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High court ruling may cut health care tax

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The U.S. Supreme Court's invalidation of a Vermont law that required employers to hand over health claims information to state regulators already is being felt in Michigan and the state's 1% tax on paid health care claims.

In addition, observers say they hope the high court ruling keeps other states from trying to impose similar taxes and results in a reversal by a federal appeals court of its earlier decision upholding the Michigan tax.

In a March 1 ruling in Alfred Gobeille v. Liberty Mutual Insurance Co., a suit that the insurer brought as an employer, the nation's highest court ruled that Vermont's law on providing health claim information to the state is invalidated by a provision in the Employee Retirement Income Security Act, which pre-empts state and local laws and regulations that relate to employee benefit plans.

“The fact that reporting is a principal and essential feature of ERISA demonstrates that Congress intended to pre-empt state reporting laws like Vermont's,” Justice Anthony Kennedy wrote for the 6-2 court.

One week later, the Supreme Court cited Gobeille v. Liberty Mutual in ordering the 6th U.S. Circuit Court of Appeals to reconsider its 2014 ruling that upheld a 2011 Michigan law imposing a 1% tax on employers' paid health care claims. Lawmakers later lowered the tax to its current 0.75% rate.

The tax, which generates several hundred million dollars a year to help fund Michigan's Medicaid program, was imposed on health insurers with fully insured plans and on third-party claims administrators for self-insured plans.

The Self-Insurance Institute of America sued to overturn the tax, arguing ERISA pre-empted the state law due to its imposition of administrative burdens on self-insured plans.

But a federal judge and the 6th Circuit rejected that argument.

“In reality, the act does not require a plan administrator to change how it administers the plan at all, and, thus, this argument fails,” Judge Karen Wilson Moore wrote for the appeals court in its 2014 unanimous ruling.

The SIIA then turned to the Supreme Court, which last week sent the case back to the 6th Circuit to reconsider its ruling in Self-Insurance Institute of America v. Rick Snyder et al.

In a one-paragraph statement, the high court returned the case to the appeals court “for further reconsideration” in light of its ruling in Liberty Mutual.

Some observers are optimistic that the 6th Circuit will overturn Michigan's 1% tax on paid health claims.

“We believe there is a reasonable expectation that the 6th Circuit will reverse its original ruling because it relied on a very narrow interpretation of ERISA pre-emption,” said Mike Ferguson, president and CEO of the Simpsonville, South Carolina-based SIIA.

Others are less certain.

“The 6th Circuit will continue to see the Michigan law as a tax law, not pre-empted by ERISA,” said Nancy Ross, a partner at Mayer Brown L.L.P. in Chicago. “The 6th Circuit already analyzed the Vermont law in another case and found ways to distinguish it from the Michigan law.”

The short-term impact of the Supreme Court's decision to send the Michigan health care claims tax case back to the appeals court, observers say, is that it will likely discourage other states from passing similar health claim taxes — at least until the Michigan case is resolved.

“Hopefully, this will give pause to other states who are considering doing something similar,” said Steve Wojcik, vice president of public policy at the National Business Group on Health in Washington.

At least one state — Illinois — has introduced legislation virtually identical to the Michigan law. The proposal to impose a 1% tax on paid health claims is part of H.B. 5750, which has been sent to a committee.

Regardless of how the 6th Circuit rules, the losing party is likely to appeal.

“You have to figure the case will be back one day before the Supreme Court,” said Joseph Ronan, senior counsel at Morgan, Lewis & Bockius L.L.P. in Philadelphia.

Several observers are optimistic the high court would overturn the Michigan law.

If the Supreme Court didn't think the Michigan health care claims tax was not pre-empted by ERISA, “I am not sure why they would have sent the case back to the appeals court,” said Gretchen Young, senior vice president of health policy at the ERISA Industry Committee in Washington.

Employers will be watching the case closely, particularly those with operations across the country, should the Michigan law be upheld and other states moved to pass comparable measures.

“We are very concerned about these kind of laws, which can impose considerable burdens on multistate employers,” said Kathryn Wilber, senior counsel of health policy at the American Benefits Council in Washington.