UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
filed: May 14, 1993.
On Appeal From the United States District Court For the District of New Jersey. (D.C. Civil Action Nos. 90-02639, 90-03640, 91-00073, 91-00336, 91-02190, 91-03280, 91-03286, 91-03897, 91-03910, 91-04078, 91-04259, 91-04700, 91-05362, 92-00085, 92-00426, 92-00526, 92-00728, 92-00849, 92-01282, 92-01454, 92-01455).
Before: Stapleton, Scirica, and Nygaard, Circuit Judges.
Opinion OF THE COURT
STAPLETON, Circuit Judge:
Appellees, several self-insured employee benefit plans and a number of individual participants in those plans ("the plans"), brought this action seeking an injunction against the application to them of New Jersey's then current statutory scheme for setting hospital rates. They also sought restitution of monies paid under protest pursuant to that statutory scheme. Appellees argue both that the New Jersey statute was preempted by the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1002 et seq., as amended ("ERISA"), and that the statute worked an unconstitutional taking of property without just compensation. Appellants are numerous New Jersey hospitals, various agencies and officials of the state of New Jersey and, as an intervening party, the New Jersey Hospital Association ("the defendants").
The district court entered summary judgment in favor of the plans on their ERISA preemption claim and enjoined the enforcement of the statute as it applied to them. The injunction was stayed, pending this appeal. The district court also entered summary judgment in favor of the defendants on the plans' constitutional claims, and declined to reach the question of restitution. The defendants appeal, and the plans cross-appeal.
We will reverse the summary judgment on the ERISA preemption claim and vacate the injunction. We will affirm the summary judgment on the constitutional claims, and remand the case to the district court with instructions that judgment be entered for the defendants.
The statutory and regulatory regime in question is found in the New Jersey Health Care Facilities Planning Act of 1971, as amended by the Health Care Cost Reduction Act of 1978, N.J. Stat. Ann. 26:2H-1 et seq., (both shall be collectively referred to as "Act") and the attending regulations, N.J. Admin. Code 8:31B et seq.
In 1978, New Jersey enacted a revised rate setting system, Chapter 83, the dual purpose of which was to "contain the rising costs of health care services, and to ensure the financial solvency of hospitals." N.J. Stat. Ann. 26:2H-1. Under this prospective rate-setting system, various medical procedures are divided into "diagnostic related groups" ("DRGs"), and a rate is assigned to each DRG. A particular hospital's DRG rate consists of a weighted average of the costs incurred by the hospital in treating a given condition and the average cost incurred by hospitals throughout the state to treat that condition. The system thus penalizes hospitals that incur costs greater than the state wide average and rewards hospitals that provide more efficient service for a particular DRG. Patients in the same DRG at a particular hospital pay the same bill regardless of the duration of their stays and the demands they make on the resources of the hospital.
The DRG rate is the base rate under New Jersey's system. A patient's bill will have other components, and it is these components that the plans challenge as inconsistent with ERISA. Hospitals in New Jersey are required by law to provide treatment for patients who cannot pay their bills. N.J. Admin. Code 8:436-5.2(c). Emergency services for the indigent are required by federal law as well. Thus, one cost of doing business for New Jersey hospitals is the cost of providing "uncompensated care." In order to pay for this care and to provide financial relief to those hospitals that provide more than their share of uncompensated care, a state wide charge is added to the DRG, and the resulting revenue is distributed in proportion to the uncompensated care provided by each hospital.
An additional surcharge is designed to compensate hospitals for the losses they incur when treating patients covered by Medicare. Hospitals that treat Medicare patients can charge those patients only the amount allotted by the federal Medicare agency for the particular treatment provided. Medicare now provides reimbursement at levels below the DRG rates. To enable New Jersey hospitals to make up for the resulting revenue shortfall, the current New Jersey system allows hospitals to include in their billings to non-Medicare patients an amount necessary to recover the difference between the Medicare rate of payment and the DRG rate.
Chapter 83 also grants discounts to certain classes of payors. The relevant section provides in part:
All payment rates shall be equitable for each payor or class of payors without discrimination or individual preference except for quantifiable economic benefits rendered to the institution or to the health care delivery system taken as a whole. In addition to other such benefits which the commission may consider, it shall consider the following, if found to be quantifiable: (1) degree of promptness and volume of payments to hospitals so that hospitals are provided with funds for current financing of their services; and (2) broad provision of health insurance coverages which are not self-supporting. In determining the quantifiable economic benefits to which consideration shall be given in approving payment rates, the commission may consider overall financial benefits to society which are provided by programs offered by a payor or class of payors.
26:2H-18b N.J. Stat. Ann. Pursuant to this provision, the commission granted a 2.2% discount to high-volume plans such as Blue Cross and granted an 11% discount to plans with open enrollment. Patients who do not belong to plans that received these discounts are billed at an increased rate to allow hospitals to recover the income lost by virtue of the discount. One of the plaintiff plans has applied for a discount under this portion of Chapter 83, but the commission has not yet ruled on its application.*fn1
At the threshold of our consideration we must determine whether this case is moot. The regulatory scheme we have just described was superseded by new state legislation on January 1, 1993. As we have noted, however, the plans seek not only an injunction against enforcement of the (now superseded) Act, but also restitution of monies paid by appellees pursuant to the Act while it was in effect. If the Act is infirm for either of the reasons asserted, the claim of restitution remains viable even though an injunction is no longer necessary. In order to adjudicate the merits of the restitution claim, we must determine if the monies were paid pursuant to an unlawful statutory scheme.*fn2 We thus turn our attention to an evaluation of the lawfulness of the Act.
For the reasons set forth by the district court in its opinion, we find that the extra costs paid by the plans pursuant to the Act do not constitute an unlawful taking of property without just compensation. See, United Wire, Health & Welfare Fund v. Morristown, 793 F. Supp. 524, 540-42 (D.N.J. 1992).
In Penn Central Transportation Co. v. New York City, 438 U.S. 104, 98 S. Ct. 2646, 57 L. Ed. 2d 631 (1978), the Supreme Court utilized a three prong analysis to determine whether a governmental regulation constituted a taking. The Penn Central analysis directs our attention to (i) the character of the governmental action; (ii) the economic impact of the regulation on the claimant; and (iii) the extent to which the regulation has interfered with investment backed expectations. Penn Central at 124. Regarding the character of the government action, we conclude that New Jersey "does not physically invade or permanently appropriate any of the [plan's] assets for its own use," but rather "adjusts the benefits and burdens of economic life to promote the common good". Connolly v. Pension Guaranty Corp., 475 U.S. 211, 225, 89 L. Ed. 2d 166, 106 S. Ct. 1018 (1986). Similarly, the economic impact of the Act upon the appellees indicates that no taking has occurred. While appellees have been deprived of money by operation of the Act, the determination of the amount owed was not randomly generated, but was rather "directly related to the individual [appellee's] hospital bill." United Wire, 793 F.Supp. at 542. Finally, given the historically heavy and constant regulation of health care in New Jersey, we cannot say that the Act interfered with the plans' "investment backed expectations." We thus affirm the district court's summary judgment for the defendants on the constitutional claim.
Whether the Act is preempted by ERISA is a somewhat thornier question. Section 514(a) of ERISA provides that, with some exceptions that do not apply in this case, ERISA "shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan" covered by ERISA. It is undisputed that the plans are covered by ERISA, and so the question to be determined is whether the Act "relates to" the plans in a way that necessitates preemption. We find that the Act does not relate to the plans in a way that triggers ERISA's preemption clause.
The preemption clause of ERISA is notable for its breadth, and manifests Congress's intention to establish pension plan regulation as an exclusively federal concern. Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 68 L. Ed. 2d 402, 101 S. Ct. 1895 (1981). The Supreme Court has noted that a state law "relates to" an ERISA governed plan, within the meaning of § 514(a)'s preemptive reach, "if it has a connection with or reference to such a plan." Shaw v. Delta Airlines, 463 U.S. 85, 97, 103 S. Ct. 2890, 77 L. Ed. 2d 490 (1983). The Court in Shaw noted, however, that "some 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. 463 U.S. at 100, n. 21.
In determining whether the New Jersey scheme of regulating hospital rates is preempted by ERISA, "as in any preemption analysis, 'the purpose of Congress is the ultimate touchstone.'" Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724, 747, 85 L. Ed. 2d 728, 105 S. Ct. 2380 (1985) (quoting Malone v. White Motor Corp., 435 U.S. 497, 504, 55 L. Ed. 2d 443, 98 S. Ct. 1185 (1978)). The Supreme Court discussed at length the Congressional intent behind the ERISA preemption clause in Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 96 L. Ed. 2d 1, 107 S. Ct. 2211 (1987). In Fort Halifax the Court was faced with the question of whether ERISA preempted a Maine statute requiring employers, in the event of a plant closing, to provide a one-time severance payment to employees not covered by an express contract providing for severance pay. In the course of holding that the Maine statute was not preempted, the Court explained the Congressional intent behind ERISA's preemption clause:
[A]n employer that makes a commitment systematically to pay certain benefits undertakes a host of obligations, such as determining the eligibility of claimants, calculating benefit levels, making disbursements, monitoring the availability of funds for benefit payment, and keeping appropriate records in order to comply with applicable reporting requirements. The most efficient way to meet these responsibilities is to establish a uniform administrative scheme, which provides a set of standard procedures to guide processing of claims and disbursement of benefits. Such a system is difficult to achieve, however, if a benefit plan is subject to differing regulatory requirements in differing States. A plan would be required to keep certain records in some States but not in others; to make certain benefits available in some States but not in others; to process claims in a certain way in some States but not in others; and to comply with certain fiduciary standards in some States but not in others.
It is thus clear that ERISA's pre-emption provision was prompted by recognition that employers establishing and maintaining employee benefit plans are faced with the task of coordinating complex administrative activities. A patch-work scheme of regulation would introduce considerable inefficiencies in benefit program operation, which might lead those employers with existing plans to reduce benefits, and those without such plans to refrain from adopting them. Pre-emption ensures that the administrative practices of a benefit plan will be governed by only a single set of regulations.
Fort Halifax, 482 U.S. at 9, 11. It is with this Congressional purpose in mind that one must read the myriad of ERISA preemption cases that have been decided in the courts since ERISA was adopted. It informs the following analysis of these cases.
A rule of law relates to an ERISA plan if it is specifically designed to affect employee benefit plans,*fn3 if it singles out such plans for special treatment,*fn4 or if the rights or restrictions it creates are predicated on the existence of such a plan.*fn5 Because we are here dealing with a statute of general applicability that is designed to establish the prices to be paid for hospital services, which does not single out ERISA plans for special treatment, and which functions without regard to the existence of such plans, the cases which have cordoned off this area of preemption are inapplicable.*fn6
This does not end our inquiry, however. A state rule of law may be preempted even though it has no such 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.*fn7
New Jersey's scheme may increase the charges billed to ERISA plan participants for hospital services. This will mean that for any plan which commits to pay all or some lesser percentage of a participant's hospital costs will be called upon to pay more in benefits than it otherwise would. This effect is no different in kind, however, from any state regulation that increases the cost of goods or services that hospitals consume and pass on in hospital costs, i.e., utility costs, the wages of its employees, waste disposal costs, etc. New Jersey's scheme does not direct ERISA plans to structure their benefits or conduct their internal affairs in any particular way. Nor does it deprive ERISA plans of any alternative they would otherwise have in these areas. Finally, since the cost of hospital services will necessarily vary from region to region, we fail to see how state regulation of hospital pricing like that chosen by New Jersey is likely to make interstate operation of an ERISA plan more difficult.
Where there is no direct nexus between a state statute and ERISA plans, no effect on the manner of such plans' conducting business or their ability to operate in interstate commerce, statutes have been upheld despite the fact that they may have the indirect ultimate effect of increasing plan costs. In Mackey v. Lanier Collection Agency and Service, Inc., 486 U.S. 825, 100 L. Ed. 2d 836, 108 S. Ct. 2182 (1988), for example, the court held that Georgia's general statute authorizing garnishment of obligations due debtors could be utilized by creditors of ERISA plan participants to require the application of plan benefits to satisfy participants' personal debts. Georgia garnishment law as so applied was found not to be preempted by § 514(a) despite the fact that "benefit plans subjected to garnishment . . . incur substantial administrative burdens and costs" in responding to garnishment summons.
The most helpful case in the present context is Rebaldo v. Cuomo, 749 F.2d 133 (2d Cir. 1984), where the court sustained against a preemption challenge a New York statute setting the rates that hospitals in that state had to charge patients, including those who were participants in self-insured employee benefit plans. The court, after noting the obvious "fact that ERISA plan members and managers are bound to engage in myriad transactions that Congress never considered when it drafted § 514," made the following observations that seem equally pertinent here:
A preemption provision designed to prevent state interference with federal control of ERISA plans does not require the creation of a fully insulated legal world that excludes these plans from regulation of any purely local transaction.
The purchase of hospital service is like the purchase of public utility service, or of any other service or commodity whose price is controlled by the State. Insofar as the regulation of hospital rates affects a plan's cost of doing business, it also may be analogized to State labor laws that govern working conditions and labor costs, to rent control laws that determine what employee benefit plans pay or receive for rental property, and even to such minor costs as the Thruway, bridge and tunnel tolls that are charged to plans' officers or employees. In short, if ERISA is held to invalidate every State action that may increase the cost of operating employee benefit plans, those plans will be permitted a charmed existence that never was contemplated by Congress. Where, as here, a State statute of general application does not affect the structure, the administration, or the type of benefits provided by an ERISA plan, the mere fact that the statute has some economic impact on the plan does not require that the statute be invalidated.
Moreover, such indirect economic impact as may result from State control over hospital rates does not run counter to ERISA's aim of national uniformity in plan regulation. See Shaw v. Delta Air Lines, Inc., supra, 103 S. Ct. at 2890 n. 20. There is no valid reason why employee benefit plans cannot be subject to nationally uniform supervision despite dissimilarities in their costs of doing business. Indeed, if statutes such as section 2807-a(6)(b) of New York's Public Health Law are held to be preempted by ERISA, every hospital will be able to set its own rates for ERISA plans, and appellee does not contend that these rates are, or will be, uniform, even as between hospitals in the same locality.
749 F.2d at 138-9.
The plans insist that Rebaldo is no longer "good law" in light of the Supreme Court's subsequent decision in Ingersoll- Rand Co. v. McClendon, 498 U.S. 133, 112 L. Ed. 2d 474, 111 S. Ct. 478 (1990). While we agree that a portion of the Rebaldo court's analysis was rejected in Ingersoll-Rand, the above-quoted reasoning remains persuasive and we are confident that Rebaldo would have been decided in the same way if the court had had the benefit of the teachings of Ingersoll-Rand.*fn8
In Ingersoll-Rand, the Supreme Court addressed the issue of whether § 514(a) preempts a state cause of action in favor of an employee terminated to prevent the vesting of his or her pension benefits. It was confronted with an argument that the phrase "relate to any employment benefit plan" should be read in the context of § 514 as a whole and that the wording of § 514(c)(2) indicates that § 514 preempts only a state law which "purports to regulate, . . . directly or indirectly, the terms and conditions of employee benefits plans." 29 U.S.C. § 1144(c)(2).*fn9 If § 514(c)(2) did so limit the scope of § 514, the state cause of action at issue would not be preempted because it did not purport to regulate the terms and conditions of ERISA plans. The Supreme Court determined, however, that § 514 preemption was not so limited and that it extended to a state cause of action predicated on the existence of an employee benefit plan. Since one of the elements of the state cause of action was the existence of such a plan, the Supreme Court had "no difficulty in concluding" that it was preempted. Id. at 483. It explained,
While the court in Rebaldo did suggest that § 514(c)(2) could be read to limit the scope of § 514 preemption,*fn10 this was not the touchstone of its analysis. Unlike the court in Ingersoll-Rand, the Rebaldo court was "dealing . . . with a generally applicable statute that makes no reference to, [and] functions irrespective of, the existence of an ERISA plan," Id. at 483, and that affects such plans only by increasing their costs of doing business. As the above-quoted portions of the opinion bear witness, it was the absence of a direct nexus to ERISA plans and the limited nature of the statute's impact on such plans that put the pricing regulation in Rebaldo beyond the scope of § 514 preemption.*fn11
In summary, we, too, have before us 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 either the effect of 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 by § 514(a), and we decline to so hold.
As we analyze the issue before us, we are not troubled, as was the district court, by what the plans refer to as the cost shifting aspects of New Jersey's program. The district court accepted the plans' argument that New Jersey was requiring them to act in a manner inconsistent with their obligation under ERISA to apply fund assets only for the benefit of fund participants. Were this the case, New Jersey's statute would, of course, be preempted as applied to the plans. But plaintiffs purport to understand ERISA to impose upon them a burden which would be an intolerable one and which we are confident Congress never intended ERISA plans to bear.
The plans argue that their fiduciary duty to apply fund assets only for the benefit of fund beneficiaries forbids them from paying for hospital services received by those beneficiaries if any portion of the price paid can be viewed as attributable to the cost of providing services to others, such as indigent and Medicare patients. As the plans appear to us to concede, however, it would be impossible to have a requirement that ERISA plans must "look through" to the pricing structure of every health care provider to assure that the price of the services rendered a particular patient directly correlates with the costs of those services. We think an ERISA plan meets its ERISA responsibilities when it pays whatever portion of the price charged by the health care provider the plan has assumed.
First, the plans do not challenge the base DRG rate feature of New Jersey's price control program even though it is inherent in this approach that a patient having an appendectomy who winds up in intensive care for two weeks pays the same amount as another patient who has an appendectomy and leaves the hospital the following day. The plans do not challenge this aspect of the plan because they acknowledge that it is not feasible in any real sense to isolate the costs attributable to any particular patient. The plans understandably add that if they have enough appendectomy patients over the years the costs they pay on behalf of others theoretically will be offset by the costs other pay on behalf of plan participants. It nevertheless remains true that the portions of the New Jersey scheme unchallenged by the plans recognize the prohibitive transactions costs associated with matching any particular disbursement of fund assets to cover a hospital bill with the actual costs of treating that particular patient.
More importantly, there are many forms of state regulation under the police power which result in increases in the cost of doing business and corresponding increases in prices where the beneficiaries of the regulation are not those who are paying the increased prices. States have recently begun to regulate the disposal of medical wastes, for example, in order to protect those who otherwise would be adversely affected by socially irresponsible disposal. Such regulations can significantly increase a hospital's cost of doing business and, accordingly, its billings to plan participants. We are confident, however, that ERISA was not intended to foreclose a state regulation of this kind. New Jersey's decisions to require hospitals to treat indigents and to treat Medicare patients for the Medicare reimbursement seem to us to be similar exercises of its police power.
In short, we are unwilling to attribute to Congress and § 514 an intent to frustrate the efforts of a state, under its police power, to regulate health care costs. In particular, we are unwilling to infer from ERISA's prohibition against applying fund assets for the benefit of others a Congressional intent to foreclose health care cost regulation of the kind here challenged.
Having concluded that the challenged portions of Chapter 83 are not preempted by § 5l4(a) and are not unconstitutional, we will reverse the judgment of the district court, vacate the injunction, and remand with instructions that judgment be entered for the defendants.*fn12
NYGAARD, Circuit Judge, Dissenting.
This is a close case because it tests the outer limits of ERISA preemption. Although my decision is made more difficult because the New Jersey regulatory scheme (the "Act") is admirable for its intended purpose and goals, I think Congress intended to preempt these kinds of statutes. The issue is: Whether a statute of purported general applicability "relates to," in the ordinary and broad sense of that term, ERISA plans if it disproportionately impacts upon ERISA plans, presupposes the existence of ERISA plans, and depends on funds extracted from ERISA plans to implement its legislative mandate. Because I believe that the district court correctly concluded that such a statute is preempted, see United Wire, Metal & Machine Health and Welfare Fund v. Morristown Memorial Hosp., 793 F.Supp. 524, 531-37 (D.N.J. 1992), I respectfully Dissent.
Congress enacted ERISA to subject employee benefit plans to a uniform system of federal laws governing disclosure, reporting, standards of conduct, remedies, sanctions, and access to federal courts. Since uniformity cannot be achieved if ERISA plans are subject to varying state regulations, Congress preempted "any and all State laws insofar as they . . . relate to any employee benefit plans." ERISA § 514(a), 29 U.S.C. § 1144(a) (emphasis added).
Section 514(a) is deliberately expansive and "conspicuous for its breadth." FMC Corp. v. Holliday, 498 U.S. 52, 111 S. Ct. 403, 407, 112 L. Ed. 2d 356 (1990). It is "virtually unique" among federal preemption statutes, Franchise Tax Bd. v. Construction Laborers Vacation Trust, 463 U.S. 1, 24 n.26, 103 S. Ct. 2841, 2854, n.26, 77 L. Ed. 2d 420 as it is "one of the broadest preemption clauses ever enacted by Congress." Evans v. Safeco Life Ins. Co., 916 F.2d 1437, 1439 (9th Cir. 1990).
The term "relate to" must be given a "broad common-sense meaning." Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 107 S. Ct. 1549, 1553, 95 L. Ed. 2d 39 (1987). A state law relates to an ERISA plan "in the normal sense of the phrase, if it has a connection with or reference to such a plan." Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 103 S. Ct. 2890, 2900, 77 L. Ed. 2d 490 (1983). Any connection may trigger preemption, and preemption is not limited to laws relating to the specific subjects covered by ERISA. Pilot Life, 481 U.S. at 47-48; Shaw, 103 S. Ct. at 2900. That a state law may be "consistent with ERISA's substantive requirements" or was enacted to "effectuate ERISA's underlying purposes" does not save it from preemption. Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724, 105 S. Ct. 2380, 2388-89, 85 L. Ed. 2d 728 (1985); Mackey v. Lanier Collection Agency & Serv., 486 U.S. 825, 108 S. Ct. 2182, 2185, 100 L. Ed. 2d 836 (1988). A state law may relate to a benefit plan even if it is not specifically designed to affect such plans, or its effect is only indirect. Pilot Life, 107 S. Ct. at 1552-53; Shaw, 103 S. Ct. at 2900; Alessi v. Raybestos-Manhattan, Inc., 451 U.S. 504, 101 S. Ct. 1895, 1907, 68 L. Ed. 2d 402 (1981); Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 111 S. Ct. 478, 483, 112 L. Ed. 2d 474 (1990).
Since no law exists in a vacuum and arguably many laws could be held to "relate to" ERISA plans, without some limits Section 514(a) could become a legal blackhole with an attractive force no state law could resist. Hence, some laws are said to affect ERISA plans in "too tenuous, remote, or peripheral a manner to warrant a finding that [they] 'relate to' the plan." Shaw, 103 S. Ct. at 2901 n.21. See, e.g., Mackey, 108 S. Ct. at 2191 (garnishment statute of general applicability is not preempted). The task then is to determine the precise relationship between the Act and ERISA plans. Mackey, 108 S. Ct. at 2186.
The declared public policy of the Act is to "contain the rising costs of health care services, and to ensure the financial solvency of hospitals." N.J.S.A. § 26:2H-1. The linchpin in this scheme is the DRG rate, which is a statistical average of costs incurred by hospitals to perform a particular medical procedure. The DRG is the rate hospitals must bill for particular services. Thus, it functions as both a price cap and an incentive to reduce costs.
The plans do not challenge the validity of the DRG rate scheme, but only attack three surcharge components incorporated into the DRG. They are costs for uncompensated care and bad debts, Medicare cost shifts, and costs related to discounts given to certain payer groups. Only hospital patients, not the general public, pay these costs. The New Jersey scheme is, quite simply, a cost-shifting mechanism whereby those who do not have deep pockets or are favored by the law are given discounts or free services. Since these discounts and services cause state-mandated financial losses to hospitals, the Act remunerates hospitals by shifting theses losses through the DRG resulting in additional 19.7% and 7% surcharges in uncompensated and Medicare costs shifts to those with deep pockets -- commercial insurers and ERISA plans.
ERISA plans play a critical role in this scheme, to the point where without them it would fall apart. They comprise a major segment of the paying hospital service users who subsidize those favored by the Act. The structure of the scheme indicates in not-so-subtle ways that the New Jersey legislature was well aware of the pivotal role ERISA plans would play in its scheme. Upon pain of not receiving reimbursements for their uncompensated care costs, the Act requires hospitals to screen patients to determine whether they are covered by a commercial insurer or a "union welfare plan." N.J.S.A. § 26:2H-18.31(c)(2). Also, under the appeal policy existing at the time, while individual patients as well as third-party payors could have appealed mistakes in the assignment of a particular DRG, only individual patients could have appealed an assignment of a DRG that was technically correct but may have been excessive. "The third-party payer (commercial insurer, self-funded union, etc.)" was specifically excluded from appealing a correct but excessive charge. A vast majority of appeals, about 85%, were based on excessive charges, and only about 1% of them were denied. Thus, the goal is transparent and little explanation is needed to see what this appeal process was designed to do.
In October 1990, the New Jersey Governor's Commission on Health Care Cost submitted a report that plainly concluded: "Only a portion of New Jersey businesses, those who purchase insurance for their workers, pay the lion's share of caring for the uninsured." It summarized the impact on employee benefit plans: "It was apparent that rapidly rising health insurance costs were a significant burden to both the business community and the labor force in this State with the potential to negatively affect New Jersey citizens . . . that the Uncompensated Care Trust Fund while affording access to hospital services was unfairly financed on the backs of those who had health insurance . . . ."
Last, the State concedes that the scheme is not "viable" without money from the plans as they "represent a major segment of the bill-paying public, to the point that it is impossible to devise a viable hospital rate-setting scheme if that segment is excluded or exempted from the scheme." Br. 2 (emphasis added). This concession dispels any doubt that the effect of the Act is to reach into the deep pockets of ERISA funds.
The Act provides a conduit by which money is transferred from, among others, ERISA plans to hospitals. Rather than spend its own general funds, New Jersey implemented a money transfer scheme where ERISA plans subsidize the medical bills of those who are favored by law. One affidavit accurately concluded: "Indeed, if the State of New Jersey were to assume the uncompensated care and the Medicare cost shift as social obligations from its general revenues, for example, the average hospital bill would decrease on a pro rata basis by this amount and these shifts would no longer be reflected in New Jersey hospital bills."
The majority believes that the connection between the Act and ERISA plans is too tenuous and remote "because we are here dealing with a statute of general applicability that is designed to establish the prices to be paid for hospital services, which does not single out ERISA plans for special treatment, and which functions without regard to the existence of such plans . . . ." Majority typescript at 23-24. The majority relies in part on Mackey v. Lanier Collection Agency & Serv., 486 U.S. 825, 108 S. Ct. 2182, 100 L. Ed. 2d 836 (1988), to suggest that where there is no direct nexus, or where a statute does not directly affect the administration of ERISA plans, the statute is not preempted despite any "indirect ultimate effect of increasing plan costs." Majority typescript at 26.
In Mackey the issue was whether a generally applicable Georgia garnishment statute was preempted by ERISA. The Court first recognized that a statute need not specifically single out, mention, or have a direct nexus to ERISA plans to be preempted. 108 S. Ct. at 2186, citing Pilot Life, 107 S. Ct. at 1552-53, and Shaw, 103 S. Ct. at 2900. The Court held, however, that the statute was not preempted. In light of certain ERISA provisions, one of which provides a plan may "sue or be sued" as an entity, 29 U.S.C. § 1132(d)(1), the Court reasoned that money judgments against ERISA plans must be collectable in some way and that garnishment is one permissible method. 108 S. Ct. at 2188 & n.9, citing FHA v. Burr, 309 U.S. 242, 60 S. Ct. 488, 491, 84 L. Ed. 724 (1940) (where Congress provides that an entity may "sue or be sued" all civil processes incident to legal proceedings including "garnishment and attachment" may apply). Thus, Mackey does not stand for the proposition that a generally applicable statute should not be preempted even though it may result in some "indirect economic impact." It stands for the proposition that where Congress intended for state law to apply to ERISA, that law will not be preempted even though it may otherwise relate to ERISA plans by placing indirect financial or administrative burdens on them.*fn13
The majority nowhere shows how any provision in or the structure of ERISA suggests that Congress did not intend these kinds of statutes to be preempted. See Malone v. White Motor Corp., 435 U.S. 497, 504, 55 L. Ed. 2d 443, 98 S. Ct. 1185 (1978) ("purpose of Congress is the ultimate touchstone"). Where Congress adopts a broad preemption provision, the "task of discerning congressional intent is considerably simplified." Ingersoll-Rand, 111 S. Ct. at 482.
Although any connection may suffice, the task is made easier when the statute refers to or specially singles out ERISA plans. The Act requires hospitals to ask patients whether they belong to a "union welfare plan," and it expressly excludes "self-funded union" plans from appealing hospital bills. The majority, however, brushes these references aside by concluding that they "can be excised without altering the effect of [the] statute in any way," and therefore they "should be regarded as without legal consequence for § 514(a) purposes." Majority typescript at 24 n.6.
The majority underestimates the significance of these references. New Jersey has implicitly classified all hospital users into two groups: those who are able to pay and those who are not. This simple dichotomy then determines "whether the patient is eligible for participation in a public assistance program," N.J.S.A. § 26:2H-18-31(c)(3), whether one must pay the three surcharges, and whether and what one may appeal. A large segment of the small percentage of patients who are able to fully pay for medical services are plan beneficiaries, and hence New Jersey requires hospitals to ask whether a patient belongs to a "union welfare plan." Thus, the Conclusion that the references to ERISA plans in the Act "can be excised without altering the effect of [the] statute in any way" is without support.
Even assuming, arguendo, that the Act does not expressly single out ERISA plans for special treatment, it does so as applied. One cannot ignore the practical consequences produced by this statute, a consequence that according to the report commissioned by the State resulted in ERISA plans having paid "the lion's share of caring for the uninsured." See Mackey, 108 S. Ct. at 2185 (it is "virtually taken  for granted that state laws which are 'specifically designed to affect employee benefit plans' are pre-empted under § 514(a)").
Moreover, the assumption that the Act "functions without regard to the existence of such plans" is puzzling in light of the State's concession that the Act is not "viable" without ERISA plans. The Act was designed with ERISA funds in mind. In this sense, it has been eminently successful; the financial drain on ERISA funds has been enormous. The surcharges are paid not by the general public at large, but by the less than 25% of the population who use hospital services. Of those 25%, about 75% receive the uncompensated care assessments challenged here. ERISA plan participants comprise only about 15% of the hospital patients, but pay about 40% of the more than $1.1 billion shortfall generated by the state-mandated cost shifts.
In Ingersoll-Rand Co. v. McClendon, 498 U.S. 133, 111 S. Ct. 478, 112 L. Ed. 2d 474 (1990), an employee sued in Texas state court, alleging that he was fired because his employer did not want to contribute to his pension fund. He sought damages under various tort and contract theories, but did not plead an ERISA cause of action. The Texas Supreme Court recognized a cause of action for wrongful discharge based upon "the employer's desire to avoid contributing to or paying benefits under the employee's pension fund." The Supreme Court reversed and held that the cause of action is preempted because it was premised on the existence of a pension plan. It reasoned that "to prevail, a plaintiff must plead, and the court must find, that an ERISA plan exists and the employer had a pension-defeating motive in terminating the employment. Because the court's inquiry must be directed to the plan, this judicially created cause of action 'relates to' an ERISA plan." Id. at 483.
Similar to the Texas cause of action, the New Jersey statute is predicated on the existence of ERISA plans and its mandates cannot be carried out without ERISA funds. See id. at 484 ("there simply is no cause of action if there is no plan") (emphasis in original). Also, the costs associated with the New Jersey regulatory scheme are not qualitatively the same as those in either Mackey or Ingersoll-Rand. In Mackey, the four Dissenting Justices opined that the administrative burdens of allowing ERISA benefits to be garnished were so "significant" as to warrant preemption of a generally applicable garnishment statute. 108 S. Ct. at 2192. In Ingersoll-Rand, a unanimous Supreme Court noted that the litigation costs of defending against a cause of action predicated upon the existence of an ERISA plan were substantial. 111 S. Ct. at 483. No one will dispute that these costs pale in comparison to the hundreds of millions of dollars extracted from ERISA funds under the Act. And while the majority may classify these costs as "the limited nature of the statute's impact on such plans," I do not.
One may argue that nothing in the Act establishes the level of benefits or structure plan benefits to include these shifted costs and that each plan is free to cover all, some or none of these costs. This argument is unpersuasive. In General Elec. Co. v. New York Dep't of Labor, 891 F.2d 25 (2d Cir. 1989), a New York labor law of general application provided that wages and "supplements" (nonwage benefits which included ERISA plans) on a public works contract must at least equal the prevailing rate and benefits paid in the locality. Where the cost of a benefit provided by an ex-locality contractor did not match those of a similar prevailing local benefit, the statute required the contractor either to bring the benefit into conformity with the local benefit, or to make up the difference through cash payments to its employees. Nothing in the statute, however, required a contractor to alter the benefits to match those in the locality, and the contractor was free to pay cash instead. But the Court of Appeals for the Second Circuit held that ERISA preempted the labor law. It reasoned that the law clearly related to ERISA plans in that to conform to the statute contractors had to maintain "schedules of supplements and wages and to make its books and records pertaining to wages, supplements and hours of labor available for inspection." Id. at 29-30.
The Act is analogous to the New York labor statute because it requires ERISA plans either to pay the surcharges or to restructure their benefits to avoid them. Since no one likes to pay for benefits or services one did not receive or benefit from, it is reasonable to expect that some plans may change their terms to exclude these costs, just as it was reasonable to expect that some New York contractors would restructure ERISA plans instead of paying cash benefits. Implicit, then, is the assumption that an ERISA plan, if it does not want to pay for the direct cost of services provided to nonbeneficiaries, "structure all its benefit payments in accordance with New Jersey [hospital rates], or to adopt different payment formulae for employees inside and outside of the State." See Fort Halifax, 107 S. Ct. at 2217; Alessi, 101 S. Ct. at 1907. This is the precise reason why Congress enacted such a broad preemption provision: so that employee benefit plans would not be subject to the vagaries of state regulations. Ingersoll-Rand, 111 S. Ct. at 484; Fort Halifax, 107 S. Ct. at 2217.
Because New Jersey has asked ERISA plans to carry the brunt of the burden of keeping hospitals financially afloat and, in fact, to largely subsidize its venture into hospital price regulation, and because the State admits that result before this court, I agree with the district court's Conclusion that there is a definite, palpable connection between the Act and the plan. See United Wire, 793 F.Supp. at 531-37.
Much attention in this appeal has been focused on Rebaldo v. Cuomo, 749 F.2d 133 (2d Cir. 1984). The New York statute provided that the state must establish for each hospital an "inpatient revenue cap," which was a price cap with additional allowances made for bad debts and charity care. The statute allowed certain programs, like Blue Cross, to get discounts, but certain ERISA plans did not qualify. The Court of Appeals for the Second Circuit first reasoned that because Section 514(c)(2) defines "State" as any agency, instrumentality or political subdivision that "purports to regulate, directly or indirectly, the terms and conditions of employee benefit plans," 29 U.S.C. § 1144(c)(2), this restriction modifies Section 514(a)'s broad preemption provision. 749 F.2d at 137. The court held that where "a State statute of general application does not affect the structure, the administration, or the type of benefits provided by an ERISA plan, the mere fact that the statute has some economic impact on the plan does not require that the statute be invalidated." Id. at 139. This holding is now infirm as the Supreme Court has since rejected the view that the definition of "State" restricts the scope of Section 514(a). Ingersoll-Rand, 111 S. Ct. at 484.*fn14
The Rebaldo court justified its holding with an economic/policy argument. It reasoned that the regulation of hospital rates are analogous to any state regulations that increase the cost of doing business for hospitals. 749 F.2d at 138. Thus, for example, the court opined that ERISA plans could not contend that they are exempt from price increases as a result of increased labor, utility, or rent costs, or from such minor costs as the bridge and tunnel tolls that are charged to plan officers or employees. Id. Moreover, it opined that since ERISA plans can be subject to nationally uniform supervision despite dissimilarities in hospital prices, any "indirect economic impact" would be consistent with ERISA's aim of national uniformity in plan regulation. Id. at 139.
Recently, even this economic rationale, for whatever worth it had, has been eroded. Although the Rebaldo court suggested that "State labor laws that govern working conditions and labor costs . . . that [have] some economic impact on the plan" would not be preempted, id. at 138-39, the Court of Appeals for the Second Circuit has since retreated from this position and has preempted a generally applicable statute governing labor costs that imposed upon ERISA plans indirect financial and administrative burdens. General Electric, 891 F.2d at 29-30.*fn15
Despite the Supreme Court's rejection of the holding in Rebaldo and the Court of Appeals for the Second Circuit's implicit rejection of what appears to be the rest, the majority nonetheless relies heavily on it. Faced with Section 514(a)'s sweeping preemption provision and the cause-and-effect financial connection between the Act and ERISA funds, the majority justifies its decision by reasoning that the Act is analogous to any number of state laws that may indirectly increase the cost of doing business, such as regulations governing labor, utility, or rent costs. Majority typescript at 25. It suggests as an example that regulations concerning the disposal of medical waste would not be preempted though their implementation may net higher medical bills as a result of the increased cost of doing business. Id. at 33.
I agree with the majority insofar as ERISA plans do not lead a "charmed existence." Rebaldo, 749 F.2d at 139. They are, of course, not exempt from paying rent, tolls, or even the many overhead costs associated with hospital management. The DRG takes into account both direct costs, such as hospital employees' salaries and benefits, and indirect costs, such as institutional overhead expenses for management, research, education and maintenance. The plans, however, do not argue that the entire DRG system is incompatible with ERISA; they do not argue that they must only pay the "actual costs" for medical services; they do not argue that any laws that increase the cost of doing business for hospitals do not apply to them; nor do they argue that they are entitled to pay to the penny only their pro rata share of overhead and incidental costs. They argue instead that the three surcharges differ from ordinary overhead costs in two important ways: first, plan participants derive no benefit from these surcharges; second, these surcharges are not equitably distributed to the general population, or to the State, or to even hospital users, but are placed squarely on the shoulders of commercial insurers and ERISA plans. As a result, they contend that they are forced to subsidize nonparticipant patients with ERISA funds.
The majority largely ignores these distinctions, choosing instead to sweep all state-mandated costs under the general penumbra of "overhead" costs. When states regulate, for example, utility, labor, education or medical sanitation, they increase the cost of doing business. To remain solvent and be able to provide services, businesses must be able to incorporate into prices these increases. In a market-based system, each consumer will pay for costs attributable to running the business, so overhead is part of the indirect costs associated with the purchase of goods and services. Since it is administratively impossible to isolate the precise actual costs attributable to any particular patient, many of the direct and indirect costs incorporated into the DRG such as overhead for management and maintenance are proper. The plans do not contend otherwise.
The surcharges are a different story, however. They are not indirect costs associated with any hospital services to plan beneficiaries. They are the direct cost of hospital services rendered to other patients, which have then been shifted to ERISA plans. One can argue, as the appellants do, that even businesses incorporate losses involved in stolen merchandises and bad debts into their prices. But the issue is not whether ERISA protects plans from the imposition of these kinds of costs because ERISA preempts only "state law" and not private action, or whether ERISA plans are entitled to nationally uniform hospital prices because that is impossible. The issue is whether state regulations have interfered with the operation of ERISA plans to the point where the plans have suffered large financial losses.
The argument that plans are affected the same way without regulations is based on questionable applications of economic assumptions. In a free market system, as well as most regulated systems, no business would knowingly sell to one who cannot in full or in part pay, whereas here New Jersey requires hospitals to provide services regardless of the ability to pay and then places the losses squarely on a small class of patients. Without the Act, the financial calculus and its effects on ERISA funds would change drastically. Since each hospital will have different rates depending in part upon their total losses, with urban hospitals, for example, incurring more losses from indigent care and bad debts, the plans would be free to select hospitals with the lowest prices. And even if hospitals distribute their losses by overcharging ERISA plans, the plans would have an alternative: they would normally be free to negotiate with various hospitals for group rates just as some groups under the Act are able to negotiate lower rates (the difference of which ERISA funds have been forced to defray). Under the Act, however, the plans are in effect precluded from negotiating group rates because, as the State concedes, the Act takes away any incentive to negotiate when it prohibits hospitals from passing on to other patients any revenue shortfall caused by a digression from the DRG rates. But see Majority typescript at 25-26 ("Nor does [the Act] deprive ERISA plans of any alternative they would otherwise have in these areas.").
Moreover, in both market-based and regulated systems, businesses generally pass losses to all customers. Here, the object of the Act is to pass hospital losses inequitably to a small segment of hospital consumers. The surcharges are neither paid by the State nor the public at large; they are not even paid by all hospital users. The State created these surcharges with the specific intention that, in essence, only a small group of the hospital users -- a large majority of whom comprise ERISA beneficiaries -- would pay for them. While the plans do not derive any benefit, real or abstract, from the surcharges, the Act takes a substantial chunk of money belonging to ERISA beneficiaries, and all because New Jersey does not want to expend its general funds to pay for the health care costs of others who are less fortunate. As one affidavit summarized: "In effect, New Jersey requires the hospitals to give the service but will pay for it using other people's money, i.e., other users of the hospitals rather than a broader base revenue source such as general taxation."
Thus, the surcharges here are anything but "ordinary" overhead costs that indirectly increase the cost of doing business, and the argument that the Act simply sets prices does not sufficiently credit the direct financial impact on ERISA plans. The majority is correct insofar as states may regulate, for example, the disposal of medical waste and allow hospitals to pass these costs off to patients; but if states require hospitals to pass off these costs only or largely to "commercial insurers and self-funded union plans," such regulations must be preempted.
I fear that the majority gives States free reign to spend and experiment with ERISA funds, held in trust for the many workers who have labored long for their security, in the noble pursuit of health care reforms so long as States exercise a minimum degree of imagination by couching their statutes in "generally applicable" terms. When I consider the financial impact and other causal effect on ERISA funds in a common sense manner, the connection between ERISA plans and the Act is not too tenuous, remote or peripheral at all. The Act refers specifically to ERISA plans, divests enormous sums of money from ERISA plans, and is predicated on the existence of ERISA plans. In my opinion the Act "relates to" ERISA plans when that term is construed in its ordinary and broad meaning, and I Dissent.