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.
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. ...