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ERISA PRE-EMPTION REMAINS VIABLE

COURT REJECTS STATE SURCHARGE ON FUND'S MEDICAL CENTERS

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NEW YORK-A federal appeals court ruling indicates that despite an important 1995 Supreme Court decision, courts will still read ERISA to pre-empt the narrow group of state laws that have a direct economic effect on benefit plans.

The 2nd U.S. Circuit Court of Appeals ruling involves a 1990 New York law that imposes taxes specifically on revenues received by medical facilities. It was challenged by a longshoremen's health care fund that operates its own medical centers.

Because the tax depletes plan assets, the statute has a direct economic effect on the plan and is pre-empted by the Employee Retirement Income Security Act, the 2nd Circuit ruled on Jan. 4.

The NYSA-ILA Medical & Clinical Services Fund operates three medical centers, two in New York and one in New Jersey. Under the 1990 law, the New York centers were assessed an amount equal to 0.6% of their gross receipts, which included contributions from employers, employees and the fund itself.

Taxes on medical centers operated by benefit funds are fundamentally different than surcharges on hospital bills, the 2nd Circuit said.

It was a New York surcharge on the hospital bills of patients in commercially insured health plans or HMOs that the U.S. Supreme Court allowed to stand in the 1995 case New York State Conference of Blue Cross & Blue Shield Plans vs. Travelers Insurance Co. (BI, May 1, 1995).

That ruling marked the first time in a series of ERISA rulings that the high court had reversed its tendency to read expansively the statute's pre-emption of state laws that "relate to" benefit plans.

While the Supreme Court decision only dealt with insured plans and HMOs, the 2nd Circuit soon went one step further, finding that New York surcharges on self-insured plans did not violate ERISA (BI, Aug. 21, 1995).

In its more recent ruling, though, the 2nd Circuit read ERISA as limiting the authority of states to tax benefit plans.

In the Travelers case, the surcharge was not on ERISA plans but on insurers providing coverage to the plans and plan participants, the 2nd Circuit said.

By contrast, the tax on medical centers operated by benefit plans imposes "an immediate tax on payments and contributions which were intended to pay for participants' medical benefits," directly affecting the multiemployer fund's principal role as an employee benefit plan, the appeals court ruled.

Benefit experts note that the ruling is very limited. "A very small amount of money is involved. And very few employers operate medical facilities," pointed out Henry Saveth, a principal with A. Foster Higgins & Co. Inc. in New York.

Still, the ruling is significant because it indicates that Travelers will not eliminate ERISA pre-emption as an employer defense when states pass laws that affect benefit plans.

"ERISA pre-emption still is viable to some degree. That is important because there had been some feeling that ERISA pre-emption would be virtually extinguished in many cases," Mr. Saveth said.

NYSA-ILA Medical and Clinical Services Fund et al. vs. David Axelrod et al. 2nd U.S. Circuit Court of Appeals; No. 93-7221.>