Opposition Brief — Trustees of the Welfare Trust Fund, Local Union No. 475 v. Dunston, New Jersey Commissioner of Health

j 13

Nos. 93-115, 93-193, 93-194, 93-210

In The

Supreme Court of the United States

October Term, 1993

+

NYSA-ILA WELFARE FUND, et al.,

Petitioners,

FRANCES J. DUNSTON, in her capacity as

NEW JERSEY COMMISSIONER OF HEALTH, et al.,

Respondents.

+

On Petition For Writ Of Certiorari

To The United States Court Of Appeals

For The Third Circuit*

«

RESPONDENTS’ BRIEF AND APPENDIX IN

OPPOSITION TO PETITIONS FOR A

WRIT OF CERTIORARI

+

Frep DeVesa

Acting Attorney General

of New Jersey

Attorney for Respondents

Frances J]. Dunston and

New Jersey Department

BENJAMIN CLARKE

Assistant Attorney General

Counsel of Record and

On the Brief of Health

Topp A. WIcGDER Richard J. Hughes Justice

EILEEN C. STOKLEY Complex, CN 112

Deputy Attorneys General Trenton, New Jersey 08625

On the Brief (609) 292-8866

(*Case captions for additional petitions

are referenced on inside front cover.)

COCKLE LAW BRIEF PRIINTING CO., (800) 225-6964

OR CALL COLLECT (402) 342-283

ee

S/BEST AVAILABLE COPY

NEW JERSEY CARPENTERS WELFARE FUND, et al.,

Petitioners,

FRANCES J. DUNSTON, in her capacity as

NEW JERSEY COMMISSIONER OF HEALTH, et al.,

Respondents.

TRUSTEES OF THE WELFARE TRUST FUND,

LOCAL UNION NO. 475, et al.,

Petitioners,

FRANCES J. DUNSTON, in her capacity as

NEW JERSEY COMMISSIONER OF HEALTH, et al.,

Respondents.

UNITED WIRE, METAL & MACHINE HEALTH

AND WELFARE FUND, et al.,

Petitioners,

MORRISTOWN MEMORIAL HOSPITAL, et al.,

Respondents.

QUESTIONS PRESENTED

1. Did New Jersey’s now-repealed system of hospi-

tal rate regulation “relate to” employee benefit plans

within the meaning of section 514(a) of the Employee

Retirement Income Security Act (“ERISA”), 29 U.S.C.

§ 1144(a)? More generally stated, does a state regulatory

system that sets the price of hospital care for patients but

that does not impose any coverage or reimbursement

obligations on third-party payors “relate to” employee

benefit plans?

2. Does a state system of hospital rate regulation

that folds into the rate structure costs arising from the

provision of hospital care to non-paying or underpaying

patients result in a compensable “taking” of employee

benefit plan property?

li

TABLE OF CONTENTS

Page

RPUPePS OGIO? FW RECIUIU NOES 6c ck swine cna vescceernce? i

DEMURE GP BRE Cs. oc eke nn cewawsescnss l

I. New Jersey’s Former Rate System........... l

II. The Proceedings Below ..................... 5

III. New Jersey’s Deregulation of Hospital Rates... 8

REASONS FOR DENYING THE WRIT............. 9

il. Summary of Argument ..............000005. 9

Il. The Decision Below Represents a Correct Appli-

cation of Settled ERISA Law and Is Not in Con-

flict With the Law of Any Other Circuit....... 12

A. ERISA Preemption Standards............ 12

ee ee ee eee 13

Ill. The Court of Appeals’ Holding That New Jer-

sey’s Hospital Rate-setting System Does Not

Result in a Compensable “Taking” of the

Plans’ Property Presents No Questions

Requiring Review by This Court............ 22

Be we Tee eT eT Tee eer eT eee re ere 23

ogg | Pn ere ere ere eee re rr rr la

ili

TABLE OF AUTHORITIES

Page

Cases CITED

Aetna Ins. Co. v. Borges, 869 F.2d 142 (2d Cir.), cert.

dented, 493 US. Gil (BGR) = «2000 ccncancsscceeys 20, 21

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

PIOOT as cndcuspuciaisaeeee eee 13, 21

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

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

dented, 112 S.Ct. Z9G5 (U98Z) 2... ce nvnccencesnnss 19, 21

Bricklayers Local No. 1 Welfare Fund v. Louisiana

Health Ins. Ass'n, 771 F. Supp. 771 (E.D.La. 1991) ..... 4

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

BEE CORI a kk cans s'ncds knee ncsnesn ones eee ane 8, 2

District of Columbia v. Greater Washington Board of

Trade, 113. SA4.. SOD (RPE) ss wns ket eecicnanaess 10, 13

E-Systems, Inc. v. Pogue, 929 F.2d 1100 (5th Cir.),

cert. denied, 116 L.Ed.2d 610 (1991)................ 19

FMC Corp. v. Holliday, 498 U.S. 52 (1990) 10, 12, 14, 17

Fort Halifax Packing Company, Inc. v. Coyne, 482

OLS. © COURS 6 ixac a vaneacaneeees cae eee 13, 20

Ingersoll-Rand Co. v. McClendon, 498 U.S. 33 (1990)

SOPOT eT TT CTT TT TT 10, 13, 14

Lane v. Goren, 743 F.2d 1337 (9th Cir. 1984).......... 14

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

gk eS 8 PT reer eee eee 11

Malone v. White Motor Corp., 435 U.S. 497 (1978)..... 12

Massachusetts v. Morash, 490 U.S. 107 (1989)......... 12

Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S.

TRE CEOs v5.5.6 5- tone xonkeereiue reennees a2, 37, MB, 23

iv

TABLE OF AUTHORITIES - Continued

Page

Penn Central Transportation Co. v. City of New York,

ee Ws.c. 108 (ISTO)... nic cerareccsesesseesenes 8, 22

Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41 (1987) ..13, 18

Ray v. Atlantic Richfield Co., 435 U.S. 988 (1978)..... 20

Rebaldo v. Cuomo, 749 F.2d 133 (2d Cir. 1984), cert.

denied, 472 U.S. 1008 (1985)............. 9, 14, 15, 17

Rodriguez DeQuijas v. Shearson/American Express,

Inc., 490 U.S. 477 (1989)... ccc cece eee e eee eeeeeen 21

Somers Drug Stores v. Corrigan Enterprises, 793 F.2d

1456 (5th Cir. 1986). ....... ccc ccc cc cece eee eeeuees 20

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

(S.D.N.Y. 1993) Gppeal PEMGING.... 2... sccessessenss 10

Statutes CITED

mite, Ann. (°NIS.A.") 26-20-1......5.05i06055.5.

Ee ere ye ie re rr 18

EN 55k shy sy Ae abba ee eek neues buns 2

SOP his oe oa. ones den vanweeeeyewens bx 3

SN MEOPEUECD, 5 ok veh osc censeesaensedecennnteede 3

ns 5 ove ve kdne eu edaesa een eas 2

FEDERAL STATUTES CITED

Es STROOD och dws cehaeeeceaeneenearnteoes a 12

RRS og ys Se ae Os | err 12

a | ee ee ree errr ere er ere Terre l

Se Wl, LSP OITWIGNED occ c cece scscectneeccbeenss 11

TABLE OF AUTHORITIES —- Continued

Page

REGULATIONS CITED

N.J. Admin. Code (“N.J.A.C.”) 8:31B-3.5............0.4. l

MPA, DORE bie cevcee tend vennseeeeeeeeeadieee l

Nj PK, DDB) oo nites es 66sesnancvecenreeee 2

Rutes CITED

eS Se | ee eer rrr eg fs 12

ne ee 8 eee reer rere rr rer er FC

Laws CITED

ee ee ee ee errr rrr rr ery e 9

MIscELLANEOUS CITED

Congressional Report C-92-03, “Optional Hospital

Payment Rates for Private Payers Based on

Medicare’s Methods” (March 1992)................. 3

P. Ginsburg, “Hospital Cost Shifting,” 310 New

England Journal of Medicine 893 (April 1994)...... 4

APPENDIX

Order of the United States District Court for the

District of New Jersey, Dated June 4, 1992........ la

STATEMENT OF THE CASE

I. New Jersey’s Former Rate System.

In 1978, the New Jersey Legislature enacted a system

of hospital rate regulation to “promote the financial sol-

vency of hospitals . . . and contain the rising costs of

health care services.” N.J. Stat. Ann. (“N.J.S.A.”) 26:2H-1

(amended 1992).* Under this system, the many types of

medical procedures performed at hospitals were divided

into “diagnostic related groups” (“DRGs”), and a rate

assigned to each DRG. The system was designed to penal-

ize hospitals that incurred costs greater than the DRG

rate and to reward more efficient hospitals, thereby pro-

viding hospitals with an incentive to keep costs down.

See, e.g., N.J. Admin. Code (“N.J.A.C.”) 8:31B-3.5.

Like most if not all regulatory rate systems, New

Jersey’s former hospital rate system operated on the

premise that the rates should allow efficient members of

the regulated industry to recover their reasonable costs of

doing business. N.J.A.C. 8:31B-1.1. One cost of doing

business as a hospital is the cost of providing care to

patients who are unable to pay their bills, a cost known as

“uncompensated care.” In all states, hospitals incur sub-

stantial uncompensated care costs, both because federal

law requires hospitals to treat emergency patients regard-

less of ability to pay, see 42 U.S.C. § 1395dd, and because

many hospitals, under their internal by-laws and operat-

ing procedures, impose similar requirements on them-

selves. In New Jersey, state law requires all hospitals to

*The New Jersey Statutes referenced herein are reproduced

in the Appendix to the Brief in Opposition on behalf of respon-

dent New Jersey Hospital Association.

accept and treat patients regardless of ability to pay. See

N.J.S.A. 26:2H-18.64; N.J.A.C. 8:43G-5.2(c).

Under the rate system as originally enacted, uncom-

pensated care costs incurred by a particular hospital were

borne only by that hospital’s patients. Each hospital,

therefore, included in its rates a hospital-specific charge

for uncompensated care in order to recover its costs in

this area. Over time, hospitals providing large amounts of

uncompensated care — primarily hospitals located in the

state’s urban areas — were thus forced to charge higher

rates than other hospitals. The resultant disparity in rates

threatened the financial viability of New Jersey’s inner-

city hospitals.

In response to this problem, and to avoid the pros-

pect of large urban areas and populations with no access-

ible hospital care, New Jersey amended its rate-setting

system in 1987 to provide that all hospitals in the state

would share equally in the cost of uncompensated care.

Under this amendment, all hospital bills were required to

include a uniform uncompensated care charge, set annu-

ally by the State’s Hospital Rate-Setting Commission at a

level intended to generate revenues approximating state-

wide uncompensated care costs. N.J.S.A. 26:2H-18(d)

(repealed 1992). The charges collected from all patients

and hospitals across the state were then pooled into a

fund known as the New Jersey Health Care Trust Fund,

and ultimately redistributed back to hospitals according

to the amount of uncompensated care provided by them.

Another cost of doing business as a hospital (in some

respects a variant of uncompensated care) is the cost of

treating patients eligible for Medicare. Under federal law,

hospitals can charge such patients only the amount Medi-

care pays for the particular treatment. From 1980-1988,

the Medicare program participated fully in New Jersey's

rate system and accepted the rates established by it. In

1989, however, Medicare began paying hospitals in New

Jersey at rates below the state-regulated rate — and, as has

been widely acknowledged, below any reasonable mea-

sure of the cost of providing care. To enable hospitals to

make up for the resultant shortfall in revenues, the state-

regulated rate had to be adjusted, and a charge included

in all hospital bills to make up for Medicare’s below-cost

reimbursement rates. See N.J.S.A. 26:2H-18(c) (repealed

1992). This charge came to be known, in New Jersey as

elsewhere, as the “Medicare cost-shift.” See generally,

Congressional Report C-92-03, “Optional Hospital Pay-

ment Rates for Private Payers Based on Medicare’s

Methods” (March 1992) (detailing the prevalence

throughout the United States of Medicare cost-shifts by

hospitals).

Another charge built into hospital rates under New

Jersey’s former rate system related to “payor differen-

tials.” Under the operative rate statutes, and in keeping

with their underlying purpose of cost-containment, the

Hospital Rate Setting Commission was authorized to

grant a “differential” (i.e., price discount) to payors pro-

viding “quantifiable economic benefits . . . to the health

care delivery system taken as a whole.” See N.J.S.A.

26:2H-18(b) (repealed 1992). Under this provision, differ-

entials were provided to “open enrollment” programs

such as Blue Cross/Blue Shield because, by offering open

enrollment, such programs reduced (or at least helped to

contain) the number of uninsured patients - and, hence,

to contain the uncompensated care costs incurred by

hospitals. Blue Cross receives a similar discount in many

states. See generally, P. Ginsburg, “Hospital Cost Shifting,”

310 New England Journal of Medicine 893 (April 1984).

Payor differentials were also granted to health mainte-

nance organizations (“HMOs”) able to show the achieve-

ment of economic benefits through their efforts at

“managed care.” Hospital patients covered by Blue Cross

or HMOs would thus be charged at a discounted rate,

and patients not covered by such plans would be charged

at a correspondingly higher rate.

New Jersey’s former rate system did not dictate that

third-party payors cover or be responsible for paying any

amount, percentage or portion of hospital bills. Rather, it

set the price of hospital care for patients in New Jersey.

Third-party payors like the petitioning employee benefit

plans were, as both a legal and practical matter, free to

determine for themselves how much coverage they

would provide for their plan members.*

Under the rate system, hospital costs in New Jersey

rose steadily, as they did throughout the country during

that time period (1978-1993). Data compiled by the Amer-

ican Hospital Association showed, however, that hospital

rates in New Jersey during the period of rate regulation

were generally lower than in neighboring states. From the

“This feature of New Jersey’s former rate system distin-

guishes it from the statutory scheme at issue in Bricklayers Local

No. 1 Welfare Fund v. Louisiana Health Ins. Ass'n, 771 F. Supp. 771

(E.D.La. 1991), which involved charges imposed directly on

ERISA plans, and from other cases that have occasionally arisen

under ERISA involving state “mandatory benefits” laws.

record in this case, it cannot be said whether the rate

system held the cost of hospital care below what it would

have been in the absence of regulation, raised it above

what it would otherwise have been, or had no substantial

impact at all. Petitioners’ repeated assertions that the rate

system had a net detrimental economic impact on them is

unsubstantiated. See Sup.Ct.R. 15.1.

II. The Proceedings Below.

In 1990, despite the fact that hospital rates in New

Jersey were then generally lower than rates in nearby

states, a number of self-insured employee benefit plans

(“the Plans”) filed suit in the United States District Court

for the District of New Jersey, asserting that the State’s

rate system was preempted by ERISA. The Plans also

asserted that the rate system resulted in a taking of their

property without just compensation, and constituted an

unlawful tax.

With respect to their preemption claim, the Plans

contended that, because rates promulgated under the

regulatory scheme included charges for uncompensated

care, the Medicare cost-shift and payor differentials, plan

administrators were effectively being compelled to divert

plan resources to the benefit of non-beneficiaries, in

direct violation of their fiduciary obligations under

ERISA. In response, the State asserted that the challenged

charges represented bona fide components of a regulated

rate and thus did not constitute a diversion of plan assets,

and that the rate system did not “relate to” ERISA plans

but rather set the price of hospital care for patients.

In the District Court, all parties moved for summary

judgment, and on May 27, 1992, the court (Hon. Alfred

Wolin, U.S.D.J.) issued a decision holding in the Plans’

favor on their preemption claim. In its decision, the Dis-

trict Court found that New Jersey’s rate system related to

employee benefit plans because it forced them “to struc-

ture benefits in a particular manner and subject[ed] the

benefit plans to inconsistent regulations” from one state

to another (80a).* The court rejected the Plans’ constitu-

tional arguments (85a).

The District Court thereafter entered an order enjoin-

ing the State and hospitals in the state from enforcing the

contested rate statutes against the Plans. Surprisingly, the

District Court also enjoined enforcement of the rate stat-

utes against plan beneficiaries, because in the District

Court’s expansive view ERISA not only precluded the

State from imposing the disputed charges against

employee benefit plans (the rate system imposed no such

charge), but also precluded it from imposing the charges

against patients who happened to be enrolled in such

plans (the rate system did impose such a charge, against

all patients) (See, Appendix to this Brief).

On June 24, 1992, before the District Court’s order

took effect, the United States Court of Appeals for the

*The District Court was unable to support this holding with

a citation to any provision of state law requiring employee

benefit plans to structure their benefits in any specified manner.

Petitioners are likewise unable to do so anywhere in the four

petitions they have filed. No such provision exists. (Appendix

citations are to the appendix filed by petitioner NYSA-ILA Wel-

fare Fund.)

Third Circuit issued a stay pending appeal. On appeal, in

an opinion dated May 14, 1993, the Third Circuit

reversed. The Third Circuit rejected the District Court’s

unsupported conclusion that New Jersey’s rate system

“force[d] employee benefit plans to structure benefits in a

particular manner” (80a), and noted that, to the contrary,

“New Jersey’s scheme does not direct ERISA plans to

structure their benefits or conduct their internal affairs in

any particular way.” (26a-27a). The Court of Appeals

acknowledged that the rate system, by setting the price of

hospital care in New Jersey, had an economic impact on

employee benefit plans, but concluded that such an

impact did not necessitate or justify a finding of preemp-

tion under the applicable decisions of this Court (26a).

With respect to the plans’ contention that the rate

system compelled them to divert plan assets to non-

beneficiaries, the Third Circuit noted that this argument,

if accepted, would give rise to a duty on the part of plan

administrators to “ ‘look through’ the pricing structure of

every health care provider to assure that the price of the

services rendered a particular patient directly correlates

with the cost of those services.” (31a). Such a duty, the

court continued, would prove a practical impossibility in

view of the “many forms of state regulation . . . which

result in increases in the cost of [hospitals’] doing busi-

ness.” (31a). The court therefore concluded that Congress

did not intend to impose such a duty on plan administra-

tors, just as it never intended, through ERISA, to preempt

states from exercising their traditional far-reaching regu-

latory powers over hospitals (32a).

Summarizing its preemption holding, the court con-

cluded that New Jersey’s former rate system was a

generally applicable law which (1) is not

intended to regulate the affairs of ERISA plans,

(2) neither singles out such plans for special

treatment nor predicates rights or obligations on

the existence of an ERISA plan, and (3) does not

have the effect of either dictating or restricting

the manner in which ERISA plans structure or

conduct their affairs or the effect of impairing

their ability to operate simultaneously in more

than one state. We have found no case that has

held such a law to be preempted . . . and we

decline to so hold. [30a].

The Third Circuit also rejected the Plans’ “takings”

arguments (22a). Applying the standards of Penn Central

Transportation Co. v. City of New York, 438 U.S. 104 (1978),

the court found that the rate system did not interfere with

the plans’ investment-backed expectations, but merely

adjusted “the benefits and burdens of economic life to

promote the common good.” Connolly v. Pension Benefit

Guaranty Corp., 475 U.S. 211, 225 (1986).

In dissent, Judge Nygaard wrote that the case “tests

the outer limits of ERISA preemption” (32a), but that he

would affirm the District Court’s judgment. Judge

Nygaard was persuaded that a preemptive “relation”

between the rate system and ERISA plans existed because

the rate system, as all parties acknowledged, would not

be viable if ERISA plans and their beneficiaries were

excluded from it.

III. New Jersey’s Deregulation of Hospital Rates.

During the time that this matter was before the Third

Circuit, New Jersey abolished its hospital rate system,

which had been politically controversial from its outset,

and deregulated hospital rates. 1992 N.J. Laws, c.160. In

an attempt to avoid the price volatility and disruptions

that might otherwise arise with deregulation, the Legisla-

ture imposed one-year revenue caps on all hospitals, but

as of January 1, 1993, the rate system that is the subject of

this case ceased to exist.

Although this development rendered the Plans’

claims for prospective relief moot, it did not render moot

their attempt to avoid responsibility for paying hospital

bills issued to their plan members during the pendency of

the action — a responsibility, it bears repeating, imposed

upon them by their own governing plan instruments, not

by the rate system. The Third Circuit accordingly pro-

ceeded to decide the appeal before it (22a).

.

REASONS FOR DENYING THE WRIT

I. Summary of Argument.

In urging the Court to grant certiorari, petitioners

assert that the opinion below conflicts with applicable

ERISA decisions of this Court and other circuits. This

assertion does not withstand scrutiny. The opinion below

adheres to settled principles of preemption law, reaches a

result that accords with this Court’s ERISA decisions, and

expressly follows the one other Court of Appeals decision

to address a similar issue, Rebaldo v. Cuomo, 749 F.2d 133

(2d Cir. 1984), cert. denied, 472 U.S. 1008 (1985) (upholding

New York’s hospital rate system against an ERISA chal-

lenge).

10

Petitioners correctly maintain that this Court, in its

recent ERISA decisions, has reaffirmed that ERISA’s pre-

emptive scope is broad, see, e.g., FMC Corp. v. Holliday,

498 U.S. 52, 58 (1990), but this uncontroversial point was

not lost on the court below. The Court of Appeals recog-

nized that the legal inquiry did not end there, however,

since it remains true under recent decisions that ERISA’s

preemptive reach, though broad, is not without limits,

and that state laws of general applicability having only a

tenuous, remote or peripheral connection with employee

benefit plans are not preempted. District of Columbia v.

Greater Washington Board of Trade, 113 S.Ct. 580, 583

(1992); Ingersoll-Rand Co. v. McClendon, 498 U.S. 33, 39

(1990).

Although petitioners cast themselves as defenders of

this Court’s ERISA jurisprudence, the result they seek to

achieve is far outside the domain of established law.

Petitioners’ central thesis - which they understandably

choose not to state in express terms - is that ERISA

precludes states from engaging in hospital rate regula-

tion. Thus, at the same time that petitioners assert that

ERISA provides a federal exemption from New Jersey's

rate system for their plan beneficiaries, they also

acknowledge, and even stress, that any hospital rate sys-

tem that excluded patients covered by employee benefit

plans from its scope would, as a practical matter, be

unworkable. See, e.g., Petition of United Wire, Metal &

Machine Health and Welfare Fund at 21-22.

As is clear on a moment’s reflection, if the latter point

is true (and it quite clearly is), it follows that ERISA

effectively prohibits states from engaging in hospital rate

regulation. Cf. Travelers Inc. Co. v. Cuomo, 813 F.Supp. 996,

11

1006 (S.D.N.Y. 1993) appeal pending (holding New York’s

hospital rate system to be preempted; the court acknowl-

edged that, under its legal analysis, it would follow that

“ERISA preempts all state hospital rate-setting statutes.”)

From a public policy standpoint, such a result might or

might not be beneficial (the data from New Jersey are

inconclusive), but from a legal standpoint there is no

reason to think that Congress intended to achieve that

result when it enacted ERISA. To the contrary, Congress

has consistently encouraged state efforts to contain health

care costs. See, e.g., 42 U.S.C. § 1395ww(6)(1) (authorizing

the Secretary of Health and Human Services to waive

Medicare’s rate schedule and to participate in state “hos-

pital reimbursement control systems”).

Petitioners’ underlying thesis is not only at odds with

Congressional intent, but rests on a legal paradox. Under

clearly established law, any state system of hospital rate

regulation that purported to exclude employee benefit

plans and their beneficiaries from its scope would be

flatly preempted. Mackey v. Lanier Collection Agency &

Services, Inc., 486 U.S. 825 (1988) (Georgia garnishment

statute providing exemption for employee benefit plans

“related to” such plans and was preempted). If peti-

tioners’ position were upheld, therefore, ERISA would

prevent states from including or excluding plan benefici-

aries from a rate-setting system - which is again to say

that states could not engage in rate regulation at all.

The Court of Appeals did not depart from estab-

lished law in rejecting petitioners’ boundless interpreta-

tion of ERISA. The decision below comports with the

applicable precedents of this Court, presents no conflict

with any other circuit court decision, and is sound on its

12

own merits. With the repeal of the rate system, any argu-

able “special and important reasons” that might once

have existed to warrant this Court’s involvement have

vanished, Sup.Ct.R. 10, and the petitions for certiorari

should accordingly be denied.

II. The Decision Below Represents a Correct Applica-

tion of Settled ERISA Law and Is Not in Conflict

With the Law of Any Other Circuit.

A. ERISA Preemption Standards.

ERISA preempts “any and all State laws insofar as

they may now or hereafter relate to any employee benefit

plan.” 29 U.S.C. § 1144(a). In determining whether a state

law “relates to” employee benefit plans under the statute,

“as in any preemption analysis ‘the purpose of Congress

is the ultimate touchstone.’ ” Metropolitan Life Ins. Co. v.

Massachusetts, 471 U.S. 724, 747 (1985) (quoting Malone v.

White Motor Corp., 435 U.S. 497, 504 (1978)).

Congress’ purpose in enacting ERISA was “to safe-

guard employees from the abuse and mismanagement of

[employee benefit] funds.” Massachusetts v. Morash, 490

U.S. 107, 112 (1989). To effectuate this purpose, ERISA

imposes uniform federal standards on reporting, dis-

closure and fiduciary responsibility, 29 U.S.C.

§§ 1021-1031, 1101-14, but a state law need not intrude

upon these specific subject areas to be preempted, nor

need its relation to employee benefit plans be direct or

express. FMC Corp. v. Holliday, 498 U.S. 52, 58-59 (1990).

Rather, a state law “relates to” employee benefit plans if,

within the “broad common-sense meaning of that

13

phrase,” it “has a connection with or reference to” such

plans. Ingersoll-Rand, supra, 498 U.S. at 39; see also Pilot

Life Ins. Co. v. Dedeaux, 481 U.S. 41, 47 (1987).

On the other hand, a state law that has only a “ten-

uous, remote or peripheral connection with covered

plans .. . as is the case with many laws of general

applicability” will not be preempted. District of Columbia

v. Greater Washington Board of Trade, 113 S.Ct. 580, 583 n.1

(1992); Ingersoll-Rand, supra, 498 U.S. at 39 (generally

applicable statutes that make no reference to or function

irrespective of benefit plans not preempted). Preemption

follows only if a state law relates to employee benefit

plans, moreover. Fort Halifax Packing Company, Inc. v.

Coyne, 482 U.S. 1, 8 (1987) (“Congress’ choice of language

is significant” in that it preempts only laws that relate to

plans); Ingersoll-Rand, supra, 480 U.S. at 39 (“only state

laws that relate to benefit plans are preempted”); cf. Alessi

v. Raybestos-Manhattan, Inc., 451 U.S. 504, 523 (1981) (Con-

gress, in enacting ERISA, “meant to establish pension

plan regulation as exclusively a federal concern”).

B. Discussion.

The decision below represents a straightforward

application of these settled legal standards. The Court of

Appeals examined each asserted connection between the

Plans and the rate statutes, and rightly concluded that,

under the ERISA decisions of this Court, none of them

established the requisite preemptive “relation.” In so

holding, the court was guided not only by the decisions

of this Court (24a-26a), but also by the one other Court of

Appeals decision to address an ERISA challenge to a

14

state system of hospital rate regulation, Rebaldo v. Cuomo,

749 F.2d 133 (2d Cir. 1984), cert. denied, 472 U.S. 1008

(1985).

As they did below, petitioners vigorously assert that

Rebaldo is no longer good law because it pre-dates this

Court’s decisions in FMC Corp. and Ingersoll-Rand Co.,

and because certain passages from the Second Circuit's

opinion take a narrower view of ERISA’s preemptive

scope than the Court espoused in those later cases. The

court below, however, was careful to limit its reliance on

Rebaldo to those portions of the opinion that remain

legally sound. In particular, the court below embraced the

observation made in Rebaldo that a finding of preemption

cannot be based on the mere fact that a state statute or

regulation affects a plan’s “cost of doing business” since

many (if not all) types of state regulations have such an

effect. 749 F.2d at 138-39. In making that observation, the

Second Circuit was not announcing a new or controver-

sial rule of law; it was stating a plain fact, and nothing in

the ERISA cases that have been decided since Rebaldo

erodes the Second Circuit’s wholly logical reasoning on

this score. Accord Lane v. Goren, 743 F.2d 1337, 1340 (9th

Cir. 1984) (state statutes prohibiting employment discrim-

ination not preempted despite the fact that such laws, like

laws “regulating zoning, health and safety, increase the

operational costs of ERISA trusts”).

Another intrinsically sound aspect of the Rebaldo

Opinion is its recognition that whether or not states

engage in rate regulation, hospitalization costs will

always vary from state to state and that, in consequence,

statutes that merely set the price of hospital care within a

given state cannot be said to subject ERISA plans to

15

inconsistent local regulation. 749 F.2d at 139. Petitioners

are unable to point to any flaw in this syllogism, but

assert that New Jersey’s rate statutes did more than set

the price of hospital care because it imposed a “dispro-

portionate” share of certain costs on ERISA plans. Thus,

petitioners inveigh that, in the last years of the rate

system, ERISA plan participants constituted only 15% of

New Jersey’s hospital patients but were assessed with

40% of the challenged “cost shifts.”

Although plausible on its face, petitioners’ “dispro-

portionality” argument turns out, on examination, to be

an exercise in statistical sophistry. The seeming inequity

of the distribution of the costs shifts evaporates when it is

recalled that the largest of the “cost shifts” — by far -

related to uncompensated care, i.e., care rendered to non-

paying or underpaying patients. By definition, such

patients (who unfortunately constitute a substantial por-

tion of the total patient population themselves) will not

bear their “proportional” share of costs; rather they will

cause hospitals to have to seek to recover those costs from

all other patients, thus creating a “disproportionate” load

for those patients.

To the extent petitioners’ “disproportionality” argu-

ment does more than reflect the fact that hospitals in New

Jersey, as in other states, incur substantial uncompen-

sated care costs, it is still lacking in force. The “cost shift”

that arose from Medicare’s below-market reimbursement

rates was as much a product of federal law as it was of

New Jersey’s rate system, and petitioners provide no

support for the notion that Congress intended ERISA

plan participants, alone among non-Medicare patients, to

be exempted from such costs. Likewise, the challenged

16

“cost shift” relating to payor differentials resulted in no

true “disproportion,” since such differentials were

granted only on the basis of demonstrated economies

benefiting the hospital system as a whole. Nothing in the

record suggests any gross disparity between the size of

the payor differentials and the benefits bestowed.

Petitioners’ aspersive descriptions of the challenged

“cost shifts” notwithstanding, see, e.g., NYSA-ILA Peti-

tion at 7-8," each of the charges in question corresponded

to a real cost of doing business as a hospital, and conse-

quently each of the charges was a legitimate component

of a regulated hospital rate. That being so, petitioners’

preemption argument amounts to a claim that, through

ERISA, Congress has given plan administrators unilateral

power (or, as the Court of Appeals put it, a duty) to

determine for themselves and their plan beneficiaries

what constitutes a “reasonable” hospital bill. Unpersua-

sive as this contention is on first blush, it becomes even

less attractive when one considers that, were it to be

upheld, federal courts would become the arbiters of

| everyday billing disputes between ERISA plan members

and healthcare practitioners, and wou!d have to develop

*Petitioners’ oft-repeated assertion that New Jersey’s rate

system was deliberately designed to target ERISA funds and to

discriminate against employee benefit plans is more than asper-

sive; itis false. See Sup.Ct.R. 15.1. Since the rate system imposed

no coverage obligations on ERISA plans (or any other third-

party payors), it was fundamentally incapable of “discriminat-

ing” against them in the fashion complained of; perhaps more to

the point, petitioners are unable to show any respect in which

ERISA plans or their beneficiaries were treated less favorably

than ordinary commercial insurers and their beneficiaries.

17

a new body of federal common law to resolve such dis-

putes.*

While the powers bestowed upon plan administra-

tors under ERISA are broad, they convey no license to

“mark down” hospital bills on behalf of plan members.

Rebaldo, supra, 749 F.2d at 138-139 (rejecting the idea that

ERISA plans lead a “charmed existence”). They do encom-

pass a power to structure plan benefits to cover so much

~ or so little - of members’ hospital bills as may be

deemed desirable, but New Jersey’s former rate statutes

did not trammel upon or in any way limit that power.

Compare Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S.

724, 739 (1985) (mandatory benefits law “related to”

employee benefit plans, but was not preempted as to

insurance companies selling policies to plans); FMC Corp.

v. Holliday, supra (anti-subrogation law preempted

because it dictated how plans had to structure benefits.)

Petitioners’ assertion that New Jersey’s former rate

Statutes made express “reference” to employee benefit

plans is even less compelling than their exaggerated

claims of “discrimination.” The only reference to ERISA

plans in the rate statutes was contained in a provision

imposing a duty on hospitals to ascertain whether a

prospective patient had any form of medical coverage.

“This would be true, it should be noted, even in states

where hospital rates are not subject to state regulation.

Throughout the country, the right of hospitals and doctors to

collect On their bills is governed by state law, and whether that

law derives from a statute or case law it “relates” to ERISA

plans in exactly the same fashion and to the same extent as New

Jersey’s former rate laws - which is to say indirectly and periph-

erally.

18

N.J.S.A. 26:2H-18.31 (expired 1992). That provision

required hospitals to

inquire of the patient . . . whether the patient is

covered by health insurance, and if so shall

require documentation . . . Documentation may

include a government sponsored health plan

card or number, a group sponsored or direct

subscription health plan card or number, a com-

mercial identification card or claim form or a

union welfare plan identification card or claim form.

[Emphasis added.]

The obvious, and salutary, purpose of this provision

was to ensure that hospitals took reasonable steps to keep

their uncompensated care costs to a minimum. For peti-

tioners, who complain so loudly about the growth of

uncompensated care costs, to suggest simultaneously that

the above provision ran afoul of ERISA is, to say the least,

perplexing. Petitioners surely do not maintain that hospi-

tals are prohibited by ERISA from ascertaining whether

patients have some form of medical coverage, and yet

they seem to be saying that hospital officials should be

required to preface patient interviews with a warning to

the effect of, “Under no circumstances should you tell me

if you belong to a union benefit plan.” Since such a

disclaimer would still involve a “reference” to ERISA

plans (at least as petitioners construe that term), the

Court of Appeals did well to reject this odd contention,

and broke no new legal ground in doing so. See Pilot Life

mae

19

Ins. Co. v. Dedeaux, supra, 481 U.S. at 47 (ERISA’s preemp-

tive language should be given “its broad common-sense

meaning”; emphasis added).*

In the final analysis, the only true “relation” between

employee benefit plans and the challenged rate system is

that, by setting the price of hospital care in New Jersey,

the rate system had an undeniable, albeit indeterminate,

economic impact on employee benefit plans. No decision

by this Court has held that such an impact alone results

in preemption. Petitioners assert that the Fifth Circuit has

found economic impact to be sufficient to establish a

preemptive “relation” in E-Systems, Inc. v. Pogue, 929 F.2d

1100 (5th Cir.), cert. denied, 116 L.Ed.2d 610 (1991), but

that case involved a tax imposed specifically on persons

rendering services to any “employer-employee . . . health

benefit plan.” Thus, the statute’s relation to benefit plans

was not merely economic, and was anything but “ten-

uous” and “peripheral”; to the contrary, it was direct and

practically exclusive.

Petitioners also seize upon dicta from Arkansas Bluc

Cross and Blue Shield v. St. Mary’s Hospital, Inc., 947 F.2d

1341 (8th Cir. 1991), cert. denied, 112 S.Ct. 2305 (1992), in

"The “reference” to employee benefit plans contained in the

New Jersey Department of Health’s policy statement regarding

patient appeals again merely lists employee benefit plans as one

possible form of third-party coverage. The policy statement

(which was not itself part of the Statutory rate scheme) merely

recognized, as an incontrovertible fact, that employee benefit

plans are a common type of third-party payor. That petitioners

construe ERISA’s preemptive language to mean that this fact

must never be acknowledged in writing by state officials dem-

onstrates the artificiality of their position.

20

an attempt to generate a conflict between the Eighth

Circuit and the court below. In that case, the Eighth

Circuit questioned - as the Fifth Circuit had done before

it, see Somers Drug Stores v. Corrigan Enterprises Inc., 793

F.2d 1456, 1467 (5th Cir. 1986) - whether the fact that a

state law falls within the state’s traditional police powers

has any legal! relevance in ERISA preemption disputes.

947 F.2d at 1350. The court left the question hanging,

although it allowed that “this factor is arguably a policy

consideration useful in deciding borderline” ERISA cases.

Id.

If the Fifth Circuit or Eighth Circuit ever chose to

formalize their speculative views on this rather fine point

of ERISA law in a legal holding, a genuine conflict among

the circuits would clearly exist. Compare, e.g., Aetna Ins.

Co. v. Borges, 869 F.2d 142, 144 (2d Cir.), cert. denied, 493

U.S. 811 (1989) (observing, in an ERISA case, “we must

assume ‘that the historic police powers of the State were

not to be superseded . . . unless that was the clear and

manifest purpose of Congress’ ”; quoting Ray v. Atlantic

Richfield Co., 435 U.S. 988, 994 (1978)). It seems doubtful

that a genuine conflict on this point will ever arise, how-

ever, since this Court has made perfectly clear that, in

addressing questions of preemption under ERISA - as

under any other federal statute - the Court “must pre-

sume that Congress did not intend to preempt areas of

traditional State regulation.” Metropolitan Life Ins. Co. v.

Massachusetts, supra, 471 U.S. at 740 (1985). This negative

presumption is bottomed on basic precepts of federal-

state comity; thus, for instance, in Fort Halifax Packing Co.

v. Coyne, supra, the Court wrote:

21

ERISA pre-emption analysis ‘must be guided by

respect for the separate spheres of governmental

authority preserved in our federalist system.’

[482 U.S. at 19, quoting Alessi v. Raybestos-Man-

hattan, Inc, 451 U.S. 504, 522 (1982)].

It is true, as the Eighth Circuit observed in Arkansas

Blue Cross, supra, that the Court has not invoked this

canon of statutory construction in its most recent ERISA

decisions. Given the extensive body of ERISA law on

which the Court is now writing, there would seem little

need. Neither the Third Circuit nor any other Court of

Appeals would be at liberty to assume that, by the omis-

sion, the Court has implicitly overruled its earlier deci-

sions, Rodriguez DeQuijas v. Shearson/American Express,

Inc., 490 U.S. 477, 484 (1989), and no reason exists to think

that it has.

The applicable decisions of this Court and of other

circuits establish that where, as here, a regulatory scheme

has an indirect economic impact on ERISA plans, a

number of considerations must be taken into account to

determine if the scheme is preempted. Those consider-

ations include whether the law in question involves an

exercise of traditional state police powers, Metropolitan

Life, supra, as well as whether it interferes with the

administration of ERISA plans, or mandates that they

provide a particular type or level of benefit, or subjects

them to inconsistent regulation. See, e.g., Aetna Life Ins.

Co. v. Borges, supra, 869 F.2d at 145-146 (surveying ERISA

cases and noting that Congress “could not possibly have

meant to preempt all laws having any impact on plans, no

matter how small or how tangential”). The Court of

Appeals examined each of these relevant criteria, and

22

concluded that they did not support a finding of preemp-

tion. The court’s legal analysis and conclusion were con-

sistent with and faithful to existing law, and its rejection

of petitioners’ overreaching contention that ERISA pre-

cludes state regulation of hospital rates presents no rea-

son for further review by this Court.

lil. The Court of Appeals’ Holding That New Jersey’s

Hospital Rate-setting System Does Not Result in a

Compensable “Taking” of the Plans’ Property Pre-

sents No Questions Requiring Review by This

Court.

The NYSA-ILA Plan, alone among petitioners, seeks

review of the Court of Appeals’ affirmance of the District

Court’s dismissal of the Plans’ “takings” claim. The Court

of Appeals’ decision on this point represents a sound and

even elementary application of established law, and does

not remotely meet any of the criteria for issuance of a

writ of certiorari.

Outside the area of “physical” takings, a three-prong

test determines whether a compensable taking has

occurred. Under that test, courts must examine the char-

acter of the governmental action involved, the economic

impact of that action on the claimant, and the extent to

which it has interfered with the claimant’s “distinct

investment-backed expectations.” Penn Central Transporta-

tion Co. v. City of New York, 438 U.S. 104, 124 (1978).

The challenged governmental action here is the inclu-

sion of certain “indirect” costs in regulated hospital rates.

The costs in question, while indirect, are true costs

incurred by hospitals and, in providing for them to be

————————

23

spread among all hospitals and hospital patients, New

Jersey’s rate system sought merely to adjust “the benefits

and burdens of economic life to promote the common

good.” Connolly v. Pension Benefit Guaranty Corp., 475 U.S.

211, 223 (1986). The economic impact of New Jersey’s rate

system upon the Plans, as has been noted, is indetermi-

nate since hospital rates in New Jersey under the system

were roughly in line with, but somewhat lower than,

rates in nearby states. Clearly, though, the system did not

interfere with the Plans’ “investment-backed expecta-

tions.” The Plans exist in order to pay the medical bills of

their beneficiaries, and have never had a reason to think

that their beneficiaries occupy a special status among

hospital patients exempting them from charges borne by

other patients. The Court of Appeals’ rejection of Peti-

tioners’ unmeritorious takings argument thus needs no

attention from this Court.

CONCLUSION

For the foregoing reasons, the petitions for writ of

certiorari should be denied.

Respectfully submitted,

FreD DeVEsa

Acting Attorney General of

New Jersey

BENJAMIN CLARKE

Assistant Attorney General

Dated: September 29, 1993

la

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF NEW JERSEY

UNITED WIRE, METAL & : Civil Action No.

MACHINE HEALTH AND =: 90-2639

WELFARE FUND, et al., (Consolidated)

Plaintiffs, ‘ AMENDED ORDER

V. (Filed June 4, 1992)

MORRISTOWN ;

MEMORIAL HOSPITAL,

et al.,

Defendants.

The Court hereby amends its Order dated May 27,

1992 as follows:

It is on this 4th day of June, 1992,

ORDERED, that the state defendants are permanently

enjoined from enforcing the provisions stated in its May

27, 1992 order as to participants in ERISA plans only.

/s/ Alfred M. Wolin

ALFRED M. WOLIN, U.S.D.].