New England Health Care Employees Union, District 1199, Seiu Afl-Cio Nina Milner, for Herself and as Class Representative for Beneficiaries and Participants of the New England Health Care Employees Health Fund and New England Health Care Employees Welfare Fund v. Mount Sinai Hospital Connecticut Hospital Association and Gwen B. Weltman, Acting Commissioner of the Office of Health Care Access
Docket: 1220
Court: Court of Appeals for the Second Circuit; September 11, 1995; Federal Appellate Court
Connecticut's Uncompensated Care Pool Act required insured patients to subsidize medical care for the uninsured by imposing a surcharge on their bills, which hospitals then forwarded to the state. This mechanism allowed Connecticut to pool funds and secure federal Medicaid matching funds. A challenge to the statute was brought by a patient, her union, and a self-insured employee benefits plan, arguing that the Employee Retirement Income Security Act (ERISA) preempted the state law. The District Court granted summary judgment in favor of the plaintiffs, citing three reasons: the statute's substantial economic impact on ERISA plans, its reliance on them, and its references to ERISA plans. However, following the Supreme Court's reversal of a related case (Travelers II), the Connecticut official enforcing the statute contended that ERISA no longer preempted it. The appellate court agreed with this interpretation, leading to a reversal and remand for judgment in favor of the defendants.
American hospitals historically provided care for the uninsured, often overcharging privately insured patients to offset costs of uncompensated care due to inadequate Medicaid and Medicare reimbursements. This practice, known as cost-shifting, was sanctioned by Connecticut's Act I in 1991, which allowed hospitals to impose a surcharge of up to 30.7% on bills for paying patients. The surcharge revenue was pooled by the state into an 'uncompensated care pool' (UCP) to subsidize hospitals, qualifying Connecticut for about $150 million in federal Medicaid matching funds annually.
In 1992, Nina Milner, a member of a union, was treated at Mount Sinai Hospital, which billed her union's self-insured ERISA plan. The hospital designated part of the bill as 'uncompensated care assessments,' which the fund refused to pay, leading to the hospital attempting to collect the remaining balance from Milner. Milner, the Union, and the Fund subsequently filed a lawsuit under 42 U.S.C. Sec. 1983 and ERISA against the Commission and the Hospital, claiming ERISA preemption of Act I and seeking an injunction and restitution for paid surcharges.
The district court dismissed the case against the Commission due to Eleventh Amendment immunity and allowed the Connecticut Hospital Association to intervene. Following this, Connecticut amended Act I, reducing the state remittance to 8.4% while allowing hospitals to retain an additional 22.1% surcharge, effectively continuing the cost-shifting practice. Further amendments broke the sales tax into two components for state remittance.
A consent order was established among the parties and Connecticut's acute care hospitals, which determined that the disputed surcharge was set at 30.5% of all hospital charges. Under this order, 8.4% of each hospital's bill was to be escrowed, while the remaining 22.1% was to be received directly by the hospitals, following the amended Act I. If the plaintiffs prevailed, the escrowed funds would be returned to the Fund, and hospitals would have to reimburse the plaintiffs for the 22.1% surcharge.
Subsequently, the parties sought summary judgment. The district court granted the plaintiffs' motion while denying the defendants', ruling that ERISA preempted Act I. The court noted that Act I relied heavily on ERISA plans and had significant economic implications for them, as it could either raise costs or lower benefits. However, there was no evidence showing that ERISA plan costs specifically increased due to Act I, rather than due to rising medical care costs.
As a result, the district court enjoined the Chairman from enforcing Act I and prohibited the hospitals from charging the combined surcharge. The court also mandated the return of the escrowed 8.4% sales tax to the Fund and required hospitals to reimburse both the Fund and class plaintiffs for the collected 22.1% cost-shift surcharge.
Following this ruling, Connecticut repealed Act I and introduced Act II with similar features. CHA, a defendant, successfully challenged Act II on ERISA preemption grounds. Although Act I was repealed, the defendants appealed the district court's decision, with the Hospital and CHA arguing that the injunction was excessive, while the Chairman contended that ERISA did not preempt Act I. The plaintiffs moved to dismiss the Chairman's appeal as moot due to the repeal of Act I.
After oral arguments, the Supreme Court's decision in Travelers II prompted a request for letter briefs regarding its implications. The Chairman maintained a vested interest in the appeal despite the repeal of Act I, arguing that Travelers II necessitated a reversal of the district court's judgment, while Milner, the Fund, and the Union contended that ERISA completely preempted Act I, particularly concerning self-insured plans like the Fund.
An appeal cannot be heard without a live case or controversy as mandated by Article III of the U.S. Constitution. If an appellant voluntarily renders their appeal moot, it will be dismissed, maintaining the lower court's decision. However, if the appellant retains a concrete interest in the case, the appeal remains valid. In this instance, the Connecticut legislature repealed Act I, which could potentially moot the Chairman's appeal. Nevertheless, the Chairman argues that he still has a stake due to financial implications, including reduced Medicaid matching funds and a potential recovery of over $1 million if Act I is upheld. These consequences affirm the Chairman's concrete interest, preventing the appeal from being deemed moot.
The plaintiffs challenge whether the Chairman experienced any collateral consequences, asserting that Act I did not result in a loss. However, the terms of the district court's injunction prohibit the Chairman from enforcing Act I against certain funds, effectively preventing the collection of the surcharge from patients covered by ERISA plans. Thus, the appeal remains valid, and the plaintiffs' motion to dismiss it as moot is denied.
On the merits, the court reviews summary judgment grants de novo. The court can reverse a summary judgment if it determines that the non-moving party is entitled to judgment as a matter of law based on undisputed evidence in the record.
ERISA preempts state laws that "relate to" an ERISA plan as defined by 29 U.S.C. Sec. 1144(a), meaning any law that has a connection with or reference to such a plan. Preemption analysis has evolved, particularly regarding laws that directly or indirectly affect ERISA plans. Direct impacts, such as state taxes on payments to hospitals operated by ERISA plans, lead to preemption, even if the effect is minimal. Conversely, indirect effects do not typically trigger preemption unless they interfere with ERISA plans' choices regarding healthcare coverage or substantially increase costs. The Supreme Court's decisions in Travelers II and Chassin clarified that mere indirect economic effects generally do not incur preemption.
Regarding self-insured plans, the court maintains that they do not receive distinct treatment under ERISA preemption rules. A law's applicability to self-insured plans aligns with its broader regulatory status; if a law does not relate to insured ERISA plans, it similarly does not relate to self-insured plans unless compliance costs compel a change in coverage scheme or force the plan to purchase insurance.
Substantial evidence was lacking to demonstrate that Act I increased costs for self-insured plans under ERISA's preemption clause. Defendants presented uncontested claims that hospital fees remained stable or even decreased after Act I, while plaintiffs acknowledged that hospitals have historically shifted costs from uncompensated care to paying patients, a practice that Act I formalized. The district court's speculation about potential cost reductions through group discounts or patient choices to suburban hospitals was unsubstantiated, especially given a Connecticut law that prohibited such discounts and the absence of evidence indicating lower costs at suburban hospitals prior to Act I.
Although the district court cited benefit reductions by the Fund as evidence of Act I's economic impact, the Fund itself indicated that budgetary issues were primarily due to rising hospital service costs, not directly attributable to Act I, and the benefit reductions occurred prior to the Act's enactment. Plaintiffs contended that even minimal economic impact from Act I warranted ERISA preemption, but the court disagreed, noting that the surcharge statute indirectly increased costs for patients rather than directly depleting ERISA plan assets. The distinction between laws that directly impact ERISA plans and those that do so indirectly is questioned in light of recent court decisions.
Act I includes a 'self-destruct' clause that references ERISA, stipulating that if a court exempts any patient care service charges from assessment, the pool's operation will terminate. Plaintiffs argue this clause invokes ERISA preemption; however, the court disagrees. While the Supreme Court has held that state laws that refer to ERISA plans are preempted, mere mention of ERISA in a statute does not guarantee preemption. A law must specifically target or affect ERISA plans. The self-destruct clause applies uniformly to all private health insurance providers without special treatment for ERISA plans, contrasting with cases where statutes created specific causes of action for ERISA-covered employees or imposed structural requirements on ERISA plans. The Fund's argument that Act I imposes a substantive coverage requirement by subsidizing medical costs for the poor is found lacking. Unlike the statute in Greater Washington, which required evaluations of ERISA plan benefits, Act I merely imposes a flat surcharge without necessitating calculations regarding benefits. Therefore, the reference to ERISA in Act I does not support preemption.
Additionally, the Fund is required to comply with both ERISA and the Labor Management Relations Act (LMRA), which mandate that the Fund be used exclusively for the benefit of participants and beneficiaries. The Fund contends that Act I's requirement to subsidize medical costs for the poor conflicts with these statutes, but the court is not persuaded by this argument.
An ERISA plan, similar to a Taft-Hartley fund, fulfills its fiduciary responsibilities by paying the agreed portion of healthcare costs charged by providers. The fiduciary duty is satisfied when the fund submits payments to the insurer as per the benefits contract, meaning it does not breach its duty by covering hospital bills that include surcharges for uncompensated care. This interpretation aligns with Congress's intent for states to experiment with comprehensive hospital reimbursement regulations, as highlighted in the Travelers II decision, which recognized a system similar to Connecticut's. States seeking federal Medicaid matching funds must address the needs of hospitals serving low-income patients, with potential funding from general or healthcare-related taxes.
The district court had concluded that Act I's success was dependent on ERISA plans, contributing 70% of UCP revenue, and the plaintiffs argued that this dependence constituted a valid basis for ERISA preemption. However, the court disagreed, asserting that no prior case had established preemption based solely on a statute's reliance on funds from ERISA plans. Traditionally, ERISA preemption is assessed based on the law's impact on ERISA plans rather than the reverse. The Travelers II case implicitly rejected the market share/dependence model, noting that even with a high reliance on ERISA plans in New York, the Supreme Court determined that ERISA did not preempt New York's surcharge statute, which aimed to level competition between Blues and commercial insurers.
The market share/dependence rationale resembles previous dicta in NYSA-ILA, which suggested that regulations targeting the healthcare industry inevitably impact healthcare plans. However, the Travelers II Court firmly rejected the idea that ERISA preempts all state regulation of hospitals, emphasizing that neither ERISA's text nor its legislative history indicates an intent to displace local healthcare regulation. As NYSA-ILA has been vacated following Travelers II, the market share/dependence argument is given little weight.
The plaintiffs did not demonstrate that Act I, which allowed cost-shifting practices by Connecticut hospitals, significantly increased costs to ERISA plans, necessitating changes in their structure or benefits. Furthermore, Act I's self-destruct clause does not invoke ERISA preemption, and the plaintiffs' claims based on exclusive benefit and market share/dependence cannot justify such preemption.
The repeal of Act I does not moot the Chairman's appeal, leading to the denial of the plaintiffs' motion to dismiss. The court finds no grounds for asserting that ERISA preempts Act I, even for self-insured plans, resulting in a reversal of the district court's judgment and remanding the case for a judgment favorable to the defendants, along with directives regarding payments under Act I. The document also notes changes in leadership related to the Commission and the establishment of the Office of Health Care Access in Connecticut.
