New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Company: the United States Supreme Court Gives Commercial Insurers a Severe Case of "the Blues" - Mark A. Williams

• Citation: Vol. 47 No. 4
• Publication year: 1996

New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Company. The United States Supreme Court Gives Commercial Insurers a Severe Case of "The Blues"

In New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Co.,¹ the United States Supreme Court determined that the Employee Retirement Income Security Act of 1974 ("ERISA")² did not preempt a New York statute³ requiring hospitals to collect surcharges from patients covered by commercial insurers but not from patients insured by a Blue Cross/Blue Shield plan.⁴ The surcharge was part of New York's comprehensive regulatory scheme for controlling hospital rates.⁵ Patients are not charged for the cost of their individual treatment, but for the average cost of treating the patient's ailment, as classified under various Diagnostic Related Groups ("DRGs").⁶ Patients with coverage through Blue Cross/Blue Shield, Medicaid patients, and Health Maintenance Organization ("HMO") participants are billed at a hospital's DRG rate.⁷ Other patients, however, are billed at the hospital's DRG rate plus a surcharge which in some instances exceeds twenty-four percent of the applicable DRG rate.⁸ The statute also subjects various HMOs to surcharges that vary with the number of Medicaid recipients enrolled.⁹ Wanting to invalidate these surcharges, several commercial insurers, acting as fiduciaries for the ERISA plans they administer, joined with their trade associations and brought actions against various state officials in United States District Court for the Southern District of New York.¹⁰ The New York State Conference of Blue Cross and Blue Shield plans, Empire Blue Cross and Blue Shield (collectively "the Blues"), and the Hospital Association of New York State subsequently intervened as defendants.¹¹ Additionally, several HMOs and the New York State Health Maintenance Organization Conference intervened as plaintiffs.¹² The district court then consolidated the actions and granted the plaintiffs' motion for summary judgment, finding that the effect of these surcharges on choices by ERISA plans was enough to trigger preemption.¹³ The Court of Appeals for the Second Circuit affirmed, rejecting the decision of the Third Circuit in United Wire, Metal & Machine Health & Welfare Fund v. Morristown Memorial Hospital¹⁴ upholding a similar rate setting statute in New Jersey, and endorsed a broad interpretation of ERISA's pre-emption clause.¹⁵ The Supreme Court of the United States granted certiorari to resolve the conflict, and in a unanimous opinion reversed and remanded.¹⁶ The

Court backed away from its tradition of broadly interpreting ERISA's preemption clause, and held that "state laws [such as New York's] do not bear the requisite 'connection with' ERISA plans to trigger preemption."¹⁷ The Court, therefore, has now made it clear that in general, indirect economic effects do not "relate to" ERISA plans enough to invoke the preemption clause unless they produce "such acute, albeit indirect, economic effects, by intent or otherwise, as to force an ERISA plan to adopt a certain scheme of substantive coverage or effectively restrict its choice of insurers."¹⁸

Article VI of the United States Constitution provides, in part, that the laws of the United States "shall be the supreme Law of the Land; . . . any Thing in the Constitution or Laws of any state to the Contrary notwithstanding."¹⁹ It has been well settled, since the Supreme Court's decision in McCulloch v. Maryland²⁰ in 1819, that any state law that conflicts with federal law is "without effect."²¹ The Court has further explained that preemption may occur either by implication, by express provision, by a direct conflict, or when federal law has so thoroughly occupied a legislative area that one can reasonably infer that Congress intentionally left no room for the States to supplement it.²² However, the Supreme Court has traditionally approached claims of preemption with the presumption that Congress does not intend to supplant state law.²³ This has been especially true regarding those areas that have traditionally been regulated by the states.²⁴ The Court has cautiously avoided preempting state law in a state's historic police power area unless that was the "clear and manifest purpose" of Congress.²⁵ In a nutshell, "'[t]he purpose of Congress is the ultimate touchstone'" of preemption analysis.²⁶ ERISA is a comprehensive statute that subjects plans providing employees with fringe benefits to federal regulation.²⁷ In short, it is designed to promote the interests of employees and their beneficiaries in employee benefit plans.²⁸ Section 514(a) of ERISA designates for preemption "all state laws insofar as they . . . relate to any employee benefit plan" ERISA covers.²⁹ The basic purpose of the preemption clause was to avoid a multiplicity of regulation in an attempt to provide for the nationally uniform administration of employee benefit plans.³⁰ Since ERISA's enactment, courts have been called upon to review the preemption clause a number of times.³¹ The Supreme Court has traditionally interpreted ERISA's preemption provision very broadly.³² For example, in Shaw v. Delta Airlines, Inc.,³³ the Court had to determine whether ERISA preempted New York's Human Rights Laws and the State's Disability Benefits Laws.³⁴ True to form, the Court endorsed a broad interpretation of ERISA's preemption clause and explained that a state law relates to an ERISA governed plan, within the meaning of section 514's reach, "if it has a connection with or reference to such a plan."³⁵ Furthermore, the Court declared that the phrase

"relates to" in section 514(a) is used "in the normal sense of the phrase."³⁶ The Court even cited the definition of "relate" in Black's Law Dictionary.³⁷ In Shaw, the Court did note, however, that "[s]ome state actions may affect employee benefit plans in too tenuous, remote, or peripheral a manner to warrant a finding that the law 'relates to' the plan."³⁸ However, a state law may be preempted even though it has no direct nexus with ERISA plans, if its effect is to dictate or restrict the choices of ERISA plans with regard to their benefits, structure, reporting and administration, or if allowing states to have such rules would impair the ability of a plan to function simultaneously in a number of states.³⁹ Most notably, in United, the Third Circuit held that New Jersey's hospital rate setting statute, which is similar to New York's, did not relate to the plans in a way that would trigger ERISA's preemption clause.⁴⁰ The Third Circuit observed that a law relates to an ERISA plan if it is specifically designed to affect employee benefit plans, if it singles out such plans for special treatment, or if the rights or restrictions it creates are predicated on the existence of such a plan.⁴¹ In United, however, the Third Circuit was dealing with a statute of general application that was engineered to establish the prices to be paid for hospital services, which did not single out ERISA plans, and that functioned without regard to the existence of such plans.⁴² The Third Circuit held, therefore, that section 514 was not intended to frustrate the efforts of a state, using its police power, to regulate health care costs.⁴³ The Supreme Court embraced this approach.⁴⁴

In reaching its unanimous decision, the Supreme Court followed principles of dynamic statutory interpretation.⁴⁵ The Court began its attempt to determine Congress's intent by examining the text of the preemption provision.⁴⁶ More specifically, the Court analyzed that portion that says, "all state laws insofar as they . . . relate to any employee benefit plan" covered by ERISA.⁴⁷ The Court first noted that this portion of the text of section 514(a) was expansive,⁴⁸ so expansive in fact that if taken literally, the words of limitation would not do much limiting.⁴⁹ The Court concluded that such a reading would result in Congress's words of limitation being nothing more than a mere sham, reading the presumption against preemption out of the law whenever Congress speaks to the matter with generality.⁵⁰ The Court then conceded that previous attempts to construe the phrase "relate to" did not provide much assistance in this case.⁵¹ The Court then turned to its decision in Shaw, in which it interpreted the preemption clause very...