Gobeille v. Liberty Mutual: Dog That Didn’t Bark, and Next Front in Preemption War
Recently, we reported on Gobeille v. Liberty Mutual, in which the Supreme Court invalidated the Vermont all-payer claims data base law. Applying what appeared to us as a straight-forward application of existing ERISA preemption jurisprudence, the Court determined that the Vermont law constituted plan administration and was thus preempted. Gobeille’s holding is significant. The decision materially shifts the Federal/state balance of regulatory power, at the expense of the states, in instances where the states seek to regulate ERISA-covered employee benefit plans. This post examines an alternative approach raised in Gobeille, but not pursued, under which states might seek to regulate service providers of plans rather than the plans themselves to avoid ERISA preemption.
An Alternative Argument
As Gobeille wound its way to the Supreme Court, the State of Vermont made an argument that got little attention. The essence of the argument is that the Vermont law applied to, and imposed obligations on, Blue Cross Blue Shield of Massachusetts (the Liberty Mutual group health plan third-party administrator) and not the plan itself. (The argument is set out in the Brief for Petitioner (August 28, 2015), page 22.)
The relevant question is not, as the Second Circuit suggested, whether ERISA is concerned with plan reporting and disclosures to participants. It is. See, e.g., Travelers, 514 U.S. at 661. The relevant inquiry is whether Vermont’s effort to collect comprehensive statewide data about health care spending and services interferes with any of ERISA’s core objectives. It does not. The state law merely requires Blue Cross—Liberty Mutual’s third-party administrator— to transmit certain claims data it generates as a matter of course. There is no meaningful difference between Vermont’s statute and other generally applicable state laws that this Court has upheld against ERISA challenges. (Emphasis added).
Consequently, said Vermont, the law in issue regulates health care and not ERISA-covered group health plans.
The Memoirs of Sherlock Holmes by Sir Arthur Conan Doyle is a collection of short stories, one of which is “Silver Blaze,” a mystery about the disappearance of a famous racehorse the night before a race and the murder of the horse’s trainer. Sherlock Holmes solves the mystery in part by recognizing that no one he spoke to in his investigation remarked that they had heard barking from the watchdog during the night. That the dog did not bark led Holmes to the conclusion that the perpetrator was not a stranger to the dog, but someone the dog recognized and thus would not cause him to bark. Vermont’s argument that it was not regulating a group health plan occupies similar ontological terrain: the dog and the Vermont law were both there, but they went unnoticed.
The sheer breadth of the ERISA preemption rule guarantees an ongoing war with the states. While the states remain free to regulate insurance, ERISA makes the regulation of employee benefit plans exclusively a Federal concern. In a recent Health Affairs Blog post, Professor William Sage offers a succinct and insightful summary of the origins of ERISA preemption. He writes:
Ideologically, ERISA represents the outcome of a hard-fought political battle between management and labor during the economic turmoil of the early 1970s: corporate America agreed to strict government regulation of workers’ pensions on condition that such regulation come in a single package from Congress and the U.S. Department of Labor, not separately from each of the 50 states.
Professor Sage goes on to explain that Congress was so focused on retirement pensions that, apart from preemption, they almost completely ignored ERISA’s application to welfare plans, including group health plans. The result is a regulatory vacuum in the case of welfare benefits that often cries out for additional regulation, state or Federal. That the states are frozen out in this manner troubled Justice Thomas. In his concurring opinion in Gobeille, he asked whether Congress overstepped its Constitutional authority in enacting a law that abrogates the right of states to regulate in an area (health care) that is traditionally a matter of state concern. Justice Thomas’ concurring opinion would in our view lead to disaster if followed. (We concede, of course, that this view is based on mere commercial expedience and not any rigorous Constitutional exegesis.) Multistate employers that sponsor self-funded plans are able to offer uniform benefit programs without having to adhere to different rules in each state in which they operate. Fully insured plans of multistate employers must still comply with state insurance codes, of course, but the compliance obligation is on the shoulders of (highly) regulated insurance carriers.
The Vermont all-payer claims law and the future of Gobeille
The State of Vermont had a legitimate statutory objective. All-payer claims databases provide detailed information to help design and assess various cost containment and quality improvement efforts. The law would enable the State to gain a complete picture of what care costs, how much providers receive from different payers for the same or similar services, the resources used to treat patients, and variations across the State and among providers in the total cost to treat an illness or medical event (e.g., a heart attack or knee surgery). Businesses, consumers, providers and policymakers can use the information to make decisions about cost-effective care.
As a result of Gobeille, the Vermont all-payer claims data base law is preempted. But other issues involving the regulation of group health plans will inevitably arise in Vermont and elsewhere. Gobeille makes it at least more difficult to directly regulate group health plans. But what about indirect regulation aimed at service providers?
To get a sense of what is at stake, it helps to get a clear understanding of what “plan” is being regulated. In a 2000 case, Pegram v. Herdrich, the Supreme Court explained what Congress meant by the term “group health plan.” It’s not what you think. Here’s what the Court said:
ERISA’s definition of an employee welfare benefit plan is ultimately circular: “any plan, fund, or program . . . to the extent that such plan, fund, or program was established . . . for the purpose of providing . . . through the purchase of insurance or otherwise . . . medical, surgical, or hospital care or benefits.” . . . Here the scheme comprises a set of rules that define the rights of a beneficiary and provide for their enforcement. Rules governing collection of premiums, definition of benefits, submission of claims, and resolution of disagreements over entitlement to services are the sorts of provisions that constitute a plan.
Thus, the Vermont all-payer claims database law endeavored to impose obligations on the set of promises that Liberty Mutual made to its employees and their beneficiaries together with the accompanying administrative scheme. Blue Cross Blue Shield of Massachusetts is a mere agent of or, in the parlance of ERISA, a service provider to the plan. It was not acting as a health insurance issuer/carrier in this case. That is, there is no shifting of risk from the employer to the carrier here.
In Rush Prudential HMO v. Moran, the Supreme Court was called upon to review the Illinois HMO Act, a law that required independent reviews of HMO claims denials. Before the Court were two questions: is the law preempted by ERISA, and, if so, is the law saved under the ERISA insurance saving clause. The Court answered, “yes” on both counts. Conceding that the Illinois HMO Act “relates to” an employee benefit plan within the meaning of ERISA, the Court nevertheless held the law saved under the insurance saving clause. In so holding, the Court also held that an HMO is an insurer despite whether it takes on any risk. The Court said that it was willing to tolerate what it referred to as a minimal “overbreadth” in state laws that are directed at insurers. To be clear, what the Supreme Court is saying in Rush Prudential HMO is that a state law that targets carriers (and therefore is saved from preemption) might not be preempted in instances in which the carrier is not acting as a risk-bearing entity but rather as a mere agent of the ERISA-covered plan (in this case, a third-party administrator).
The discussion of statutory overbreadth in Rush Prudential HMO was dicta, i.e., it was not essential to the holding of the case. So it’s not technically the law. But it does point to legislative strategy: regulate the carrier irrespective of whether risk is being transferred. The Vermont law at issue in Gobeille did not do this. Rather, it purported to regulate group health plans directly. So the issue of regulating the carrier was not before the Court. If Vermont had regulated just state-licensed carriers, would the result have been different? We hope not, but that question was not before the Court.