Petition for Writ of Certiorari — NYSA-ILA Welfare Fund v. Dunston

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IN THE

Supreme Court of the Wnited States

OCTOBER TERM, 1993

NYSA-ILA WELFARE FUND, by its Trustees, JOHN BOWERS,

ALBERT CERNADAS, FRANK LONARDO, THOMAS POPOLA,

JAMES CAPO, JOSEPH N. BARBERA, BART DiMATTINA,

and RICHARD H. O'NEILL,

Petitioner,

FRANCIS J. DUNSTON, in her capacity as New Jersey Commissioner of Health:

NEW JERSEY STATE DEPARTMENT OF HEALTH:

NEW JERSEY HOSPITAL RATE SETTING COMMISSION:

AND COLUMBUS HOSPITAL, EAST ORANGE GENERAL HOSPITAL,

ST. JAMES HOSPITAL, and UNIVERSITY HOSPITAL, individually and as

Class Representatives of Hospitals in the State of New Jersey;

and NEW JERSEY HOSPITAL ASSOCIATION, as Class Representative

of Hospitals in the State of New Jersey,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE UNITED

STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

Thomas W. Gleason C. Peter Lambos

Ernest L. Mathews, Jr.* Donato Caruso*

Kevin Marrinan LAMBOS & GIARDINO

GLEASON & MATHEWS 29 Broadway, 9th Floor

26 Broadway, | 7th Floor New York, NY 10006

New York, NY 10004 (212) 943-2470

(212) 425-3240

Co-Counsel to Petitioners

(* Counsel of Record)

QUESTIONS PRESENTED FOR REVIEW

1. Does the Employee Retirement Income Security Act

(“ERISA”) pre-empt a state healthcare statute that (i) deliberately

shifts onto ERISA plans the cost of care provided to persons not

covered by the plans and the cost of rate discounts provided to pre-

ferred insurers, (ii) increases the costs incurred by ERISA plans for

hospital services to their beneficiaries by more than one-third, (iii)

cannot function without the enforced participation of ERISA plans,

and (iv) by express reference to ERISA plan beneficiaries deprives

them of appeal rights enjoyed by others? -

2. Does a state healthcare system that requires certain pri-

vate welfare plans to pay for the hospital costs of the indigent and

for mandatory discounts to certain favored insurers constitute a tak-

ing of private property without compensation in violation of the

Fifth Amendment to the Constitution of the United States where

* the system increases the plans’ hospital

costs by more than 334%

* the only benefit received by the plans and

their participants is the continued exis-

tence of hospitals in the state, which con-

fers no special benefit beyond that enjoyed

by the general public;

* in establishing and funding the plans

through collective bargaining, manage-

ment and labor invested in welfare plans

assets available for labor costs on the ex-

pectation that the broad ERISA pre-emp-

tion clause would protect the assets from

state poaching; and

* matching federal funds received by the

state based upon amounts paid by the

plans for the indigent are not refunded to

the plans or put into the healthcare system

but are deposited into the state’s general

treasury?

ii

PARTIES TO THE PROCEEDINGS

All parties in the court of appeals appear in the caption of

this petition except parties in other cases that were consolidated

with this action. In accordance with Sup. Ct. Rule 14.1(b) the

names of all parties in the consolidated cases appear in the caption

of the opinion of the court of appeals, which is reproduced in the

separately bound appendix to this petition. It is also noted that,

pursuant to Sup. Ct. Rule 12.4, all parties to the proceeding in the

court whose judgment is sought to be reviewed shall be deemed

parties in this Court, unless petitioner notifies the clerk of this

Court of the petitioner’s belief that a party below has no interest in

the outcome of the petition. Petitioner has no knowledge of any un-

interested party. In accordance with Sup. Ct. Rule 29.1, petitioner

states that it does not have a corporate parent, subsidiary, or

affiliate.

TABLE OF CONTENTS

QUESTIONS PRESENTED FOR REVIEW ........cccccccscssecesescececesees

PARTIES TO THE PROCEEDINGS..............c:cssccessssssosessessseseeees

A. Employee Retirement Income Security Act...........

1 ics nihinnehansecnsenenneceensnecensasconccs

1. New Jersey’s Hospital Rate-Setting Regime.......

aaa dedi ichecthnsikabdibesenanspninesiniacnvecs

a. Uncompensated Care Surcharge ......................

iy PUI GMT MEUIIES sc ccscesccsscccsescnnssnsessoosvensseneie

a ia dcnatceansnaspaecseannonneesocasncese

ie III UE MRED, UII co ssncsiccccsscccsonesesesevenvencnees

C. Proceedings in the District Court ................000000000.

D. Proceedings in the Court of Appeals .....................

REASONS FOR GRANTING THE WRIT..............cscseneeesseeeseeeees

1. This Case, Which Involves the Effect of State

Healthcare Regulations on ERISA Plans, Presents

Substantial and Pressing Questions of National

BE GRE MEUIIOD saiccescsnreccessassnssnseccccessecsesesensss

2. The Decision of the Court of Appeals, with its

Constriction of ERISA Pre-emption so as to Per-

mit State Taking of Plan Assets for Public Use,

Conflicts with Applicable Decisions of This

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B. Unconstitutional Taking...................sscssesssessesseees

ST ALN siiiabaiil siden bnsbiiedinneeanseeneensnscansscssonsavanece

NIN WA WO NAW WW NY NO —

17

18

21

24

iv

TABLE OF AUTHORITIES

Cases: -

Alessi v. Raybestos-Manhatian, Inc., 451 U.S. 504

CIPI si sicsniceesscdiintnnahideadaaienibicuansiaainumebiiadegaasaaaaiaaiate

Armstrong v. United States, 364 U.S. 40 (1960)......

Blassie v. Kroger Co., 345 F.2d 58 (8th Cir. 1965).

Connolly v. Pension Benefit Guar. Corp., 475 U.S.

8 CN niisnticcinisninieindieaiantiindiniatn

District of Columbia v. Greater Wash. Bd. of

Trade, 506 U.S. —_, 113 S. Ct. 580 (1992).........

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

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

PEP vciiesssesnciisbicihciebesedsi tienda oadeaietailncnadidataenieinnai

Franchise Tax Board v. Construction Laborers

Vacation Trust, 463 U.S. 1 (1983) .0.......ccceeeeeeeeseeee

Harper v. Virginia Dep’t of Taxation, 61 U.S.L.W.

4664 (1993) (U.S. No. 91-794) oe eeeeeeeeeeeees

Hines v. Davidowitz, 312 U.S. 52 (1941)...............00.

In re Typo-Publishers Outside Tape Fund, 478 F.2d

374 (24 Cir.), cert. denied, 414 U.S. 1002 (1973) ...

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

CRIP eaaiseseneseceninsvniniinnnnalsnscnenitibisesciecbusieibiniapandaanaintitianie

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

Me UAE. TD Ce sitcisheiacinintciipniaentiacninenesins

Meier v. Anderson, 692 F. Supp. 546 (E.D. Pa.

1988), aff'd without op., 869 F.2d 590 (3d Cir.

Metropolitan Life Ins. Co. v. Massachusetts, 471

SF TR CED cisenckcieusndetanindumananaaaennianaincints

Norwood v. Baker, 172 U.S. 269 (1898)............000008:

Pennsylvania Coal Co. v. Mahon, 260 U.S. 393

COTES willsssnstissaseusscnstaniechibistaipcabeiiamaaaneapiicmaleanioaias

Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987).

Shaw v. Delta Air Lines, 463 U.S. 85 (1983)...........

Travelers Ins. Co. v. Cuomo, 813 F. Supp. 996

(S.D.N.Y. 1993), appeal pending, No. 93-7194

(2G Car. anguaed Magy 20, 1993) n.cecseescavenscsennssesensses

Page (s)

5, 12n, 18

23

14n

passim

passim

|

Vv

TABLE OF AUTHORITIES

Page(s)

Constitution:

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Chie RE MIE. Fy ksecaecsekiciscsnterbcmnmeicnienuines passim

Statutes:

N.J. Stat. Ann. § 26:2H-18 (West Supp. 1992)......... 6

ee ile eRe CR estnicidditerirninrngcceens 2

ee ees ee I icarcticicden ciesinenieontaneandiaibemnsienins On

29 U.S.C. § 106 Glam. TV 19GZ) ccrerecsascsescrsssesssses 14n

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BIS Fake Eo 2) | EOC ee 9n

Oe CEA. BRS Ce icc erictstansennninncinisinniintiinne passim

Bills:

S. 3223, 102d Cong., 2d Sess. (1992), reintroduced

as S. 480, 103d Cong., Ist Sess. (Mar. 2, 1993).. 15

Regulations:

Ts I Bee I sce inserscinicensicnbiiccanisopathieseinaioenniiaitiaie lin

N.J. Admin. Code, tit. 8, ch. 31B (Supp. 1990)....... 5 oe, 7

Miscellaneous:

138 CONG. REC. $13267-02 (Sept. 10, 1992)............ 12n

No.

: IN THE

Supreme Court of the United States

OCTOBER TERM, 1993

NYSA-ILA WELFARE FUND by its Trustees,

JOHN BOWERS, ALBERT CERNADAS, FRANK

LONARDO, THOMAS POPOLA, JAMES CAPO, JOSEPH

N. BARBERA, BART DiMATTINA,

and RICHARD H. O’NEILL,

Petitioner,

V.

FRANCIS J. DUNSTON,

in her capacity as New Jersey Commissioner of Health;

NEW JERSEY STATE DEPARTMENT OF HEALTH;

NEW JERSEY HOSPITAL RATE SETTING

COMMISSION; AND COLUMBUS HOSPITAL, EAST

ORANGE GENERAL HOSPITAL, ST. JAMES HOSPITAL,

and UNIVERSITY HOSPITAL, individually and as Class

Representatives of Hospitals in the State of New Jersey; and

NEW JERSEY HOSPITAL ASSOCIATION, as Class

Representative of Hospitals in the State of New Jersey,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

INTRODUCTION

The NYSA-ILA Welfare Fund (‘Welfare Fund”) and other

employee welfare benefit plans protected by the Employee Retire-

ment Income Security Act (“ERISA”), 29 U.S.C. §§ 1001-1461

(1988 & Supp. IV 1992), became the targets of a deliberate scheme

2

by the State of New Jersey to force these plans to do that which

ERISA prohibits: use their funds for the benefit of persons who are

not plan beneficiaries. Under the guise of a neutral law of general

application fixing hospital rates the State of New Jersey actually

adopted and implemented an elaborate cost-shifting scheme under

which ERISA plans and their beneficiaries were forced by state law

to use plan assets to finance the cost of hospital care provided to the

indigent and to subsidize discounts provided to certain preferred in-

surers. The district court concluded that ERISA pre-empted appli-

cation of this cost-shifting scheme. Despite the magnitude of the

cost-shifts and their use to defray expenses of state programs from

which ERISA plans and their beneficiaries derived no special

benefit, the district court held that the cost-shifts were not a taking

violative of the Fifth Amendment to the Constitution of the United

States. A divided panel of the court of appeals reversed the pre-

emption ruling and affirmed the Taking Clause determination. The

Welfare Fund urges this Court to review the circuit court’s decision.

OPINIONS BELOW

The judgment and opinion of the court of appeals, which is

unofficially reported at 61 U.S.L.W. 2723 (3d Cir. May 14, 1993),

are reproduced in the separately bound appendix to this petition

(la-61a).! The unreported opinion and order of the court of appeals

sur petition for rehearing en banc (62a-63a) and the opinion and

order of the United States District Court for the District of New

Jersey (64a-95a), which is reported at 793 F. Supp. 524 (D.N.J.

1992), are also reproduced in the appendix.

JURISDICTION

The judgment of the court of appeals was entered on May

14, 1993. Thereafter the court of appeals denied a petition for re-

hearing by order dated June 15, 1993. This petition is filed within

90 days of both dates. The jurisdiction of this Court is invoked

pursuant to 28 U.S.C. § 1254(1) (1988).

' References are to the pages of the appendix.

EEE

3

CONSTITUTIONAL PROVISION AND

STATUTE INVOLVED

1. The Fifth Amendment to the Constitution of the United

States provides in relevant part:

nor shall private property be taken for public

use, without just compensation.

2. The relevant statutory provision is ERISA § 514(a), 29

U.S.C. § 1144(a) (1988):

(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 bene-

fit plan described in section 1003(a) of this ti-

tle and not exempt under section 1003(b) of

this title. This section shall take effect on Jan-

uary 1, 1975.

STATEMENT OF THE CASE

A. Employee Retirement Income Security Act

In 1974 Congress enacted ERISA, a comprehensive regime

to protect the interests of employees and their beneficiaries in em-

ployee benefit plans. ERISA’s “crowning achievement” was the

elimination of state regulation of employee benefit plans. See Shaw

v. Delta Air Lines, 463 U.S. 85, 100 (1983). Congress fostered this

objective by enacting a broadly worded pre-emption clause, ERISA

§ 514(a), which provides that ERISA “shall supersede any and all

state laws insofar as they may now or hereafter relate to any em-

ployee benefit plan” covered by ERISA. 29 U.S.C. § 1144(a)

(1988). Lest there be any doubt, Congress also broadly defined the

term “state law” to include all laws, decisions, rules, regulations, or

other state action having the effect of law and the term “state” to

include any political subdivision, agency, or instrumentality. 29

U.S.C. §§ 1144(c)(1), 1144(c)(2) (1988).

4

The function of federal pre-emption is to give effect to the

“full purposes and objectives” of federal legislation, see Hines v.

Davidowitz, 312 U.S. 52, 67-68 (1941), since under the Supremacy

Clause of the Constitution of the United States federal law is “the

supreme Law of the Land” to which “any Thing in the Constitution

or Laws of any State to the Contrary” must yield. U.S. CONST. art.

VI, cl. 2. When Congress adopts a broadly worded pre-emption

provision, the “task of discerning congressional intent is considera-

bly simplified.” Jngersoll-Rand Co. v. McClendon, 498 U.S. 133,

138 (1990).

Previous decisions of this Court have described ERISA’s

express pre-emption provision as “conspicuous for its breadth,”

FMC Corp. v. Holliday, 498 U.S. 52, 58 (1990), “virtually unique,”

Franchise Tax Board v. Construction Laborers Vacation Trust, 463

U.S. 1, 25 n.26 (1983), and “designed to establish pension plan reg-

ulation as exclusively a federal concern.” /ngersoll-Rand, 498 U.S

at 138. The clear and unambiguous congressional intent of expan-

sive pre-emption is manifested not only in the explicit language of

ERISA’s pre-emption clause itself but in the historical record of its

legislative passage.

The bill that became ERISA onginally con-

tained a limited pre-emption clause, applica-

ble only to state laws relating to the specific

subjects covered by ERISA. The Conference

Committee rejected these provisions in favor

of the present language, and indicated that the

section’s pre-emptive scope was as broad as

its language.

Shaw, 463 U.S. at 98.

ERISA’s pre-emption provision has generated a wealth of

decisional law, reflecting the efforts of the lower courts to plot the

outer limits of ERISA’s pre-emptive reach. This Court has visited

the provision with unusual frequency, and it is evident from the im-

port of its most recent decisions that it has had to do so in order to

protect ERISA pre-emption from improper limits on its metes and

bounds that lower federal courts have sought to impose. See /nger-

soll-Rand Co. v. McClendon, 498 U.S. 133 (1990); FMC Corp. v.

Holliday, 498 U.S. 52 (1990); Pilot Life Ins. Co. v. Dedeaux, 481

U.S. 41 (1987); Metropolitan Life Ins. Co. v. Massachusetts, 471

5

U.S. 724 (1985); Shaw v. Delta Air Lines, 463 U.S. 85 (1983); and

Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504 (1981).

The focus of these visitations has centered on the meaning

and scope of the phrase “relate to,” which was chosen by Congress

as the controlling standard. This Court has consistently protected

the ERISA pre-emption provision from erosion by lower courts’

narrowing of the term “relate to.” The “relate to” standard must be

interpreted expansively, see Shaw, 463 U.S. at 98, and must be

given “a broad common sense meaning,” see /ngersoll-Rand, 498

U.S. at 139. Indeed, the controlling test for determining whether a

state law meets the “relate to” standard is simple and direct: every

state law that has a connection with or reference to an ERISA em-

ployee benefit plan relates to that plan and is pre-empted. FMC

Corp., 498 U.S. at 58-59; Shaw, 463 U.S. at 96-97. Pre-emption

occurs even if the connection, reference, or effect is only indirect.

District of Columbia v. Greater Wash. Bd. of Trade, 506 U.S. —_,

113 S. Ct. 580, 583 (1992); Ingersoll-Rand, 498 U.S. at 139; Pilot

Life, 481 U.S. at 47. Only where the connection is “tenuous, re-

mote or peripheral” is pre-emption avoided. Shaw, 463 U.S. at 100

n.21.

B. Facts of This Case

1. New Jersey’s Hospital Rate-Setting Regime

A highly socialized system for regulating hospital rates

evolved in the State of New Jersey. It had its modest beginnings in

1971, when New Jersey enacted the Health Care Facilities Pianning

Act, N.J. Laws 1971, ch. 136, § 18, a legislative authorization for

collectivized rate-setting limited at first to patients insured by Blue

Cross and Blue Shield of New Jersey (hereinafter “Blue Cross”) or

entitled to benefits from certain federally funded programs, like

Medicare and Medicaid (20a; 66a). Seven years later the limitations

were removed, and the State of New Jersey embarked on a full-

fledged, comprehensive hospital rate-setting scheme that mandated

fixed rates for all (66a). See N.J. Stat. Ann. §§ 26:2H-1—26:2H-52

(West 1987 & Supp. 1992); N.J. Admin. Code, tit. 8, ch. 31B

(Supp. 1990).

2. Cost-Shifts

The State of New Jersey made a conscious and deliberate

decision to impose disproportionately on ERISA plans and their

6

beneficiaries certain social welfare costs associated with hospital

care in the state (34a; 37a; 43a). The New Jersey hospital rate-

setting statute and regulations required hospitals to add to the basic

rate? surcharges to pay for uncompensated hospital care, the “Medi-

care Cost-Shift,” and discounts granted to certain preferred insur-

ers. ERISA plans and their participants bore the lion’s share of

these surcharges (37a).

a. Uncompensated Care Surcharge

New Jersey hospitals are mandated by state law to admit

every patient seeking treatment regardless of ability to pay (20a;

68a). Uncompensated care consists of costs incurred to provide

hospital care to uninsured, indigent patients not covered by Medi-

care or Medicaid. All New Jersey hospitals were required to add to

the applicable DRG rate an uncompensated care surcharge of 19%

(34a; 68a), which was transmitted to the state-administered New

Jersey Health Care Trust Fund, from which it was redistributed to

hospitals statewide according to need (68a), see N.J. Stat. Ann. §§

26:2H-18.7 18.14 (West Supp. 1992).

The uncompensated care program not only enabled New

Jersey to insulate its state treasury from responsibility for indigent

care but also provided the state with an ingenious windfall. New

Jersey received federal matching funds for amounts collected by the

Health Care Trust Fund. These federal monies, however, never

found their way into the Trust Fund. They were intercepted and

deposited in the general treasury of the state to be used for other

purposes unrelated to healthcare.

2 Hospital rates were based not on the actual cost of the inpatient treatment re-

ceived by the patient from the particular treating hospitz] but on a blended, state-

wide average cost normally incurred to treat the particular illness or condition

(20a; 34a; 67a). An elaborate taxonomic system classified diseases into more than

740 categories, known as Diagnostic Related Groups or “DRG’s,” see N.J. Admin.

Code, tit. 8, ch. 31B, § 5.3 (Supp. 1990). Each DRG for each hospital in the state

was assigned a rate which was the weighted average of the cost incurred by that

specific hospital and the average cost incurred by all hospitals in the state to treat

that particular DRG condition (20a; 67a). The costs taken into account included

both direct costs, such as salaries and fringe benefits provided to hospital employ-

ees engaged in the direct delivery of patient care, and indirect costs, such as insti-

tutional overhead expenses for management, research, education, and maintenance

(41a; 67a). The DRG system itself is not at issue in the litigation (20a).

eT NT ET ae

b. Medicare Cost Shift

The DRG rate was increased by an additional add-on to

compensate hospitals for shortfalls caused by the Medicare Cost

Shift. Hospitals treating Medicare patients received reimbursement

at rates invariably less than the New Jersey DRG rates. The New

Jersey Hospital Rate Setting Regulations, see N.J. Admin. Code, tit.

8, ch. 31B, § 3.73(a)(S) (Supp. 1990), required hospitals to include

in their DRG rates billed to non-Medicare patients surcharges, aver-

aging approximately 7% (34a), that were necessary to recoup

shortfalls created by the difference between the Medicare rates of

reimbursement and the New Jersey DRG rates (20a-21a; 68a).

c. Payor Discounts

Medicare was not the only preferred insurer. The State of

New Jersey itself anointed others to receive “payor differentials” or

rate discounts. Blue Cross was the prime beneficiary of the state’s

largesse, enjoying a whopping 11% discount because it offered

open enrollment health insurance (21a; 68a).? Medicaid and Health

Maintenance Organizations (““HMO’s’”’) also received favored treat-

ment. Only commercial insurers and ERISA plans did not; indeed,

they had to pay more in order to make up the shortfalls created by

the privileged discounts.

3. Impact on ERISA Plans

The effect on ERISA plans and their beneficiaries_of the

surcharges required by the state-mandated cost-shifts was stagger-

ing. Less than 25% of the population of the State of New Jersey

receives in-patient hospital care (37a). Based upon statistics sup-

plied in the litigation by New Jersey’s Assistant Commissioner of

Health, the universe of hospital patients totalling approximately 1.2

million New Jersey residents each year included 900,000 non-

payors whose treatment was financed by uncompensated care as-

sessments. ERISA plan participants paid 40% of these uncompen-

sated care costs, even though they comprised only 15% of the total

hospital patient population — a substantial financial drain on

ERISA plans, when annual uncompensated care costs were at the

more than $700 million level and rising. The cost burden became

* Since federal law requires ERISA plans to limit their enrollment to covered em-

ployees and their dependents, see infra note 12, ERISA plans were foreclosed from

eligibility for this open enrollment discount (68a-69a).

8

mind-boggling when the other cost-shifts were piled on, raising the

tab for ERISA plans to as much as 40% of the more than $1.1 bil-

lion shortfall generated by the state-mandated cost-shifts (37a).

New Jersey’s hospital rate-setting scheme was carefully

fashioned not only to impose on ERISA plans and their benefi-

ciaries the costs of uncompensated care, the Medicare shortfall, and

the preferred-payor discounts but also to insure that ERISA plans

could not escape the cost-shifts net. While ERISA plans were theo-

retically able to negotiate volume discounts with individual hospi-

tals, no hospital in the state was willing to come to the negotiating

table, since, as New Jersey’s Assistant Commissioner of Health ac-

knowledged, the New Jersey statute prohibited passing on to other

patients any revenue shortfall caused by a digression from the state-

mandated rates (43a). While uninsured patients were granted a

right to appeal for a reduction of any excessive hospital bill when-

ever the DRG rates exceeded actual charges by more than $250 —

an exceedingly efficacious right that resulted in a reduction to the

lesser charges in 99% of the appeals (34a) — ERISA plans and

their beneficiaries in a provision that expressly referred to “self-

funded union [ERISA] plans” were denied this entitlement because

of their plan coverage (78a).‘

The New Jersey cost-shifting regime finally became unbear-

able. The average in-patient hospital benefits claim paid by Peti-

tioner Welfare Fund in the State of New Jersey grew fourfold from

$1,979.59 in 1987 to $7,990.96 in 1991. This dramatic and alarm-

ing increase could not be absorbed indefinitely out of the fixed an-

nual level of employer contributions received by the Welfare Fund.

Benefits had to be reduced, or other cost-savings realized; other-

wise, the well would have run dry, and the Welfare Fund’s 7,000

beneficiaries in New Jersey would have had to be added to the rolls

of uninsured recipients of hospital care. Unlike other plans, which

cut benefits or withheld payment of the surcharges in whole or in

* New Jersey's Patient Appeal Policy was classically Kafkaesque. ‘“Self-funded

union” plans were expressly ineligible to appeal (34a). ERISA plan beneficiaries

also faced a no-win situation. They were ineligible if their “self-funded union

[plan] does not reimburse the hospital on the DRG price per case” or if “the hospi-

tal bill has been paid in full by a third-party payer [ERISA plan] excluding the

deductible.” So long as a patient was an ERISA plan beneficiary, he lost his right

to appeal, since he was ineligible both when his plan paid the full DRG charge and

when it did not (69a). There was no other conceivable circumstance that could

trigger eligibility. ERISA plans and their beneficiaries were locked in a Catch-22

bind.

9

part (69a), the Welfare Fund was forced to depart from its tradi-

tional self-administration system and retain the administrative serv-

ices of Blue Cross. This arrangement enabled the Welfare Fund to

share in the payor discount enjoyed by Blue Cross. The arrange-

ment with Blue Cross was not limited to New Jersey. Blue Cross

had to be selected tc administer hospital benefits in all states in

which the Welfare Fund’s beneficiaries resided, since bifurcated ad-

ministration would have been impracticable. Thus, apart from its

devastating monetary impact, New Jersey’s cost-shifting regime se-

riously disrupted the Welfare Fund’s longstanding administrative

practices not only in New Jersey but in other states as well.

C. Proceedings in the District Court

Petitioner Welfare Fund, a self-insured joint labor-manage-

ment, multiemployer employee welfare benefit plan providing hos-

pital and health benefits to longshore workers in the Port of New

York and New Jersey, commenced a civil action under ERISA

against two groups of defendants: the State Defendants and the

Hospital Defendants. The Welfare Fund sought an injunction

prohibiting future enforcement by the State Defendants of the cost-

shifts and also restitution from the Hospital Defendants of cost-

shifts previously paid by the Welfare Fund on the grounds that the

New Jersey statute was pre-empted by ERISA and worked an un-

constitutional taking of property. Other ERISA plans filed similar

actions that were consolidated with the Welfare Fund’s.

The district court entered summary judgment in favor of the

Welfare Fund and the other ERISA plans on their pre-emption

claim (94a). It held that the cost-shifting features of the New Jersey

hospital rate-setting statute and regulations related to ERISA plans

* The State Defendants were the New Jersey officials responsible for administer-

ing the challenged hospital rate-setting legislation (67a). The Hospital Defendants

were virtually every acute-care hospital facility in New Jersey and their class repre-

sentative, the New Jersey Hospital Association.

* Jurisdiction in the district court was predicated on ERISA § $02(aX3), 29 U.S.C.

§ 1132(a)(3) (1988), which empowers plan fiduciaries to bring a civil action to

enjoin any act or practice that violates ERISA, to enforce any provision of ERISA,

or to obtain appropriate equitable relief to redress any violation of ERISA (22a).

Jurisdiction to entertain ERISA § 502(a)3) actions resides exclusively in the dis-

trict courts of the United States. See ERISA § 502(eX1), 29 U.S.C. § 1132(eX 1)

(1988). In light of the Welfare Fund’s prosecution of this ERISA action and its

constitutional challenge to the New Jersey statute, the district court was also vested

with subject matter jurisdiction under 28 U.S.C. § 1331 (1988), which bestows on

federal district courts original federal question jurisdiction of all civil actions aris-

ing under the Constitution, law, or treaties of the United States.

—

10

and, hence, were pre-empted by ERISA because these state-man-

dated cost-shifts:

¢ forced ERISA plans to structure their ben-

efits in a particular manner (80a);

* subjected ERISA plans to inconsistent reg-

ulation (80a-8 la);

* compelled ERISA plans either to disburse

funds for the benefit of non-beneficiaries

in contravention of the express proscrip-

tions of ERISA or to reduce benefits to

their own beneficiaries in contravention of

the express provisions of their plan instru-

ments (81a);

* subjected ERISA plans to ongoing admin-

istrative hardship (82a); and

* contained explicit references to ERISA

plans (78a).

The district court denied the Taking Clause challenge on the

grounds that (1) New Jersey did not use the cost-shifts to appropri-

ate monies for its own use, (2) the cost-shifts benefitted ERISA

plan participants by assuring the fiscal viability of hospitals in the

state and providing a means by which ERISA plan participants

themselves could receive quality health care whenever they could

not afford it, and (3) the cost-shifts did not interfere with the rea-

sonable investment-backed expectations of ERISA plans and their

participants (89a-92a).’

D. Proceedings in the Court of Appeals

A panel of the United States Court of Appeals for the Third

Circuit in a split decision reversed the district court’s grant of sum-

mary judgment on the ERISA pre-emption claim and entered judg-

ment in favor of respondents (23a-32a; 61a). The court of appeals

” The district court devoted only one page of its opinion to the Welfare Fund's

restitution claim (66a). Despite noting ERISA as a basis for its subject matter

jurisdiction (66a), the district court nevertheless recharacterized the restitution

claim not as a federal ERISA claim, as alleged in the complaint, but as a state law

claim which should be deferred to the New Jersey state courts in the interest of

comity. Accordingly, the district court declined to exercise jurisdiction over what

it labeled a state law claim (66a).

11

also affirmed the district court’s rejection of the Taking Clause

challenge (22a-23a).

The panel refused to credit Congress’s straightforward dec-

laration that a state law is pre-empted if it relates to an ERISA plan.

In the majority’s view mere relationship is insufficient to trigger

pre-emption. Rather, the challenged state legislation must “relate to

the plans in a way that necessitates pre-emption” (23a) (emphasis

supplied).

While paying lip service to the test set forth in the statute,

the panel majority actually undermines the express congressional

intent. First, in the view of the court of appeals an express refer-

ence to ERISA plans in the New Jersey legislation can be disre-

garded for pre-emption purposes if its removal wou!d not alter the

legal effect of the statute (25a). Second, the majority opinion finds

that Congress’s only intention is to pre-empt those state laws that

would result in inconsistent regulation in different states, a situation

the panel majority found lacking in this case (24a-25a; 27a). Third,

the majority limits the reach of the conspicuously broad ERISA

pre-emption clause to those specific situations where courts have

already found pre-emption (25a). The majority synthesizes existing

caselaw to develop principles that in effect establish boundaries be-

yond which pre-emption would not extend (25a-26a). In its view a

state law would relate to an ERISA plan only if a prior court deci-

sion had so found.®

* On June 15, 1993, the court of appeals denied applications for rehearing en banc

(45a-46a). On July 8 the Third Circuit granted a Fed. R. App. P. 41(b) stay pend-

ing disposition of this petition.

12

REASONS FOR GRANTING THE WRIT

1. This Case, Which Involves the Effect of State Healthcare

Regulations on ERISA Plans, Presents Substantial and

Pressing Questions of National Scope and Importance.

This case is one of exceptional significance. It involves two

areas of extreme national importance, healthcare and ERISA pre-

empiion. The inevitable interface between these two competing de-

siderata gives rise to issues that cry out fer prompt resolution by the

nation’s highest Court.

Healthcare is the subject of increasing national attention and

4 has been called the issue of the ’90’s. Whatever the future may

hold at the federal level, healthcare regulation similar to New

Jerszy’s is presently the subject of legislation in 36 states, and it is

likely if present economic conditions continue that other states in

the union will jump on the bandwagon.’ If the decision of the court

of appeals in this case is left undisturbed, these state billing

schemes will spread, laying waste ERISA plans throughout the

nation.

The integrity of the national policy favoring the creation and

preservation of ERISA funds is in jeopardy. Congress, prompted by

a desire to preserve and protect ERISA plans and to encourage and

foster their creation, formulated in ERISA the most sweeping pre-

emption provision possible. The history of that provision in this

Court is the highest testimony to its national significance. Ten

times in the last dozen years this Court has granted certiorari to

review lower court determinations concerning ERISA pre-emp-

tion.'° In ten decisions on the merits, only thrice has the Court

failed to find that the challenged state law was pre-empted. The

very number of times that this Court has visited the issue under-

scores its national importance.

* 138 CONG. REC. $13267-02 (Sept. 10, 1992).

© District of Columbia v. Greater Wash. Bd. of Trade, 506 U.S. —_., 113 S. Ct.

580 (1992); Ingersoll-Rand Co. v. McClendon, 498 U.S. 133 (1990); FMC Corp.

v. Holliday, 498 U.S. 52 (1990); Mackey v. Lanier Collection Agency & Serv., Inc.,

486 U.S. 825 (1988); Fort Halifax Packing Co. v. Coyne, 482 U.S. 1 (1987); Pilot

Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987); Metropolitan Life Ins. Co. v. Massa-

chusetts, 471 U.S. 724 (1985); Franchise Tax Bd. v. Construction Laborers Vaca-

tion Trust, 463 U.S. 1 (1983); Shaw v. Delta Air Lines, 463 U.S. 85 (1983); and

Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504 (1981).

13

This Court has repeatedly recognized the special signifi-

cance of ERISA pre-emption by relaxing the usual norms for grant-

ing writs of certiorari in cases involving this issue. Often it has de-

parted from the usual criterion of a conflict among the circuits and

has granted review under the less rigorous standard of divisions,

disagreements, or conflicts among lower federal or state courts. See

Ingersoll Rand, 498 U.S. at 137; Mackey, 486 U.S. at 828; Shaw,

4635 U.S. at 95. History teaches, then, that the importance of the

ERISA pre-emption issue itself and this Court’s role as protector of

the congressional will are sufficient reasons for granting certiorari.

That enduring importance is present in this case with a ven-

geance because of the healthcare context in which the threat to

ERISA plans arises. Hospital rate-setting focuses on a particular

area in which ERISA plans are deeply involved. Hospital care is not

some ancillary service or commodity that welfare plans purchase

from time to time. It is their very raison d’étre. ERISA welfare

plans exist solely for the purpose of providing healthcare to their

beneficiaries.'' ERISA welfare plans and their participants exist in

every state in this nation, and the problem of healthcare, especially

for the indigent, is one of national scope. There can be no doubt,

then, that the resolution of the issues in this case will affect ERISA

plans throughout the country.

Despite this Court’s repeated recognition of the sweep of

ERISA pre-emption, the court of appeals in this case purports to

find a fatal chink in the protective armor that Congress created,

which puts at risk the lifeblood and very existence of ERISA plans.

The Third Circuit’s dangerous limitation on ERISA pre-emption in

a manner that clearly departs from existing precedent warrants

certiorari.

The court of appeals fashioned a novel and unprecedented

test concerning the manner in which a state hospital rate-setting

statute can be structured to extract from ERISA funds a dispropor-

tionate share of society’s healthcare costs. This test threatens

ERISA funds not only in New Jersey but throughout the nation.

" Section 3(1) of ERISA defines an employee welfare benefit plan as including

“any plan, fund, or program . . . established or maintained by an employer . . . for

the purpose of providing for its participants or their benef: iciaries, through the pur-

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

or benefits in the event of sickness, accident, disability, death or unemployment

- ++." 29 ULS.C. § 1002(1) (1988).

14

The decision here will go a long way toward limiting the vulnerabil-

ity of ERISA plans to the appetites of state legislatures.

The breadth of the challenge to ERISA welfare plans by

state healthcare regulation and hospital rate-setting is apparent

when one considers the kinds of state laws that have triggered Su-

preme Court review in the past. These have included state garnish-

ment statutes, Mackey, 486 U.S. at 826; motor vehicle financial re-

sponsibility laws, FMC Corp, 498 U.S. at 53; mandatory severance

pay, Fort Halifax, 482 U.S. at 1; human nights laws, Shaw, 463 U.S.

at 85; tax collection statutes, Franchise Tax Bd., 463 U.S. at 1; and

application of state common law tort and contract actions to ERISA

plans, /ngersoll Rand, 498 U.S. at 135; Pilot Life, 481 U.S. at 42. It

is safe to say that few, if any, of these laws, which the court has

found worthy of its consideration, have the impact on or pose the

threat to ERISA plans that is implicit in state healthcare and hospi-

tal rate-regulation.

The effect of the decision of the court of appeals will not be

limited to New Jersey. If left to stand, it authorizes states to estab-

lish schemes that will divert hundreds of millions of dollars annu-

ally from the intended beneficiaries of ERISA plans and to treat

ERISA payors differently from other hospital payors. Under the

court of appeals decision states can mandate a healthcare scheme

that creates a host of exemptions for virtually everyone but ERISA

plans, leaving those plans holding the bag (42a-43a). If the court of

appeals is correct, a state regulatory regime can be crafted deliber-

ately to shift onto the plans the substantial costs of others.

In this case the plans were not merely hit; they were deliber-

ately aimed at. The effect was not only to raise costs (by better than

one-third) but also to subject the plans to the Hobson’s choice of

either reducing benefits to their own beneficiaries or violating

ERISA by expending plan assets for the benefit of strangers.'? The

Congress adopted in ERISA the requirement that “the assets of a plan shall never

inure to the benefit of any employer and shall be held for the exclusive purposes of

providing benefits to participants in the plan and their beneficiaries and defraying

reasonable expenses of administering the plan.” 29 U.S.C. § 1103(c)(1) (Supp. IV

1992). This mandate reaffirms for all ERISA plans the identical “exclusive bene-

fit” requirements enacted by Congress as far back as 1947 in the Taft-Hartley Act

for joint labor-management plans created in collective bargaining. See 29 U.S.C. §

186 (Supp. IV 1992). The “exclusive benefit” provisions prohibit the use of trust

assets to benefit persons other than plan participants and their beneficiaries. Jn re

Typo-Publishers Outside Tape Fund, 478 F.2d 374, 375-76 (2d Cir.), cert. denied,

414 U.S. 1002 (1973); Blassie v. Kroger Co.,345 F.2d 58, 68 (8th Cir. 1965).

15

decision as to whether states can continue their regulation of health-

care by forcing ERISA beneficiaries, contrary to Congress’s man-

date, to underwrite the care of others should be made by this Court.

The district court below toppled the rate-setting scheme that

had been in existence in New Jersey for more than two decades.

Indeed, the program relied so heavily upon ERISA plans to pay for

indigent care that New Jersey conceded that its system was not via-

ble without this exaction from ERISA plans (37a). When the district

court held the cost-shift provisions unconstitutional, it inspired the

New Jersey Legislature with the approbation and encouragement of

the Governor to replace the existing collectivized rate-setting

scheme with a free market system that went into effect on January

1, 1993 (22a).

Repeal of the challenged state legislation did not render the

issues in this case moot. Apart from the practical need to decide

these issues in order to resolve the restitution claims in this case

(22a; 32a), reversal by the Third Circuit permits the New Jersey

Legislature to reinstate the same or similar legislation. Moreover,

the final decision in this case transcends the particular statute at

issue; it will establish principles that will determine the contours of

ERISA pre-emption in the healthcare field nationwide. Indeed, the

effect of the lower court’s adjudication was not confined to the

State of New Jersey alone but reverberated in the halls of Congress.

Senator Durenberger introduced a bill currently under consideration

to remove state hospital rate-setting programs from ERISA’s pre-

emptive sweep. S. 3223, 102d Cong., 2d Sess. (1992), reintroduced

as S. 480, 103d Cong., Ist Sess. (Mar. 2, 1993).

However, the nation does not have the luxury of awaiting

rulings from courts in other states, see, e. g., Travelers Ins. Co. v.

Cuomo, 813 F. Supp. 996 (S.D.N.Y. 1993), appeal pending, No.

93-7194 (2d Cir. argued May 20, 1993), or watching the outcome of

the legislative process. The immense sums involved in these state-

mandated programs require a prompt ruling from this Court for the

good of all concerned.

The resolution of this question will affect every sector of the

nation that provides health benefits to employees and their families

through ERISA plans. Under the challenged scheme in New Jersey

alone ERISA plan participants, who comprised 15% of hospital pa-

tients, were required to subsidize 40% of the $1.1 billion dollar

shortfall generated by the state-mandated cost-shifts (37a). This

16

multi-million dollar charge reflected only one year’s burden. Ab-

sent immediate correction by this Court, ERISA plans will be de-

pleted as more and more states enact varying regulations designed

to leech on to ERISA trust funds.

The need for a swift and decisive ruling by this Court is

great no matter how the question is ultimately decided. Hospitals

operating under state regulations are presently collecting millions of

dollars annually from ERISA plans, as they did in New Jersey. If

the plans prevail and the state schemes are held to be unconstitu-

tional, the hospitals will have to make restitution of these monies at

least for the period of the applicable statutes of limitations. Harper

v. Virginia Dep’t of Taxation, 61 U.S.L.W. 4664 (1993) (U.S. No.

91-794). The effect upon the hospitals will be devastating. It may,

indeed, require state legislatures to bail out the healthcare institu-

tions at tremendous cost to the taxpayers. The quality of healthcare

in each state cannot fail to suffer. On the other hand, if ERISA

plans are not permitted to apply the unconstitutionality ruling retro-

actively to recover the monies unlawfully collected from them, the

plans will have lost tremendous sums under laws which should

never have been passed and which in our jurisprudence are consid-

ered null and void. But the money will be gone nevertheless.

Prompt resolution is also called for because until this Court

finally puts the issue to rest, ERISA plans will be reluctant to make

the challenged payments. Confronted with the possibility that hos-

pitals will be financially unable to pay back monies unlawfully col-

lected or that retroactive recovery may be denied, the plans will pre-

fer to withhold, or escrow, those portions of their beneficiaries’

bills that constitute the illegal cost-shifts. This, of course, puts a

financial strain on the hospitals, can lead to the denial of services to

plan beneficiaries, and engenders wasteful litigation that the re-

sources of both ERISA plans and hospitals can ill afford. The pub-

lic weal demands an end to the upheaval and uncertainty that the

decisions below have created.

There is also a very practical consideration to be factored

into the equation. It is clear that so long as the circuit court’s deci-

sion looms over their heads, employers and employees covered by

ERISA plans will not passively sit by and continue to fund medical

benefits for workers merely to permit states to siphon off the mon-

ies the contracting parties believed would be held in trust. Ironi-

cally, the decision below will cause the opposite of its intended ef-

fect by inducing those employers that are already providing welfare

17

benefits to reduce or eliminate those benefits in favor of wages or

some other form of compensation that the workers can keep, thus

aggravating the underlying healthcare crisis. As their past practices

attest, employers and unions favor using available assets to create

and fund welfare plans. In so doing they perform a real public serv-

ice, consistent with the congressional purposes embodied in ERISA

of fostering and encouraging these plans. But one cannot realisti-

cally expect these plans to accept the role of wet nurse to the rest of

society in a scenario that they rightly believe constitutes an uncon-

stitutional taking of their property. See infra pp. 21-24.

If the Third Circuit is to be reversed, it should be done post-

haste so that the contracting parties do not have to restructure their

arrangements.’ Once altered, it is unlikely that these arrangements

will be changed back in the wake of some future ruling. Similarly,

if the Third Circuit’s position is to be upheld, simple justice re-

quires that it be done soon, so that management and labor can order

their affairs accordingly. The present state of the law is in flux, and

so the great usefulness of the law as a canon pursuant to which the

private sector can order its affairs is absent. Too much is at stake —

$400 million in New Jersey in one year alone — to warrant delay.

This Court should grant certiorari and resolve the matter as soon as

possible.

2. The Decision of the Court of Appeals, with its Constriction

of ERISA Pre-emption so as to Permit State Taking of

Plan Assets for Public Use, Conflicts with Applicable

Decisions of This Court.

The bottom line of the Third Circuit’s decision is to permit

state legislatures to construct healthcare and hospital rate-setting

systems which mandate the use of ERISA plan assets to fund medi-

cal care for non-beneficiaries. In the view of the court of appeals

the inflation of hospital costs to plan beneficiaries by a factor of

more than 35% has only a tenuous, remote, or peripheral connec-

tion with the plans and is not pre-empted so long as the statutory

scheme is carefully crafted to make the targeting of ERISA plans

sufficiently covert.'4 To salvage the New Jersey system the Third

' The current longshore collective bargaining agreements on the East Coast expire

on September 30, 1994. Negotiations will commence in January 1994.

'* Statistics confirmed by the Hospital Defendants reveal that in 1991 the

surcharges to finance the mandated cost-shifts amounted to more than 35% of the

average New Jersey hospital bill ($2,874 of surcharges included in an average bill

of $8,196).

18

Circuit’s decision at every turn runs afoul of prior decisions of this

Court concerning not only ERISA pre-emption but also the Taking

Clause of the Fifth Amendment. The New Jersey law did not

merely relate to ERISA plans; it did so in a way that amounted to an

unconstitutional taking of their property. Review by the Supreme

Court is necessary to preserve a body of ERISA pre-emption prece-

dent that has been built up over the past 12 years to effectuate the

will of Congress and to shield ERISA plans from unconstitutional

takings of their assets.

A. ERISA Pre-emption

There is inherent in the opinion of the court of appeals an

invidious perversion of the very essence of the ERISA pre-emption

doctrine. ERISA’s pre-emption clause is clear and straightforward.

State law is pre-empted if it relates to an ERISA plan in the ordi-

nary, common sense meaning of those words, — if it has a connec-

tion with or reference to an ERISA plan. Greater Wash. Bd. of

Trade, 113 S. Ct. at 583. The wealth of litigation engendered by

this clause has been due not to any ambiguity or uncertainty in the

statute but to a reluctance by the lower courts to give the congres-

sional language its plain effect, a reluctance epitomized by the

Third Circuit’s metaphysical quest in this case to divine some

deeper kind of relating that “necessitates” pre-emption (23a). The

formulation by the court of appeals would permit courts to substi-

tute their subjective judgment for the concrete touchstone enacted

by Congress.

Although it acknowledged the test set forth in the ERISA

statute and repeatedly articulated by this Court, the court of appeals

chipped away at the express congressional intent. In its effort to

avoid a relationship “that necessitates preemption” the circuit court

engaged in some fancy analytical footwork. Unmindful of this

Court’s admonition that “ERISA’s authors clearly meant to pre-

clude the States from avoiding through form the substance of the

pre-emption provision,” Alessi, 451 U.S. at 525, the Third Circuit

transformed the “deliberately expansive” language chosen by Con-

gress, see Greater Wash. Bd. of Trade, 113 S. Ct. at 583 (quoting

Pilot Life, 481 U.S. at 46), into something crabbed and constricted.

The attorney for the state admitted that the New Jersey

healthcare regime could not function without the participation of

ERISA funds (35a). This candid admission was confirmed when,

19

in reaction to the decision of the district court that the cost-shifts

could not constitutionally be imposed on ERISA plans, the New

Jersey Legislature scrapped the entire system. Nevertheless, the

majority of the panel of the court of appeals mischaracterized the

mandated cost-shifts as a mere cost of doing business imposed by a

law of general application, having too tenuous, remote, and periph-

eral a connection with ERISA plans to trigger pre-emption (23a;

26a-28a). The Third Circuit’s error is not merely a matter of ap-

proach. Each of the bases for its decision conflicts with a prior

decision of this Court.

First, the panel majority brushed aside the express reference

to ERISA plans in the New Jersey legislation by asserting without

any authority the proposition that the reference can be disregarded

for pre-emption purposes if its removal would not alter the legal

effect of the statute (25a-26a). This approach gratuitously creates

an escape hatch previously unknown. This Court has never quali-

fied its consistent holding that a statute that has a reference to an

ERISA plan relates to that plan. See Greater Wash. Bd. of

Trade, 113 S. Ct. at 583; FMC Corp., 498 U.S. at 59-60; Shaw, 463

U.S. at 96-97.'° Indeed, the precise argument made by the Third

Circuit here, that a direct reference to ERISA plans may somehow

be excused under certain circumstances and pre-emption avoided,

was rejected by this Court in its latest ERISA pronouncement. See

Greater Wash. Bd. of Trade, 113 S. Ct. at 583.

Second, the court of appeals purports to find that Con-

gress’s only intention was to pre-empt those state laws that would

result in inconsistent regulation in different states, a result that de-

clares open season upon ERISA plans that operate only in a single-

state. The panel opinion quotes extensively from this Court’s deci-

sion in Fort Halifax Packing Co. v. Coyne, 482 U.S. 1 (1987), in

which that concern was mentioned (24a-25a).'© However, to limit

the congressional intent to this narrow field is manifestly unrealis-

tic. Many ERISA plans operate only in a single state. It cannot be

'S Conspicuously absent from the majority decision is any analysis of the second

prong of the “relate to” test. The majority does not come to grips with why the

New Jersey system does not have a “connection with” ERISA plans. The dissent

does not shy away from the controlling test and, applying it, easily finds the con-

nection (37a; 39a; 43a-44a).

‘* The Supreme Court language quoted by the panel's majority is actually inappo-

site, since the Maine statute at issue in Fort Halifax called for the payment by

employers of a one-time severance payment that did not implicate any ERISA plan.

20

seriously claimed that these single-state plans were not intended by

Congress to enjoy the protections of ERISA pre-emption.

The congressional desire for uniformity must be taken as

consistency among plans as well as within a plan. Congress in-

tended that there be one, national standard governing ERISA plans

and imposed pre-emption to prevent plans in one state from being

treated differently from plans in another state. The Third Circuit’s

reading into ERISA pre-emption of a congressional purpose to

thwart only inconsistent regulation of the same plan in different

states is clearly contrary to the position of this Court, which has

granted certiorari and found pre-emption where only single state

plans were involved and inconsistent regulation was not at issue.

See Greater Wash. Bd. of Trade, 113 S. Ct. at 588 (Stevens, J. dis-

senting) (dissent faults majority for pre-empting statute that poses

no threat of inconsistent state regulation).

The third new limitation created by the circuit court is

equally discordant with prior decisions of this Court. By develop-

ing principles that impose boundaries beyond which pre-emption

will not extend, the circuit court’s synthesis of existing caselaw cir-

cumscribes the conspicuously broad ERISA pre-emption clause to

those specific situations where courts have already found pre-emp-

tion (25a-26a). In its view a state law would relate to an ERISA

plan only if a prior court decision had so found. It is not a judicial

function to erect fences where the legislature has not. Existing

caselaw has hardly exhausted all the possible ways in which state

statutes could relate to ERISA plans. To limit pre-emption to what

has already been decided is to transform a extremely broad pre-

emption provision into a very narrow one. The panel majority’s

approach parallels that of the Executive Branch, which had sought

to define ERISA pre-emption by example or subject matter — an

approach rejected by Congress. See Shaw, 463 U.S. at 98 n.19.

In contradistinction to the majority below the dissent stands

as a model of common sense. Consistent with precedent it gives the

term “relates to” its “ordinary and broad meaning”(44a). In so do-

ing the dissent comes to the obvious conclusion that a statute which

* by express reference deprives ERISA

plan beneficiaries of appeal rights en-

joyed by others,

* by deliberate legislative structuring ex-

empts a favored group of hospital payors

hao eeeneeineitiiieiaiamniaumeilll

21

So as to shift their obligations onto

ERISA plans,

* requires ERISA plans to devote more

than one-third of their assets to fund

healthcare for non-beneficiaries despite

ERISA’s express proscription,

* cannot function without the enforced par-

ticipation of ERISA plans, and

* has quadrupled the average hospital bill

for Welfare Fund beneficiaries

must relate to ERISA plans and so be pre-empted.

The majority decision which finds that a statute with these

kinds of connections with ERISA plans does not relate to those

plans must be tinkering with the concept of “relate to.” The Third

Circuit’s niggardly reformation of the “relate to” test saps the pre-

emption clause of all vitality in direct contradiction of consistent

Supreme Court teaching. Such a radical departure should com-

mand the attention of this Court.

B. Unconstitutional Taking

No less deserving of the Court’s attention is the fact that the

cost-shifts mandated by the New Jersey hospital rate-setting scheme

amount to an unconstitutional taking. The Taking Clause plays a

significant role in this age of pervasive governmental regulation in

limiting the government’s power to debase the property rights and

economic interests of its citizens through regulatory legislation.

This Court has articulated three factors of “particular significance”

in determining whether governmental regulation constitutes an inva-

lid taking of property: (1) the character of the governmental action,

(2) the economic impact of the regulation, and (3) the extent to

which the regulation has interfered with investment-backed expec-

tations. Connolly v. Pension Benefit Guar. Corp., 475 U.S. 211,

224-25 (1986). The district court’s analysis of these three factors

(89a-92a), which was adopted by the court of appeals (22a-23a), in

every respect contravenes prior decisions of this Court.

The lower courts in this case purported to see no problem

because the State of New Jersey did not physically invade or perma-

nently appropriate plan assets for its own use but merely “adjusts

the benefits and burdens of economic life to promote the common

good” (23a; 92a). This cavalier approach disregards the principle

OE ——

22

established by this Court that a government regulation that goes too

far will be just as viclative of the Fifth Amendment as a direct tak-

ing. Pennsylvania Coal Co. v. Mahon, 260 U.S. 393, 415 (1922)."’

The fundamental defect in the lower courts’ analyses in this

case is over-simplification of the character of the state action. That

a state may never actually appropriate monies directly is inconse-

quential. The uncompensated care surcharges paid by ERISA plans

and their participants are paid into a fund managed and controlled

by a state bureaucracy. There is no doubt that the cost-shifting sys-

tem is for a public use. Obviously, the State of New Jersey devised

the system because of its perceived public benefit. Hospital care to

the indigent and to the uninsured as well as the economic aid to the

healthcare system provided by Medicare, Medicaid, Blue Cross,

and HMO’s presumably benefit the entire body politic.

Having established mandatory hospital care regardless of ability

to pay, having compensated Blue Cross and other preferred payors

for open-enrollment insurance and other systemwide benefits to the

citizens of New Jersey, and having to make up the shortfalls created

by the Medicare program, New Jersey had an obligation to assist the

hospital industry to finance the costs of these public welfare pro-

grams. Lacking temerity to confront the public with the need for

additional tax dollars to provide the state treasury with the funding

required for these programs, New Jersey devised an elaborate cost-

shifting scheme to have one segment of the populace underwrite the

programs (35a). Under these circumstances the conclusion that

there was no governmental appropriation is unrealistic and

untenable.

The lower courts’ analysis of the economic impact of the

New Jersey system contravenes this Court’s teaching that to pass

muster under the Taking Clause, the state program must accord a

compensatory benefit to those bearing the financial burden. Nor-

wood v. Baker, 172 U.S. 269, 279 (1898) (any governmental exac-

tion in excess of the special benefits accruing to the payor is an

unconstitutional uncompensated taking). In short, there must be a

'? It would seem that at least with respect to part of the monies there was an actual

invasion of the plans’ assets. By requiring plans to pay uncompensated care taxes

and then pocketing the matching federal funds, New Jersey actually took private

monies for public use. The route from the plans’ accounts to the state treasury

may be circuitous, but it is direct, certain, and carefully plotted. Thus, despite the

Third Circuit’s disclaimer there is in this case a real, direct taking. With respect to

all the assets the New Jersey scheme amounted to a regulatory taking, the sus-

taining of which by the Third Circuit contravenes prior decisions of this Court.

23

“reciprocity of advantage.” Meier v. Anderson, 692 F. Supp. 546,

555 (E.D. Pa. 1988), aff'd without op., 869 F.2d 590 (3d Cir. 1989).

The viability of the New Jersey hospital rate-setting scheme

depended on its ability to milk ERISA plans (37a). There was no

benefit to ERISA plans and their participants to compensate them

for their role as public benefactors (43a). All that the district court

could come up with is that the system assures the continued exis-

tence of hospitals from among which ERISA plan participants can

choose and to which they can repair in the event they join the ranks

of the indigent (92a). The court of appeals utterly failed to come to

grips with the requirement of this Court that the benefit must be

discrete and particular to the victim of the taking and not merely an

indistinguishable share of the general benefit enjoyed by the public

at large. The benefits to ERISA plan participants cited by the dis-

trict court are no different than the benefits enjoyed by all other

segments of society. It is difficult to imagine a state scheme that is

a more perfect example of “forcing some people alone to bear pub-

lic burdens which, in all fairness and justice, should be borne by the

public as a whole” — the very type of governmental action that the

Taking Clause of the Fifth Amendment was designed to bar. Arm-

strong v. United States, 364 U.S. 40, 49 (1960).

Although it seems anomalous to discuss ERISA plans in

terms of “investment-backed expectations,” there is a consideration

analogous to this factor. The employers’ contributions to these

plans and their employees’ acceptance of those contributions in lieu

of other expenditures in the wage/benefit package can certainly be

likened to the investment of resources. The circuit court’s evoca-

tion of “the historically heavy and constant regulation of health care

in New Jersey” (23a) to sweep aside the interference with invest-

ment-backed expectations is obtuse indeed. ERISA itself estab-

lishes the regulatory expectation of plans and participants covered

by the federal legislation, and that expectation is complete freedom

from state interference. ERISA plans and their participants have

more than a mere investment-backed expectation; they have a con-

gressionally-created expectation that their plan assets would be pro-

tected from state predators.

Since the cost-shifting provisions of the New Jersey statute

could not be anticipated by ERISA-protected plans and participants,

do not confer on them any benefit not enjoyed by the general pub-

lic, and impose the burden of social welfare programs on only one

small segment of the state population, these provisions amount to

24

an unconstitutional taking in violation of the Fifth Amendment to

the Constitution of the United States, as interpreted by this Court.

With respect, then, to both pre-emption and to the Taking

Clause the Third Circuit’s decision fails to adhere to the holdings

and principles set forth by this Court. Review is warranted to cor-

rect these untoward departures.

CONCLUSION

This ERISA pre-emption case arises in the field of health-

care, an area of burgeoning state activity and a subject of important

national concern. The Third Circuit’s decision is antagonistic to the

repeated holdings of this Court, drastically cuts back on the scope

of ERISA pre-emption, and opens the door to state manipulation of

employee welfare plans so as to require them to use a significant

portion of plan assets to finance social programs for the benefit of

non-beneficiaries. Under the tests enunciated by this Court the

state laws at issue here do not merely have a connection with or

reference to ERISA welfare plans, they relate to them in a way that

amounts to an unconstitutional taking of property. A prompt reso-

lution of these substantial issues by the Supreme Court is necessary

to prevent untold harm to ERISA plans, hospitals, and state treasur-

ies nationwide and to deter a cut-back in collectively bargained wel-

fare benefits in derogation of the congressional purposes embodied

in ERISA. For these reasons the petition for a writ of certiorari

should be granted.

Dated: New York, New York

July 22, 1993

Respectfully submitted,

Thomas W. Gleason C. Peter Lambos

Ernest L. Mathews, Jr.* Donato Caruso*

Kevin Marrinan LAMBOS & GIARDINO

GLEASON & MATHEWS 29 Broadway, 9th Floor

26 Broadway, 17th Floor New York, NY 10006

New York, NY 10004 (212) 943-2470

(212) 425-3240

Co-Counsel to Petitioner

NYSA-ILA Welfare Fund

(* Counsel of Record)