Attorney General: Hon. William Cibes, Office of Policy and Management, 1994-009 Formal Opinion, Attorney General of Connecticut

Attorney General's Opinion

Attorney General Richard Blumenthal

March 25, 1994

Hon. William Cibes
Secretary
Office of Policy and Management
80 Washington Street
Hartford, CT 06106

RE: ERISA--Uncompensated Care

Dear Mr. Cibes:

You have requested an opinion as to whether proposed legislation regulating hospitals' net revenues, imposing taxes related to the provision of hospital services, and appropriating funds for Medicaid disproportionate share payments to hospitals is likely to be preempted by the Employee Retirement Income Security Act of 1974 ("ERISA") because the amended statutes may "relate to" ERISA plans.

This request is prompted by two recent court decisions. On February 25, 1994, the United States District Court issued a decision in a case entitled New England Health Care Employees Union District 1199 et al v. Mt. Sinai Hospital, et al, No. 2:29CV01012(JAC). The Court ruled that Connecticut's existing Uncompensated Care Pool statute, Conn.Gen.Stat.  19a-168, was preempted by ERISA because it "relates" to the plaintiff Fund. The New England Health Care decision was based, in part, upon the recent decision of the Second Circuit Court of Appeals in Travelers Insurance Co., et al v. Cuomo, et al, F.2d (2d Cir.1993) which preempted a New York hospital rate setting statute insofar as it provided for three different surcharges to be added to a patients's bill depending on the identity of the third party payer. In our opinion, the District Court erred in finding that ERISA preempted the existing Uncompensated Care Pool statute. This office is appealing the District Court's decision to the Second Circuit Court of Appeals, and has sought a stay of the District Court's judgment pending appeal. That appeal will be vigorously pursued.

The administration has expressed the concern that the hospital reimbursement system cannot afford to wait for the completion of the Second Circuit's review of the New England Health Care decision and, as a result, a state legislative response is contemplated. On March 23, 1994 you supplied this office with a working draft of the proposed legislation. While the proposed legislation is lengthy, you have requested our opinion on two aspects of the proposal: the proposed Connecticut Gross Earnings Tax on Hospitals and the statutory net revenue cap on the aggregate amount of revenue that may be realized by Connecticut hospitals. You specifically inquire as to whether either one of these two aspects of the proposed legislation would violate the federal ERISA provisions rendering the proposed legislation inoperative. While the law in this area is clearly unsettled, it is our opinion that the proposed legislation, including the contemplated Connecticut Hospital Gross Earnings Tax and the net revenue cap, satisfies many of the concerns raised by Judge Cabranes in New England Health Care and, therefore, should withstand a subsequent legal challenge brought on ERISA grounds.

I.

There is exceptionally expansive language regarding ERISA preemption employed in parts of the New England Health Care decision. In light of this language, it may well be that the proposed legislation would be challenged, and that the issues on which you seek our advice will ultimately be resolved through litigation, perhaps at the appellate level. We believe the proposed legislation satisfies federal ERISA requirements even though it imposes a tax that must be paid by hospitals based upon a percentage of their revenues, and applies the state's general six percent sales tax to the sale of hospital services to patients.

One claim regarding the proposed Gross Earnings Tax is that it would be preempted by ERISA because it would have a substantial cost impact on ERISA plans. In response to this concern, it should be noted that the District Court in New England Health Care explicitly ruled that: [I]t is possible that the Fund could have reduced costs by negotiating group discounts for uncompensated care or by encouraging participants to choose hospitals with low uncompensated care costs. Slip op., p. 14.

The proposed Bill specifically addresses this concern by allowing third party payers and hospitals unlimited discretion to negotiate uncompensated care costs. With the complete deregulation of prices and discounts, hospitals are free to either absorb the costs associated with the tax by becoming more efficient, or hospitals can negotiate any discount with a plan they determine appropriate. Therefore the costs attributable to the Hospital Gross Earnings Tax should not have a substantial impact on ERISA plans under the terms of the statute.

Additionally, the Uncompensated Care Pool is eliminated by the Bill as are the former assessments to fund. The proposed Bill funds uncompensated care by General Fund appropriations to the Department of Social Services for purposes of Medicaid disproportionate share payments to hospitals. The New England Health Care decision indicates that a General Fund appropriation is a permitted method of funding uncompensated care because it removes the existing statutory linkage between the uncompensated care assessments and the Medicaid disproportionate share payments to hospitals. While revenues from the Connecticut Hospital Gross Earnings Tax may, as part of the General Fund, help pay for uncompensated care, the Gross Earnings Tax, like other business taxes, is a tax of wider applicability than the uncompensated care pool assessment and is currently levied on utility companies and community antenna television companies.1

II.

You have also inquired whether the proposed continuance of the hospital net revenue cap, Conn.Gen.Stat.  19a-167b, raises ERISA preemption concerns. As noted supra, prices are completely deregulated under the proposed Bill in that hospitals have complete discretion to set prices and to negotiate discounts with payers. The net revenue cap only restricts the aggregate amount of revenue that a hospital may receive from all sources over the course of a year.

We can identify no adverse impact of an aggregate net revenue cap upon ERISA plans and therefore no legal constraint on maintaining it by reason of ERISA. You report that representatives of ERISA plans have contacted you urging the continued maintenance of a revenue cap, demonstrating that the maintenance of a revenue cap may well be in the interest of ERISA plans and would not, therefore, be preempted by ERISA.

The plaintiffs in New England Health Care claimed the gross revenue cap of Conn.Gen.Stat.  19a-167b impliedly authorized "cost shifting" since the statute explicitly required the Commission to consider the uncompensated care experience of each hospital in setting the gross revenue cap.2By contrast, the proposed net revenue cap is set irrespective of the uncompensated care experience of each hospital. Since the proposed Bill repeals the gross revenue cap, it eliminates any basis for a claim that the statutes authorize or require cost shifting.

Very truly yours,

RICHARD BLUMENTHAL
ATTORNEY GENERAL

RB


Footnote:

1 There is little question that the existing sales tax on hospital services is not preempted by ERISA since it is a broad based tax of general applicability. Firestone Tire & Rubber Co. v. Neusser, 810 F.2d 550 (6th Cir.1987).

2 The District Court's decision did not reach the "cost shifting" challenge to the gross revenue cap asserted by plaintiffs.


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