to this rule, id. at 121; Chico v.

Schweiker, 710 F.2d 947, 952 (2d Cir. 1983); see also

Davis v. Musler, 713 F.2d 907, 917 (2d Cir. 1983) (Van

Graafeiland, J., concurring) and cases there cited. Be-

cause the district court examined the issue of relationship

in some detail and because that court’s decision has broad

legal ramifications and concerns the validity of a State

statute, we think this is a case for such an exception.

190-——

9a

Opinion

Moreover, both parties as well as amici have fully

briefed and argued before this Court whether this New

York law “relates to” ERISA plans within the meaning

of §514(a), and the issue is solely one of law the deter-

mination of which could not be altered by appellee’s pro-

ducing additional evidence.

Section 514(a) of ERISA, 29 U.S.C. § 1144(a), pro-

vides that “the provisions of this title and title IV shall

supersede any and all State laws insofar as they may now

or hereafter relate to any employee benefit plan... .” In

the definitional section, 29 U.S.C. § 1144(c) (2), Congress

defined the term “State” for ERISA preemption purposes

as follows:

The term “State” includes a State, any political sub-

divisions thereof, or any agency or instrumentality

of either, which purports to regulate, directly or in-

directly, the terms and conditions of employee benefit

plans covered by this subchapter.

Thus, a state law must “purport[] to regulate, . . . the

terms and conditions of employee benefit plans” te fall

within the preemption provision. Appellee contends that

this phrase should not be read to impose any special

limitation in determining whether the hospital rate regu-

lation in the instant case relates to United. We disagree.

1 Appellee relies for this argument on a report issued after the

passage of ERISA by the House Committee on Education and

Labor that concluded that the phrase “which purports to regulate”

modifies “agency or instrumentality” only and does not modify the

term “State.” H.R. Rep. No. 1785, 94th Cong., 2d Sess. 47-48

(1977). Such reports, although often persuasive, are not binding.

We reject this Report’s analysis as lacking even persuasive au-

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

525 (1981), the Supreme Court held that the phrase “directly or

indirectly” modified both “State” and “agency or instrumentality.”

[Footnote continued on following page]

10a

Opinion

As the district court quite properly recognized, the Su-

preme Court has given the term “relate” as used in

ERISA a broad and liberal construction. See Shaw v.

Delta Air Lines, Inc., 108 S. Ct. 2890, 2899-900 (1983).

However, the preemptive scope of ERISA is neither all-

encompassing, Lane v. Goren, No. 83-6496, slip op. 4263,

4265 (9th Cir. Sept. 27, 1984), nor unlimited, Savings

and Profit Sharing Fund of Sears Employees v. Gago, 717

F.2d 1038, 1040 (7th Cir. 1983). ERISA does not in-

validate those State statutes whose effect on pension plans

is simply tangential in nature. Shaw v. Delta Air Lines,

Inc., supra, 103 S. Ct. at 2901 n.21; American Telephone

& Telegraph Co. v. Merry, 592 F.2d 118, 121 (2d Cir.

1979). This conclusion follows as a matter of common

sense from the fact that ERISA plan members and man-

agers are bound to engage in myriad transactions that

Congress never considered when it drafted § 514. A pre-

emption provision designed to prevent state interference

with federal control of ERISA plans does not require the

creation of a fully insulated legal world that excludes

these plans from regulation of any purely local trans-

action.

The containment of hospital costs is an exercise of a

State’s police powers, which should not be superseded by

federal regulations unless that was the clear intent of

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

[Footnote continued from previous page]

This entirely sensible reading follows naturally the structure of

the sentence and its punctuation, and we see no reason to read

the immediately preceding clause, “which purports to regulate,”

any differently. Thus, even without the decision in Alessi, we

would read the phrase “which purports to regulate, . .. the terms

and conditions of employee benefit plans” as modifying the term

“State.” Accord, Lane v. Goren, No. 83-6496, slip op. 4263, 4265

(9th Cir. Sept. 27, 1984).

lla

Opinion

504, 522 (1981); Massachusetts Nursing Association V.

Dukakis, 726 F.2d 41, 44 (1st Cir. 1984); see Ray v.

Atlantic Richfield Co., 435 U.S. 151, 157 (1978). Ac-

cordingly, a State’s promulgation of hospital rate sched-

ules should not be found to “relate” to “the terms and

conditions of employee benefit plans” unless this conclu-

sion is unavoidable. See Alessi v. Raybestos-Manhattan,

Inc., supra, 451 U.S. at 522.

It is clear that ERISA preempts state laws that

require or forbid the provision of a certain kind of bene-

fit. See, eg., Stone & Webster Engineering Corp. V.

Ilsley, 690 F.2d 323, 329-30 (2d Cir. 1982), aff'd sub

nom, Arcudi v. Stone & Webster Engineering Corp., 103

S. Ct. 3564 (1983) (state law requires provision of health

insurance to former employee receiving workmen’s com-

pensation). It is equally clear that ERISA does not pre-

empt every state law that incidentally touches pension

plans through its effect on individuals. See, e.g., Ameri-

can Tel. & Tel. Co. v. Merry, supra, 592 F.2d at 123-26

(garnishment of pension benefits to collect alimony and

child support). As said in Shaw v. Delta Air Lines, Inc.,

supra, 103 S. Ct. at 2901 n.21: “Some state actions may

affect employee benefit plans in too tenuous, remote, or

peripheral a manner to warrant a finding that the law

‘relates to’ the plan.” New York’s decision to regulate

the amounts hospitals can charge falls within this descrip-

tion. Appellee’s suggestion that, because this regulation

affects pensions plans in their dealings with hospitals by

increasing their costs of doing business, it must be found

preempted, proves altogether too much. As the court

observed in Lane v. Goren, supra, slip op. at 4266:

That argument does not withstand scrutiny. So too,

for example, do State laws and municipal ordinances

regulating zoning, health, and safety increase the

12a

Opinion

operational costs of ERISA trusts, but no one could

seriously argue that they are preempted.

See also American Progressive Life & Health Insurance

Co. v. Corcoran, 715 F.2d 784, 787 (2d Cir. 1983).

The purchase of hospital service is like the purchase

of public utility service, or of any other service or com-

modity whose price is controlled by the State. Insofar as

the regulation of hospital rates affects a plan’s cost of

doing business, it also may be analogized to State labor

laws that govern working conditions and labor costs, to

rent control laws that determine what employee benefit

plans pay or receive for rental property, and even to such

minor costs as the Thruway, bridge and tunnel tolls that

are charged to plans’ officers or employees. In short, if

ERISA is held to invalidate every State action that may

increase the cost of operating employee benefit plans,

those plans will be permitted a charmed existence that

never was contemplated by Congress. Where, as here, a

State statute of general application does not affect the

structure, the administration, or the type of benefits pro-

vided by an ERISA plan, the mere fact that the statute

has some economic impact on the plan does not require

that the statute be invalidated.’

Moreover, such indirect economic impact as may re-

sult from State control over hospital rates does not run

counter to ERISA’s aim of national uniformity in plan

a

2 The mere fact that section 2807 recognizes differences between

groups, including “self-insured groups” like United, and tempers

its treatment of these groups to reflect these differences, does not

make it any the less a law of general application for preemption

analysis. Cf. New York Tel. Co. v. New York State Dept. of

Laber, 440 U.S. 519 (1979) (New York unemployment benefit

law that gives special treatment to striking employees is “a law

of general application,” and thus is not preempted by NLRA).

13a

Opinion

regulation. See Shaw v. Delta Air Lines, Inc., supra, 103

S. Ct. at 2890 n.20. There is no valid reason why em-

ployee benefit plans cannot be subject to nationally uni-

form supervision despite dissimilarities in their costs of

doing business. Indeed, if statutes such as section 2807-

a(6)(b) of New York’s Public Health Law are held to be

preempted by ERISA, every hospital will be able to set

its own rates for ERISA plans, and appellee does not

contend that these rates are, or will be, uniform, even as

between hospitals in the same locality. Lack of uni-

formity is not a valid argument for preemption of New

York’s statute.

The author of this opinion, writing only for himself

and not his colleagues, who take no position on the issue,

believes that New York’s experimental and demonstration

project, incorporated in section 2807-a, also is exempted

from the preemptive provisions of ERISA by section 514

(d) of that Act, which provides that nothing in ERISA

shall be construed to “impair . . . any law of the United

States .. . or any rule or regulation issued under any

such law.” 29 U.S.C. § 1144(d).

Medicaid has been described correctly as a “coopera-

tive endeavor”, a “cooperative program of shared financial

responsibility” between the states and the federal govern-

ment. Harris v. McRae, 448 U.S. 297, 308-09 (1980).

It is “one of the ‘cooperative federalism’ welfare prorrams

administered jointly by state and federal governments.”

Massachusetts General Hospital v. Sargent, 397 F. Supp.

1056, 1061 (D. Mass. 1975). See also King v. Smith,

392 U.S. 309, 316 (1968). A federally authorized ex-

perimental and demonstration project that incorporates

both Medicaid and Medicare certainly is no less a coopera-

tive undertaking.

Ida

Opinion

As already pointed out, Congress authorized the Sec-

retary of Health, Education and Welfare “to develop and

engage in experiments and demonstration projects . . . to

determine whether the rates of payment . . . for health

care services, approved by a State for purposes of the

administration of one or more of its laws, when utilized

to determine the amount to be paid for services furnished

in such State under the health programs established by

this chapter, would have the effect of reducing the costs

of such programs without adversely affecting the quality

of such services.” 42 U.S.C. § 13885b-1(a)(1)(C). This

statute unambiguously vests the Secretary with authority

to engage in such experiments. Blue Cross Association V.

Harris, 622 F.2d 972, 976 (8th Cir. 1980).

It is a commonplace of statutory construction that a

legislative grant of power carries with it the right

to.use the means and instrumentalities necessary to

the beneficial exercise of that power.

Id. at 978. See also Health Care Service Corp. v. Califano,

601 F.2d 934, 935 (7th Cir. 1979); California Welfare

Rights Organization v. Richardson, supra, 348 F. Supp.

at 493, 495.

In fact, Congress did more than merely authorize

the Secretary to approve New York’s demonstration

project. In section 603b(1) of the 1983 Act, Congress

ratified what the Secretary had done by authorizing the

continuation of the established project. The program

under review is not simply a New York undertaking; it

is a cooperative undertaking of the state and federal

governments.

The need for such experimental projects in the con-

tinually developing field of public health and assistance

1Sa

Opinion

is obvious. “A purpose to determine whether and how

improvements can be made in the welfare system is as

‘legitimate’ or ‘appropriate’ as anything can be.” Aguayo

v. Richardson, 473 F.2d 1090, 1109 (2d Cir. 1973). See

California Welfare Rights Organization v. Richardso:,

supra, 348 F. Supp. at 497. Indeed, the predetermined

rate scheduling procedure that New York adopted for

Medicaid in 1970 began its existence as an experimental

or demonstration project with the approval of the Secre-

tary and later was adopted as a permanent basis for pay-

ments. The above outlined history of the numerous con-

gressional enactments authorizing experiments and demon-

stration projects shows the consistent intent of Congress

that such experiments be conducted. When Congress gives

authority with one hand, it ordinarily does not take it

away with the other.

In attempting to control hospital charges, a State has

the choice of setting rates for specific services, a procedure

that is both cumbersome and expensive, or of prescribing

a “revenue cap” for all services, a procedure that elim-

inates much of the administrative morass inherent in

selective rate setting and gives hospitals some leeway in

fixing specific charges. In order for the “revenue cap”

concept to operated properly, a plan must provide, as New

York’s does, for an equitable apportionment of hospital

costs among all payors, including the costs of bad debts

and charity care. Indeed, the Medicare Act specifically

prohibits the shifting of costs between Medicare and non-

Medicare payors. 42 U.S.C. §1395x(v)(1)(A). See

Greater New York Hospital Association v. Matthews, 536

F.2d 494, 499 (2d Cir. 1976); 10 N.Y. Admin. Cede, tit.

10, § 86-1.11(b). Were the Secretary prevented from

approving experimental reimbursement programs that at-

tempt to regulate all sources of hospital inpatient revenue

16a

Opinion

and equitably apportion responsibility for bad debt and

charity care, the statutory mandate for such experimental

programs would be impaired substantially.

In sum, the writer does not believe that Congress in-

tended that ERISA would preempt a project of cooperative

federalism, such as we have here, a project that was au-

thorized and ratified by federal statute and is intended

in substantial part to conserve federal funds.

The district court’s judgment is vacated and the

matter is remanded for further proceedings consistent

with this opinion.

17a

OPINION AND ORDER OF THE UNITED STATES DISTRICT

COURT, SOUTHERN DISTRICT OF NEW YORK DATED

MARCH 12, 1984

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

83 Civ. 8707

(wcc)

SEBASTIAN REBALDO, as Chairperson of the Board of

Trustees of the UNITED OPTICAL WORKERS INSURANCE

FUND,

Plaintiff,

- against -

MARIO CUOMO, Governor of the State of New York, and

DAVID AXELROD, Commissioner of Health of the State of

New York,

Defendants.

APPEARANCES:

SIPSER, WEINSTOCK,

HARPER, DORN &

LEIBOWITZ, ESQS.

Attorneys for Plaintiff

380 Madison Avenue

New York, New York 10017

18a

Opinion and Order

I. PHILIP SIPSER, ESQ.,

DONALD E. KLEIN, ESQ.,

JEROME TAUBER, ESO.,

SUSAN MARTIN, ESQ.,

Of Counsel

ROBERT ABRAMS, ESQ.

Attorney General of the State

of New York

Attorney for Defendants

Two World Trade Center

New York, New York 10047

MELVYN R. LEVENTHAL, ESQ..,

Deputy First Assistant Attorney General

ROBERT A. FORTE, ESQ.

Assistant Attorney General

Of Counsel

BREED, ABBOTT &

MORGAN, ESQS.

Attorneys for Amicus Curiae

Blue Cross and Blue Shield

of Greater New York

153 East S3rd Street

New York, New York 10022

ROBERT A. BICKS, ESQ..,

Of Counsel

CONNER, D. J.:

i9a

Opinion and Order

Plaintiff Sebastian Rebaldo (‘‘Rebaldo’’) filed this action on

behalf of the United Optical Workers Insurance Fund (the

‘“‘Fund’’) in December 1983, seeking declaratory and injunctive

relief against implementation of a small portion of the New York

Prospective Hospital Reimbursement Method (the “‘NYPHRM"’),

New York Public Health Law §2807-a, ef seg. Among its

provisions, the NYPHRM establishes one method of hospital

reimbursement for major third-party payors such as Medicare,

Medicaid and Blue Cross, and another for all other payors.

Rebaido contends that the subsection in question, §2807-a.6(b),

which mandates that rates for charge-paying individuals and

groups such as the Fund be set at levels from 12% to 15% higher

than rates set for corporations like Blue Cross, is invalid as applied

to the Fund. He reasons that because this subsection restricts the

right of an employee welfare benefit plan to negotiate with

hospitals for reduced rates, it is pre-empted by the Employee

Retirement Income Security Act of 1974, 29 U.S.C. $1001 er seq.

(1976 ed. and Supp. V\“‘ERISA"’). Defendants Mario Cuomo,

the Governor of the State of New York, and David Axelrod, the

Commissioner of Health, are the state officials charged with

enforcing the NYPHRM. The matter is now before the Court

on cross-motions for summary judgment.'

The Fund is a self-insured and self-administered employee

welfare benefit plan governed by a board of trustees, of which

Rebaildo is the chairman. The Fund receives contributions from

employers in various states pursuant to the terms of collective

bargaining agreements between the employers and the United

Optical Workers, Local 408, and the resulting fund is used to

provide hospital and other health and welfare coverage for

employees and their dependents. Rebaldo Aff. at {1. The parties

to this action and amicus Blue Cross agree that the Fund is

governed by ERISA. PI's Mem. at 2; Def’s Mem. at 2; Amicus

Mem. at 19.

ele

20a

Opinion and Order

Prior to 1983 the Fund purehased insurance coverage through

Blue Cross. However it suffered financial losses under this

arrangement, and in 1982, it retained Donald Rubin (‘‘Rubin’’)

to explore the possibility of self-insuring. Rubin concluded that

by self-insuring, the Fund could provide superior benefits at

reduced costs. Under his guidance, the Fund terminated its

relationship with Blue Cross effective January 1, 1983, and

converted to a self-insured and self-administered plan. On behalf

of the Fund, Rubin negotiated discount contracts with more than

100 area hospitals; these contracts called for payment rates

calculated at 5% above the discount rate paid by Blue Cross. As

a result of these negotiated discount arrangements, as well as

increased efficiency and lower administrative costs, the Fund

estimates that it saved approximately $100,000 in hospitalization

costs in 1983 by self-insuring. Jd. at 43.

The New York Legislature enacted the NYPHRM in 1982,

following years of proposals and recommendations aimed at

remedying a vast array of hospital cost containment problems

caused by such conditions as spiraling inflation, inability to cover

bad debts and charity care, inadequate efficiency incentives and

an inequitable distribution of financial burdens on various

categories of payors. See generaily Ex.A to Sweeney Aff. The

ultimate goal of the statute, as characterized by the Director of

the Office of Health Systems Management of the New York State

Department of Health, is the attaining ‘‘financial stability for

the hospital industry while at the same time promoting cost

containment and overall increased efficiency in hospital

operation.’’ Sweeney Aff. at 419. The NYPHRM seeks to

accomplish this end through a complex and comprehensive

‘reimbursement methodology’’ that accounts for and controls

all sources of hospital revenue. The central concept is that of an

‘inpatient revenue cap’’ established for each hospital, which

determines the maximum amount of inpatient revenue the hospital

2la

Opinion and Order

may receive for services in a given year. Section 2807-a.1; Lovett

Aff. at 414,; Miller Aff. at 44. Once the dollar figure is fixed

for each hospital, it is allocated among various categories of

payors, im part by the subsection at issue here.

Hospitals receive the great bulk of their revenue for patient

care from third-party payors rather than from the personal funds

of individual patients. Medicare, Medicaid and Blue Cross account

for approximately 80% of payments for hospital care in New York,

and the remaining percentage is attributable primarily to private

insurance companies, self-insured groups such as the Fund, and

individual ‘‘self-pay’’ patients (collectively ‘‘charge payors’’).

Sweeney Aff. at 44. lin order to implement a comprehensive system

to contain hospital costs, and to prevent hospitals from ‘‘juggling”’

reimbursement among payors, making up losses in one area with

higher revenues from another, the legislature concluded that it

would be necessary to achieve control over the rates paid by each

of these groups. Sweeney Aff. at 4420, 25.

The New York State Department of Health already regulated

Medicaid reimburseinent rates, Sweeney Aff. at 45, and similar

controls had been exerted over rates charged to Blue Cross, a

not-for-profit corporation which is organized pursuant to Article

IX-C of the New York Insurance Law, and which is therefore

subject to considerable state regulation. Lovett Aff. at 43; Sweeney

Aff. at 49. Prior to the enactment of the NYPHM, however, the

federal government had sole responsibility for establishing

reimbursement rates for the Medicare program, Sweeney Aff. at

47, and the State made no attempt to control self-insured groups

that wished to negotiate their own discount rates. In order to bring

Medicare reimbursement rates under state control, New York

proposed and received from the Office of Research and

Demonstration of the federal Health Care Financing

22a

Opinion and Order

Administration, Ex. A to Lovett Aff., a waiver under which the

state was permitted td establish its own method of setting Medicare

rates during an experimental three-year period. Sweeney Aff. at

448, 10.? Control over the rates charged to self-insured groups

was achieved by the enactment of §2807-a.6.

Section 2807-a.6(a) requires that each hospital establish a

charge schedule that will be sufficient to generate the inpatient

revenue authorized by the revenue cap. Section 2807-a.6(b) then

requires that as of January 1, 1984, each hospital’s gross charges

shall be set at a level such that the reimbursement rates paid by

Blue Cross and other Article [IX-C corporations are from 12%

to 15% lower than the rates billed to charge-paying patients. In

other words, self-insured groups such as the Fund must be charged

by each hospital at its full or ‘‘gross’’ rates. Lovett Aff. at 416.

An express exception not applicable to the Fund’s contracts allows

for the continuation of negotiated discount systems which were

in effect on May 1, 1982.

Plaintiff seeks relief from this Court because the terms of

§2807-a.6(b) effectively nullified its negotiated contracts as of

January first of this year. He has submitted letters from the

administrators of various hospitals with which contracts had been

arranged, terminating those agreements ‘‘in compliance with

section 2807-a(6)(b).’’ Ex. A to Rebaldo Reply Aff., Ex. A to

Rubin Aff. Rebaldo asserts that §2807-a.6(b) ‘‘relates to’? ERISA

plans, and that it therefore falls within the broad scope of ERISA’s

pre-emption provision. Defendants concede that the subsection

relates to ERISA plans, but argue that it escapes pre-emption

under two of ERISA’s savings clauses, one of which exempts state

laws that regulate insurance, and the other which forbids

construing ERISA’S preemption provision so as to alter, amend

or modify federal law. For the reasons set forth below, I conclude

23a

Opinion and Order

that §2807-a.6(b) is pre-empted by ERISA, and therefore may

not be enforced against funds such as that administered by

plaintiff.

Discussion

ERISA is a comprehensive body of federal law designed to

promote and protect the interests of employees and their

beneficiaries in pension and welfare benefit plans. 29 U.S.C. §1001.

An ‘‘employee welfare benefit plan’’ is any plan, fund or program

that provides medical, surgical or hospital care or benefits for

contingencies such as illness, accident, disability, death or

unemployment, 29 U.S.C. §1002(1), and all parties to this action

agree that plaintiff’s Fund is covered by the terms of this provision.

The instant dispute arises under ERISA’s pre-emption provision,

§514(a), 29 U.S.C. §1144(a), (**§514(a)’’) and the savings clauses

that follow.

With certain exceptions discussed below, §514(a) pre-empts

‘‘any and all State laws insofar as they may now or hereafter

relate to any employee benefit plan’’ covered by ERISA. The scope

of this provision was widely debated after ERISA’s enactment,

but much of the controversy was put to rest by the Supreme Court

in Shaw v. Delta Air Lines,___ U.S. ___., 103 S.Ct. 2890 (1983).

The unanimous Court announced in Shaw:

The breadth of §514(a % pre-emptive reach is

apparent from that section’s language. A law

‘‘relates to’’ an employee benefit plan, in the

normal sense of the phrase, if it has a connection

with or reference to such a plan.

Id. at 2899. The Court then cited Black’s Law Dictionary for

its definition of the term ‘‘relate’’: ‘“To stand in some relation;

24a

Opinion and Order

to have bearing or concern; to pertain; refer; to bring into

association or connection with.’’ Jd., n.16. This definition is

consistent with ERISA’s §514(c)(2), which provides that ERISA

pre-empts any state action ‘‘which purports to regulate, directly

or indirectly,’’ the terms or conditions of covered plans. (emphasis

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

525 (1980) (‘‘It is of no moment that New Jersey intrudes

indirectly, through a workers’ compensation law, rather than

directly, through a statute called ‘‘pension regulation’. ERISA

makes clear that even indirect state action bearing on private

pensions may encroach upon the area of exclusive federal

concern.’’) The Supreme Court went on to say in Shaw that in

using the words ‘“‘relate to’’ in their broadest sense, Congress

rejected the suggestion that §514(a) be interpreted to preempt only

state laws dealing with the subject matters specifically covered

by ERISA, such as reporting, disclosure and fiduciary

responsibility.

The Court recognized that requiring multi-state plans such

as Rebaldo’s Fund to comply with varying state regulations would

have the direct effect of increasing the costs and decreasing the

efficiency of fund administration. These increased costs, the Court

reasoned, would eventually. result in a reduction of benefits to

participants.

The employer might choose to offer a number of

plans, each tailored to the laws of particular states;

the inefficiency of such a system presumably would

be paid for by lowering benefit levels

ERISA’s comprehensive pre-emption of state law

was meant to minimize this sort of interference

with the administration of employee benefit plans.

103 S.Ct. at 2904, n.25.

25a

Opinion and Order —

ERISA’s legislative history was given considerable attention

in Shaw. The Court extensively quoted the bill’s sponsors, who

noted as ERISA’s crowning achievement its reservation to federal

authority of ‘‘the sole power to regulate the field of employee

benefit plans,’’ and who anticipated that the statute would

eliminate any threat of conflicting or inconsistent state and local

regulation. Jd. at 2901, quoting Remarks of Representative Dent

and Senator Williams, 120 Conf.Rec. 29197 and 29933 (1974).

The Court also cited remarks by Senator Javits, who described

the ‘‘ernergence of a comprehensive and pervasive Federal interest’’

and who recognized that ‘‘the interests of uniformity with respect

to interstate plans required — but for certain exceptions — the

displacement of state action in the field of private employee benefit

programs.’’ Jd. at 2901 n.20, quoting 120 Cong. Rec. 29942.

In light of this legislative history, the Supreme Court

determined thai the specific enumerated exceptions to the pre-

emption provision should be narrowly construed. Jd. at 2902, 2903.

(‘‘As we have detailed above, Congress applied the principle of

pre-emption ‘‘in its broadest sense to foreclose any non-Federal

regulation of employee benefit plans,’’ creating only very limited

exceptions to pre-emption’’).

Neither defendants nor amicus argues that §2807-a.6(b) does

not ‘‘relate to”” ERISA plans,’ and such an argument would not

prevail. Section 2807-a.6(b) adversely affects the administration

of such plans in at least two ways . It is obvious that if the Fund

is required to pay the higher reimbursement rates set for charge

payors, it will not be able to provide the same breadth of coverage

for its beneficiaries. Its other alternative is to return to the previous

arrangement of purchasing insurance through Blue Cross, but the

Fund asserts that its experience has shown this arrangement to

be more expensive than the present system, and that some

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Opinion and Order

reduction in benefits would still be necessary to cover increased

costs.

In addition, by imposing a local condition on the

administration of covered funds, §2807-a.6(b) runs afoul of

ERISA’s goal of facilitating the operation of uniform multi-state

plans. In order to best conserve assets, the Fund might well find

it practical to operate separate plans in different states; it might

find that it could provide benefits most efficiently by insuring

through Biue Cross in New York and by self-insuring in states

without similar restrictions. This would result in higher

administrative costs, and as the Supreme Court noted in Shaw,

would eventually necessitate a decrease in benefits.

It should be noted, as well, that §2807-a.6(b)’s impact on

ERISA plans is not incidental; it is apparent from the express

exclusion of discount contracts entered into by ‘‘self-insured and

self-administered groups’’ before May 1, 1982 that the legislature

considered ERISA pians and fully intended to curtail their ability

to negotiate or receive discounts after January 1, 1984. This

conclusion is further supported by direct references to ‘‘self-insured

groups [that] have negotiated payment rates with individua!

hospitals’’ in a report by the statutorily-created Council on Heaith

Care Financing, which was charged with devising a plan for

financing hospital inpatient care, and also by statements attributed

to Edwin Werner, the President of Blue Cross and a member of

the Council on Health Care Financing. In a memorandum entitled

“‘Questions and Answers on the Changes in Financing Hospital

Care in New York State,’’ Ex.C to Rubin Aff., Werner discussed

the impact of the NYPHRM on self-administered funds:

These funds pay substantially less than other

charges-paying patients; in several circumstances,

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Opinion and Order

their payment rates approximate [Blue Cross’]

own. The unfairness of this became obvious to all

in the course of the Council on Health Care

Financing deliberations. As a result, under the Act,

no new arrangements of this sort can be established

after May 1, 1982.

Id. at p.7. In discussing the impact of the NYPHRM on Blue

Cross, Werner then stated that the ‘‘abusive reimbursement

practices of self-insured programs will be curtailed.”’ Jd. at p.8.

I am convinced, based upon the foregoing, that §2807-a.6(b)

‘pertains to’”’ and ‘‘refers to’? ERISA funds, and that it has a

direct ‘‘bearing on’’ and ‘‘connection with’’ them. This conclusion

by no means suggests that the designers of the NYPHRM acted

with improper motives toward ERISA funds. To the contrary,

defendants and amicus have provided the Court with considerable

justification for the payment rate differential established between

ERISA plans and corporations such as Blue Cross. The wisdom

of §2807-a.6(b) is not at issue here, however, and I therefore turn

to an examination of whether eicher of the proffered exceptions

to ERISA’s broad pre-emption rule apply.

Defendants and amicus assert that two of §514(a)’s narrow

savings provisions apply to this controversy. The first is subsection

(b)(2)(A) of §514, which excepts from pre-emption ‘‘any law of

any State which regulates insurance.’’ On its face, §2807-a.6(b)

certainly does not purport to be an insurance law; it merely

regulates the rates at which charge payors compensate hospitals

for health care services. As noted above, this group of charge

payors includes many individuals who are not covered by insurance

at all. Nevertheless, it is apparent from the very existence of the

present controversy that this measure has a regulatory effect on

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Opinion and Order

insurance, and I therefore look to the intended meaning of the

phrase ‘‘law which regulates insurance’’ in §514(b)(2)(A).*

ERISA itself provides no definition of this language, but both

parties recognize that §514(b)(2)(A) is a reflection of congressional

intent to accommodate the states’ primacy in the area of insurance.

Pl’s Mem. at 6-7; Def’s Mem. at 11-12. See also Wadsworth v.

Whaland, 562 F.2d 70, 78 (ist Cir. 1977); Eversole v. Metropolitan

Life Ins. Co., 500 F. Supp. 1162 (C.D.Cal. 1980); McLaughlin

v. Connecticut General Life Ins. Co., 565 F. Supp. 434, 443

(N.D.Cal. 1973). That primacy was officially granted by Congress

with the enactment of §2(b) of the McCarran Ferguson Act, 15

U.S.C. §§1011-1015 (1976)“‘:he McCarran Act’’), and thus it is

appropriate to examine the language and background of the

McCarran Act in construing ERISA’s insurance savings clause.

The McCarran Act was passed in response to the Supreme

Court’s decision in United States v. South-Eastern Underwriters

Assn., 322 U.S. 533 (1944), which held that insurance transactions

were subject to federal regulation under the Commerce Clause.

Congress was apparently concerned that inroads might be made

on the tradition of state insurance regulation, and it therefore

sought to “‘give support to the existing and future state systems

for regulating and taxing the business of insurance.’’ Prudential

Ins. Co. v. Benjamin, 328 U.S. 408, 429 (1946). It accomplished

this by enacting §2(b), which provides in relevant part:

No Act of Congress shall be construed to

invalidate, impair, or supersede any law enacted

by any State for the purpose of regulating the

business of insurance, or which imposes a fee or

tax upon such business, unless such Act specifically

relates to the business of insurance ..

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Opinion and Order

In: SEC v. National Securities, Inc., 393 U.S. 453 (1969),

the Supreme Court discussed the meaning of the McCarran Act’s

‘““business of insurance”’ language. The Court stated first that in

enacting the measure, Congress intended to assure that states retain

the free hand they had previously enjoyed in ‘‘regulating the

dealings between insurers and policyholders.’’ It is the protection

of this relationship, according to the Court, with which laws

regulating the ‘‘business of insurance’’ are concerned.

Insurance companies may do many things which

are subject to paramount federal regulation; only

when they are engaged in the “business of

insurance’’ does the statute apply. Certainly the

fixing of rates is part of this business;

Congress was concerned with the type of state

regulation that centers around the contract of

insurance, the transaction which Paul v. Virginia

held was not “‘commerce.’’ The relationship

between insurer and insured, the type of policy

which could be issued, its reliability, interpretation,

and enforcement — these were the core of the

“business of insurance.’’ Undoubtedly, other

activities of insurance companies relate so closely

to their status as reliable insurers that they too must

be placed in the same class. But whatever the exact

scope of the statutory term, it is clear where the

focus was — it was on the relationship between

the insurance company and the policyholder.

Statutes aimed at protecting or regulating this

relationship, directly or indirectly, are laws

regulating the ‘‘business of insurance.”’

Id. at 459-60 (emphasis added).

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Opinion and Order

The Supreme Court again addressed the meaning of §2(b)’s

“business of insurance’ language in Group Life & Health

Insurance Co. a/k/a Blue Shield of Texas v. Royal Drug Co.,

440 U.S. 205 (1979). Royal Drug involved agreements between

Blue Shield and certain ‘‘participating’’ pharmacies, under which

policyholders would pay only two dollars for each prescription

drug purchased, and Blue Shield would then reimburse the

pharmacies for the drug acquisition costs. Policyholders who

purchased drugs at non-participating pharmacies would pay full

price, and could seek partial reimbursement from Blue Shield.

The only issue before the Court was whether the establishment

of these pharmacy agreements between Blue Shield and the

participating pharmacies constituted the ‘‘business of insurance”’

which, under the McCarran Act, could only be regulated by the

state.

In concluding that entry into these agreements did nor

constitute the ‘‘business of insurance,*’ the Court first discussed

the significance of risk-spreading as an indispensable characteristic

of insurance. Rejecting Blue Shield’s suggestion that the

agreements did involve undewriting of risks, the Court said:

The benefit promised to Blue Shield policy holders

is that their premiums will cover the cost of

prescription drugs except for a $2 charge for each

prescription. So long as that promise is kept,

policyholders are basically unconcerned with

arrangements made between Blue Shield and

participating pharmacies.

The Pharmacy Agreements thus do not

involve any underwriting or spreading of risk, but

are merely arrangements for the purchase of goods

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Opinion and Order

and services by Blue Shield. By agreeing with

pharmacies on the maximum prices it will pay for

drugs, Blue Shield effectively reduces the total

amount it must pay to its policyholders. The

Agreements thus enable Blue Shield to minimize

arrangements may well be sound business practice,

and may well inure ultimately to the benefit of

policyholders in the form of lower premiums, but

they are not the “‘business of insurance."’

Id. at 214-15 (footnotes omitted).

The Court went on to emphasize that the pharmacy

agreements were simply contractual arrangements between Blue

Shield and the pharmacies for the sale and distribution of goods

and services other than insurance, and that they did not implicate

the relationship between insurer and insured, which was at the

heart of §2(b) of the McCarran Act. For these reasons, the Court

concluded that the agreements were not ‘“‘the business of

insurance’ within the meaning of that Act. /d. at 230.

In the instant case, the Fund negotiated with third parties

for the delivery of health care services at a discount price. The

contracts were designed to reduce the Fund’s costs and preserve

its assets, but they had no direct impact upon the relationship

between the Fund and its beneficiaries. In short, within the

meaning of the McCarran Act, the Fund was not engaging in

the ““business of insurance’’ when it executed the contracts affected

by the implementation of §2807-a.6(b).

Of course, §514(6)2)(A) of ERISA does not contain the

““business of insurance’’ language found in the McCarran Act;

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Opinion and Order

it refers simply to “‘any law ... which regulates insurance”’

Nevertheless, several courts have concluded, correctly I believe,

that the two provisions promote the same policy and should

therefore be construed consistently. See Wadsworth v. Whaland,

$62 F.2d 70, 78 (1st Cir. 1977) (“*[T]he national policy of primacy

in the reguiation of insurance announced by Congress in the

McCarran-Ferguson Act .. . is twice reaffirmed by ERISA in

§514: first with the saving clause and again with subsection (d)"");

McLaughlin v. Connecticut General Life Insurance Co., 555 F.

Supp. 434, 445 (N.D. Cal. 1983); Eversole v. Metropolitan Life

Insurance Co., 500 F. Supp. 1162, 1168 (C.D. Cal. 1980) (“‘The

two statutes are in pari materia and should therefore be construed

consistently’’). In light of the Supreme Court's conclusion that

the specific exceptions to ERISA’s general pre-emption rule are

to be construed narrowly, I see no purpose in interpreting the

reference to insurance regulation in §514(6)(2)A) more broadly

than the corresponding reference in the McCarran Act. It follows,

therefore, that §2807-a.6(b) of the New York Public Health Law

‘s not saved from pre-emption under ERISA’s insurance savings

clause.

Blue Cross has proposed an alternative method of saving

§2807-a.6(b) from pre-emption, inviting the Court's attention to

§S14(d) of ERISA. This subsection states:

Nothing in this subchapter shall be construed to

alter, amend, modify, invalidate, impair or

supersede any law of the United States or any rule

or regulation issued under any such law.

Amicus contends that if this Court were to construe

ERISA to pre-empt §2807-a.6(b), the federal

government would be impaired in its ability to

33a

Opinion and Order

discharge its responsibilities under the Medicare

program, Title XVIII of the Social Security Act,

42 U.S.C. §1395 et seg. The theory, although

creative, is also flawed.

Underlying Blue Cross’s argument is a concern

for the continued viability of the federal

government's Medicare waiver, which was granted

under a section of the Social Security Act designed

to encourage experimentation with Medicare

reimbursement at the state level, and which was,

in fact, a condition precedent to implementation

of the NYPHRM. The source of this concern is

a provision, codified as a note to §2807,which

provides that:

if any payor reduces its rate of payment below that

which is developed in accordance with the

provisions of section twenty-eight hundred seven-

a of the public health law, .. ., the provisions

of this act shall have no force and effect and the

provisions of the public health law as they existed

immediately prior to the enactment of this < :t shall

be restored and deemed to be in full force and

effect.

1982 N.Y. Laws, ch. 536, §10(a). Blue Cross argues that even

though plaintiff has asked the Court to enjoin application of

§2807-a.6(b) only insofar as it applies to ERISA funds, the

language quoted above forecioses any possibility of such limited

relief — in other words, if §2807-a.6(b) is pre-empted, the whole

scheme will be invalidated.

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Opinion and Order

According to Blue Cross, when the Secretary of Health and

Human Services granted the waiver, it thereby ‘‘adopted’’ the

NYPHRM scheme for the federal Medicare program, Amicus

contends this is precisely the sort of operational experiment

Congress clearly sought to enable by enacting §514(d). Amicus

letter of February 17, 1984, 6.

Plaintiff responds that NYPHRM’s non-severability clause,

§10(a) of L.1982, ch. 536, was intended only to assure the

continuing participaticn of the state’s three major payors,

Medicare, Medicaid and Blue Cross, im the overall scheme, and

does not apply to ERISA funds. Plaintiff suggests that another

general severability clause, found at §2813 of the Public Health

Law, operates to save §2807-a from pre-emption except to the

extent that it is held unenforceable against ERISA funds, Pl’s

Reply Mem. at 17, and that pre-emption therefore poses no threat

to the continued viability of the Medicare waiver.

Defendants and amicus have emphasized repeatedly the

comprehensiveness of the NYPHRM, and the importance of

incorporating into the reimbursement scheme all sources of hospital

revenue. These considerations militate against adoption of

plaintiff’s construction of §10(a). On the other hand, plaintiff

has correctly recognized that a literal construction of the language

would lead to the absurd result that ‘‘a single uninsured patient

who settled his hospital account for less than the charge payer

rate would invalidate the statute.’’ P!’s Reply Mem. at p.17 n.6.

Given the importance of the objectives served by the NYPHRM,

the extensive time and effort expended in designing and

implementing the complex statutory scheme, and the obvious need

for some degree of flexibility in its administration,’ I believe that

had the New York Legislature been presented with the ambiguity

raised here, it would have clerified §10(a) or made some other

35a

Opinion and Order

provision to avoid the drastic result predicted by amicus. My

confidence is bolstered by the fact that the suggestion that pre-

emption of §2807-a.6(b) would invalidate the NYPHRM in its

entirety was raised not by the Office of the New York State

Attorney General, but only by amicus Blue Cross. It would appear,

then, that the defendants do not share Blue Cross’s concern for

the future of the NYPHRM.

Fortunately, it is not necessary for me to second-guess the

New York Legislature in order to resolve the legal issue at hand.

Even assuming the legislature fully intended that pre-emption of

any one provision would result in the defeat of its entire statutory

scheme and the nullification of the special Medicare waiver, I

have concluded that such a disposition would not alter, modify

or impair ‘‘any law of the United States or any rule or regulation

issued under any such law’’ within the meaning of §514(d) of

ERISA. ‘

Medicare is a comprehensive health insurance program for

elderly and disabled persons. Medicare Hospital Insurance (Part

A) covers medically necessary inpatient care in a hospital, and

thereafter in a skilled nursing facility, while Medicare Medical

Insurance (Part B) primarily covers medically necessary outpatient

services and supplies. The Secretary of Health and Human Services

(the ‘‘Secretary’’) is granted authority under 42 U.S.C. §1302 to

‘‘make and publish such rules and regulations ... as may be

necessary to the efficient administration’ of the Medicare

program, and she has exercised that authority by publishing

regulations governing reimbursement for services rendered to

persons covered under Medicare Part A. See 42 C.F.R. §405

(1982). These regulations set forth the retrospective reimbursement

procedure from which the New York State Department of Health

sought relief in order to implement the NYPHRM.

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Opinion and Order

The Secretary is authorized under 42 U.S.C. §1395b-1(a)(1)(c)

to engage in experiments and demonstration projects designed

to determine whether the rates of payment or reimbursement

approved by a state for purposes of administering its own laws

would reduce the cost of Medicare coverage without adversely

affecting the quality of services. Section 1395b-1(b) provides that

in the case of any experiment or demonstration project entered

into under subsection (a), the Secretary may waive compliance

with applicable reimbursement requirements. Under this authority,

the Federal Health Care Finance Administration’s Office of

Research and Demonstrations issued a letter to the Commissioner

of the New York State Department of Health on December 14,

1982, granting such a waiver. Ex.A to Lovett Aff.

Blue Cross has not suggested that the predicted nullification

of the NYPHRM by pre-emption of §2807-a.6(b) would impair

in any way the continued ability of the Secretary to grant waivers

under 42 U.S.C. §1395b-1(b). It argues, instead, that the particular

waiver granted for purposes of implementing the NYPHRM would

be jeopardized, and that this waiver amounts to a ‘“‘rule or

regulation’’ which cannot be impaired under §514(d).°

By formal action denominated ‘‘Waiver’’ (42

U.S.C. §1395b-1(b)(1976), throughor* “lew York

the Secretary has substituted for ‘‘rules and

regulations’ set forth in 42 C.F.R. those

regulations for reimbursement under Medicare Part

A prescribed by NYPHRM. ... In effect, then,

the Secretary’s ‘‘Waiver’’ action has constituted

adoption of new ‘“‘regulations’’ to govern Medicare

Part A reimbursement for New York.

Amicus letter of February 17, 1984, 43. For the several reasons

set forth below, I cannot agree.

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Opinion and Order

Section 514(d) of ERISA refers to ‘‘any rule or regulation

issued under any federal law,’’ but nowhere in the statute is that

phrase defined. The Medicare waiver itself is surely not a federal

regulation; it merely relieves Medicare providers in New York

of their obligation to comply with federal regulations. A rule,

in its broadest sense, may be ‘‘an agency statement of general

or particular applicability,’’ Administrative Procedure Act, 5

U.S.C. §551(4), but rulemaking by an agency ‘‘characteristically

involves the promulgation of concrete proposais, declaring

generally applicable policies binding upon the affected public

generally. PBW Stock Exchange Inc. v. SEC, 485 F.2d 718, 732

(3d Cir. 1973), cert. denied, 416 U.S. 969 (1974). See, e.g., Flospital

Association of New York State v. Toia, 438 F. Supp. 866, 872

(S.D.N.Y. 1977) (In approving New York State Medicaid plan,

HEW acted in ‘‘neither an adjudicatory, nor a rule making

capacity’’); Vandemark v. Housing Authority of the City of New

York, 663 F.2d 436, 440 (3d Cir. 1981). In deterrnining whether

the waiver is within this definition, I am of course cognizant of

the Supreme Court’s mandate that exceptions to ERISA’s general

pre-emption provision be narrowly construed. In light of that

mandate, it is inconceivable that Congress intended to permit a

state to circumvent ERISA’s requirements merely by persuading

a federal bureaucrat to act favorably upon a proposal that

embodies otherwise impermissible measures, and then protecting

this transgression by means of a non-severability clause.

The Medicare waiver was apparently obtained upon an ex

parte application. There was no publication or opportunity for

opponents to be heard, and the record is devoid of any indication

that federal agency officials even considered the potential impact

of the proposed plan on ERISA funds before approving the waiver.

Under all of these circumstances, I cannot accept amicus’ argument

that the waiver effectively converted state law into federal law.

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Opinion and Order

See, e.g., Vandemark, 663 F.2d at 441 (‘‘[Local housing

authority’s] indebtedness policy was part of a policy submitted

by the [authority] as part of its administrative plan which was

approved by HUD .... However, the approval of the

{authority’s] policy did not establish a general policy which would

bind all housing authorities and tenants .. . . The indebtedness

policy is not, therefore, a policy of HUD but is rather a policy

of the local housing authority’’).

I am also convinced that Congress would not approve the

sort of patchwork pattern of laws affecting ERISA funds that

would inevitably result if each state were to obtain a Medicare

waiver and adopt its own variation of the NYPHRM. Multi-state

ERISA funds such as that administered by plaintiff would then

be placed in the awkward position of having to comply with the

several states’ differing provisions. Obviously, when viewed in

light of the legislative history of ERISA’s pre-emption provision

with its heavy emphasis on interstate uniformity, such a result

cannot be justified.’

As set forth above, I am not persuaded that Blue Cross is

correct in its position that pre-emption of §2807-a.6(b) would result

in the invalidation of the NYPHRM. If Blue Cross is correct,

the result would, indeed, be unfortunate; I have reviewed the

voluminous submissions detailing the need for reforms in New

York’s hospital reimbursement scheme, and I have been most

impressed with the efforts devoted over many years to establishing

this innovative and comprehensive alan. Nonetheless, this Court

is bound to comply with express congressional intent to displace

all state action in the field of private employee benefit programs

and §2807-a.6(b) trenches upon that protected area. The Supreme

Court recognized in Shaw that application of ERISA’s pre-emption

rules might well cause problems in the administration of New

39a

Opinion and Order

York’s fair employment laws. The Court concluded, however,

that ‘‘those problems are the result of congressional choice and

should be addressed by congressional action.’’ 103 S.Ct. at 2904-5.

The state has a similar remedy here.

For all of the reasons set forth above, I conclude that

summary judgment for plaintiff is appropriate. Section 2807-a.6(b)

of New York’s Public Health Law is pre-empted insofar as it relates

to ERISA funds, and enforcement against such funds is hereby

enjoined.*

Plaintiff is instructed to submit a proposed judgment within

five days of the date of this Opinion and Order, on five days’

notice.

SO ORDERED.

s/ William C. Conner

United States District Judge

Dated: New York, New York

March 12, 1984

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FOOTNOTES

1. Plaintiff’s complaint asserts several causes of action in

addition to the ERISA pre-emption claim. It alleges that

§2807-a.6(b): (1) is pre empted by the Sherman Act, 15 U.S.C.

§1 et seq.; (2) violates the Commerce, Contracts, and Supremacy

Clauses of the United States Constitution; and (3) violates the

Equal Protection Clause of the 14th Amendment. In hopes of

obtaining a prompt disposition, plaintiff filed along with his

complaint an order to show cause for entry of a preliminary

injunction.

The Court set up a briefing schedule and granted permission

for Blue Cross and Blue Shield of Greater New York to file an

amicus curiae brief in opposition to a preliminary injunction. The

parties and amicus thereafter addressed the likelihood of plaintiff's

prevailing on the merits of his claim, as well as the irreparability

of harm.

The Court made a preliminary review of the various

submissions and concluded, at least with respect to the ERISA

claim, that there were no factual issues to be resolved at a trial

on the merits and a prompt resolution on the merits would be

possible. A conference was convened on January 25, 1984, at

which the parties and amicus were asked whether there would

be any objection to the Court’s treating the submissions as cross-

motions for summary judgment on the ERISA claim and delaying

resolution of the other claims. All interested parties indicated that

this would be an appropriate ";anner in which to proceed because

there were no disputed issues uf material fact, and that they had

no additional materials to submit.

wy ne

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Opinion and Order

2. The rate-setting procedure employed by the federal

government is ‘‘retrcspective.’’ This means that ‘‘hospitals were

issued rates estimated as adequate to cover their current costs

for caring for Medicare patients and these rates were then

subsequently retroactively adjusted to reflect the facilities’ actual

expenses.’’ Sweeney Aff. at 47. According to Raymond Sweeney,

the Director of the Office of Health Systems Management of the

New York State Department of Heaith, this retrospective system

was criticized because it provided no incentive to contain costs

or increase efficiency. Jd.

Under the ‘‘prospective’’ method adopted in New York,

reimbursement rates are generally computed on the basis of actual

expenditures in a previous ‘‘base year,’’ and then adjusted for

inflation. According to Sweeney, this system provides an incentive

for hospitals to increase efficiency because they retain excess

revenue generated by keeping actual per diem expenses below their

per diem reimbursement rates. Jd. at 46.

3. Defendants and amicus argue only that §2807-a.6(b) is

saved from pre-emption by express exceptions to the broad rule

of §514(a). Defendants assert that the ‘‘state is functioning here

in an area [insurance regulation] in which it has primacy ....

Accordingly, plaintiff's ERISA preemption claims must fail.’’

Def’s Mem. at p.11. Blue Cross states: ‘‘It is upon each of these

express requirements — that ERISA not be construed to impair

the discharge of other federal authority and that ERISA’s pre-

emption shall not apply to state laws regulating insurance — that

plaintiff’s ERISA claims founder. Mem. of Amicus at p.20.

4. This subsection is followed by a qualifying ‘‘deemer

clause,’’ §514(b)(2)(B), which provides that an employee benefit

plan shall not ‘‘be deemed to be an insurance company or other

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Opinion and Order

insurer ... or to be engaged in the business of insurance or |

banking for purposes of any law of any State purporting to regulate

insurance companies, insurance contracts, ... or investment

companies.’’ Various courts and commentators have struggled

to delineate the scope and explain the interaction of these

subsections, particularly where legislation regulating aspects of

insurance traditionally governed by the states has had an indirect

or incidental impact on ERISA-covered plans. Their conclusions

have not been consistent, and efforts to reconcile the varying

interpretations have created still greater confusion. See generaily

Michigan United Food & Commercial Workers Union v.

Baerwaldt, 572 F. Supp. 943 (E.D.Mich. 1983); Eversoie v.

Metropolitan Life Ins. Co., 500 F. Supp. 1162 (C.D.Cal. 1980);

Manno, ERISA Pre-emption and the McCarran-Ferguson Act:

The Need For Congressional Action, 52 Temple L.W. 51 (1979);

Brummond, Federal Pre-emption of State Insurance Reguwiation

under ERISA, 62 lowa L.R. 57 (1976); see also American

Progressive Life & Health Ins. Co. of New York v. Corcoran,

715 F.2d 184 (2d Cir. 1983). But see Attorney General v. Traveler’s

Insurance Co., 432 N.E. 433 2d 1223 (Mass. 1982), vacated and

remanded sub nom., Metropolitan Life Ins. Co. v. Massachusetts,

—_._ U.S. ___, 103 S.Ct. 3563 (1983). Fortunately, the present

controversy does not present so delicate an issue. I conclude that

§2807-a.6(b) does not ‘‘regulate insurance’’ within the meaning

of §514(b)(2)(A), and therefore I find it unnecessary to join the

fray.

5. The statute itself provides for some flexibility. Section

2807.10 provides:

Notwithstanding the provisions of this article, the

commissioner may waive, subject to the approval

of the state director of the budget, the requirements

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Opinion and Order

of any provisions of this section or section twenty-

eight hundred seven-a to permit the development

and/or continuation of limited pilot reimbursement

programs to provide additional knowledge and

experience in different types of reimbursement

mechanisms for general hospitals. (emphasis

supplied).

6. Amicus’ reliance on Shaw is misplaced because Shaw dealt

with the impairment of Title VII of the Civil Rights Act of 1964,

42 U.S.C. §2000e et seg., which is quite obviously a ‘“‘law of the

United States.’

7. Indeed, the Court has been informed that prior to the

enactment of the NYPHRM, the state received Medicare waivers

from the federal government in order to establish two experimental

reimbursement projects which operated at a regional level.

Anderman Aff. at 45. It is conceivable, then, that ERISA plans

would be subject to conflicting requirements within a given state.

8. Because §2807-a.6(b) is pre-empted by ERISA, I need not

reach the other arguments raised by plaintiff.

44a

ORDER OF JUDGMENT OF THE UNITED STATES

DISTRICT COURT FOR THE SOUTHERN DISTRICT OF

NEW YORK DATED MARCH 30, 1984

UNITED STATES DISTRICT COURT FOR THE

SOUTHERN DISTRICT OF NEW YORK

83 Civ. 8707

(WCC)

SEBASTIAN REBALDO, as Chairperson of the Board of

Trustees of the UNITED OPTICAL WORKERS INSURANCE

FUND,

Plaintiff,

~against-

MARIO CUOMO, GOVERNOR OF THE STATE OF NEW

YORK; and DAVID AXELROD, COMMISSIONER OF

HEALTH OF THE STATE OF NEW YORK,

Defendants.

This cause having come to be submitted before Hon. William

C. Conner, United States District Judge, on plaintiff's motion

for a preliminary injunction against New York Public Health Law

§2807-a(6)(b) on the grounds that the state statute, in part, is pre-

empted by §514(a) of the Employee Retirement Income Security

Act of 1974 (““ERISA”’), 29 U.S.C. §1144(a), in part, conflicts

with 15 U.S.C. §§1, 2, 13, 42 U.S.C. §1395ww, in part, violates

the supremacy, commerce and contracts clauses of the United

States Constitution and, in part, denies plaintiff equal protection

of the laws under the Fourteenth Amendment to the United States

Constitution; and the parties and the amicus curiae, Blue Cross

4Sa

Order

and Blue Shield of Greater New York, having consented to treating

the motion for a preliminary injunction and the opposition thereto

as cross-motions for summary judgment on plaintiff's claim that

Public Health Law §2807-a(6)(b), in part, is pre-empted by ERISA,

29 U.S.C. 1144(a); and the court having considered the pleading,

affidavits, exhibits, memoranda and letter-memoranda and having

issues an opinion and order dated March 12, 1984; it is

ORDERED, ADJUDGED AND DECREED:

1. Plaintiff's motion for summary judgment is granted to

the extent set forth in paragraphs 2 and 3 hereof, and defendants’

motion for summary judgment is denied;

2. Public Health Law §2807-a(6)(b), in part, is declared pre-

empted by ERISA, 29 U.S.C. §1144(a), and the state statute is

invalid to the extent it prohibits a hospital from establishing

inpatient charges for self-insured employee benefit plans covered

by ERISA which are other than those authorized by Public Health

Law §2807.a(6);

3. Defendants, their successors, officers and employees are

enjoined from enforcing Public Health Law §2807-a(6)(b) to the

extent the state statute prohibits a hospital from establishing

inpatient charges for self-insured empioyee benefit plans covered

by ERISA which are other than those authorized ty Public Health

Law §2807-a(6); .. .

Dated: New York, New York

March 30, 1984

47a

ORDER OF THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT DATED NOVEMBER 26, 1984

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

84-7388

At a stated Term of the United States Court of Appeals for

the Second Circuit, held at the United States Courthouse in the

City of New York on the twenty-six day of November one

thousand nine hundred and eighty-four.

Present:

HON. HENRY J. FRIENDLY

HON. ELLSWORTH A. VAN GRAAFEILAND

HON. JON. 0. NEWMAN

Circuit Judges,

SEBASTIAN REBALDO, as Chairperson of the Board of

Trustees of the UNITED OPTICAL WORKERS INSURANCE

FUND,

Plaintiff- Appellee,

Vv.

MARIO CUOMO, Governor of the State of New York; and

DAVID AXELROD, Commissioner of Health of the State of

New York,

Defendants-Appellants.

48a

_ Order

Appeal from the United States District Court for the Southern

District of New York.

This cause came on to be heard on the transcript of record

from the United States District Court for the Southern District

of New York and was argued by counsel.

ON CONSIDERATION WHEREOF, it is now hereby

ordered, adjudged and decreed that the judgment of said District

Court be and it hereby is vacated and the action be and it hereby

is remanded to the said district court for further proceedings in

accordance with the opinion of this court.

Elaine B. Goldsmith,

Clerk

s/ Edward J. Guardaro,

Deputy Clerk

A True Copy

Raymond F. Burghardt, Clerk

s/ J. Caffey

Deputy Clerk

49a

RELEVANT STATUTES

State Statute

New York Public Health Law §2807-a(6) states in part:

Hospital charge schedules. Effective for the year beginning

January first, nineteen hundred eighty four and thereafter, each

general hospital shall establish a charge schedule for available

and authorized services in accordance with a gross charge

determination formula provided by the commissioner which shall:

(a) Establish gross charges sufficient to generate the inpatient

revenue authorized by the revenue cap; and

(b) Establish gross charges such that (i) the payment rate to

be made on behalf of subscribers of corporations organized and

operating in accordance with article nine-C of the insurance laws,

adjusted for uncovered services, shall be at a specified discount

from the gross charge rate billed <o or on behalf of charge paying

patients; (ii) permit the continuation of negotiated payment rate

determination systems between self-insured and self-administered

groups and hospitals which were in effect on May first, nineteen

hundred eighty-two; and (iii) for general hospitals subject to the

provisions of paragraph (a) or (b) of subdivision twelve of this

section [providing for article nine-c corporations and health

maintenance organizations], the costs (including all allowances

specified in subdivision four of this section) or services provided

to charge paying patients shall be at a specified discount from

the gross charge rate billed to or on behalf of charge paying

patients.

During the period of January first, nineteen hundred eighty-four

through December thirty-first nineteenth hundred ninety-five, the

discount referred to in subparagraphs (i) and (iii) of paragraph

50a

Relevant Statutes

(b) of this subdivision shall not exceed twelve percent for those

-hospitals which had a discount of less than twelve percent during

the previous year, shall be no greater than the discount in effect

during the previous year for those hospitals whose previous year’s

discount was between twelve and fifteen percent and shall not

exceed fifteen percent for all others. Self-insured and self-

administered negotiated systems as described in subparagraph (ii)

of paragraph (b) of this subdivision may remain in effect for the

period commencing January first, nineteen hundred eighty-three

and ending on December thirty-first, nineteen hundred eighty five

and shall be incorporated in the formula methodology provided

by the commissioner.

Federal Statute

§1144. Other laws

(a) Supersedure; effective date

Except as provided in subsection (b) of this section, the

provisions of this subchapter and subchapter III of this chapter

shall supersede any and all state laws insofar as they may now

or hereafter relate to any employee benefit plan described in section

1003(a) of this title and not exempt under section 1003(b) of this

title. This section shall take effect on January 1, 1975.

(b) Construction and application

* * =

(2)(A) Except as provided in subparagraph (B), nothing in

this subchapter shall be construed to exempt or relieve any person

Sla

Relevant Statutes

from any law of any State which regulates insurance, banking,

or securities.

(B) Neither 2n employee benefit plan described in section

1003 (a) of this title, which is not exempt under section 1003(b)

of this title (other than a plan established primarily for the purpose

of providing death benefits), nor any trust established under such

a plan, shall be deemed to be an insurance company or other

insurer, bank, trust company. or investment company or to be

engaged in the business of insurance or banking for purposes of

any law of any State purporting to regulate insurance companies,

insurance contracts, banks, trust companies, or investment

companies.

(c) Definitions

For purposes of this section:

(1) The term ‘‘State law’’ includes all laws, decisions, rules,

regulations, or other State action having the effect of law, of any

State. A law of the United States applicable only to the District

of Columbia shall be treated as a State law rather than a law

of the United States.

(2) The term ‘‘State’’ includes a State, any political

subdivisions thereof, or any agency or instrumentality of either,

which purports to regulate, directly or indirectly, the terms and

conditions of employee benefit plans covered by this subchapter.

(d) Alteration, amendment, modification, invalidation,

impairment, or supersedure of any law of the United States

prohibited

52a

Relevant Statutes

Nothing in this subchapter shall be construed to alter, amend,

modify, invalidate, impair, or supersede any law of the United

States (except as provided in sections 1031 and 1137(c) of this

title) or any rule or regulation issued under any such law.

(Pub. L. 93-406, Title I, §514, Sept. 2, 1974, 88 Stat. 897; Pub.

L. 97-473, Title III, §§ 301(a), 302(b), Jan. 14, 1983, I 96 Stat.

2611, 2613.)