Of state laboratories and legislative alloys: how 'fair share' laws can be written to avoid ERISA preemption and influence private sector health care reform in America.

• Author: Abernetty, Darren

TABLE OF CONTENTS INTRODUCTION I. THE MARYLAND FAIR SHARE ACT A. The Law and Its Background II. EMPLOYMENT RETIREMENT INCOME SECURITY ACT OF 1974 (ERISA) A. The Law and Its Background B. Early Supreme Court Interpretation of ERISA 1. Health Benefit Mandates C. The New Paradigm: The Travelers, Dillingham, and De Buono Trilogy 1. Travelers 2. Dillingham 3. De Buono III. RETAIL INDUSTRY LEADERS ASSOCIATION V. FIELDER A. Tax Injunction Act B. ERISA Preemption C. The Fourth Circuit Court of Appeals' Decision IV. MODIFICATIONS FOR FUTURE "FAIR SHARE" LEGISLATION V. APPROACH #1: REWRITE THE LAW AS A MEDICAID TAX, NOT A REGULATORY MANDATE A. Statutory Language and Medicaid Financing Purpose B. Legislative Record and Collection of the Tax C. Reduce the Shortfall Tax VI. APPROACH #2: MINIMUM WAGE AND "TOTAL PACKAGE" BENEFITS A. Employer Size-specific Minimum Wages B. Additional Options for Employers To Meet Minimal Expenditures 1. Clinics and Health Savings Accounts 2. "Total Package" Statutes VII. REPORTING REQUIREMENTS AND UNIFORM PLAN ADMINISTRATION CONCLUSION INTRODUCTION

To stay experimentation in things social and economic is a grave responsibility. Denial of the right to experiment may be fraught with serious consequences to the Nation. It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory.... (1) Justice Brandeis's famous dissent in New State Ice Co. v. Liebmann remains apt today, particularly when viewed through the prism of America's developing health care crisis. As health care costs rapidly rise, (2) state and federal deficits increase, (3) and the uninsured rolls swell, (4) the importance of finding new avenues for public and private funding of health care assistance becomes increasingly salient.

In keeping with long-standing tenets of federalism, in recent years several states have taken the lead in trying to solve some of health care's impending difficulties. (5) One prevailing notion has been to use "pay or play" legislation (6) to shift some of the burden of financing health insurance to the private sector through America's competitive, efficient, and highly imaginative capitalist economy. (7)

One such state is Maryland, whose General Assembly passed a statute (8) in January 2006 requiring all for-profit, non-governmental employers with more than 10,000 employees in the state to spend at least 8 percent of total payroll wages on health insurance costs for employees. (9) Any noncompliant employer that fell under the purview of the "Fair Share Health Care Fund Act" ("Fair Share Act" or "FSA" or "the Act") was required to pay the state the difference between the percentage of their health care expenditures and the 8 percent rate required by the law. (10) Any revenues collected from the assessment were to be deposited into a special fund that would be used to supplement the State's Medicaid program. (11)

FSA opponents, primarily in the retail and commerce communities, dubbed the Act the "Wal-Mart Law" because the three other instate employers to which the law could apply were exempted for reasons explained below. (12) The Retail Industry Leaders Association challenged the Fair Share Act in federal court, alleging that the Act was preempted by federal law. (13) A federal district court held that the Maryland Fair Share Act was preempted by the federal Employment Retirement Income Security Act of 1974 (ERISA), (14) and the court's decision was upheld on a 2-1 ruling by the Fourth Circuit Court of Appeals in early 2007. (15)

This Note examines Maryland's preempted statute and the United States District Court case that granted its opponents declaratory relief. After reviewing the Fair Share Act, the federal ERISA statute, (16) and the significant changes in Supreme Court jurisprudence concerning ERISA preemption in the past decade, this Note will offer new approaches through which states can modify the analytical framework outlined by the Fair Share Act to achieve improvements in the state financing of Medicaid through large private employers. (17) The goal of this Note is to analyze ways to fit future fair share legislation within the non-preempted confines of ERISA.

The proposed modifications include: (1) rewriting fair share laws as unequivocal, non-regulatory Medicaid taxes from which compliant employers may become exempt; (18) (2) dulling the sharp edge of the FSA's punitive texture by decreasing the 100 percent shortfall tax to 35-50 percent; (19) (3) a state-initiated higher minimum wage for very large employers, with an incentivized exemption provision allowing an employer to revert back to the higher of the state or federal government's general minimum wage if the employer spends a certain percentage of payroll wages on employee health insurance; (20) (4) expanding employers' options for "outlets" that meet the 8 percent health expenditure benchmark, such as through an increase in non-medical fringe benefits, which would give the statute a less coercive feel; (21) and (5) a "total package" benefits approach analogous to unpreempted ERISA prevailing wage cases. (22)

Part I of this Note will describe the legislative history and passage of the Maryland Fair Share Act, as well as Wal-Mart's role in the retail sector nationally and in Maryland specifically. Part II will provide a brief background of ERISA. Subsections within Part II will discuss early Supreme Court jurisprudence regarding ERISA, as well as the Court's interpretive changes to ERISA since the landmark Travelers decision in 1995. Part III treats RILA v. Fielder (RILA I), giving particular attention to the rationale employed by Judge Frederick Motz with respect to the Tax Injunction Act and ERISA preemption. Additionally, the Fourth Circuit's 2-1 affirmance (RILA II) will be briefly discussed.

Part IV introduces modifications for future "fair share" legislation, and Part V proposes an approach focused on rewriting the law as a Medicaid tax, rather than a legislative regulatory mandate. Part V stresses the importance of (1) the statutory language, (2) a Medicaid financing purpose, (3) a reduction in the shortfall tax, (4) the means of collection of the tax, and (5) the statute's legislative record. Part VI then offers a second approach: the introduction of employer size-specific minimum wages and "total package" benefit statutes that provide additional incentivized means for employers to meet their minimal expenditure requirements.

Finally, Part VII discusses a concern voiced by Judge Motz in RILA I: the perceived strain on employers' reporting requirements and uniform plan administration. This Part argues that large employers such as Wal-Mart, with a massive workforce and a multitude of health insurance plan offerings, have regularly collected, accessible payroll and personnel data, as well as a plan of administration that cannot be described as uniform.

Lastly, the Note concludes by summarizing the approaches described, and stressing the long-term federal interest in allowing states to act as laboratories by shifting to the free market some of the burden of grappling with enlarging Medicaid costs.

1. THE MARYLAND FAIR SHARE ACT

   1. The Law and Its Background

   In 2005, the state legislature of Maryland passed Senate Bill 79023 and House Bill 1284, (24) the "Fair Share Health Care Fund Act." (25) Though vetoed by Governor Robert L. Ehrlich, Jr., the Maryland General Assembly overrode the veto on January 12, 2006, (26) enacting the law that would have taken effect on January 1, 2007. (27) The FSA created a fund to assist the operations of Maryland's Medicaid program (28)--Maryland's public health insurance program that is jointly funded by the states and the federal government, and which serves eligible low-income parents, children, seniors, and people with disabilities. (29) The fund was created, in part, as a response by the Maryland legislature after learning that "between fiscal years 2003 and 2006, annual expenditures on [Maryland's Medicaid and children's health programs] increased from $3.46 billion to $4.7 billion." (30)

   The FSA's fund was to be replenished through a health care "payroll assessment" on large employers who did not spend at least 8 percent of their total payroll on health insurance costs. (31) Underpaying employers with more than 10,000 in-state employees (32) were required to pay the difference between their payroll health insurance costs and the 8 percent target set by the statute. (33) The FSA also required such employers to report annually to the Secretary of Labor, Licensing, and Regulation their total number of in-state employees, the amount spent by the employer on health insurance, and the percentage of payroll spent by the employer on health insurance costs. (34) As defined by the FSA, "health insurance costs" included payments for "medical care, prescription drugs, vision care, medical savings accounts, and any other costs to provide health benefits (35) as defined in [section] 213(d) of the Internal Revenue Code." (36)

   In Maryland, only four employers have 10,000 or more employees: Johns Hopkins University, Northrop Grumman Corporation, Giant Food Inc., and Wal-Mart. Northrop Grumman was exempt because it had successfully lobbied for a FSA provision permitting employers to exclude, for purposes of calculating the percentage of payroll spent on healthcare, compensation paid to employees above the state's median household income. (37) Johns Hopkins, a nonprofit organization, met the lower 6 percent benchmark set by the FSA for nonprofits, (38) and Giant Food Inc.'s health care expenditures already exceeded 8 percent of the total wages it paid to its in-state employees. (39)

   The only institution affected by the Fair Share Act was Bentonville, Arkansas-based Wal-Mart Stores Inc., which employed 14,301 individuals in Maryland according to the FSA's 2005 General Assembly Fiscal and Policy Note. (40) The Fiscal and Policy...