States may add surcharges to the hospital rates of patients covered under employee healthcare plans without running afoul of federal law, the U.S. Supreme Court ruled last week.
In a unanimous decision, the high court upheld the state of New York's practice of imposing surcharges on some payers' rates. The surcharges are paid by commercially insured patients and HMO enrollees but not by Medi-caid patients or people with Blue Cross and Blue Shield coverage.
The ruling is thought to give states broad flexibility to regulate hospital costs and charges, and to raise funds to subsidize care for the poor and uninsured.
"I think this is a clear victory for states," said Carl Volpe, a senior health policy analyst at the National Governors' Association in Washington.
Health insurance representatives offered a gloomier interpretation. Calling the ruling "a defeat for healthcare consumers," Willis Gradison, president of the Health Insurance Association of America, Washington, said it "places insurers in New York state on an uneven playing field and imposes hidden taxes." Other states may now follow suit, he added.
New York imposes a 13% surcharge on hospital bills paid by commercial insurers and up to 9% on HMOs. In addition, an 11% tax was paid to the state by commercial insurers for a one-year period ended March 30, 1993, to help fill a budget gap.
The higher rates paid by commercial insurers are intended to offset the greater risks assumed by New York's Blue Cross and Blue Shield plans, which are required by the state to enroll anyone who applies for coverage. The HMO surcharge is paid by HMOs that fail to meet certain Medicaid enrollment levels.
The court said the economic impact of the surcharges on employee health plans is not enough to trigger pre-emption under the Employee Retirement Income Security Act, as some insurers contended.
"Such state laws do not bear the requisite `connection with' ERISA plans to trigger pre-emption," Justice David H. Souter wrote for the court.
But Souter said the court was stopping short of saying that the federal law pre-empts only direct regulation of ERISA-protected plans. There may be some indirect regulations that are so restrictive on ERISA-covered plans that they may still be pre-empted, he said.
Hartford, Conn.-based Travelers Insurance Co. and the Health Insurance Association of America brought the initial court challenges that led to last week's ruling.
MetraHealth, the company formed by Travelers and Metropolitan Life Insurance Co., expressed disappointment in the ruling, which reversed decisions of two lower federal courts. In a prepared statement, the company said New York's hospital financing system needs improvement and should be addressed through a free-market system.
But the Hospital Association of New York State said the decision vindicates New York's rate-setting system. By rejecting the ERISA pre-emption argument, the high court prevented hospitals from losing $200 million a year paid by commercially insured patients.
The decision also validates states' use of surcharges to finance health spending.
"I'm very convinced that the effect of this decision is that states don't need to be concerned about finding ways to fund bad debt and charity care," said Jeffrey Sherrin, a partner in the Albany, N.Y., law firm of Sherrin & Glasel, which represented HANYS. Sherrin said the decision "completely validates what states are doing."
It does, however, raise the question of how far states can go and for what purposes the funds may be used, said Don Gasparro, a managing director with Apex Management Group, a Princeton, N.J., actuarial and management consulting firm.
The decision may also affect other pending ERISA challenges. For example, the state of Connecticut is appealing a Nov. 17, 1994, federal court ruling that invalidated two taxes levied by the state to subsidize care for the poor. The taxes, which generate some $300 million, were said to be unlawful under ERISA. The appeal has been on hold pending a decision in the Travelers case.
In addition, a number of other ERISA challenges of New York's surcharges remain unresolved.
"My reaction is......those challenges will fail," said Peter Nadel, an attorney with the law firm of Rosenman & Colin in New York.