The Supreme Court sheds a very narrow light on ERISA - ERISA, benefits, insurance business, and hospital rate laws in New York and New Jersey - Column

Business & Health, June, 1995 by Charles J. Steele

An eagerly awaited Supreme Court decision has answered the question of whether ERISA preempts New York and New Jersey laws for setting hospital rates. No other answers were forthcoming, however, disappointing those who had hoped the Court would shed some light on another case in which Virginia's Any Willing Provider Law was not preempted by ERISA.

The Court took on the rate case because lower courts had issued conflicting opinions. In New York State Conference of Blue Cross & Blue Shield Plans et al. v. Travelers Insurance Company et al., the U.S. Court of Appeals for the Second Circuit had ruled that ERISA preempted a New York law requiring hospitals to collect surcharges from patients covered by commercial insurance or HMOs but not from those covered by Blue Cross/Blue Shield. The Third Circuit reached the opposite conclusion about a similar New Jersey statute in United Wire, Metal and Machine Health and Welfare Fund v. Morristown Memorial Hospital.

ERISA preempts all state laws that relate to employee benefit plans, except those that regulate the business of insurance. The most troublesome ERISA questions have always been: What is meant by "relates to" employee welfare benefit plans? And does a particular practice constitute "the business of insurance"? The first question was the one addressed by the Supreme Court in Travelers. Did the surcharges relate to employee benefit plans? If they did not, there was no preemption.

At the trial level, the District Court found that although they did not directly increase employee costs or affect the level of their benefits, there was "little doubt that the surcharges at issue [would] have a significant effect on the commercial insurers and HMOs which do or could provide coverage for ERISA plans and thus lead, at least indirectly, to an increase in plan costs." Therefore, the effect on choices made by ERISA plans was enough to trigger the preemption. The Second Circuit upheld that decision, setting the stage for Supreme Court review.

Justice David Souter, in the unanimous opinion, confessed that "we have to recognize that our prior attempt to construe the phrase 'relate to' does not give us much help drawing the line here." That was because the "unhelpful text" of ERISA and the "frustrating difficulty" of trying to define the meaning of "relate to" forced the Court to go beyond the words of the statute and look to ERISA's objectives. The Court recognized that "the basic thrust of the preemption clause...was to avoid a multiplicity of regulation in order to permit the nationally uniform administration of employee benefit plans." For that reason, in Shaw v. Delta Airlines, Inc., the Court had no trouble finding that New York's human rights law, which prohibited employers from structuring benefits in a way that discriminated against pregnant employees, clearly "related to" benefit plans.

The Court found Travelers to be different. Both the purpose and the effects of New York's law distinguished it from those that the Court had previously found to relate to benefit plans. Proceeds from the surcharges were used to support the state's Medicaid system. New York justified the exemption for the Blues on grounds that they pay hospitals promptly and, more importantly, provide coverage for many subscribers whom commercial insurers reject as unacceptable risks. Furthermore, surcharges for HMOs vary with the number of Medicaid recipients each enrolls.

The Court recognized that the surcharges made the Blues more attractive as insurance alternatives and thus did have an indirect economic effect on choices made by employee benefit plans. An indirect economic influence, however, does not bind employers to any particular choice. Commercial carriers and HMOs could still offer packages more attractive than the Blues, and benefits and administration could be standardized for interstate plans. Basically, said the Court, an employer "will shop for the best deal it can get, surcharges or no surcharges."

The Court added that eliminating price differences, which presumably would exist in the absence of New York's surcharges, was almost certainly not an object of ERISA preemption. Laws such as New York's, the Court held, leave plan administrators "right where they would be in any case, with the responsibility to choose the best overall coverage for the money. We, therefore, conclude that such state laws do not bear the requisite 'connection with' ERISA plans to trigger preemption."

Because the commercial insurers and HMOs had relied heavily on the Supreme Court's opinion in Metropolitan Life Insurance Co. v. Massachusetts, the Court went into some detail about that 1985 case. Metropolitan Life involved a state law that mandated benefits. The Court held that the statute directly affected employee benefit plans and, therefore, was related to them, but it also regulated the business of insurance, which saved it from preemption. Plaintiffs in the Travelers case argued that if state laws that mandated benefits related to employee benefit plans, then so did New York's surcharge laws.