On January 12, 2006, the Maryland legislature enacted, over the Governor’s veto, the Fair Share Health Care Fund Act (the "Maryland fair share law"), which requires businesses with 10,000 or more employees to spend eight percent (six percent in the case of nonprofit organizations) of their payroll on employee health care benefits. If an employer’s spending falls short of the mandated amount, the difference must be paid to a state fund set up for the purpose of defraying state health care costs for the uninsured. There is a substantial civil penalty for failure to make the required payments to the State.
The Maryland fair share law is among a handful of state and local laws that have come to be referred to as "pay-or-play" laws. Jurisdictions that have adopted pay-or-play laws so far include the State of Vermont; New York City; and Suffolk County, New York. Under a "pay-or-play" law, employers are generally required to devote a particular amount or percentage of payroll to health care coverage or pay an amount to the state. More than 30 state legislatures are currently considering some sort of pay-or-play arrangement.
Because of its 10,000-employee threshold, the Maryland fair share law potentially affected only four of the state’s employers (Johns Hopkins University, Northrop Grumman Corp., Giant Food Inc., and Wal-Mart), only one of which—the retail giant, Wal-Mart—would have been required to pay any money. The Retail Industry Leaders Association (or RILA), a trade association of which Wal-Mart is a member, challenged the law in federal court. RILA based its challenge principally on the grounds that it was preempted—i.e., rendered unenforceable—by the Employee Retirement Income Security Act of 1974 (ERISA). On July 19, in Retail Industry Leaders Association v. James D. Fielding, Jr., Maryland Secretary of Labor, Licensing and Regulation, the District Court for the District of Maryland filed its opinion in which it sided with RILA, holding that the Maryland fair share law was preempted by ERISA and therefore unenforceable.
On April 12, Massachusetts Governor Mitt Romney signed into law Chapter 58 of the Acts of 2006, An Act Providing Access to Affordable, Quality, Accountable Health Care ("Chapter 58"). Though far more comprehensive than the Maryland fair share law, Chapter 58 does include a type of "fair share" employer mandate that requires employers to pay up to $295 annually for each employee for whom the employer does not make a "fair and reasonable premium contribution" to health insurance costs. (The particulars of Chapter 58 are addressed in a Mintz Levin Health Alert dated April 13, 2006, and recently issued proposed regulations under Chapter 58 relating to the employer mandate are discussed in our Employment, Labor and Benefits Advisory of July 12, 2006.)
This client advisory discusses the District Court’s opinion in RILA and speculates on its impact on Chapter 58’s fair share employer mandate. (There are other provisions of Chapter 58, such as its so-called "free rider surcharge," that might attract challenges based on ERISA preemption that are beyond the scope of this advisory.) The RILA decision breaks important new ground, and, if followed on appeal and in other judicial circuits, would have momentous consequences for state legislatures as they grapple with health care reform. For now, however, it’s one decision by one trial court. This advisory merely speculates about what might happen to Chapter 58 and to other pay-or-play arrangements if the court’s holding is sustained and more widely embraced.
A (Brief) Overview of ERISA Preemption
In ERISA, Congress sought to unify, simplify and make consistent the judicial and regulatory environment within which employee benefit plans operate. To that end, ERISA was designed to supplant all state laws regulating employee benefit plans with a uniform federal system of regulation. Under ERISA the regulation of benefit plans is, with few exceptions, an exclusively federal matter.
ERISA § 514(a) provides that ERISA "shall supersede any and all state laws insofar as they may now or hereafter relate to any employee benefit plan." (Emphasis added.) This provision makes ERISA the sole source of rules governing the maintenance and operation of employee benefit plans by preempting, or rendering inoperative, all state laws relating to these plans. But this rule is not absolute. There is an exception, referred to as the "saving clause" or the "insurance saving clause," under which the states retain the right to regulate insurance, banking and securities. It is because of the insurance saving clause that state medical benefit mandates may be imposed on insured group health plans.
In determining whether a state law "relates to" an employee benefit plan (and is therefore preempted), the Supreme Court started out construing "relates to" expansively. In a 1983 case, Shaw v. Delta Air Lines, the Court said that the phrase "relates to" should be given its broad common sense meaning, such that a state law "relates to" an employee benefit plan if it has connection with or reference to such a plan. Therefore, the only laws that relate to employee benefit plans that are not preempted are those whose connection is too "tenuous, remote or peripheral." But in 1995, in New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., the Supreme Court pulled back from its earlier, expansive reading of "relates to" in a case involving a New York statute that required hospitals to collect surcharges on hospital bills from patients or payers. (The revenue from the surcharges was used to subsidize the state’s uncompensated care programs.)
Shortly after Travelers, the Supreme Court revisited the issue of the reach of ERISA preemption in two other important cases, California Div. of Labor Stds. Enforcement v. Dillingham Constr., and De Buono v. NYSA-ILA Medical & Clinic Services Fund. As a result of these cases — which are referred to collectively along with Travelers as the "Travelers trilogy" — a state law is preempted if it affects plan "structure or administration."
Before RILA’s challenge to the Maryland fair share law, it was clear that:
- A state could impose a tax on employer-sponsored group health plans in the state; and
- A state could not require employers to establish a group health plan or pay a particular level or amount of premiums.
What was not clear was whether a state could impose a fee, assessment or tax but provide for a waiver, offset, or deduction for amounts expended on health care. Is such a requirement more like the imposition of a tax (which is not preempted), or is it really a mandate to provide coverage (in which case it is preempted)? This is the critical ERISA preemption question that RILA addressed.
The District Court’s Opinion
The Maryland Secretary of Labor, Licensing and Regulation argued that the Maryland law does not require an employer to spend a certain amount on health care costs but rather simply provides that, if the employer does not do so, it must pay to the Secretary an amount equal to the difference between its actual health care expenditures and the required amount. The court disagreed, saying that, while theoretically true, it does not "approximate reality." In the court’s view, an employer faced with the choice of paying a sum of money to the State or offering an equal sum of money to its employees in the form of health care, would choose not to pay the state. The court found that the choice is therefore illusory, so that what remains is a mandate to establish a plan.
The district court began its analysis by reciting the requirements of ERISA § 514(b) to the effect that ERISA preempts "any and all state laws insofar as they may now or hereafter relate to any employee benefit plan." It then made a point of noting that ERISA’s preemption provisions, though "clearly expansive," are not limitless. The court then cited with approval the test first annunciated in Shaw v. Delta Airlines, Inc. (discussed above), under which a state law relates to an ERISA plan if it has either a "reference to" or "connection with" such a plan.
- The "Reference To" Test . The court looked first to the "reference to" test. It explained that a statute has a "reference to" ERISA where it "acts immediately and exclusively upon ERISA plans" or "where the existence of ERISA plans is essential to the law’s operation." But because the court ultimately determined the issue based on the "connection with" test, it never reached a conclusion regarding the "reference to" issue.
- The "Connection With" Test . In applying the "connection with" test, the court noted that it must look to (i) the objectives of the ERISA statute as a guide to the scope of the state law that Congress understood would survive, and (ii) the nature of the effect of the state law on ERISA plans.
Regarding the first "connection with" requirement, the court noted that one of ERISA’s objectives was to "avoid a multiplicity of regulations in order to permit the national uniform administration of employee benefit plans." In the court’s view, the Maryland Act created health care spending requirements that were not applicable in most other jurisdictions, some of which had conflicting requirements. The court was also concerned that Wal-Mart would have to "track separate pools of expenditures for its Maryland employees, and structure its contributions (including deductibles and co-pays) with an eye on how this will affect the spending requirement." Regarding the second requirement, the court saw the law as imposing an obligation on Wal-Mart to increase its contributions to its health benefit plans in violation of federal law.
The court’s reliance on Shaw v. Delta Airlines, Inc. comes as a surprise to some seasoned ERISA practitioners. In the minds of many commentators, the expansive reading of the ERISA preemption clause in the early Supreme court cases (like Shaw) gave way in the mid-1990s to a more restricted reading (in the Travelers trilogy). The Supreme court never explicitly overruled the earlier cases, however, leaving open the question of whether Shaw v. Delta Airlines was still good law. The district court believes it is. Because the court viewed the Maryland fair share law as imposing a mandate, it did not need to consider the impact of Travelers. By definition, any state law that purports to impose a mandate affects plan structure and administration and is, consequently, preempted.
The Effect on Chapter 58
Applying the RILA analysis to Chapter 58, it does not appear that the Act is preempted under the "reference to" test of Shaw v. Delta Airlines because it does not act "immediately and exclusively" on ERISA covered plans. Non-ERISA plans, such as those maintained by churches and instrumentalities of government, are equally affected. But since the RILA court did not elaborate further on the application of this test, its opinion sheds no new light.
Under Shaw v. Delta Airlines’ "connection with" test, however, the Massachusetts law could very well suffer the same fate as the Maryland fair share law. Chapter 58’s fair share requirement differs from the Maryland fair share law, but it may be a distinction without a difference. The Act prescribes no pre-set percentage of payroll that is offset by employer expenditures. Instead, an employer must either make a "fair and reasonable premium contribution" (which has been prescribed in a recently proposed regulation) or pay an assessment that is substantially less than the amount that it would cost to provide coverage. The Act might survive a preemption challenge on this score, however, if its requirements are deemed to be sufficiently "tenuous, remote or peripheral," so as not to warrant preemption. In a footnote to its opinion in RILA, the District Court singled Chapter 58 out for comment, saying:
"Of course, I am expressing no opinion on whether legislative approaches taken by other States to the problems of health care delivery and its attendant costs would be preempted by ERISA. For example, the Commonwealth of Massachusetts has recently enacted legislation that addresses health care issues comprehensively and in a manner that arguably has only incidental effects upon ERISA plans. In light of what is generally perceived as a national health care crisis, it would seem that to the extent ERISA allows, it is strongly in the public interest to permit states to perform their traditional role of serving as laboratories for experiment in controlling the costs and increasing the quality of health care for all citizens." (Emphasis added.)
Conclusion
The State of Maryland can be expected to appeal the district court’s opinion in an effort to overturn it. In the meantime other pay-or-play laws may be challenged, and, if the lower federal courts reach inconsistent results, the Supreme Court might decide to step in and settle the matter. And, although it does not appear likely, Congress might decide to enter the fray. One possible outcome is that RILA might spell the end of state-sponsored efforts to enact pay-or-play requirements. Alternatively, RILA might provide proponents of the pay-or-play approach with a blueprint for how to design a law that sidesteps ERISA preemption. But, with state Medicaid and uncompensated care obligations ballooning, it’s a safe bet that the debate is far from over.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
