Told that effective regulation of the nation's healthcare industry may be at stake, the U.S. Supreme Court agreed last week to decide whether states may tax the income of healthcare facilities run by employee welfare benefit plans.
The court will review a federal appellate court ruling that struck down a New York tax as it applied to two such facilities.
Asked by the justices for its views, the Clinton administration said the appeals court was wrong when it invalidated the New York tax and that the ruling should be reviewed.
The appeals court said the state tax is pre-empted by the federal Employee Retirement Income Security Act of 1978. The act generally supersedes any state law relating to employer benefit plans.
Many states have enacted some form of healthcare provider tax.
Confronted by mounting healthcare costs, the New York Legislature in 1990 voted to impose a small tax on all hospitals. The tax is 0.6% of a facility's revenues from patient-care services and other operating income.
The NYSA-ILA Medical and Clinical Services Fund, an ERISA-covered benefit plan, operates two New York clinics. Under the challenged tax, the fund had paid $7,066 in taxes on $1.7 million of income in 1991.
The majority of hospital payments come from employee benefit plans because most Americans have health-care insurance through them. Some of those plans run their own facilities.
A federal judge, noting the minimal economic impact and general application of the tax law, upheld it. But the 2nd U.S. Circuit Court of Appeals in New York ruled in January that the tax was precluded by the federal law.
The appeals court said the tax law "depletes the fund's assets directly, and thus has an immediate impact on the operations of an ERISA plan."
In the appeal before the Supreme Court, New York Attorney General Dennis Vacco argued that the appeals court ruling conflicts with a 1995 Supreme Court decision in another New York healthcare dispute.
In that ruling, the court allowed states to regulate hospital costs by charging different rates based on a patient's healthcare coverage.
Nineteen states joined in a friend-of-the-court brief urging the justices to grant New York's appeal.
If the 2nd U.S. Circuit Court's ruling is left standing, they said, "it is only a matter of time before healthcare facilities reorganize themselves as plan-owned so that they, too, can evade state public health regulation."
The 19 states that joined in the brief are Arizona, Arkansas, Connecticut, Hawaii, Maine, Maryland, Massachusetts, Mississippi, Montana, Nevada, New Hampshire, New Jersey, Oklahoma, Pennsylvania, Rhode Island, Texas, Vermont, Virginia and West Virginia.
The case is DeBuono vs. NYSA-ILA Medical and Clinical Services Fund, 95-1594.