HIGH COURT RULES ON ERISA PRE-EMPTIONS

WASHINGTON-The Supreme Court is continuing to circumscribe how broadly the Employee Retirement Income Security Act pre-empts state laws that have an economic impact on benefits plans.

In a 7-to-2 ruling last week in De Buono vs. NYSA-ILA Medical and Clinical Services Fund, the high court ruled that New York state has the right to tax hospitals owned and operated by an ERISA plan. A federal appeals court had ruled earlier that the tax violated ERISA's pre-emption of state laws governing benefit plans (BI, Oct. 21, 1996).

In another case decided last week, however, the high court ruled that the ERISA pre-emption trumped a state community property law that gave a deceased employee's children from a previous marriage a share of his pension at the expense of his second wife (BI, Nov. 11, 1996).

The tax case involved the NYSA-ILA, a longshoremen's union health care fund that owns and operates two hospitals in New York and one in New Jersey. The hospitals provide a variety of services primarily to workers, retirees and their dependents. The New York facilities have had to pay a tax on gross receipts under the state's Health Financing Assessment, which was enacted in 1990.

The hospitals paid the assessment from January through November 1991, an assessment that amounted to $7,066 on receipts of nearly $1.2 million, and then sued the state. The suit held that the tax depleted fund assets, thus having a direct economic impact on the plan, and therefore should be pre-empted by ERISA.

A U.S. District Court disagreed, and the fund appealed to the 2nd U.S. Circuit Court of Appeals. The appeals court held in favor of the fund, and the state appealed to the U.S. Supreme Court.

Writing for the majority, Justice John Paul Stevens said: "There is nothing in the operation of the HFA that convinces us it is the type of state law that Congress intended ERISA to supersede. This is not a case in which New York has forbidden a method of calculating pension benefits that federal law permits, or required employers to provide certain benefits. Nor is it a case in which the existence of a pension plan is a critical element of a state law cause of action, or one in which the state statute contains provisions that expressly refer to ERISA or ERISA plans.

"A consideration of the actual operation of the state statute leads us to the conclusion that the HFA is one of 'myriad state laws' of general applicability that impose some burdens on the administration of ERISA plans but nonetheless do not 'relate to' them within the meaning of the governing statute.

"The HFA is a tax on hospitals. Most hospitals are not owned or operated by ERISA funds. This particular ERISA fund has arranged to provide medical benefits for its plan beneficiaries by running hospitals directly, rather than by purchasing the same services at independently run hospitals. If the fund had made the other choice and it had purchased health care services from a hospital, that facility would have passed the expense of the HFA onto the fund and its plan beneficiaries through the rates it set for the services provided. The fund would then have had to decide whether to cover a more limited range of services for its beneficiaries or perhaps to charge plan members higher rates," he wrote.

"Any state tax or other law that increases the cost of providing benefits to covered employees will have some effect on the administration of ERISA plans, but that simply cannot mean that every state law with such an effect is pre-empted by the federal statute," read the opinion.

In a dissent in which he was joined by Justice Clarence Thomas, Justice Antonin Scalia did not raise the question of pre-emption but rather questioned whether the Supreme Court even has any jurisdiction in the matter, holding that question must be resolved "before reaching the merits of respondent's ERISA pre-emption claims."

Observers say the court's decision in De Buono is simply the most recent example of the high court's willingness to take a narrow rather than expansive view of ERISA's pre-emption of state law. The court's retreat from a broad reading of ERISA pre-emption became evident two years ago, in New York Conference of Blue Cross & Blue Shield Plans vs. Travelers Insurance Co. (BI, May 1, 1995). In that case, the court upheld New York's right to impose a surcharge on commercially insured health plans despite ERISA pre-emption.

Before that decision, Supreme Court justices had given the broadest possible ERISA pre-emption of state laws that "relate to" health care plans. With the De Buono decision, the justices have further narrowed that pre-emption, say observers.

"I'm not really sure it's a narrow decision. It really does further limit the pre-emption doctrine" in regard to how "relate to" is defined, said John Piro, a consultant with Hewitt Associates L.L.C. in Rowayton, Conn.

"It's not a surprise. I think the scales are tipping increasingly in favor of taxes being something ERISA doesn't pre-empt," said Mary Case, a principal with The Kwasha Lipton Group in Fort Lee, N.J.

"It's a narrow case, but it basically is just another weight on the side of states' ability to tax things that are being paid out of employee benefit plans," she said. She pointed out that few health plans own and operate their own hospitals.

"It does seem to be somewhat of a trend toward reining in the most expansive reaches of pre-emption. Many people thought that this case might be different from its predecessors because the plans were in essence hospitals. But the Supreme Court declined to use that distinction," said Henry Saveth, a principal at William M. Mercer Inc. in New York.

"The impact will be limited in the sense that there aren't that many plans that own and operate hospitals. At the same time, there is a legal trend in that the Supreme Court seems to be drawing a circle around the pre-emption and keeping broad pre-emption within parameters," he said.

The decision "seems to ignite a lot of further state activity, particularly in tax law," predicted Mr. Piro. "There's some confusion as to what you can do here," he said.

"Where's the dividing line" between what is permissible and where a state law's economic impact is so great that the pre-emption is triggered? asked Mr. Piro.

In the other ERISA pre-emption decision handed down by the court last week, a narrow majority of the justices ruled that ERISA pre-empts Louisiana's community property law.

The case, Boggs vs. Boggs, involved an attempt by the children from a deceased telephone company employee's first marriage to collect their deceased mother's portion of benefits from their father's estate.

The sons of Isaac Boggs sued in Louisiana state court under the state's community property law and their stepmother, whom their father had married a year after their mother's death, countersued, holding that ERISA pre-empted the sons' claims.

By a 5-4 margin, the high court upheld the ERISA pre-emption. The majority, in an opinion written by Justice Anthony Kennedy, found that ERISA's objective is to provide income to the surviving spouse. In a dissent, Justice Stephen Breyer questioned whether Congress intended ERISA to become involved in state matters of "family, property and probate."

De Buono vs. NYSA-ILA Medical and Clinical Services Fund, U.S. Supreme Court; No. 95-1594. Decided June 2, 1997.

Boggs vs. Boggs, U.S. Supreme Court; No. 96-79. Decided June 2, 1997.